Cases by Issue - Mergers

California v. American Stores Co. - Oral Argument

Fri, 09 Jan 2009 14:49:21 +0000

Case:

California v. American Stores Co.

Media File:

89-258_19900116-argument.mp3

Related Transcript:

1989_89_258_argument.xml

Transcript:

Argument of H. Chester Horn, Jr.

Chief Justice Rehnquist: We'll hear argument next in Number 88-258, California v. American Stores Company.

Mr. Horn.

Mr. Horn: Thank you, Mr. Chief Justice, and may it please the Court:

This case presents the question whether Section 16 of the Clayton Act prohibits a district court from decreeing divestiture of a supermarket chain in California acquired in violation of the Clayton Act.

The issue arises from the attempt of the American Stores Company, the parent to Alpha Beta, the fourth largest supermarket chain in California, to acquire Lucky Stores, Inc., the largest supermarket chain in California, the acknowledged low-price leader, for the purpose of merging those two supermarket chains into one dominant firm controlling 25 percent of every consumer grocery dollar spent by California consumers.

The district court below found that that merger almost certainly violates Section 7 of the Clayton Act.

The district court found that that merger almost certainly threatens irreparable harm to California consumers in the form of several hundred million dollars per year in... higher grocery bills that the California customers will pay if this merger is allowed to be completed.

The district court therefore entered a preliminary injunction which it found necessary to preserve the remedy of divestiture and other possible relief to prevent that harm from occurring if it found, following a trial, that indeed this merger does violate Section 7 of the act.

The court of appeals in this case affirmed both sets of findings by the district court.

It affirmed the finding that this merger likely violates Section 7.

It affirmed the district court's finding that this merger threatens the precise harm that Section 7 of the Clayton Act was designed to prevent.

And it affirmed the district court's finding that California had made an adequate showing justifying preliminary injunctive relief on the record before it, which is the record before this Court.

But, the court of appeals held, based on its prior decision in ITT, that the preliminary injunction was overly broad, solely because the remedy of divestiture is not available, a conclusion it reached based not on the language of the statute, based not on the overriding purpose of Section 16 of the act and based on none of the policies underlying the substantive provisions under the act.

Rather, the Ninth Circuit concluded, based on a fragment of the legislative history which was... it was presented with, that Congress did not intend solely to provide the divestiture remedy to private litigants.

We think the Ninth Circuit's approach fundamentally misinterprets the approach prescribed by this Court in cases like Porter v. Warner Holding.

The inquiry ought not to be did Congress intend to prohibit a particular form of relief.

The question is, by granting the injunctive powers for the courts to remedy antitrust violations, is there a clear and valid command by the Congress to preclude that relief.

Unknown Speaker: Well, Mr. Horn, I guess the argument made by the other side in part is that at the time Congress considered this question and adopted the statute we are asked to examine, that there was generally regarded that there was a distinction between prohibitory injunctive relief and injunctive relief that required mandatory action, the so-called affirmative injunction.

And their argument is that Congress had in mind only providing prohibitory injunctive relief.

Now, how do you respond to that argument?

Mr. Horn: We agree with American Stores that in 1914 the distinction between prohibitory and mandatory injunctive relief was well understood by the Congress.

And if Congress had intended to limit private litigants to prohibitory injunctive relief it would have said so clearly in the statute.

That is not what it did.

It provided the full scope of the injunctive relief to prevent... to prevent threatened loss or damage by a violation of the antitrust laws.

That is a long way from incorporating a distinction between prohibitory and mandatory injunctive relief.

And, by the way, the Ninth Circuit did not ground its decision on that distinction.

That is American Stores' argument to support the Ninth Circuit rule.

The... that distinction is not supportable by the language of Section 16.

I think--

Unknown Speaker: Now, Mr. Horn, the... the order here was one to hold and operate the stores separately, in effect.

Now, that is some kind of divestiture order in your view?

Mr. Horn: --Well, we don't think so.

We think this is... the order that was crafted by the district court is a straightforward prohibitory preliminary injunction maintaining the status quo and preserving the possibility of all available remedies following a trial.

The Ninth Circuit--

Unknown Speaker: But that order has no purpose unless the court has the power to order divestiture.

I... surely you acknowledge that that... that that order is beyond the proper discretion of the court if the court cannot order divestiture.

Right?

I mean it... it assumes that if everything comes out a certain way, the court will order divestiture.

Mr. Horn: --It does preserve the divestiture.

I mean, we don't dispute that.

Unknown Speaker: And has no other purpose.

Mr. Horn: I disagree.

The district court could order, following a trial, a permanent hold separate of these two supermarket chains.

That is a permanent injunction which would fall squarely within even American Stores' reading of Section 16.

It would be prohibitory only, would order the American Stores to operate its firms independently of one another, and, for the reasons that we argued in the district court, while we don't believe that that is complete relief, we don't believe that that would be effective relief, it would nonetheless have the tendency over the long run to provide some relief from the injury threatened by this merger.

Unknown Speaker: But the question you raised in your certiorari petition is whether divestiture is within the provision for injunctive relief in Clayton Act Section 16.

Mr. Horn: That is correct, Justice Rehnquist, and that is the issue that we present because we do agree that one of the purposes of the district court's preliminary injunction was to preserve the divestiture remedy, and we believe that the divestiture remedy falls squarely within the authorizing language of Section 16 of the Clayton Act.

And I would like to turn to that.

Unknown Speaker: Do we know that that was one of the things that the district court had in mind?

Mr. Horn: I think we can fairly assume that because of the district court's discussion of the effect of the Federal Trade Commission's hold separate order from its tentative consent agreement and final approval, because Judge Kenyon said in his opinion that he was... it would be a matter of verbal calisthenics to call this a completed merger which could not be prevented by effective injunctive relief at the permanent injunction stage following trial.

And it seems clear to me that he thought he had the power to order the sale of the acquired firm if he felt, at the conclusion of a trial, that that was necessarily effective relief.

Unknown Speaker: Let me, before you leave this preliminary point, you did preserve a second question in your cert. petition which I thought raised the question whether, on its own merits, the whole separate order could be sustained.

You do, you ask... your second question whether the court of appeals erred by reversing the preliminary injunction and so forth and so on, which, it seems to me the question whether the whole separate order itself would be a valid form of relief, even if you could not get divestiture, is still before us.

Mr. Horn: I think that is right.

The question of whether a permanent injunction ordering the permanent holding separate of these two firms by American Stores would be an available remedy following trial is one of the issues we presented... is still before you, and we believe--

Unknown Speaker: We... you petitioned on two questions, but I had thought we only granted on the first question.

Am I wrong on that?

The only question you have in your brief on the merits is divestiture being a form of injunctive relief.

Mr. Horn: --I understand that, Justice Rehnquist, but the petition presented two questions.

The order from the Court granting that petition granted it and did not indicate a limitation to only the first.

In the brief on the merits we did recast the principal issue that we think must be decided in this case.

We did not intend to discard, and our reply brief preserves, the second question as well.

Turning to the language of the statute, the vehicle Congress chose in 1914 to supplement the government enforcement effort under the anti... nation's antitrust laws--

Unknown Speaker: Don't you think you should have done that in your first brief, just out of courtesy to the respondents so they could have had a shot at it, too?

I mean if, you know, if you were going to convert this into... into an argument over a permanent hold separate, I would have liked to hear what the respondents had to say in writing on the point too.

I frankly had thought that that was out of the case.

Mr. Horn: --Well, if anyone was misled we certainly apologize.

That was not our intent, either to mislead or to indicate that that issue was not still before the Court.

Unknown Speaker: You don't mention it in your statement of the question presented, and you don't mention it in your... in your principal brief.

What... what else is one to think?

Mr. Horn: Well, I think, Your Honor, that it's... that it is also an issue which is fairly subsumed even with the divestiture issue which we did discuss, because the Ninth Circuit, in its opinion in this case, concluded that even the preliminary injunction mandating a temporary hold separate also amounted to divestiture under--

Unknown Speaker: I agree it is subsumed, but to say it is subsumed is not to say it need not be argued.

Mr. Horn: --Well, I think all of the principles which we will... which we did argue and are arguing today, that divestiture is available or applicable to the indivestiture portion of the Ninth Circuit's holding below and in ITT.

Turning to the language of Section 16, Congress provided to private citizens and the states the right to secure injunctive relief against threatened loss or damage by a violation of the antitrust laws.

We believe this language is clear and that each of the three elements is plainly present in this case.

First, California sought in its complaint and the district court found that divestiture might be necessary to remedy the harm threatened by this merger.

Secondly, California showed and the district court found that divestiture was a form of injunctive relief within the meaning of Section 16 that would prevent the very threatened loss that Section 7 was designed to prevent.

And third, California showed and the court found that the injury threatened by this merger was that... that this merger was a violation to antitrust laws and threatened the precise injury which Section 7 was designed to prevent.

Now, in light of American Stores' argument referred to by Justice O'Connor, it is especially important to note two things about Section 16.

First, Congress did not limit Section 16 relief to prohibitory injunctions.

Second, Congress did not limit the Section 16 to injunctive relief directed only at threatened violations.

Rather, Congress was focusing on injury to businesses and the consumers of this nation.

And it was focusing on that injury whether from violations which were completed or ongoing or would occur in the future.

And there is not a hint in the language or the history of Section 16 that Congress intended to limit that statute to only future violations of one of the substantive provisions.

Unknown Speaker: Well, they argue that the language of the statute, of course, is that the relief can be obtained against threatened loss or damages.

Mr. Horn: That is correct, Justice O'Connor.

Unknown Speaker: Which could be interpreted as looking to the future.

Mr. Horn: Clearly it does look to the future, because it is the future injury, but it is not limited to injury which flows only from future acts or from future violations, which is the next step of American Stores' argument.

And we think it is especially important to note that Congress went out of its way to specifically authorize private litigants under Section 16 to enforce Section 7 of the Clayton Act.

That is important because in 1914 there was no Hart-Scott-Rodino Act.

There was no Securities Exchange Act by which private litigants would learn in advance that persons were about to make acquisitions which would violate Section 7 of the Clayton Act and threaten them with injury.

Private litigants would only learn about mergers violating Section 7 when they began to feel its effect, long after the stock had been purchased.

And Congress could not have intended to provide a remedy which would be wholly superfluous to the very provision of the Section 7 that it was asking Section... private litigants to enforce.

A more natural reading of the statute does focus on the threatened injury that individuals face from completed violations, or irrespective of whether the violation is complete or not.

Unknown Speaker: One of the arguments that the respondents make is that Section 15, giving authority to the Federal Government, is cast in different and they say broader language than Section 16.

What is your response to that?

Mr. Horn: My first response is that it is not broader language.

If anything, Section 15 of the act is the language which speaks of preventive language, restraining violations, preventing violations.

It is language which lends itself readily to the suggestion that it is directed only at future violations.

But for 100 years this Court has recognized that that statute authorizes the government to seek, and the district courts to order, the relief directed at completed violations and affirmative structural relief.

Section--

Unknown Speaker: So your suggestion is that... what was Congress' purpose in putting the authority of the Federal Government in different language than that of the private people?

Mr. Horn: --The principal reason for it is because Section 16, by conferring a private remedy, needed to import a standing limit, and that is why we have threatened injury.

It is a standing limit which the government has never been required to show for it, to establish its rights to secure relief against antitrust violations.

Now, I would like to turn briefly, if I may, to the legislative history of the Clayton Act, since that is where the Ninth Circuit and American Stores' grounds what I think is the heart of its argument in this case.

We know that Congress, in 1914, knew that Section 15 of the Clayton Act... or the Sherman Act predecessor, had given the government the right to both prohibitory and mandatory relief, and specifically the remedy of dissolution.

And we also know, by careful reading of the debates on the final conference bill in both the Senate and the House in 1914, that those two bodies were told by the floor managers of this bill that it provided the very same remedies under Section 16 that the Congress was providing to the government in Section 15.

We know that Representative Webb in the House told the House in the final conference debate that this bill was as strong in civil remedies as it could be made.

And it seems to us that that cannot be true if the most effective remedy for violations of Section 7 was not being provided.

We think it is clear from those debates on the conference bill that the full scope of the injunctive powers of the courts was conferred on the courts by Section 16.

The only portion of the legislative history--

Unknown Speaker: Excuse me, Mr. Horn, suppose... suppose an acquisition had occurred 20 years ago that forms a new corporation that would be in violation of the Clayton Act.

Would there be a cause of action for divestiture this... at 20 years later?

Mr. Horn: --I think... I think that the answer is there would be a cause of action, but whether... the question whether it could survive the challenges that would be made under recognized equitable principles such as Laches, clean hands and the rest, would be extraordinarily difficult in that case.

Unknown Speaker: Well, it's a monopolized market.

I mean, it turns out that in fact there is not as much competition as there might have been had that merger not occurred 20 years ago.

Mr. Horn: Well, if the specific individual bringing that suit 20 years later could show that he first began to feel the effects of the behavior that that merger conferred on the offending firm, then I think he would be entitled to bring the case at that time.

If that person could only show that he had begun to feel the effects 20 years ago, and sat on his rights for 20 years, then I think he is going to have a difficult case indeed.

But that does not go to the availability of a cause of action.

It simply goes to how the equitable principles would be applied by courts to address it.

Unknown Speaker: But you are obliged to argue, in order to sustain your case, that whenever there is an acquisition that violates the act, it is a continuing violation that extends indefinitely into the future.

Because... because the language of Section 16 is not just injunctive relief against threatened loss, but it's injunctive relief against threatened loss by a violation of the antitrust laws.

So your position is the acquisition is not the violation of the antitrust laws.

Your position is the continuing operation of the acquired firm jointly is a continuing, perpetual violation of the antitrust laws.

That is necessary to your case, right?

Mr. Horn: I don't think it is necessary, but I happen to agree that that is correct.

It's not--

Unknown Speaker: Why isn't it necessary?

I mean, that's how the provision reads.

It's a threatened loss or damage by a violation of the antitrust laws.

Now, if you say the only violation here is the... is the acquisition, that is past.

It is not a threatened violation; it has happened.

Mr. Horn: --The acquisition has happened.

But the injury that it threatens and that it causes is continuing and continuing.

And that is what this district court found.

That's what the Ninth Circuit found.

And there is nothing to suggest, in the language of Section 16, that we must establish an ongoing violation.

What we must establish is that there is ongoing injury.

And that is what we have shown.

Unknown Speaker: You, you think that what the court under Section 16 is supposed to enjoin is not the violation but the loss?

Does a court enjoin loss?

That is very strange.

I... you know, I would read Section 16 to say what it provides for is an injunction against violation.

And the violation is the acquisition.

Mr. Horn: I don't see how you can read the statute that way, Justice Scalia, with respect.

The statute directs district courts to prevent injury caused by violations.

Now, I agree that that statute can be and should be read to give the district courts power to unwind an illegal act after it occurred if that's the effective way to prevent injury.

But Section 16 has commanded the district courts to design relief effective to prevent injury which flows from violations, and it matters not whether they are completed, past, ongoing or threatened.

Unknown Speaker: So, in light of your answer that the period of time that elapses is irrelevant, I take it then it is unimportant, other than for the way it may bear on the equities and the court's discretion, it is unimportant that the operational aspects of this merger had not taken effect?

Mr. Horn: I think it is unimportant to the specific question whether a district court has the power to decree divestiture.

I think it is not unimportant if the Court decides to, which we oppose, but if the Court were to buy into the distinction between prohibitory and mandatory.

Then I think that the failure to bequeath the operational aspects of the merger makes the availability of a permanent hold separate still an important question.

Unknown Speaker: Well, how does that aspect of your argument work?

You are asking us to see whether a merger has been completed operationally?

We don't look to the Delaware law?

Mr. Horn: No, I don't think you do look to the Delaware law.

I don't think Delaware law can control the question of the availability of relief under Section 16.

Unknown Speaker: Well, it controls when the merger was effective.

If, by hypothesis, we are, we do draw a line between post and pre-merger filings, then isn't it Delaware law that controls?

Mr. Horn: I don't think so, Justice Kennedy, because the only thing that the Delaware law did was it enabled American... the short form merger provision under the Delaware law did was it enabled American Stores to acquire the stock which had not been tendered by the Lucky shareholders.

That is what the short form merger provision does.

And the hold separate order was entered in place long before... or not long before, but before that merger law was activated by American Stores.

And the hold separate order required the operational separation of these two firms, and that order was still in place when the preliminary injunction was entered.

So it seems to me that a permanent injunction restricting the completion of what the whole purpose of this merger was the integration of the two firms, and that is what the district court found would confer on American Stores the power to charge higher prices.

If that is correct, and we think this Court is bound by those findings, then a permanent order separating the two firms is available relief.

In conclusion--

Unknown Speaker: Suppose there had been no hold separate order, but the operational aspects of the merger just hadn't taken effect yet?

Would there still be authority of the court to order a divestiture?

Mr. Horn: --Yes.

Unknown Speaker: So what is it that we look to?

Whether or not the operational aspects of the merger have been completed?

Mr. Horn: Well, in the question of whether divestiture is available, I think that is not a relevant inquiry.

I think that if we are addressing whether divestiture is available, the question is does Section 16 authorize it.

We believe it does, and it doesn't make any difference whether even the operational aspect has been completed.

Unknown Speaker: But I am asking, assuming we disagree with you on that point.

Mr. Horn: Then I think they would have had to have complete the operational aspects in order to preclude us from divestiture.

Unknown Speaker: Is there any authority to guide us in that area?

Mr. Horn: I don't think there is any authority which has specifically addressed that question.

In conclusion, I would like to highlight one important feature of American Stores' argument.

There is more at stake in this case than Section 7 or the availability of divestiture in this case, because its proposed distinction between the availability of prohibitory and mandatory relief under Section 16, if that is what this Court were to decide, would have a severe impact on enforcement of all the substantive provisions of the antitrust laws, not just this case or just Section 7.

It would require this Court, for example, to conclude that a person facing injury from the inability to have access to a central facilities controlled by a monopolist, in cases like Otter Tail or Associated Press, is entitled to no relief to redress that injury.

It would require the Court to conclude, for example, that persons facing ongoing injury from violations of Section 1 of the Sherman Act, in cases like Zenith and Silver, are not entitled to affirmative relief to redress the injury that they face from those violations.

This Court has rejected those arguments in Zenith, Hazeltine, Otter Tail and Associated Press, and we think they must be rejected here.

Unknown Speaker: Mr. Horn, what if the merger... a merger has taken place and years later a private plaintiff comes in and seeks divestiture?

Mr. Horn: Then I think that is very much like the ITT case, which was the genesis of this rule.

And I think that the private plaintiff would have a cause of action and would have a very difficult burden perhaps of establish... of meeting the equitable principles, or overcoming the equitable principles of Laches and the rest, which would entitle him to specific--

Unknown Speaker: Well, what are the standards in your view for the private plaintiff to get a divestiture order?

Mr. Horn: --I think the standards are whether or not divestiture is the relief necessary to prevent the harm caused by the violation.

And it doesn't make any difference whether the violation is completed or not.

The question is is it necessary to prevent the injury.

The district court below found in this case that it was.

And that is why he entered the injunction preserving the divestiture remedy.

I would like to reserve my remaining--

Unknown Speaker: Mr. Horn, I don't want to take your time looking for it, but when you get back up will you tell me where in your reply brief you preserve the, or you argue the point about a hold separate?

I, I can't find it at a quick look.

Mr. Horn: --I'll be glad to do that.

Unknown Speaker: Thank you.

Mr. Horn: Thank you.

Unknown Speaker: Thank you, Mr. Horn.

Mr. Lee.

Argument of Rex E. Lee

Mr. Lee: Mr. Chief Justice, and may it please the Court:

First, just very briefly with respect to what issue is before this Court, I think that the second question presented, fairly read, does not include anything other than what the second question presented says, which is whether a preliminary injunction preserving the possibility of divestiture is authorized by Section 16.

It says nothing about any hold separate agreement.

The brief appears to acknowledge the correctness of the Ninth Circuit's ruling on that aspect of the case.

And then, Justice Scalia, it is in footnote 1, and the way it is raised is, was this final under Delaware law.

And if there is anything on which this Court did not grant certiorari it was to decide who was right as a matter of Delaware law.

Now, the case really boils down to a simple matter of statutory interpretation.

The petitioner is quite right in this respect.

That in 1914 Congress expanded the package of remedies available to private plaintiffs to include equitable relief.

And in that respect their relief is the same as that of the Federal Government.

But the further proposition, that private remedies were to be identical to those of the Federal Government, is rejected by the statute on its face and by every rule of statutory interpretation that is applicable here.

If the package of private remedies were identical, then why two separate sections?

And why separate language in each of the sections?

Now, we are told that the reason is that the government must... doesn't need to show any injury, and that is just flat wrong.

These are, as Mr.... as Mr. Horn has pointed out--

Unknown Speaker: Yes, but Mr. Lee, the government doesn't have to show injury to itself.

Mr. Lee: --But it does have to show some kind of injury.

Unknown Speaker: But it doesn't have to show... it doesn't have the standing problem that a private litigant has.

Mr. Lee: That is correct.

But I would observe, Justice Stevens, that if that was the purpose of the separate language, then it is strange... it's a strange way to express it.

Unknown Speaker: But you know, the separate language, it was interesting to me that neither side quoted Section 15 in the brief.

And I suppose the reason is that there isn't that much difference between the two sections.

Mr. Lee: Oh, but there is.

Unknown Speaker: Section 15 talks about prevent and restrain also.

Mr. Lee: The difference is this.

The difference is this, and we did, in fact, with respect, quote Section 15.

Unknown Speaker: Not the whole section.

Mr. Lee: That is correct.

Oh, I apologize.

Yes, we did not quote the whole section.

Unknown Speaker: You just quote the jurisdictional language.

Go ahead anyway.

Mr. Lee: I guess it was just because we were up against the page limits.

I wondered about the same thing, but--

The crucial language... the crucial language in Section 15 does need to be noted, and that it is, that it is proceedings in equity, and that is quite different from the language--

Unknown Speaker: As opposed to injunctive relief.

Mr. Lee: --As opposed to, on the other hand, injunctive relief, and then there are two important qualifiers.

One is threatened loss or damage, which does not appear in Section 15, and... and then it goes on to say... and then it goes on to say--

Unknown Speaker: Well, the private plaintiff has to show antitrust injury, I suppose.

Mr. Lee: --Yes, but the language really goes beyond just requiring that he show antitrust injury.

This is the language that is just an insuperable obstacle, in my view, for the petitioner--

Unknown Speaker: You are reading at 16 now?

Mr. Lee: --Yes, in 16, and it is printed in the petitioner's brief.

It is the end of the relevant language:

"when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity. "

Conduct.

That's what the private plaintiff is entitled to enjoin.

Not structure.

Not status.

Unknown Speaker: Yes, but Mr. Lee, you rely heavily on a distinction between prohibitory and mandatory injunctions.

And what is the language in Section 15 that authorizes a mandatory injunction in your view?

Mr. Lee: Just the fact that the difference in language--

Unknown Speaker: The language is to prevent and restrain.

Mr. Lee: --That is correct.

Unknown Speaker: And you think that clearly authorizes a mandatory injunction?

Mr. Lee: Well, what it talks about is equitable proceedings or equitable relief.

Unknown Speaker: But the relief that can be granted is to prevent and restrain.

Mr. Lee: That is correct.

That is correct.

Unknown Speaker: And that is the language you say clearly differentiates one section from the other, and one allows mandatory and the other does not.

Mr. Lee: Well--

Unknown Speaker: Well, it may... they may be different, but I am not sure which way it leans.

It may... you say it prevents the private mandatory injunction and permits the... I would think you could argue that it is just the reverse.

Mr. Lee: --Well, except that the mandatory-prohibitory distinction also looks toward a difference between conduct, behavior, things that people do, on the one hand, and structure on the other, referring back to Justice Scalia's hypothetical about the corporation that has been in existence.

If you look at the legislative history, which I intend to get to in just a moment, it is full of examples.

The Rogers... the Rogers-Carlin exchange, the Floyd-Untermeyer exchange, about the difference between on the one hand prohibiting conduct, things that may happen in the future.

And they specifically refer to why not give them a mandatory injunction; they don't have it now.

That is in the Rogers exchange.

On the one hand, and structure, and structure on the other.

Unknown Speaker: Well, but does that mean there is no jurisdiction to dissolve a patent pool, for example, or to require the stock exchange to change its regulations and require fair hearings and that sort of thing?

Mr. Lee: Let me say two things in that respect, Justice Stevens.

The first is we think that there is jurisdiction to dissolve a patent pool, that you can do that with a prohibitory injunction.

Certainly there is nothing in the Zenith case, and certainly nothing in the Silver case, that would reject that.

The second point that I want to make is that this distinction between prohibitory and mandatory is part of a larger distinction that is really the one that is the ultimate distinction in this case, between conduct on the one hand and structure on the other.

And the one thing that is undeniable is that in Section 16 Congress referred to threatened conduct that will cause loss or damage.

Now, the only answer, the only answer that the petitioner has to that language is that what they really meant to do by that provision was to incorporate the familiar... requirement of the familiar restriction that you have to show that you are going to suffer injury that is not... that is not redressable by... excuse me, for which there is no other adequate remedy.

And I have two responses to that.

In the first place, that just isn't what the... that is the only language, that is the only explanation they have for that threatened conduct language.

And that just isn't what it says.

If Congress had intended by that language to prohibit... to incorporate the familiar equitable requirement of inadequate other remedy, then Congress would surely... would have said so.

The language it used, threatened conduct that will cause loss or damage, just doesn't say that.

Moreover, by its express language, Section 16 does incorporate the entire package of equitable remedies, by this language:

"when and under the same conditions as injunctive relief against threatened conduct is granted by courts of equity. "

Unknown Speaker: Let me just be sure I understand you.

The threatened conduct, what is the threatened conduct that would justify a dissolution of a patent pool?

Why is that different than the dissolution of a business enterprise?

Mr. Lee: Excuse me.

I guess I misunderstood Your Honor when you said the dissolution of the pool, as opposed to... I think, while that is not this case, I think that the dissolution of the pool, the actual dissolution of the pool, as opposed to what the Ninth Circuit referred to as symptomatic relief prevented the individual acts from occurring, could well be.

Unknown Speaker: Well, what is your position... I am not really sure I understand you.

What is your position, does a Federal court having an antitrust violation having been proved and thinking it is necessary, one, say in a patent case to dissolve a patent pool, or in a motion picture case to set up competitive bidding instead of having clearances, does the court have the power to do that or not?

Mr. Lee: Well, I cannot see any instance in which prohibitory relief would not be adequate to prevent any offenses--

Unknown Speaker: Well, that's not an answer to my question.

Mr. Lee: --by a patent pool.

Unknown Speaker: All you're saying is it is prohibitory relief to... you just, you enjoin the continuance of the patent pool.

Mr. Lee: That's right.

That's right, and any acts--

Unknown Speaker: Well, that is just a play on words, isn't it?

Can't you enjoin the continuance of the combined operation of these two stores?

Mr. Lee: --The Ninth Circuit has acknowledged that there is the power to enjoin the actual acts, the symptomatic relief.

But what you can't do, and where it really makes a difference, is in the merger case.

I don't think it does in the patent pool case.

Unknown Speaker: Excuse me, where--

Mr. Lee: In the merger case, to actually dissolve the structure itself.

Unknown Speaker: --With a patent pool, Mr. Lee, isn't there a continuing agreement, which is what the... you know, what the Sherman Act and the Clayton Act are ultimately directed against.

Combinations and agreements.

Isn't there a continuing agreement to leave the patents in a pool?

Mr. Lee: And you simply prohibit--

Unknown Speaker: That is the violation.

And that violation can be enjoined.

Mr. Lee: --That is correct.

Unknown Speaker: But when there has been an acquisition of a company, there's no further agreement that is keeping that acquisition in effect.

Well, what about--

--It's in effect as a matter of property.

Mr. Lee: Exactly.

Unknown Speaker: What about an injunction against continuing to vote the stock of the subsidiary?

Mr. Lee: Well, as far as... well, I think that is different.

In the case of the patent pool you simply prohibit the future enforcement.

Now, insofar as voting the stock is concerned, I think in most instances that could also be handled through a prohibitory injunction.

Unknown Speaker: You could.

You're saying that would be a permissible form of relief to say that you may not appoint the managers or vote the stock in the acquired company?

That is pretty close to divestiture.

Mr. Lee: That is pretty close to divestiture.

That is pretty close to divestiture.

Unknown Speaker: Well, a year after a merger takes place, a plaintiff who thinks he has been hurt by the merger that he thinks violated antitrust laws can sue and get some damages, I suppose, if he can prove antitrust injury.

Mr. Lee: Of course he can.

Of course he can.

Unknown Speaker: And I suppose then that the day after the merger there is or was threatened loss or injury.

Mr. Lee: That is correct, and those also can be--

Unknown Speaker: And you say that he can't get an injunction... he can't sue to get an injunction the day after the merger on account of the threatened loss or injury?

Mr. Lee: --Well, he can get an injunction to sue against threatened loss of injury, and he can sue on account of conduct.

But the distinction that is drawn--

Unknown Speaker: Well, can't he... I take it you say though that even though he can prove the day after the merger that he is really threatened with loss or injury, you cannot avoid... you cannot get an injunction to avoid that loss or injury by getting a divestiture order.

Mr. Lee: --By... strictly from the existence of the--

Unknown Speaker: Loss or injury.

Mr. Lee: --of the--

Unknown Speaker: You have to wait to get hurt.

Mr. Lee: --That is correct.

And if there is one thing that comes shining through the legislative history, and I--

Unknown Speaker: You must wait to be put out of business.

Mr. Lee: --Not wait to be put out of business, but wait for--

Unknown Speaker: Well, why, you do have to wait.

You can't get an injunction, because this merger is going to do exactly what you fear.

And a year later you can get all the money you want for being put out of business.

But you cannot get an injunction against it.

Mr. Lee: --What you can get an injunction against is specific practices, such as improper pricing, perhaps even undue concentration in the--

Unknown Speaker: Well... well on that basis you will say, on that basis you would say the merger just isn't illegal, unless you get some other injury.

Mr. Lee: --I am not sure I understand.

Unknown Speaker: Well, you... I would think if, even a year later then, that he would have some trouble recovering, unless he proves some special practices that occurred from the merger.

Mr. Lee: That is correct.

That is correct.

Justice White--

Unknown Speaker: Could the state have gotten an injunction, a prohibitory injunction before the merger took place?

Mr. Lee: --Then... then it would have been... then they would have been enjoining conduct.

They would have been enjoining an act, which was the act of going ahead.

Unknown Speaker: But some of these distinctions are really a little bit evanescent, I think.

As someone has pointed out from the bench, I forget who, a distinction between a prohibitory and a mandatory injunction can frequently be reversed just by changing the... changing the syntax.

And your difference is between conduct and structure.

One may be enjoined, the other not?

I think that's a rather... blurred at the edges at least, isn't it?

Mr. Lee: Well, I think both of them, Mr. Chief Justice, are helpful, and the conduct-structure distinction is one that is most clearly demonstrated not only by the language, because it does talk about conduct, but also by the legislative history.

Time after time this very point was made in the course of the legislative history.

Probably the most noted example was the exchange between Messrs. Floyd and Untermeyer, in which Mr. Floyd, who was one of the three sponsors of the bill, said we did not intend by Section 16 to give the individual the same power to bring a suit to dissolve the corporation that the government has.

Unknown Speaker: Well, there is a distinction, perhaps, between dissolution and other divestiture orders, and maybe, maybe you have put your finger on what it was that really bothered the legislators.

But perhaps it didn't bother them that there would be an order of the type involved in this case.

Mr. Lee: That is the argument that our opponents make, Justice O'Connor.

I submit that a careful and objective reading of not only the legislative history but what was happening in the country at the time, just completely dispels that proposition.

There are so many evidences that the word that was used at that time for any... in Justice Brandeis'... Mr. Brandeis' words at that time, change in the status of the corporation was dissolution.

The most frequent example that the legislators used in referring to what they meant by dissolution was the Standard Oil case.

And in the Standard Oil case, and I am reading now from pages 78 and 79, the language is very clear.

It commanded, referring to the district court, the dissolution of the combination.

Dissolution.

And therefore in effect directed the transfer by the New Jersey corporation back to the stockholders of the various subsidiary corporations.

What they did in the Standard Oil case was a classic example of divestiture.

They referred to it as dissolution.

Unknown Speaker: But that was a massive divestiture in Standard Oil.

It wasn't just divesting of one acquisition.

There were just a number of other companies involved, weren't there?

Mr. Lee: That is correct.

But, Mr. Chief Justice, I was responding to Justice O'Connor's question about the distinction between dissolution and divestiture.

And the point is that dissolution is the word that was used at that time to describe any kind of change of status.

The--

Unknown Speaker: My point was that one could have described the Standard Oil decree as dissolution without feeling it would necessarily embrace a much smaller divestiture.

Mr. Lee: --Possibly, except that though... the only difference was the scale.

One was simply larger than the other.

And I think any doubt on that subject is laid to rest by what is probably the closest case to being on point that we have, which is, to be sure, a Second Circuit case, but I offer it for a couple of reasons.

It was the Cambria Steel case written by Judge Hand a short time after the Clayton Act was passed, and it involved a case that in no respect is distinguishable from this one.

Cambria Steel was a small steel company that had been acquired by Bethlehem.

Unknown Speaker: How was it acquired?

Mr. Lee: I'm not sure that the opinion discloses that, Justice White, whether it by stock or asset acquisition.

Unknown Speaker: What was it here?

Mr. Lee: Excuse me?

Unknown Speaker: What was it here?

How was... how did this merger take place?

Mr. Lee: How did... oh, in this case it was a stock acquisition.

Minority shareholders of the Cambria company, in the language of the court, sought to unravel the transaction and restore to the Cambria company... here is the answer, the assets so taken, so it was an asset acquisition.

Unknown Speaker: All right.

Mr. Lee: And what Judge Hand said was that this simply wasn't an injunction suit within the scope of Section 16.

He says, and I quote, the suit at bar, whatever it is, is not a suit for an injunction.

Indeed it is really a suit for the dissolution of a monopoly pro tanto.

And then this line:

"I cannot suppose that anyone would argue that a private suit for dissolution would lie under Section 16 of the Clayton Act. "

Unknown Speaker: Well, Mr. Lee, in your view the acquisition of control that would amount to an antitrust violation of another company, if it has been completed, could never be attacked in court by a private plaintiff or by the state acting under the same statute, if it has already occurred.

Mr. Lee: That is correct.

Unknown Speaker: And, of course, most of these things are handled before the state or a private person would know it is going to take place.

So you would just cut off that remedy all together.

Mr. Lee: Yes, Justice O'Connor, and let me say a couple of things in that respect.

The first--

Unknown Speaker: You don't think that is what Congress had in mind?

Mr. Lee: --Oh, I have no... yes, I really do think that's what Congress had in mind.

Now, whether it was good policy or not is a debate that has raged from 1914 through 1975, the Hart-Scott-Rodino Act.

Brandeis was solidly on one side and Senator Nelson solidly on the other.

It is not an easy policy question.

And as you can see from the amicus briefs that have been filed here, it involves complex issues not only of antitrust policy, but labor as well.

But the fact of the matter is that is exactly what Congress intended.

And I would simply invite the Court to those exchanges between a variety of people, not only Floyd-Untermeyer but also the Brandeis-Carlin exchange.

Once the--

Unknown Speaker: This was in hearings.

Mr. Lee: --This was in hearings.

Once the--

Unknown Speaker: Not on the floor.

How about in the Senate?

Mr. Lee: --On the Senate side there were no hearings, Justice White.

Unknown Speaker: Well, so much the better maybe.

[Laughter]

Mr. Lee: The one thing that happened on the Senate side that is significant is the introduction of this Reed Amendment, which clearly would have given the... excuse me, would have given the states the power that they seek here, and the Reed Amendment was rejected.

Let me just mention briefly, let me just mention briefly the... the statement by Mr. Brandeis.

The Clayton Act was a major initiative of the Wilson Administration.

And this Boston lawyer, Louis D. Brandeis, appeared on behalf of the Wilson Administration.

And at this time the exchange with Messrs. Carlin... excuse me, with Messrs. Untermeyer and Rogers had already occurred, in which they had said you ought to give more.

And specifically would it not have helped you if you could have brought suit for the dissolution of the trust?

This section only gives you injunctive relief.

And then Mr. Carlin said to Mr. Brandeis it has been suggested to us that we ought to give the individual the right to file a bill in equity for the dissolution of one of these combinations, the same right which the government now has.

And here was the response by Mr. Brandeis:

"It seems to me that the right to change the status, which is the right of dissolution, is a right which ought to be exercised only by the government, although the right for full redress against future wrongs is a right which every individual ought to enjoy. "

Now, a couple or three points.

One is that this statement, like Judge Hand's, shows, in answer to Justice O'Connor's question, that the word that they used in those days was dissolution, and indeed, in the second DuPont case, this Court observed just exactly that.

That dissolution and divestiture are largely interchangeable.

They have been over the years, and we so regard them.

The second point, and even more important, is that regardless of whether you call it dissolution or divestiture or anything else, it is the change in status that we are talking about.

And there is no question that there is a difference in that respect between what the Federal Government can do and what everyone else can do.

Unknown Speaker: You're perfectly content with saying that it is a reasonable reading of Section 15 to say that government can get an injunction requiring divestiture?

Mr. Lee: Oh, of course.

Of course the government can, under--

Unknown Speaker: Well, but do you have to say it is a fair reading of the language.

Mr. Lee: --Of course I do.

Of course I do.

And it is a fair reading of the language, because the language is not only broader, but even more important, it is not limited... it does not have in it the word conduct.

And you do not have behind it the kind of legislative history that you have here.

Again, I repeat, it was a debate that raged, it was an intense debate.

Should we... one of the metaphors that was used was grinding the poor defendant between the upper and the nether millstones of the Federal enforcement on the one hand, and then once he finished with that, then he has to go through another gauntlet.

There is no question they knew what they were doing.

And what they were doing was exactly what these various congressmen responded to these New York lawyers, that they weren't going to give them: the same relief that the government had.

That, in opposition our opponents refer to one legis... one piece of legislative history in which Senator Nelson did use the words same relief.

What he was really saying was same injunctive relief.

In fact, those were his exact words.

The same injunctive relief.

Senator Nelson in fact did not take the position, and he knew that the relief was not the same.

In any event the argument proves too much because no one contends that the two are the same.

If they were the same, then the states would have criminal prosecutorial authority, which they don't have.

And later on, in connection with another statute... excuse me, with another section of the statute, Senator Nelson, who would have liked private individuals to have had this broad remedy, made that precise point.

Doesn't it strike you, he said, as a bit unfair that Section 16, to which he specifically refers, gives this right of injunctive relief, but only the Federal Government has the broader powers.

Just a word about the relevance of Hart-Scott-Rodino.

It was an amendment to the Clayton Act, and as a consequence the legislative, the legislative history of the Hart-Scott-Rodino Act, under this Court's decision in Bell v. New Jersey, is persuasive.

By that time we were using the word divestiture in our lexicon, in 1976, and there was a proposal that state attorneys general be given this divestiture remedy.

And Chairman Rodino, who of course was one of the sponsors of Hart-Scott Rodino, said in the clearest words which the English language is capable, the state attorneys general should not be authorized to file parens patriae suits seeking divestiture.

Now, my opponent's answer to that, his only answer, is that Chairman Rodino's views were really rejected later on by Senator Hart.

The citation that they give simply do not support that proposition.

Senator Hart was not saying anything at all about divestiture.

What he said was that the courts, that the states do have the authority to bring parens patriae suits, and that that is sufficient and cites in support Georgia v. Pennsylvania Railroad.

I invite the Court's attention to Georgia v. Pennsylvania Railroad.

It is a decision by this Court, and of course obviously, if it had resolved the divestiture issue, then we would not be in this Court, because it would be dispositive.

All it said was that the states do have the authority to bring parens patriae suits.

That is what Senator Hart said was sufficient.

He did not say anything about divestiture.

And the only statement on that comes from Chairman Rodino.

Just one final point.

This case does not implicate any issues of federalism.

The policy issues for the State of California are of course to be resolved by the California legislature.

And if the California legislature really wants its own attorney general to have this kind of power, then it should be for the California legislature to make the judgment.

Those are just as difficult policy issues today as they were in 1914, as they were in 1976, but they should be resolved in the initial instance by the California legislature and not by the attorney general.

Mr. Chief Justice, unless the Court has questions I have nothing further.

Unknown Speaker: Thank you, Mr. Lee.

Mr. Horn, you have four minutes remaining.

Rebuttal of H. Chester Horn, Jr.

Mr. Horn: Thank you, Mr. Chief Justice.

Justice Scalia, in response to the question you asked me, we refer to the second issue at footnote 1 of our reply brief, because that footnote discusses whether or not this Court can... must reverse the Ninth Circuit's decision below, even if it agrees with American Stores, because the preliminary injunction which Judge Kenyon entered is indisputably prohibitory and it preserves an indisputably prohibitory permanent relief of a permanent hold separate order.

Unknown Speaker: Very subtle.

Mr. Horn: Pardon?

Unknown Speaker: That's a very subtle way of making the argument.

Mr. Horn: In response to several questions from several justices, I think it is fair to say that American Stores agrees that this Court has decided, in cases like Zenith and Silver, that affirmative injunctive relief is available under Section 16 of the Clayton Act.

And if they are not willing to go quite that far, they clearly agree that whatever that relief was it could be characterized as prohibitory.

It seems to me that this case is just like those cases in that respect.

The district court below, following a trial, could readily frame a prohibitory injunction prohibiting American Stores from holding the stock of Lucky or the assets of Lucky acquired in violation of Section 16 of the Clayton Act.

It is probably worth remembering here that when this Court decided United States v. DuPont one of the things that this Court noted is that indeed Section 7 does prohibit not only the acquisition but the continued holding of assets acquired in violation of Section 7, and that is how the decree in the second DuPont decision was actually framed.

And... so the difference between prohibitory relief and mandatory relief is not going to get American Stores very far down the road.

And it's a debate which really ought to be beside the point under Section 16.

Section 16 asks the district court to prevent injuries that face individuals and businesses from violations--

Unknown Speaker: So you think the big debate was just a lot of hot air before the Congress about whether private parties should have the power to dissolve a combination?

Mr. Horn: --No, I don't think that was a lot of hot air at all, Justice White.

The debate which American Stores refers to--

Unknown Speaker: Well, you could say well that's a prohibitory injunction, continuing to have the combination.

Mr. Horn: --But the debate in the Congress in the early stages of the hearings before the Clayton subcommittee did not speak to the difference between prohibitory and mandatory relief, except with a minor exchange where he was urging that mandatory relief ought to be available.

And it is important to note about those early exchanges that they were discussing a much different bill than was ultimately introduced into the Congress and passed by that Congress.

Section 13 of the bill that was being discussed in those exchanges between Representatives Floyd and Carlin and those witnesses was going to amend the Sherman Act.

And it was not going to add the new substantive provision which is found in Section 7, which was ultimately added by the Congress.

That debate focusses on a proposed amendment giving private litigants the right to seek injunctive relief against the trusts, the restraints of trade violations under Section 1 and Section 2.

Unknown Speaker: To dissolve a monopoly.

Mr. Horn: And that is precisely right.

And that is what, that is what Mr. Brandeis was saying.

He was saying that the ability to attack these nationwide trusts, like the ones which Congress was so upset about in the decrees in Standard Oil and American Tobacco, that kind of attack really belonged in the hands of the Federal Government.

But no one at that point was yet debating what relief was available to enforce Section 7 of the Clayton Act, because that bill was a separate bill which was not being discussed and would not have involved Section 13.

The separate bill was going to add a whole new provision of law not in the Sherman Act, creating this new substantive liability.

Now, it is important, I think, to again remember that the bill that ultimately came out of the Congress now--

Unknown Speaker: Well, that may be... that may be the case, but if you say that Section 16 doesn't give authority to dissolve a trust, how come it gives authority to order divestiture that's in... that violates Section 7?

Mr. Horn: --I don't say that Section 16 doesn't give authority to violate the trust.

I say that Congress changed its mind from the early debate in February of 1914 to the debate on the conference bill when Senators Nelson and Shields made it so perfectly clear.

Unknown Speaker: Okay.

Chief Justice Rehnquist: Thank you, Mr. Horn.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Cargill, Inc. v. Monfort Of Colorado, Inc. - Oral Argument

Fri, 09 Jan 2009 14:48:25 +0000

Case:

Cargill, Inc. v. Monfort Of Colorado, Inc.

Media File:

85-473_19861006-argument.mp3

Related Transcript:

1986_85_473_argument.xml

Transcript:

Argument of Ronald G. Carr

Chief Justice Rehnquist: We will hear arguments next in Cargill v. Monfort.

Mr. Carr, you may proceed whenever you're ready.

Mr. Carr: Mr. Chief Justice, and may it please the Court:

This case presents two issues.

The first issue is whether the plaintiff, Monfort of Colorado, in seeking to prevent the acquisition by one of its rivals, Excel Corporation, of another of its rivals, Spencer Beef, established the kind of injury to itself necessary to support relief under Section 16 of the Clayton Act.

The second issue is whether the acquisition could be thought substantially to lessen competition under the standards this Court has employed in applying Section 7's prohibition.

Under this Court's decision in the Brunswick case, these two issues necessarily are interrelated, analytically, and in light of the purposes of the antitrust laws.

In Brunswick, the Court held that a damages plaintiff, in order to get relief, must establish that his injury will flow from the anticompetitive effects of the act he challenges.

In other words, the plaintiff's theory and proof of violation must be congruent with his theory and proof of injury.

The injury must flow from what makes the act in question unlawful.

All of the purposes that the Brunswick requirement was intended to serve apply just as much under Section 16 as they do under Section 4.

The basic purpose of the Brunswick rule was to assure that the antitrust remedies are invoked and are deployed in circumstances that serve the pro-competitive purposes of the antitrust laws.

In Section 16 actions quite as much, and perhaps even more, than Section 4 actions this purpose is implicated.

Indeed, in Section 16 actions, if the injunction can be applied to what may he pro-competitive conduct, the public loses the benefit of that enhanced competition altogether.

In this case, exactly that problem is revealed by the record.

And the rulings below would allow that danger to take place, and disserve the purposes of the antitrust laws.

Unknown Speaker: How does any... under your approach, how does any merger damage competition, or could it ever?

Mr. Carr: An acquisition... if you mean competitors as opposed to competition, it can indeed.

But an acquisition can harm competitors in any one of a number of ways.

Unknown Speaker: Well, I know.

But how can it harm competition?

Mr. Carr: An acquisition can harm competition by so significantly increasing concentration--

Unknown Speaker: That what?

Mr. Carr: --and raising entry barriers as to make the market perform less competitively.

Unknown Speaker: Well, that may be so.

But then who could ever sue for it besides the government?

Mr. Carr: In the event that an acquisition had those effects, the standard effects predicted by Section 7 horizontal merger analysis, consumers, large-scale consumers particularly, would have an interest in preventing the acquisition.

In this instance where the--

Unknown Speaker: But no... it would never... nobody in the same trade level could sue?

No competitor could sue?

Mr. Carr: --The usual consequences of a horizontal acquisition is to diminish competition.

That's when it's objectionable under Section 7.

Unknown Speaker: But it wouldn't hurt a competitor?

Mr. Carr: It would not hurt a competitor.

Unknown Speaker: Would it ever?

Would it ever hurt a competitor?

Could a competitor ever object to a merger?

Mr. Carr: There are kinds of horizontal acquisitions that we believe could hurt a competitor.

If the acquisition involved market shares so significant that--

Unknown Speaker: That what?

Mr. Carr: --they raise a credible threat, a genuine threat, of predatory activity, then, if the market circumstances are such as to give some palpable basis--

Unknown Speaker: You mean predatory activity like lowering prices to drive somebody else out of business?

Mr. Carr: --Genuinely predatory conduct.

That is to say, the kind of conduct in which a firm with a dominant market position--

Unknown Speaker: So it almost has to be monopolization?

Mr. Carr: --As a practical matter, predation is impossible unless the firm, the would-be predator, has at least close to a dominant market position.

Unknown Speaker: It also requires an intent, does it not?

Mr. Carr: Well, of course.

The predator has to be willing, as well as able, to deploy that dominant market position, in such a way as to drive rivals from the market.

It is an elaborate and difficult scheme--

Unknown Speaker: xxx cause of action on a competitor?

Mr. Carr: --Consumers are directly injured by any sort of significantly increased concentration in the market that gives rise to the possibility of oligopolistic conduct.

But oligopolistic--

Unknown Speaker: Which is like what?

Raising prices?

Mr. Carr: --Raising prices, reduce supply.

Unknown Speaker: Which wouldn't hurt competitors?

Mr. Carr: Far from it.

Any competitor, faced with the possibility of diminished competition, that is, an increased likelihood of oligopolistic conduct, market interdependence, whether tacit or express collusion, should, faced with such an acquisition, be delighted.

Unknown Speaker: Mr. Carr, is there a difference in your view between Section 7 of the Clayton Act and Section 2 of the Sherman Act?

Mr. Carr: Yes, indeed, there is.

Unknown Speaker: What is the difference?

Mr. Carr: Section 2 of the Sherman Act looks to the achievement, whether through--

Unknown Speaker: The power to affect price.

Mr. Carr: --active conduct or otherwise a monopoly position.

Unknown Speaker: Enough power to get the price up a little bit.

Do you have to get the same degree of power under Section 7?

Mr. Carr: In order to show a violation of Section 7, no.

Unknown Speaker: So in this case it's at least theoretically possible that there could have been a violation of Section 7 but no impact on price at all; is that right?

Mr. Carr: The purpose of Section 7 is to predict probably future impacts on market conditions.

As a consequence--

Unknown Speaker: What if a trial judge concluded in this case that there's no impact on price now, but when the industry gets sufficiently concentrated, it's predictable that it would be?

And that with this merger, that evil day will arrive in 10 years instead of 20 years, just... it moves the process of concentration up a little bit.

Would a competitor have a cause of action under those--

Mr. Carr: --No, it would not.

Section 7 horizontal merger standards, those that the District Court used here to determine that there was a violation, predict the likelihood--

Unknown Speaker: --xxx could, under Justice Steven's hypothetical?

Mr. Carr: --Both the government and consumers could sue.

Unknown Speaker: But no competitor?

Mr. Carr: A competitor can't sue precisely because--

Unknown Speaker: Well, how could even a consumer sue under my hypothetical?

Because for the next 10 years, things are going to be very competitive.

It'll just take awhile before you get the monopolistic condition in the market to have any impact on price.

Mr. Carr: --Well, the consumer can, based on the facts that we've been discussing, predict a possible or probable future effect of the kind that Section 7 forbids, of tendencies toward increased concentration and reduced competition, which under the--

Unknown Speaker: What if the defendant came in and said, yes, but in the 10-year interval between arriving at that period of time... concentrated market in our present condition, we can have even more intensive competition than we've had in the past while the process goes on?

Could the consumer still sue?

Mr. Carr: --It's difficult to know how that mechanism could operate.

If indeed, the 10 years--

Unknown Speaker: Well, just the facts in the oil industry under the Standard Oil case.

Isn't that what happened?

There was very intense competition until they got a large enough segment of the industry, and then the prices went up.

Mr. Carr: --Well, what happened, as I recall, under the Standard Oil case is, there was a kind of competition which was of a sort that led to increased concentration and a monopoly.

Unknown Speaker: Through a whole bunch of mergers.

Mr. Carr: Partially... partially through mergers.

But that is not the consequence that Monfort predicted here, nor is the mechanism the same.

On the record here, Monfort challenged the acquisition solely on the ground... as a substantive antitrust... Section 7 matter, solely on the ground that the acquisition would increase concentration in the markets, and hence, diminish competition at some reasonably foreseeable point in the future.

Unknown Speaker: Do you think Monfort proved enough to... that if the government had brought this suit and proved exactly what Monfort did, that there would have been a Section 7 violation made out?

Mr. Carr: Had the government established the facts... we, of course, believe that on the merits the facts do not show an antitrust violation.

But assume for the moment that they did, there would be no question that the government--

Unknown Speaker: No, I asked you, on the facts that were proved by Monfort in this case, if the government had brought the case, proved the same facts, would a Section 7 violation have been made out?

Mr. Carr: --No, we believe not.

The correct standards of analysis, this Court's decision in General Dynamics and other cases, suggest that the analysis applied to the facts below was incorrect; that in fact these markets would continue--

Unknown Speaker: Well, is that your major point in this case?

Or is it that they didn't make out an antitrust injury?

Mr. Carr: --Our point is both, that an attempt--

Unknown Speaker: The Court of Appeals found at least there was a Section 7 violation.

Mr. Carr: --The Court of Appeals concluded that the District Court's analysis on the Section 7 merits was not clearly erroneous.

There were various findings of fact which the District Court made were not clearly erroneous.

Unknown Speaker: So it's easier for you to go the antitrust injury route?

Mr. Carr: Well, we go both.

Unknown Speaker: Well, I know you do.

But you don't have to eat up some District Court's findings.

Mr. Carr: We don't believe that on the Section 7 merits it's necessary to disturb the District Court's findings of fact in order to conclude that the analysis that applied to those facts--

Unknown Speaker: Well, we review the District Court's findings here under the same standard as the Court of Appeals do.

Mr. Carr: --That's right.

But we believe that the Court of Appeals misapplied the clearly erroneous standard.

And in fact, the problem in the District Court's decision that we attempted to identify in the briefs below, and that we've discussed in the briefs to this Court is not that the particular findings of fact were incorrect, or incorrectly reflected the market realities.

The problem was the inferences drawn from those factual findings for purposes of answering the ultimate Section 7 question, which is to say, what is the effect of this acquisition on the future performance of these markets.

Unknown Speaker: And in terms of Section 7, how did it affect competition?

Mr. Carr: How is it... how did it affect, and how is it likely to affect competition.

In order to make that sort of judgment, it's not possible to lock, as the District Court here did, to conditions of rivalry under very and intense market... a market that's intensely competitive.

The answer... the question can be answered only by positing a possibility that the leading firms in the market will begin to behave collusively or attempt to behave collusively or oligopolistically, and asking, what would happen then?

What sorts of competition would be called into play?

What sorts of new entry might occur?

What the fringe firms--

Unknown Speaker: You say, Mr. Carr, it has to be done this way that you're explaining to us.

But isn't that itself kind of a factual statement?

Why did the District Court have to adopt your approach to it rather than the one it in fact adopted?

Mr. Carr: --Because I think the approach we're urging, Mr. Chief Justice, is the only approach consistent with the purposes of Section 7.

Section 7 asks, what is the likely effect of this acquisition on competition?

Is this acquisition likely substantially to diminish competition in the market?

The only way that question can be answered is by looking to the effects of the acquisition on likely future market performance.

If the dancer that is a source of concern... and the plaintiffs' contention is that the acquisition will increase concentration, and that that will lead to an increased likelihood of interdependent or collusive conduct, then the only sensible way of answering the Section 7 question is to posit that sort of conduct, and try to predict, based on the best material and evidence available, what the likely reactions are going to be.

Can in fact this... these firms, the merging firms and their principal rivals, come together and interdependently control market price and reduce its output.

Unknown Speaker: Suppose we find... and I know it's your case that we can't find, but suppose we find that it would; and that the end result of this whole process would be an oligopolistic market.

Is it your contention that there would still be no standing because this plaintiff must assert that it went out of business in the intermediate phase of competition, assuming no predation theory but just fierce, competition which this plaintiff says will drive them out of business, resulting in an oligopolistic market of which they are not a part; would they have a standing in that situation?

Mr. Carr: No.

No, they would not.

Unknown Speaker: Why not?

Mr. Carr: Because their injury flows from intense competition.

And if, indeed--

Unknown Speaker: Yes, but can't you lock at the thing as a unit?

Isn't... do you just have to look at the oligopoly?

Can't you look at the whole process that leads to the oligopoly, and say that if it does lead to the oligopoly, the submersion of this company, which is part of the process that leads to that oligopoly, gives them standing?

Mr. Carr: --The question is, how does the acquisition lead to the oligopoly?

The acquisition, according to the plaintiff here, both in its brief to the trial court and its brief to the Court of Appeals, could lead to the oligopoly ultimately and in the long run only by increasing the relative efficiency of Excel, its efficiency relative to other firms in the market.

If, indeed, the mechanism by which the acquisition leads to oligopoly is via increased efficiency... and efficiencies uniformly will serve the benefit of consumers... those efficiencies ultimately and inevitably would be achieved through market evolution in some way, sooner or later.

In other words, the injury that's being complained about is an injury from the normal economic evolution of the market, functioning competitively.

And it in no way--

Unknown Speaker: The market always works?

Mr. Carr: --I'm sorry?

Unknown Speaker: The market always works?

Mr. Carr: No, the point is not that the market always works, but that the antitrust laws are designed to identify only those circumstances in which firms behave anticompetitively, or, through their voluntary actions, increase the likelihood that the markets in which they participate are likely to perform anticompetitively.

And it's vitally important that the antitrust remedy of an injunction against acquisitions be restricted to those circumstances.

These kinds of questions are extraordinarily difficult to answer with any confidence at all in their accuracy.

The data that are available to answer them are very thin, are very hard to come by.

The cases must be tried rapidly because of the timetables of these acquisitions.

And no economists, except in the most extreme market circumstances, would ever say that he knows with complete confidence what the likely effects of an acquisition would be.

But exactly for that reason, it's critical that the plaintiff before the Court, and asking for the Court's judgment on these sorts of difficult questions, assert a kind of harm that is at least consistent with the anticompetitive theory on which he's relying to establish a violation.

Unknown Speaker: Mr. Carr, I take it you're not urging the position of the Solicitor General, that there can never be standing for a competitor to sue?

Rather, you are arguing on these facts, no substantive claim of anticompetitive conduct was made out?

Mr. Carr: As a matter of policy, as a matter of general principle, it may be that the rule the Solicitor General is urging is very wise.

But it is not necessary to adopt that rule in order to decide this case.

There simply is no question in this that what the plaintiff was relying upon to show injury departs radically from what it was relying on to show an antitrust violation on the merits.

On the one side, diminished competition in order to show a violation.

On the other side, enhanced efficiencies and heightened competition in order to show that somehow the acquisition would injure Monfort.

Unknown Speaker: This case isn't on the pleadings or summary.

This case was tried, was it not?

Mr. Carr: This case was tried, and the record is available.

Unknown Speaker: And the question is, if it's essential to prove an antitrust injury, your claim is they didn't prove it?

Mr. Carr: They didn't prove an antitrust injury at all.

Unknown Speaker: Do you agree with the District... with the Court of Appeals that the standard of proof for antitrust injury in an action for an injunction is less than in an action for damages?

Mr. Carr: No, I think that the Brunswick principles require that the Brunswick standard be applied with equal rigor in actions under Section 16.

And I see no possible basis for a distinction.

Unknown Speaker: Mr. Carr, if I understood your response to Justice White earlier, although you don't agree with the government, in theory, that a competitor can't sue, as a practical matter, that's what your theory ends up with, isn't it?

Mr. Carr: No.

A competitor who can show that an acquisition causes a genuine threat of predatory or other exclusionary conduct--

Unknown Speaker: Other than predation.

Mr. Carr: --There are other kinds of exclusionary conduct.

For example, a foreclosure of supply.

Or foreclosure of customers.

Those are the kinds of anticompetitive harm that can lead directly to the elimination of a competitor; that can substantially diminish the competitiveness of the market.

And acquisitions have been found unlawful on those grounds.

That sort of theory of violation would be perfectly consistent with the theory of injury.

What we believe you cannot do is to assert, on the one hand, as Monfort did here, that the acquisition will diminish competition, and on the other, it will increase.

Unknown Speaker: There is a gray area you get to, whether... when intense competition turns into predation.

Mr. Carr: It is often by no means easy to tell when it does... when it is competitive and when it's predatory.

For exactly that reason--

Unknown Speaker: Well, I know, but in a Section 7 case, that may change the burden of... of a plaintiff's burden.

Mr. Carr: --But the courts have been extraordinarily concerned in antitrust cases with making exactly that distinction, and developing tests to make it, precisely because of the danger the competitors may challenge competitive conduct.

Equally, in Section 7 cases, where you're looking to future predictions of harm, exactly the same sort of care must be taken, and these sorts of allegations of predatory conduct approached with extreme skepticism.

The use of the term "predatory" in the courts below has absolutely no meaning.

Unknown Speaker: So certainly you don't think a competitor is going to make out a case of antitrust injury if, as Justice Scalia has proposed, he alleges that they are going to compete so fiercely that I'm just going to have to go out of business?

Mr. Carr: No.

Fierce competition is simply not an antitrust violation, and doesn't make the acquisition unlawful.

Unknown Speaker: That is not predation.

That's just competition?

Mr. Carr: Precisely.

Argument of Louis R. Cohen

Chief Justice Rehnquist: Thank you, Mr. Carr.

We'll hear from you, Mr. Cohen.

Mr. Cohen: Mr. Chief Justice, and may it please the Court:

The Court of Appeals recognized in this case that a competitor cannot legitimately object to the merger of two of its rivals on the ground that the merger will reduce competition and raise prices, but because, the Court of Appeals said, the competitor would surely benefit from such a transaction.

The transaction might violation Section 7, and consumers or customers... here, we're talking about customers like Safeway and A & P... customers might have... would have standing to challenge a merger on that ground; but not competitors.

Let me answer the question that I think was implicit in some of the questions addressed to Mr. Carr, which is, why shouldn't we let any interested person, particularly, a well informed competitor, challenge a merger on the ground that it will reduce competition?

First, the statute, Section 16, says that the plaintiff must allege threatened loss or damage.

And this Court said as long ago as the Borden case in 1954 that this must be of a sort personal to the plaintiff.

Perhaps more important, though, the statute was wise, because there's a real fox-guarding-the-henhouse problem here.

The competitors' incentive is to favor mergers that will decrease competition and raise prices, and to oppose mergers that will increase competition and lower prices.

And if the only person opposing a merger is a competitor, as here, that's probably because his instinct tells him the merger will intensify competition.

And I mean no respect to overworked District judges when I say that the competitor's informed instinct may be more reliable than the outcome of a trial full of economists' charts on whether... on issues as elusive as this.

Monfort in fact brought this case because it feared intensified competition.

Mr. Monfort testified on direct examination eloquently on the point.

He said, IBP decides they want to stay number one.

Excel decides they want to be number one.

They simply increase their production by working Saturdays, by being very aggressive in the marketplace, and that without ever talking to each question.

Question: Do you believe this would occur if this acquisition is approved?

Answer: I most certainly do.

That is why I am here today.

Unknown Speaker: Mr. Cohen, I agree with you xxx that the incentives are as you say.

Put how do you get from that to the rule of interpreting a statute that you're urging upon us?

It seems to me the equivalent is to say, it's very unlikely that a little man will beat up a big man; and therefore, we will not allow any tort actions by big men asserting that they've been assaulted by little men.

Now, it's very plausible that the vast majority of those suits are likely to be frivolous suits or harrassing suits.

But how do you find a rule of law in the statute that says competitors can't sue?

It's a convenient rule, but where is it in the statute?

Mr. Cohen: Justice Scalia, we're not urging that a little man... this was a billion-dollar-a-year little man, Monfort... that a little man may not sue and say, he hit me.

If there is evidence of predatory pricing that has occurred, there is a suit under Section 2 of the Sherman Act.

What we are urging is that competitors not be allowed to label the kind of intensified competition that Monfort feared, the kind of future intensified competition, to label that predatory.

Because the consequence of allowing standing on that ground is to allow any competitor who wants to get into court and challenge a merger that he fears will be pro-competitive, the opportunity--

Unknown Speaker: Although others can label it that way?

You allow other people to come in and say that just fierce competition is predation.

But you will not allow competitors to make the same allegation in court.

And I just find it hard to see in the statute any principle that will enable us to allow some people to make the allegation and not other people.

Mr. Cohen: --No.

In fact, we think that the notion of predatory pricing is, as this Court observed last year in the Matsushita case, so irrational a form of conduct on the form of predators, and so rare in fact, that no plaintiff, including the United States, ought to be allowed to challenge a merger solely on the ground that future competitive activity will be predatory.

It's like saying, Cohen has said he'd like a bigger house and he obviously can't afford it on his government salary, so we better enjoin him from robbing the bank.

Unknown Speaker: So, I take it, then, if the government had brought this suit and proved precisely what Monfort did, you would say the government should have lost?

Mr. Cohen: If the government had brought this suit alleging future--

Unknown Speaker: And offered the same evidence that Monfort did, you say the District Court should have ruled against the government?

Mr. Cohen: --The government would have had standing to allege that the merger would reduce competition--

Unknown Speaker: Yes.

Mr. Cohen: --and raise prices, which is our usual allegation--

Unknown Speaker: But it should have lost?

Mr. Cohen: --Well, we think... we don't have a position on whether this merger... we didn't bring a suit.

We looked at it.

We decided not to.

We don't have a position on whether this merger should have been enjoined.

We don't think the District Court decided the merits correctly.

Unknown Speaker: But as far as you're concerned, we should... we could, consistent with your position, assume there was a second... that the government on this evidence could have proved a Section 7 violation, but that nevertheless, Monfort should lose because of the lack of antitrust injury?

Mr. Cohen: That's right.

That's correct.

Unknown Speaker: xxx I'm in some confusion now.

I thought you had said in response to my question that you wouldn't allow the government to make these arguments any more than you'd allow... which was contrary to my reading of your briefs.

Now if that's--

Mr. Cohen: There really were--

Unknown Speaker: --That isn't a party standing question.

It's really a substantive question about what will establish an antitrust violation.

Mr. Cohen: --Justice Scalia, there really were two quite contrary contentions made for purposes of standing and the merits here by Monfort, who did bring it.

Monfort alleged standing on the ground that there would be intensified competition that would lower prices and drive it out of business.

Monfort then alleged on the merits that there would be reduced competition and higher prices.

We are arguing that a competitor does not have standing to make either sort of claim, the first because there is no violation in intensified competition, the second because there is no injury if the consequence is reduced competition and higher prices.

The government certainly has standing to make the second kind of claim.

We think that the problem with a predatory pricing claim is both a substantive problem and a standing problem.

It's a substantive problem because--

Unknown Speaker: Mr. Cohen, may I ask you, with respect to the second kind of claim that the government may ask, what is your view of the proximity in time that must be alleged and proved when the change in the price structure might occur in order to establish a violation?

Does it have to prove that immediately following the merger there will be an impact on price, in your judgment?

Mr. Cohen: --No, it does have to prove, under the Brown Shoe case, a reasonable probability that the change in structure in the market will lead to a reduction in competition.

Unknown Speaker: Sooner or later?

Mr. Cohen: Yes.

But the scenario under which prices go one way for 10 years and then start to go the other way is a scenario that I, frankly, don't understand.

It doesn't reflect a profitable or feasible strategy for any competitor to adopt.

Unknown Speaker: Well, is it correct that just under your view as a competitor may not sue because in the interim competition is more intense, also, a consumer could not sue, or a customer also could not sue?

Because they would also benefit.

Everybody benefits from increased competition.

Mr. Cohen: I don't think that the customer, Safeway, has an interest in suing to block this merger if it thinks--

Unknown Speaker: What it really boils down to is that no private party can sue until the market is affected; is that right?

Mr. Cohen: --No, a private party can sue on the basis of an expectation that the consequence of the combination will be to reduce competition and increase prices.

And if Safeway had thought that that would be the consequence of this acquisition, they would have brought suit.

Unknown Speaker: Mr. Cohen, I suppose that some mergers might hurt competitors in nonprice ways that are anticompetitive, like foreclosing a source of supply, or something of that kind.

Mr. Cohen: It is not, Justice O'Connor, the government's position that competitors may not sue... categorically may not sue on any theory.

We would not let competitors sue on either of the two theories that are involved in this case.

Argument of William C. McClearn

Chief Justice Rehnquist: Thank you, Mr. Cohen.

Mr. McClearn, we'll hear from you now.

Mr. McClearn: Mr. Chief Justice, may it please the Court:

Before turning to the question of standing, I'd like to take just a moment to describe why this suit was brought and what, substantively, is at issue here.

Monfort brought this suit because Mr. Monfort believed the acquisition seriously would affect competitive conditions in the beef packing industry.

Monfort's father had been a cattle feeder since the 1920s.

The company went into the beef packing business in the early 1960s.

As the industry moved through a period of transition following, inefficient firms disappeared, and efficient firms, including Monfort, survived.

A leading firm, IBP, emerged; a second leading firm, Excel, assumed a strong second position; both with resources vastly in excess of those of my client.

By 1983, when this suit was brought, this was a no-growth industry.

It had gone through a period of transition.

It had stabilized.

And it was not growing.

Monfort perceived that this acquisition would significantly increase the power of Excel, and would result in the leading companies becoming even more dominant than they previously had been.

He saw that future growth in this industry would not be due to efficiencies.

He believed that the increased market power created in Excel by this acquisition would ultimately force his company out of business not because it was less efficient but because it had fewer... far fewer... financial resources than the dominant firms.

Unknown Speaker: Would you spell... what would be the consequences of its having far fewer financial resources?

Mr. McClearn: The consequences as found by the District Court, and as I think really are the essence of what the injury claim is here, Mr. Chief Justice, are these:

Following the acquisition here, Excel would have a very substantially increased market share, something over 20 percent.

It would also have the enormous financial resources of its parent and related companies.

And thirdly, and most importantly, it would have the intent, which we demonstrated, to take market share from particularly its smaller rivals, of whom my client is one.

And lastly, what this acquisition did for Excel was to give it plants in a geographic location where it could, and indeed as the District Court found, there was a distinct possibility that it would, target one of my client's plants for selective price cutting, below-cost pricing.

Unknown Speaker: I had intended by my question to ask you what the connection was between the lack of financial resources of your client, and the potential antitrust injury.

Because I thought you said that what your client lacked in this forthcoming battle was financial resources.

Mr. McClearn: That is true.

Unknown Speaker: And how is that going to effect it?

Mr. McClearn: Because my client, under the circumstances posed, and indeed, under the circumstances found by the District Court, could not withstand a period of losses for the length of time that Excel could.

And--

Unknown Speaker: This is on the predatory pricing hypothesis?

Mr. McClearn: --Yes, it is.

And I think--

Unknown Speaker: 0 xxx.

Mr. McClearn: --Well, I think I need... it needs to be said, Your Honor, that... counselor quoted, for example, from the trial transcript as to what Mr. Monfort said about competition.

He did indeed say that the industry was competitive and had been competitive in the past.

But what he also said was: I can compete with these people if they price at or above cost.

I cannot compete with them below cost.

Unknown Speaker: Was there any assertion... was there any particular reason to think that they were going to sell below cost?

Mr. McClearn: Yes, there was.

Unknown Speaker: In his testimony?

Mr. McClearn: Yes, there was.

Unknown Speaker: As I recall his testimony, he said something like, well, it depends on how you compute cost.

They keep their books differently from ours.

Mr. McClearn: No.

What he said is, I don't know what their costs are.

And indeed, he shouldn't know what their costs are.

But let's assume, and I know that he does assume, that we are essentially operating on the same costs.

What this record does not show is that there is any difference in the efficiencies of the Excels of the world and my client.

And therefore, if you are going to take market share, which Excel has clearly and specifically said it's going to do, it can only do that by going below cost, at least in selective circumstances.

And that necessarily has to follow, unless you can establish that you are more efficient than I am.

Unknown Speaker: Or unless you believe you're more efficient, in which case you would make the same statement.

Do you have any evidence of predatory intent other than the fact that they are a company with more resources?

Can one assume predatory intent whenever you're dealing with a company with greater resources which has said that we're going to try to expand our share of the market, which I assume, by the way, is what every company says?

Do you know of any company that doesn't want to expand its share of the market?

Mr. McClearn: Of course not.

But I think what you have to look at in those circumstances is, what is the purpose and what is the legislative intent behind Section 7?

And Section 7... the problem with Section 7, to the extent it has one, is that it does require a prediction of future events.

And that's what the District Court did in this case?

Unknown Speaker: And it's enough to predict predation that you're dealing with a company that has a lot of money and that wants to increase its market share?

That alone is some unusual evidence of predation?

Mr. McClearn: No.

I don't... I think you have to go on, and I think you have to--

Unknown Speaker: Well, then, what more do we have here?

Mr. McClearn: --You have the point--

Unknown Speaker: That's my point.

If you're running a predation theory.

Frankly, I didn't see your theory below as being a predation theory.

Mr. McClearn: --The one thing that I think has got to be put to rest, my client is not concerned about increased competition.

We do not take the position that competition, simply because they are bigger and we are smaller, is somehow violative of Section 7.

I think you can assume a circumstance where that might exist.

For example, the economist called by the defendants in this case would not agree that a combination of IBP and Excel would, on its face, be improper.

People, I suppose, can come to differing conclusions.

I think he was wrong on that.

But the point that we make here is that the District Court did look at Section 7.

He did look at what the purpose of Section 7 was.

He looked at the market.

He locked at the degree of concentration.

He looked at the trend of concentration.

He really did follow this Court's precedents, I think.

Unknown Speaker: Mr. McClearn, to come to the conclusion that predatory pricing will ensue from a merger, don't you have to find, as a matter of fact, that one of the merged companies intend to drive the rest out of the market after they have sufficiently cut costs, cut prices?

It isn't just a general kind of a vague movement toward intense competitiveness.

Doesn't it require specific intent?

Mr. McClearn: Absolutely not, I would say, Mr. Chief Justice.

And the reason is this: That's the requirement of Section 2.

If in fact I have to prove a Section 2 case, we can put Section 7 aside; it would have no purpose.

Unknown Speaker: Well, but if we're talking about predatory pricing, and I thought this was the definition that was repeated most recently in Matsushita, it's the intent to cut prices, drive... so that your competitor can no longer stay in the market.

And then, when they have dropped out, you raise the prices and take the benefit finally of all the losses you've sustained.

Now, that, to me, requires a specific intent.

That's a plan.

Mr. McClearn: But there is a considerable difference, I submit to your, sir, between Matsushita and this case.

One is, that was a Section 1 and a Section 2 case where the specific intent was required.

More importantly, that case involved an alleged predation by a whole series of companies.

Unknown Speaker: It may be that you can succeed in this case without proving predatory pricing, but I don't see how you can prove predatory pricing without proving more in the way of intent than you can see.

What intent do you have?

Mr. McClearn: Sir?

Unknown Speaker: What do you have in the record to show intent specifically?

Mr. McClearn: What there is in the record--

Unknown Speaker: Yes, sir.

--Justice Marshall, is the fact that as a result of this acquisition Excel will have a market share something over 20 percent.

It acknowledged in its own papers that a 20 percent market share... and we cite it in our brief... will create price influence.

Secondly, we have documents, again from its own file, saying that it intends to inhibit the market share of smaller competitors.

That's my client, among others.

Thirdly, we have, as the District Court found, the resources, the market, the economic client, that would permit it to do that.

Now, that doesn't really say that it will.

But the District Court, in those circumstances, is required to make a prediction.

Excuse me--

--They took a whole lot of individual points, no one of which would do anything, and combined them to make the intent.

Mr. McClearn: --I think that's true, although I would not agree with you, sir, that I have to prove intent, because that isn't what Section 7 is intended to do.

It really isn't, I don't think.

I don't think the legislative--

Unknown Speaker: xxx cut in prices isn't exactly Section 7.

Mr. McClearn: --Well--

Unknown Speaker: I mean, because antitrust wasn't set up to keep prices at the right level.

Mr. McClearn: --It certainly was not.

Unknown Speaker: So then you have to show something in addition to cutting prices.

That's all the Chief Justice was saying.

Mr. McClearn: Well--

Unknown Speaker: Cutting prices alone doesn't do it.

Mr. McClearn: --What we did show, and what the District Court found, and indeed, what the Court of Appeals also found, was that the concentration of these markets in this industry, as a result of this acquisition, and when you looked at that in the light of the trend toward concentration over the past generation, clearly brought this case as a matter of substantive Section 7 law, within the precedents of this Court and the legislative history of Section 7.

So then you have to take the next step, properly so, under Brunswick, and say, all right, if you really did prove a Section 7 violation, that's all well and good.

But how would it impact your client?

And the District Court did that.

And we think that we showed that.

Not to a certainty, because you can't look to the future and say, this will happen.

But you can look to the future, and you can take the economic facts that you have, and you can say, I believe it is probable that this will happen.

Unknown Speaker: Mr. McClearn, let's assume that.

Let's assume you even have to show less.

Let's assume that all you have to show is that there is more likely to be a predatory intent here than there would in the normal case.

How do you derive that merely from the fact that here you have a company with deep pockets which will ultimately have 20-some-odd percent share of the market?

To succeed in predatory pricing, don't you need enough of the market share, or enough capacity, at least, to meet the entire market demand?

Otherwise, you sell your 25 percent below cost.

There's no more of the goods left.

Your competitors, far from being driven cut, are then able to supply the other 75 percent at a handsome profit.

So you're losing money and they're gaining money.

Mr. McClearn: Justice Scalia, that's Matsushita.

That's not this case.

The difference here... and believe me, I understand that prediction is required, because that's what the statute mandates.

Unknown Speaker: Granted.

Mr. McClearn: But to the extent that a company such as Excel has a motive and has the resources and has the market structure, it can target a client such as mine.

It doesn't have to drive out the market with its 25 percent.

It would surround one of my client's plants--

Unknown Speaker: How could it surround... you have a 12-state market.

I thought that that was what you argued, and that's what the lower court found.

Mr. McClearn: --No--

Unknown Speaker: How can you target a single plant if it's conceded that the market is a 12-state area?

Mr. McClearn: --Well, it was conceded, it was found, we did argue it.

But that is quite different from saying that you cannot target a particular plant.

The argument that is made on the 12 states assumes that there is prior uniformity and that cattle just flow within that 12-state area.

Unknown Speaker: That's what a market means.

Mr. McClearn: Yeah, but the judge didn't find that.

He found that it was a market, but he did not find that there was uniformity of price.

And in fact--

Unknown Speaker: Excuse me.

You have a single market with a disuniform price throughout... in different pieces of it.

That's a strange phenomenon, isn't it?

Mr. McClearn: --A not uniform price.

A disuniform... I don't know exactly what that means.

But I do know that there was not a finding of uniformity of price, which I think in no way denigrates the finding of a 12-state market.

And the result of this acquisition really would be to permit Excel to surround one of my client's plants with several.

And to the extent they wished, to be selectively... to selectively target that plant, the economic circumstances really would permit them to do it.

I might say--

Unknown Speaker: 0 xxx.

Mr. McClearn: --Oh, I'm sure, it does.

There's a--

Unknown Speaker: What would its balance sheet show?

Mr. McClearn: --The balance sheet in 1983 would show that my client... total sales were something like, I think, $900 million.

Unknown Speaker: That's a profit and loss statement.

Mr. McClearn: Sir?

Unknown Speaker: What's the total assets?

Mr. McClearn: The total assets would have been about, in 1983, somewheres around $50 to $60 million.

And gross sales just under $100 million?

Just under a billion.

And the net earnings for 1983 would have been, I believe, about $15 million.

The beef industry, Justice Powell, is a debt-heavy industry.

Return on sales, the record is clear and the findings reflect, are less than one percent, for Excel as well as for Monfort, and I think the others.

Unknown Speaker: Your client is number four in the market?

Mr. McClearn: I think the record indicated it was number five.

But it was close to number four.

I mean, four and five were close together.

One of the things that it seems to me the court below did was to give effect to the... what I understand the purposes of Section 7 to be; and really, one of the basic purposes of the antitrust laws.

And that is, that businesses are expected to acquire profits not at the... not by acquiring competitors but by internal expansion and growth.

And that, it seems to me, is a fundamental principle that is at issue here.

Unknown Speaker: But if that were true, the Section 7 would have simply would have banned any acquisition, rather than saying, only those acquisitions which will substantially lessen competition are bad, wouldn't it?

Mr. McClearn: It is not a ban, and I appreciate that.

But certain as between... as a policy matter, it is the policy of the antitrust laws to encourage growth by its internal expansion as opposed to acquisition.

Now, of course, we all know that plenty of acquisitions take place.

And indeed, there has been, to some extent, a shift of economic philosophy in recent years.

I expect it will shift again in the future.

Unknown Speaker: But certainly a good bedrock place to look for the policy of Section 7 is the language of Section 7, I would assume.

Mr. McClearn: The language, the legislative history, and this Court's precedents, is what I would say, Mr. Chief Justice.

One of the things that occurs, and that the government suggests in its papers, is that somehow or other allowing competitors to sue here would lead to a flurry of abusive suits.

Now, as one of the members of the Court suggested, there really isn't anything in the language of Section 7 that says you can draw a distinction between permitting or a competitor or a supplier or a consumer to bring this lawsuit.

And I quite agree with that.

The notion, however, that the government advances here is that somehow allowing a competitor to bring a suit will cause all manner of spurious suits is simply belied by the record that we cite; the fact that there have been, I guess, a half a dozen competitor lawsuits in the last several years out of 5,000 or thereabouts acquisition transactions.

There really are all manner of tools that courts use everyday... Rule 11, Rule 12, Rule 56... to deal with anything that is perceived to be an abusive suit.

And surely that must not be a valid reason for preventing my client from bringing this suit.

The other point that I think deserves making, and it is noted in the briefs, and that is, there really are only two issues before this Court, in our view.

The first is, do we have standing to bring a suit?

Does our complaint allege a violation of Section 7?

And the second point is: Did we prove a violation of Section 7?

It is a fact that the Tenth Circuit did not review the finding of threatened injury.

Now, that point is disputed in our briefs.

But I submit to the Court that you cannot find, in the opinion of the Tenth Circuit, a review of the finding of the District Court of threatened injury.

Unknown Speaker: Why does that prevent us from reviewing it?

Mr. McClearn: I think it does not.

But I believe it is... it has been this Court's practice not to do so.

That... the failure of the Tenth Circuit to review... and of course it found, it says, that that issue was not raised on appeal by my opponents... was not cited as a around for error by them here, nor in any kind of a petition for reconsideration at the Tenth Circuit.

It clearly is not jurisdictional.

And indeed, as I have argued to you, even if you were to go ahead and review the finding of threatened injury, I think that we have made our record sufficient on that point.

Unknown Speaker: Mr. McClearn, let's assume that the courts below hadn't proceeded on a predation theory.

And as I told you before, that's the way I read their opinion; that what they're talking about is cost-price squeeze, that is that, simply, the increased ability of this company to compete will drive out the plaintiff.

Let's assume that that's what they said.

And that this would lead to an oligopoly market, thereby harming the public interest in the way that the law prescribes.

What reason would there be to believe that it would lead to an oligopoly market?

How could an oligopoly market be maintained in this industry, with the entry being as easy as it seems to me it would be, once other people had been driven out?

Specifically, you assert that the manufacturing equipment is not useable for other purposes.

So no matter how many people you drive out, the equipment would be lying there idle.

So that if anybody wants to come back in, they can pick it up for a song and get right back into the business.

How do you have an oligopoly problem?

Mr. McClearn: I think you asked two questions.

Unknown Speaker: I think it's all one.

Mr. McClearn: All right.

You're talking about the barrier to entry problem.

First of all, the District Court clearly, specifically, and on a complete record, found that there were significant barriers to entry.

Secondly, if you did have the oligopoly that you suggest... let's assume for purposes of your question that only IBP and Excel are left... the notion that somebody would be willing to invest the sums of money to come in and compete with those two companies seems to me to fly in the face of almost any reality.

It would be about like suggesting that somebody would say, well, look at the profits that Ford and General Motors are making.

Why shouldn't I go into the car manufacturing business in the United States?

And I don't think anybody would do that.

Unknown Speaker: But the United States just did it recently.

Mr. McClearn: I guess I'm not familiar with what you're--

Unknown Speaker: I'm talking about the Chrysler bailout.

It surely depends on how much it costs you to pick up the equipment that is to be used to manufacture the competitive product.

Mr. McClearn: --I respectfully disagree with you, because it seems to me it is the perception of the entrant or the would-be entrant as to how long he is going to be able to survive, and how long there will be super-competitive prices if he enters.

And clearly, anybody facing a duopoly like that would believe, if they had the power to exclude all previous competitors, they're not going to sit idly by and just let he come in--

Unknown Speaker: You forget, we're assuming no predation.

We're assuming no predation here.

We're assuming it's just fierce competition he has to confront.

Why wouldn't it pay him to come into an industry that seems to be making a higher than normal profit by picking up the equipment of those companies that have gone out of business, and which equipment is just lying around?

Mr. McClearn: --Well, I don't know that you can assume no predation.

The District Court, among other things, found what it called psychological barriers.

But what it really was talking about, I think, was simply the fact that you have an entrenched company or companies with existing customers and distribution systems and all of that.

And that is a very substantial noncost barrier to anybody that would enter a high-cost industry.

That's, I suppose, why you need to look to the future when you're trying to make a Section 7 prediction, the best that a judge can do.

The statute requires a district judge to make those predictions.

He takes the best evidence he's got.

He makes a judgment, in this case, I submit, a thorough and thoughtful judgment, a judgment that has been affirmed by the Court of Appeals after a pretty careful review.

And that's all he can do.

Unknown Speaker: Mr. McClearn?

Mr. McClearn: Yes, sir.

Unknown Speaker: This complaint was brought three years ago.

Did you have a merger agreement?

How is the deal to be consummated?

By a merger agreement?

Mr. McClearn: You mean the one that we attacked?

Unknown Speaker: Yes.

Mr. McClearn: There was at least a buy and sell agreement.

Unknown Speaker: Is that a binding contract?

Mr. McClearn: Sir?

Unknown Speaker: You had a binding contract?

Mr. McClearn: Well, my opponents did.

I attacked the merger.

Unknown Speaker: I understand that.

Mr. McClearn: Yes.

There was a binding contract.

Unknown Speaker: What's the status of that contract today, three years later?

Mr. McClearn: I don't know.

Unknown Speaker: Were there any outs in it?

Is the case moot?

You'd probably like to have it moot, I suppose.

Mr. McClearn: No, I think it is not moot.

That subject has been raised, Justice Powell, as a reason by... particularly by the Department of Justice as to why suits by competitors should be frowned about.

Unknown Speaker: It's a favorite way to defeat a takeover.

Mr. McClearn: In this case, Your Honor, this case was tried on the merits.

Within 2-1/2 months, this the date that we filed our complaint, and 2-1/2 months before the closing date of the transaction that we sought to enjoin.

If the, judge... and since the judge ruled in our favor, since he found merit to our complaint, then indeed, that transaction, at least for the moment, should have been enjoined.

If we had not brought a meritorious complaint, I assume that he would have found against us.

And the transaction could have gone forward.

It doesn't seem to me that you can carve out merger transactions from any other kind of business and maybe some nonbusiness transactions, and say they sort of deserve special treatment at the hands of the courts.

You either bring a meritorious complaint, or you don't.

And that's what the Court must decide.

Unknown Speaker: Mr. McClearn, you have claimed standing up here, although you did not below, not just in your capacity as a manufacturer of boxed beef, but also on the basis that Monfort is a supplier of fed cattle.

Mr. McClearn: That's true.

Unknown Speaker: Now, as I recall, it was conceded below that suppliers of fed cattle would have standing.

If that was so, why didn't you... and if indeed you are so clearly a supplier of fed cattle, why didn't you simply say, well, we're that, too, below?

Mr. McClearn: The fact of the matter is as you describe it.

The reason we didn't below, Justice Scalia, was that in 1983, which really wasn't very long ago, it seemed so totally clear to us that no one had a better claim to standing than a competitor.

Indeed, I confess, we looked at the question, but we didn't look very far.

We looked at Professor Areeda, for example, who just said, of course competitors have got standing.

And I... and I have to say to you that I did not, as a standing matter, regard it as a serious question.

Unknown Speaker: The Professor is on your opponent's brief.

Mr. McClearn: He is.

If there are no further questions, thank you very much.

Chief Justice Rehnquist: Thank you, Mr. McClearn.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Northeast Bancorp, Inc. v. Federal Reserve System - Oral Argument

Fri, 31 Aug 2012 18:30:09 +0000

Case:

Northeast Bancorp, Inc. v. Federal Reserve System

Media File:

84-363_19850415-argument

Related Transcript:

84-363_19850415-argument

Transcript:

ORAL ARGUMENT OF STEPHEN M. SHAPIRO, ESQ., ON BEHALF OF THE PETITIONERS

Chief Justice Warren E. Burger: We'll hear arguments next in Northeast Bancorp against the Federal Reserve.

Mr. Shapiro, I think you may proceed whenever you're ready.

Stephen M. Shapiro: Thank you, Mr. Chief Justice, and may it please the Court:

At issue in this case is the constitutionality of regional banking laws enacted by the states of Connecticut and Massachusetts which permit New England bank holding companies to enter those states and engage in full service commercial banking, but which withhold that same right from bank holding companies located in other sister states.

The first question presented is whether the Douglas Amendment to the Bank Holding Company Act immunizes the statutes from scrutiny under the Commerce Clause of the Constitution.

The second question is whether these laws are part of an agreement among the states which requires Congress' approval under the Compact Clause of the Constitution.

And after briefly describing these statutes, I'd like to address all of these questions.

The Massachusetts and Connecticut laws permit companies from six designated New England states to enter those states and engage in full service commercial banking if the other New England state extends reciprocity to Connecticut and Massachusetts.

These regional laws operate in combination with another regional law enacted by the state of Rhode Island, and together they set up a multistate common market which permits some companies to come in and denies that same right to other companies based solely on the location or the state origin of those other companies.

Thus, some companies in some states get important competitive benefits which are withheld from other companies based solely on geography or state of origin.

Now, these statutes in New England were designed to permit regional expansion of bank holding companies in New England while excluding companies from the neighboring state of New York, regardless of their proximity to New England and regardless of their size.

By the same token, companies that are in New England such as petitioner Northeast Bancorp, are unable to merger with banks located directly across the New York border.

The practical impact of these laws can be illustrated with a simple example.

Before passage of these laws, companies in Massachusetts and in New York competed on an equal basis for business in Connecticut.

Each could offer full service commercial banking in its home state, but neither could offer full service commercial banking in the state of Connecticut.

Now, however, Massachusetts companies can have full service banks both in their own home state and in the state of Connecticut, while their direct competitors in the state of New York are still limited to their one home state.

As the Court is aware, these regionally discriminatory laws are not an isolated phenomenon.

New York is flanked by the New England laws on the east, and directly to the south its neighbors are in the process of forming another exclusionary market, the Mid-Atlantic market.

And there is a similar combination of states in the southeast which also excludes the state of New York.

We are thus witnessing a partitioning of the entire East Coast into exclusive banking zones, and as the Court is aware, some other... some 20 other states are in the process of considering regionally exclusive banking laws which would divide the countries into other regions throughout the entire nation.

Now, as the Solicitor General and the Board have acknowledged and the other respondents do not dispute, these laws would violate the Commerce Clause unless approved by Congress.

As this Court stated in the Eisenberg Farm case, and I quote,

"The United States could not exist as a nation if each of them were to have the power to discriminate as against sister states with respect to admitting articles of commerce. "

"And when combinations of states jointly impose this kind of discrimination in unison, the danger of injury and divisiveness and retaliation is even greater. "

Now, where there is this kind of a threat to the core purposes of the Commerce Clause, this Court's decisions require proof that Congress unmistakably gave its consent to otherwise invalid state legislation.

And that, we say, is a burden which respondents cannot sustain in this proceeding.

The Solicitor General on the one hand has made the argument that the plain language of the Douglas Amendment permits this kind of discrimination among sister states.

But all that the Douglas Amendment says is that the Board may not approve an acquisition unless there is a state law in existence which permits the acquisition.

It doesn't say a single word about the various kinds of laws which a state might adopt, and it certainly doesn't say that a state in lifting the federal ban is free to pick and choose among sister states or to join into a regional confederation which sets up a preferential trade zone for some states and excludes the others.

Unidentified Justice: But doesn't the very paucity of language, Mr. Shapiro, suggest that the states were given very wide latitude; that all Congress was interested in was state approval?

Stephen M. Shapiro: To the contrary, Your Honor.

When Congress defers to the states in this manner with general language of this sort, the Court has made it quite clear that the presumption is that Congress means to defer to constitutionally valid state law; and when it refers to state law in these very general terms, the negative ingredients of the dormant Commerce Clause are part and parcel of the state law to which Congress has deferred.

Unidentified Justice: Well, Mr Shapiro, I suppose the McCarran-Ferguson Act doesn't really make it unmistakably clear that states can adopt reciprocal discriminatory taxes, and yet, the Court upheld that power in cases like Western and Southern.

Stephen M. Shapiro: That's a very important question, and the distinction is between night and day; and let me explain that.

In the McCarran-Ferguson Act, the statute explicitly says not only that the states may regulate, but that the silence of Congress shall not be deemed to be any barrier to regulation or taxation of insurance within the state.

And the legislative history, of course, was that this was an area that traditionally had not been treated as part of commerce.

And then in 1944 this Court changed the construction on that question, and all of a sudden state laws across the country were exposed to Commerce Clause challenge.

Congress acted within one year to pass this law which expressly stated that it was lifting the negative implications of the dormant Commerce Clause.

So you have unmistakable language, and you have unmistakable language in the legislative history.

And we say there is nothing remotely resembling that in the Douglas Amendment.

Now, our brothers, the private respondents, have made the somewhat different argument here on the authorization point, that Congress' division of the banking industry along state lines is such a splintering or such a balkanization that the states should be free to pick and choose among sister states and set up their own regional lines.

But this also is directly in the teeth of recent decisions of this court.

In the Bacchus case, decided only last term, federal law had balkanized the entire industry along state lines, had given the states plenary power to permit or not permit the importation of liquor, and yet that was not sufficient to displace the requirements of the Commerce Clause with respect to discriminatory state taxation.

Unidentified Justice: Well, Mr. Shapiro, suppose it were perfectly clear, that the Douglas Amemdment was perfectly clear to the effect that the state may pick and choose?

You wouldn't have any constitutional argument then, would you?

Stephen M. Shapiro: Well, if the Douglas Amendment such as S. 2851, the bill that was considered by Congress, said that a state may pick and choose among sister states, there would be no Commerce Clause issue.

If a group of states tried to do it jointly without Congress' approval, there would be a compact issue.

Unidentified Justice: But that would be only... that would be the only remaining issue would be--

Stephen M. Shapiro: That is correct.

Unidentified Justice: --So doesn't this case just turn on what Congress intended?

Stephen M. Shapiro: It turns on the specific language of the Douglas Amendment.

Unidentified Justice: How do you ever get to any constitutional issue other than the compact issue?

Stephen M. Shapiro: The Commerce Clause issue does turn on the meaning of the Douglas Amendment, that's quite correct.

Unidentified Justice: And if they intended it to give the states the right to pick and choose, there isn't any Commerce--

Stephen M. Shapiro: That's correct.

It's an issue of intent.

Unidentified Justice: --But if they didn't... if they didn't intend to reach that, then what?

Stephen M. Shapiro: If they didn't intend to permit the states to pick and choose and to gang up against their sister states, then there is a black letter violation of the Commerce Clause.

Now, the reason for not inferring authorization--

Unidentified Justice: Well, I suppose, Mr. Shapiro, you had an equal protection claim below which you dropped.

Stephen M. Shapiro: --We have reinserted that issue--

Unidentified Justice: After reading Metropolitan Life.

Stephen M. Shapiro: --That is correct.

[Laughter]

Your Honor is quite right.

Unidentified Justice: I wonder if you think that having read that case that you think the Massachusetts and Connecticut statutes could survive an equal protection challenge under that doctrine?

Stephen M. Shapiro: We think for the reasons that we explained in our supplemental brief that they clearly do not, and we have suggested that the Court may wish to consider this issue.

It's, of course, a discretionary proposition.

But if the Court agrees with us on either the Commerce Clause or the Compact Clause, there is no reason to reach equal protection.

Should it disagree with us on the first two issues, we would suggest that it is appropriate to turn to equal protection, the reason being that states across the country are now considering statutes of this sort, and many, many transactions will turn on the validity of these laws.

That is why we've raised this equal protection issue in light of Metropolitan Life as a discretionary matter for the Court.

Now, to return to authorization, the reason for not inferring authorization from Congress' regulatory pattern, the balkanization by Congress, is a compelling one that goes to the very structure of our system of government.

When Congress regulates a market, it acts to protect all affected interests and all affected states.

But when a group of states imposes its own discriminatory system, there is a real danger that unrepresented interests will suffer serious harm without any means to protect themselves.

And the Court, we say, should be especially cautious about inferring authorization for regional discrimination from this Douglas Amendment.

The Douglas Amendments preserves the equal status of each state, and it rests on historical state boundaries, not on newly conceived regional lines.

Unidentified Justice: Let me go back there.

Suppose that we agree that the Douglas Amendment didn't intend to give the states powers to pick and choose.

Well, then, the Douglas Amendment said no acquisitions by out-of-state banks; isn't that right?

Stephen M. Shapiro: That's correct.

Unidentified Justice: Unless the state agrees.

Stephen M. Shapiro: That is correct.

Unidentified Justice: Well, if these agreements by the state are not the kind of agreements the Douglas Amendment purported to permit, then why shouldn't the ban... why shouldn't the ban against out-of-state acquisitions take over?

Neither New York banks nor New England banks could make out-of-state acquisitions.

Stephen M. Shapiro: The ban would certainly be back in place unless and until--

Unidentified Justice: How would you ever reach a Commerce Clause issue?

Stephen M. Shapiro: --Unless and until the state enacted a constitutional statute lifting the ban, there would be no acquisition.

Unidentified Justice: So why wouldn't... if we agreed with you that Congress didn't intend to let the states pick and choose, then these states have not given the right kind of consent.

Stephen M. Shapiro: Well, these states--

Unidentified Justice: They haven't given any consent.

Stephen M. Shapiro: --These states have enacted laws that purport to give consent, but they're unconstitutional laws that have no blessing from the Douglas Amendment.

Unidentified Justice: Well, they're not the kind that Congress anticipated.

Stephen M. Shapiro: That's correct.

Unidentified Justice: They didn't intend to permit states to act in this way, in which event there's no way to avoid the general ban.

Stephen M. Shapiro: That's correct.

There is--

Unidentified Justice: Well, then how do you ever reach a constitutional issue?

Stephen M. Shapiro: --Well, the Commerce Clause contains a rule of constitutional law that is of assistance to the Court in construing what the Douglas Amendment means, what it admits to allow.

Unidentified Justice: If the Douglas Amendment had said bank holding companies may not acquire banks from out of state except that states may consent to do that, but we do not intend to give the states the power to pick and choose, and if they try to pick and choose, it shall not be deemed consent for purposes of this amendment.

Stephen M. Shapiro: Well, that's--

Unidentified Justice: Why isn't that really what you're arguing?

Stephen M. Shapiro: --It's very close to what we're arguing, but our position I suppose is slightly different in this sense.

The states are free to enact statutes of any kind that they want to.

They have general legislative power.

And the question under the Douglas Amendment is if they have enacted a valid statute, that lifts the ban.

Now, if these statutes are unconstitutional under Commerce Clause principles, the question is whether Congress has permitted this exceptional result.

And we say that--

Unidentified Justice: Well, all right.

Assume we agreed with you that they're unconstitutional.

They they haven't given the constitutional consent.

There is no consent in existence.

Stephen M. Shapiro: --That is correct.

Unidentified Justice: So neither the New York banks or anybody else could... may acquire an out-of-state bank.

Stephen M. Shapiro: That is quite correct.

These orders of the Board would have to be reversed in that instance, and these transactions could not proceed, and my clients would be spared the competitive injury that they now stand to suffer.

Unidentified Justice: Well, I'm suggesting that if we agreed with you, we'd never need to talk about the Commerce Clause.

Stephen M. Shapiro: We're not far apart, Your Honor.

I believe that the Commerce Clause contains a rule of interpretation that is relevant to the statutory issue.

That's the only difference between us.

The Wunnicke case and Sporhase and others have said that the Commerce Clause means that you have to have unmistakable evidence of consent to permit this kind of discrimination, and we say that our brothers can't find that unmistakable consent.

Now, they tried to find this unmistakable consent from the legislative history, and the Court has warned against reliance on fragments from the legislative history to reach issues such as consent.

But there is no question that this legislative history does refer to state discretion and to state policy and certainly supports the view that the states may lift the federal ban.

But it doesn't say a single word about the right of the states to pick and choose among sister states or to enter into multistate exclusive banking federations, and it doesn't say a single word about relinquishing the protection of the Commerce Clause.

Now, respondents also have made the argument here that the Board was entitled to deference when it addressed the issue of authorization, but the Board made specific findings about its own statute which we say completely undercut respondent's submissions.

The Board found that the Douglas Amendment

"does not appear on its face to authorize discrimination based on state location. "

and that the legislative history contains

"no discussion of the power of the states to discriminate against potential out of state interests. "

Now, the Board did say, of course, that the Douglas Amendment is a renunciation of all federal interest in the subject of interstate bank acquisitions.

But with great respect to my friends at the Board, this is certainly an erroneous overstatement.

Federal law prescribes a host of statutory criteria and policies applicable to interstate bank acquisitions.

In this very case the Board had to look at competition, potential competition, managerial resources, service to the community and other standards prescribed by Congress.

And besides this, even if there were a total retreat from the field by the federal government, which there certainly isn't, it would be beside the point because when Congress retreats and defers to state law, it is deferring to valid state law consistent with the principles of the Commerce Clause, as this Court has said repeatedly in recent terms.

Unidentified Justice: Well, Mr. Shapiro, do you think the statement of the Board that Congress has just been silent with respect to this pick and choose business, that doesn't necessarily destroy the deference that's due the Board, because the Board nevertheless though it was consistent with the statute to do what it did.

Stephen M. Shapiro: Well, the Board--

Unidentified Justice: Isn't that right?

Stephen M. Shapiro: --We don't think so, Your Honor, because--

Unidentified Justice: You mean they said we were acting contrary to the statute?

Stephen M. Shapiro: --They said they were waiting for judicial clarification.

They did not know how to analyze this in light of existing--

Unidentified Justice: But nevertheless, they felt there was room under the statute to do what they did.

Stephen M. Shapiro: --Yes.

Unidentified Justice: Or they wouldn't have done it.

Stephen M. Shapiro: And the rationale was this renunciation theory which, with great respect, is totally in error.

There is no renunciation of federal--

Unidentified Justice: Well, I know, but they nevertheless thought that the statute permitted what they were doing.

Stephen M. Shapiro: --On this theory of renunciation.

Unidentified Justice: Well, I don't... on the theory of silence.

That Congress didn't forbid us, forbid our interpreting the statute in this manner.

Stephen M. Shapiro: But silence--

Unidentified Justice: And why shouldn't... and they left that up to us.

Stephen M. Shapiro: --Silence, under this Court's opinions, is certainly not sufficient.

The unmistakable intent on Congress' part to permit this extraordinary result, a result which this Court has said is destructive to the very fabric of the Union.

States picking and choosing among sister states, provoking retaliation--

Unidentified Justice: I would think you'd have to concede that you have the problem of convincing us that there's only one construction permissible under this statute with respect to picking and choosing.

Stephen M. Shapiro: --Yes.

The silence--

Unidentified Justice: I mean the Board could have decided it the other way, too.

Stephen M. Shapiro: --The silence of the statute on the issue of picking and choosing means that there is no unmistakable intent that Congress meant to permit something like this, completely destructive of principles that the Founding Fathers were concerned about.

This is provocative of trade warfare among states.

It is inconsistent with the idea that the states are equals in our sovereign system, sovereign states of equal status.

Now, if Congress meant to permit this extraordinary result, isn't it amazing that it didn't say a word to illuminate this for courts--

Unidentified Justice: Mr. Shapiro, may I question right there?

Stephen M. Shapiro: --and for the other Congressmen who voted on it, and for the President who signed this law.

Unidentified Justice: There are really two conditions in the state statutes here: one, that the other, the acquiring bank be in New England, and secondly that they have a reciprocal provision.

What if they just had the latter, would that comply with the statute?

Stephen M. Shapiro: The reciprocity provision is one of dubious constitutionality, of course, under this Court's decision, its decisions.

Reciprocity has to be analyzed under a rule of reason approach, not a per se approach of the sort that we say is applicable here.

Our position about these laws is that they have to stand on their own two feet.

They get no blessing from the Douglas Amendment.

They have to satisfy all of the traditional requirements of the Commerce Clause.

Whether a reciprocity statute would pass constitutional muster is a close question.

It would depend on all the circumstances, the purpose of the reciprocity requirement, its effect in the market, and the availability of alternatives.

Unidentified Justice: But your argument would be that if that... if we thought that violated the Constitution apart from the statute, the statute would not save that either.

Stephen M. Shapiro: That's quite correct.

Now, the Government's argument about deference to the Board is especially puzzling here, because the Board declined to sign the Government's brief.

And it's apparent that the Board disagrees with the Government's literal meaning analysis because it said on the face of the statute it sees no such literal meaning.

Now, since the Government thinks that deference to the Board is so important, I'm sure Mr. Lee intends to explain to the Court what the Board's views are, why they disagree with the Government's brief, and wherein the disagreement lies, because after all, one who invokes the rule of deference should at least explain what the agency thinks about the submission presented to this Court.

Now, I have one final point about the authorization issue.

In 1983 and in 1984 Congress considered bills that would permit regional banking laws and regional multistate compacts.

Those bills were not enacted, and at the end of the last Congress, the House and the Senate disagreed in the most fundamental terms about the shape that legislation should take in this area.

The chairman of the House Judiciary Committee expressed serious reservations about the whole concept of regional banking and its economic implications for the nation.

Congress is again considering regional banking proposals and is expected to start hearings this spring.

Now, if the Court were to hold here that Congress approved these state laws sub silentio 30 years ago, that would largely moot the policy debate before Congress.

Before Congress would have a chance to finish its hearings on its this subject, numerous acquisitions would be consummated under existing state regional banking laws.

We submit to the Court with great deference that it is the better part of wisdom in this situation to adhere to the established principle that state laws violative of the Commerce Clause are not sustainable unless and until Congress gives its unmistakable intent and its unmistakable approval.

Congress has not yet given that unmistakable consent, and it may never do so.

Unidentified Justice: Is this an argument, Mr. Shapiro, that we should do nothing until Congress has acted?

Stephen M. Shapiro: It's the reverse, Your Honor.

The argument is that the burden of persuading Congress is on those who would impose violations of the Constitution and the harmful effects on our economy.

They have to wait for Congress to say yes.

The wisdom of the constitutional scheme is that before potentially harmful arrangements like this are implemented by states, that Congress has to give its approval, not afterwards after the injury has been done.

And we think there is a real risk of substantial injury from these discriminatory state laws in terms of retaliation discord and divisiveness among the sister states which hitherto have been co-equal sister states in our system.

Unidentified Justice: Well, suppose we don't agree with you?

Stephen M. Shapiro: On the Commerce Clause issue?

Unidentified Justice: Yes.

Stephen M. Shapiro: The second issue in that event would be the Compact Clause issue, and the question, of course, is whether this amounts to a compact or an agreement among the states which requires Congress' approval.

Now, there is no contention that Congress has given its consent to a multistate compact in this case.

Unidentified Justice: Well, just what is it that you say Connecticut and Massachusetts have agreed to?

Stephen M. Shapiro: This Court's opinions establish that reciprocal statutes can constitute compacts or agreements if they have the effects that the Founding Fathers were concerned about.

And this, we say, has exactly the effects that the Founding Fathers were concerned about... the danger of divisiveness, regional combinations oppressing commerce in other parts of the country.

This has precisely the impact that the Constitution--

Unidentified Justice: But there are various kinds of reciprocal statutes on many different subjects on the books, are there not?

Stephen M. Shapiro: --That's quite true, Your Honor, and what is unique--

Unidentified Justice: And you think all of those are suspect.

Stephen M. Shapiro: --We do not.

What is unique about this multistate arrangement is that it allows some to come in and doesn't allow other sister states to come in.

It confers powerful competitive benefits in some states, withholds those same benefits from direct rival institutions in other states just because of where they're located.

Now, there is not a compact like this, to our knowledge, that has ever been considered, and certainly Congress has never approved a compact like this.

The closest cousin--

Unidentified Justice: Maybe it isn't a compact.

You keep saying this is a compact.

Isn't that one of the issues?

Stephen M. Shapiro: --We say not only is it a compact because of the reciprocal nature of the statutes, but also because of the joint action in adopting these statutes.

Now, when Senator Brennan proposed this multistate arrangement, he rode circuit in Rhode Island and in Connecticut and urged the establishment of a real New England system, and he thereafter testified before the legislatures.

When the Connecticut bill was prepared, it was submitted to the banking commissioner in the state of Massachusetts for his approval, and when the bill returned to the floor in Connecticut, on seven separate occasions the Connecticut legislators called it a compact or an agreement.

These are the words of the legislators who adopted this provision.

Unidentified Justice: Well, what if Connecticut, Mr. Shapiro, had simply adopted a statute that said we will allow out-of-state banks to come in so long as the state in which the bank is incorporated allows our bank to come in... just simple reciprocity without the New England regional aspect?

Stephen M. Shapiro: We say a simple reciprocity statute does not have to go to Congress because it's not... although it could be characterized as a multistate agreement under the Multistate Tax case, it wouldn't have those deleterious effects on the Union and the equality of the states in the Union that requires Congress' approval.

Only certain compacts have to go to Congress, and the one you've described that would be open to everybody would not have to go to Congress.

Now, of course this is the real question in this case: why is it the kind of compact that has to go to Congress?

Now, the test has been articulated in slightly different ways in past decisions of the Court, and ultimately the issue is one of potential impact on our federal structure.

And as the Court stated in Florida v. Georgia, the provision is obviously intended to guard the rights and the interests of the other sovereign states and to prevent any compact or agreement between any two states which might affect injuriously the interests of the others.

Now, by setting up a regional common market in which favored states are invited in while disfavored states are kept out, we say that there has been established a treaty of commercial privileges of exactly the kind that this Court is condemned in Virginia v. Tennessee.

It said agreements among states that confer special privileges on those states that are withheld from the others have to go to Congress for its approval.

Unidentified Justice: Mr. Shapiro, can I interrupt you?

We got a lot of reading material in this case, and I must confess in that which I have been able to read I didn't find something you mentioned earlier, that the Government brief was not signed by the Federal Reserve Board?

Stephen M. Shapiro: That is correct.

The Board's--

Unidentified Justice: Where does that appear in the papers?

Stephen M. Shapiro: --On the face of the paper you'll see the Department of Justice's names, but you'll see no representative from the Board listed.

Unidentified Justice: But there's no comment on that in any of the papers.

Stephen M. Shapiro: No comment on that.

And I'm sure Mr. Lee will explain the background of that.

Unidentified Justice: Well, doesn't the... the Solicitor General does have authority to represent the Board.

Stephen M. Shapiro: Yes, he does.

In every case, to my knowledge, where he's done so, the Board has signed that brief.

They didn't do it here.

If the Court please, I'd like to reserve--

Unidentified Justice: Well, you don't suggest that in every case where the Government is up here and there's an agency involved that an agency's name is on the brief?

Stephen M. Shapiro: --Not in every case, but with the Board that is indeed the practice.

Unidentified Justice: Well, how do we know that?

Stephen M. Shapiro: Mr. Lee can confirm this.

That is my own experience having worked in that office.

Unidentified Justice: Well, what if he doesn't?

[Laughter]

Stephen M. Shapiro: The Court can see for itself in the disagreement.

Chief Justice Warren E. Burger: You'll deal with that on rebuttal if we allow you any rebuttal time.

Stephen M. Shapiro: Thank you very much.

Chief Justice Warren E. Burger: Mr. Solicitor General.

ORAL ARGUMENT OF REX E. LEE, ESQ., ON BEHALF OF THE FEDERAL RESPONDENT

Rex E. Lee: Mr. Chief Justice, and may it please the Court:

Let me clarify first of all that this brief I have in my hand is filed on behalf of the federal respondent in this case, the Federal Reserve Board.

There is in this record some indication that the Chairman of the Federal Reserve Board and one other member of the Board have some qualms about the policy, the soundness of the policy that has been reflected in the three orders that are at issue in this case.

And also, as the Board's opinion reflects, there is some confusion at the Board concerning the constitutional issue.

We simply submit these things.

First of all, the fact that in the face of their policy concerns... and that's on page A-1-99 of the Appendix to the Certiorari Petition... and in the face of those constitutional concerns that the Board would still conclude unequivocally that these statutes are covered by the Douglas Amendment, makes all the stronger the conclusion that this is an instance in which the Board has lent its expertise to the particular item, the only item on which the Board's expertise... on which the Board is entitled to expertise.

It is not on the constitutional issue.

It is rather on the statutory interpretation issue.

The position of the Government is as stated, and insofar as the position of the Board is concerned, this doesn't need to be stated, but it is in the brief that the three orders of the Federal Reserve Board at issue in this case which set forth its position, and that's the position.

What the Board did is what we as the Government are defending in this particular instance.

The only Commerce Clause issue in this case is identical to the statutory question, and the key to decision is how much burden-lifting flexibility did Congress intend to allow the states and did Congress allow the states to exercise.

Now, the petitioners contend that the states were limited to a choice between two polar extremes.

They could either leave this Congress' total ban in place, or they could lift it completely; but they had no middle ground alternative.

And we profoundly disagree.

In our view it is very clear that what Congress intended to do and what Congress did do was to permit each individual state to tailor its own commerce-enhancing package to its own needs to identify that point along the regulatory spectrum between complete prohibition, complete permissiveness that best comports with that state's policy.

It is a view that is solidly supported by all three of the traditional guides to statutory interpretation.

Most important, that's what the statute says.

Now, the petitioners complain that Congress did not speak with sufficient clarity, but I submit that that argument only confuses clarity with specificity.

The Douglas Amendment could not be more clear.

It could not be expressed.

And within any reasonable view of the ordinary meaning of the language, the applications that the Board approved in this case were specifically authorized by the statute laws of the state in which the bank was located.

What the petitioners are really contending, therefore, is that Congress is constitutionally required not only to speak with clarity, but also to spell out the details of the circumstances under which the states may act.

It is an argument which would interpret the Commerce Clause as a significant limitation on Congress' power to regulate commerce, because Congress really had two policy options available to it.

On the one hand, it could have, as it did, delegate to the states the power to do... enact general... it could have delegated a rather general power to the states to enact.

On the other hand, Congress could have specifically spelled out the details of the kinds of statutory authority that the states were to have.

And in choosing between those two, the choice between those two was a significant policy alternative available to Congress.

What the petitioners are really saying is that the Commerce Clause limited Congress to only one of those two alternatives.

It is an argument that is squarely rejected by the McCarran-Ferguson Act cases.

It is true in McCarran-Ferguson that there also Congress dealt in very general language.

"The business of insurance shall be subject to the laws of the several states. "

And the fact that Congress in another section said and we really mean it, does not alter the fact that Congress did not specifically authorize the states to enact, for example, retaliatory laws such as were involved in Western and Southern.

And this Court in Western and Southern specifically noted... and I quote...

"that the unequivocal language of the Act suggests no exception. "

And that also specifically describes the circumstance here.

Congress elected to impose the specificity requirement on the states.

It was the states that were required to be specific.

It did not elect to impose that obligation on itself.

This approach, I submit, of leaving important segments of banking policy for resolution by the states is hardly a new approach to American banking, and the distinctive aspect of American banking is highly relevant to the constitutional issue, because it's relevant to the statutory interpretation issue for at least 150 years.

Ever since the death of the Second National Bank in 1836, the cornerstone of American banking, in stark contrast to the rest of the world, has been localized control.

The number of commercial banks in the United States is somewhere between 14,000 and 15,000.

The same number in Canada, by contrast, is 11, and the United Kingdom is 36.

It is a tradition that imposes some efficiency costs, but it also provides some benefits.

As this Court observed in Philadelphia National Bank and in the Phillipsburg Bank case, that is the cornerstone of American banking tradition.

The local banker, the banker who makes the loan decision, is a person who lives in the local community, and as the Court observed in Phillipsburg, often makes loans on the basis of what he knows about the character of the individual.

Many persons' banking needs are best met by a continuation of that kind of a scheme, by a banker who is a member of the local community and who knows local people and local needs and can respond to them on a personal, individualized basis.

Now, by contrast, other persons' needs, to be sure, are best served by the broader range of services that can be offered only by larger banks located in metropolitan areas; and the mix of those needs will necessarily vary from place to place and from state to state.

The central feature of the Douglas Amendment is that it permits each state to work out its own mix; that is, to maintain localized control over banking to the extent that localized control is in that state's best interest.

And in this case Massachusetts and Connecticut have simply exercised that leeway by opting neither for total localized banking, nor for complete, uninhibited interstate banking, but a middle ground alternative between the two.

In the face of interstate banking as a very real possibility as a future prospect, it was certainly rational for these two states to prepare themselves for it by experimenting with a regional banking middle ground, an experiment which would at lesser costs acquaint them with some of the problems associated with departures from the local banking model that they know best, and at the same time would better inform their later decision whether interstate banking or anything other than the local banking approach would best serve their people's needs.

That's what the Douglas Amendment provides for the states, and that's what they have... that's what they have taken advantage of.

The legislative history is brief, and it clearly confirms that Congress meant what it said.

I disagree with Mr. Shapiro.

These are not just fragments.

Well, they're fragments in the sense that they're brief, but they're not fragments in the sense that... the legislative history here is entitled to a good deal more deference than is usually given to comments made on the floor, because since the Douglas Amendment was only a floor amendment, the comments made on the floor are the only legislative history.

That's all there is.

There's only about seven or eight pages of it, and it can be fairly briefly read.

And the overwhelming conclusion that one comes away with when reading that legislative history is that the states were to be in charge and that Senator Douglas and other supporters of the legislation were well aware of this tradition of local banking, and that's what they meant to preserve.

Unidentified Justice: Mr. Lee, I suppose you would agree, though, that a state couldn't attach an unconstitutional condition to the consent.

It couldn't say, for example, provided that the bank is owned by Republicans, or Mormons or something like that.

Rex E. Lee: Of course, of course.

Unidentified Justice: So there is some limit on the state's--

Rex E. Lee: Of course there is.

And that's the distinction that needs to be drawn.

This unconstitutional limitation pertains to something other than the Commerce Clause itself, because Congress clearly does have the authority to shape the extent to which the states may enhance commerce... the movement of goods and services across interstate commerce.

But insofar as the Commerce Clause is concerned, the argument that what Congress intended to do was to authorize only otherwise valid state laws simply ignores the thrust of the Commerce Clause, and any attempt to structure a separate constitutional argument insofar as the Commerce Clause is concerned from the Douglas Amendment itself is--

Unidentified Justice: --What if it said something like provided that the acquiring bank doesn't charge interest rates that are different from those that prevail in our state or something like that?

Could there be any condition all that might affect the way the bank did business?

Rex E. Lee: --Well, I think it would once again come back to whether that was or was not a commerce-related concern, and that's also, Justice Stevens, why Mr. Shapiro's attempted distinction between this restriction, this geographic restriction and the reciprocity restriction or the grandfathering provisions or any others just won't wash.

Because in any event what you have when one of the states lifts the burden to an extent but not total, you have left in place a scheme under which there is a segment of state business that is available to in-staters but is unavailable to out-of-staters, and that's what under this Court's precedents is a per se violation of the Commerce Clause.

Now, finally, Justice White is absolutely right that the petitioners have the burden of showing that their view is the only permissible one, because the agency charged with the implementation of this statute has consistently entered orders approving acquisitions in all cases where state statutes specifically permit the particular type of interstate acquisition before the Board.

And that includes not just these geographic limitations but also the substantive limitations where someone can come in from outside but can only engage in the credit card business, for example.

The fact that the members... that the Board may not have understood that its interpretation of the Douglas Amendment in this unique constitutional setting also determines the constitutional question is immaterial.

It has interpreted the Douglas Amendment, and our defense before this Court is a defense of the orders that the Court entered.

And the Court not only through it orders but also through its opinions made it very clear that notwithstanding its policy misgivings, notwithstanding its constitutional misgivings, concluded that these orders fell squarely within the scope of what Congress intended the states to be able to do under the Douglas Amendment.

Unidentified Justice: Well, if they do, they're certainly can't be any Commerce--

Rex E. Lee: That is absolutely correct, Justice White.

And it is equally clear--

Unidentified Justice: --How can the Board... how can the Board have some constitutional doubts; that if it really thinks Congress intended to do this, what's left of the--

Rex E. Lee: --Because they didn't understand this Court's decisions in Western and Southern and in Prudential Insurance v. Benjamin.

If the Court has no further questions, I have nothing further.

Chief Justice Warren E. Burger: Mr. Tribe.

ORAL ARGUMENT OF LAURENCE HENRY TRIBE, ESQ., ON BEHALF OF RESPONDENTS BANK OF NEW ENGLAND CORPORATION, ET AL.

Laurence Henry Tribe: Mr. Chief Justice, and may it please the Court:

I would like, if I might, to first clear away what I think is some confusion about the Compact Clause, because I don't think it really belongs in this case.

When Justice O'Connor asked Mr. Shapiro what exactly have Massachusetts and Connecticut agreed to, and there was a pause, and then we were told, well, they've agreed to reciprocity.

Notice, this Court has held, of course, in Beaux v. Barrett, 1953 that reciprocity alone doesn't make something the kind of compact Congress need approve.

The key point is they're complaining of the proposed exclusion of New York.

There isn't any suggestion in this case that there is a reciprocal agreement to exclude New York.

Reciprocity means you let us in, we'll let you in.

But there's no basis whatever for arguing that there is an exclusionary agreement in this case, and there's been no response whatever by the petitioners to our argument that indeed as long ago as 1896, this Court expressly ruled that no approval by Congress is needed under the Compact Clause where legislation on the part of two or more states reciprocally permits corporate entities to enter one another.

I think the Compact Clause is a nonissue here, and I think Justice White is surely correct that the whole question is what power did Congress delegate to the states.

Now, as Justice Rehnquist indicates, the paucity of language about restrictions here cuts only one way, and this Court in Justice Brennan's opinion in Western and Southern I think made clear which way it cuts.

When there are no limitations placed in an open-ended grant of authority to the states, that means that Congress meant what it said.

Now, that is absolutely clear here where Congress could readily have imposed limitations and indeed impose one, namely that the burden lifting action by the states, tailoring their own commerce-enhancing package, as General Lee puts it so well, that that step must be taken by state statute.

And moreover, quite apart from the unambiguous language here, I would say far clearer and far more explicit than the statement about the implications of silence in the McCarran-Ferguson Act, we have here a case where the legislative history, far from fragmentary, is literally overwhelming.

The sponsors, Douglas and Paine, spoke about leaving it to the states' discretion.

The floor manager of the bill, Roberston, said that if you believe in states' rights, you've got to go this way because if you accept the House version of the bill, you don't give the states leeway.

The opponents of the bill made the argument that Mr. Shapiro is making here: that it is discriminatory.

Senator Brucher opposed the bill on the grounds that it gave states new powers to restrict bank holding companies that entered.

That's on page 674 of the Joint Appendix of the Second Circuit.

It seems to me that in this case in particular, the statements of a legislator who sponsored the bill are entitled to special weight.

The petitioners in their brief cite language from this Court's opinion in Chrysler v. Brown, saying that what a legislator says may not be decisive.

But more recently, this Court in Northhaven against Bell made quite clear in Justice Blackmun's opinion for the Court that although that's sometimes true, the remarks of a Senator who is the sponsor of the language ultimately enacted are, in this Court's words,

"an authoritative guide to the statute's construction. "

when the matter comes up on the floor.

So it seems to me clear that if, as Justice White asks, there is only one construction permissible, I think I know what it is, and that is Congress meant what it said.

The States could lift selectively.

And I think, conversely, if more than one construction is permissible, there ought to be deference to the expertise of the Board on the meaning of the statute that it has uniformly administered.

But I do want to turn to the image that petitioners would deploy in this Court to somehow make it appear as though what the states are doing here or what they are authorized to do does entail something like Justice Stevens' concern about an unconstitutional condition, a kind of gerrymander, picking and choosing perhaps among various states, as though Massachusetts and Connecticut through their statutes brandished the slogan "We hate New York".

Nothing of that sort is going on here.

There's a decision to respect the historic cultural and economic boundaries of the region, the New England region, hardly an artifact of anyone's imagination.

Unidentified Justice: But, Mr. Tribe, would the case be any different in your view if they thought that there was particularly dangerous competition from, say, California and New York, and so we'll let every state except those two in?

Laurence Henry Tribe: Justice Stevens, I think it would be no different.

The question would be this--

Unidentified Justice: Just New York, every state except New York.

Laurence Henry Tribe: --I think the question in that case would be is there a rational basis for singling out New York by name or New York and California by name, just as in--

Unidentified Justice: Well, the reason is we don't like New York.

Laurence Henry Tribe: --Well, if the reason is we don't like New Yorkers, pure and simple--

Unidentified Justice: --in particular.

Laurence Henry Tribe: --Then it looks pretty bad.

It looks like I guess the Merino case where this Court said that just because you don't like a certain group, that's not a good enough reason.

But here, interestingly, both the Board and the Second Circuit on an ample record found that that was not the reason.

The reason rather was a well-calculated decision to foster a limited experiment preserving diversity and stability in a system at one and the same time responsive to local needs and yet likely to build up enough indigenous entities to resist the coming onslaught.

Unidentified Justice: But you seem to be arguing there that the reasons were sufficient; in other words, that there was a justification for discrimination.

And I'm asking you, supposing you had a case in which there's no apparent justification, no legislative history.

They just took in everybody except New York.

Would that be a different case?

Laurence Henry Tribe: I guess, Justice Stevens, that would surely be a harder case, but I would say that it would require new law--

Unidentified Justice: Why would it be harder?

Laurence Henry Tribe: --Well, I suppose it would be harder because I can imagine this Court saying that like persons, states are subject to a norm of equality, and that if states by name are treated differently by other states, there must at least be a rational basis for the difference.

Unidentified Justice: Even when Congress says it's okay?

Laurence Henry Tribe: I think when Congress says it's okay, Central Roeig suggests that that's decisive, and I think though harder, we would still win the case.

Unidentified Justice: See, that's what puzzles me.

Has Congress said it's okay?

If it has, why can't they do it for 49 states and not the last?

If they haven't, then don't we have to look at reasons?

Laurence Henry Tribe: Well, if Congress has said it's okay, there still is a Fifth Amendment problem, I suppose, with the validity of what Congress did.

But the point is whichever way we go on that, there's no doubt in this record that they had good reasons.

The Federal Reserve Board in the Second Circuit found there was a rational relationship, and that's easy to see--

Unidentified Justice: Would there be a potentially bigger problem in the instance posed by virtue of the Equal Protection Clause analysis of Metropolitan Life?

Laurence Henry Tribe: --Well, I would think if Metropolitan Life were extended into a truly destructive engine for all laws of this kind, there might be a problem.

But if you view Metropolitan Life, as I tend to, just as holding that when your whole purpose is just to benefit the home team at the expense of outsiders, that that is not per se legitimate.

Then that would cause no problem here, because if anything, Massachusetts and Connecticut gave up a home team advantage in order to preserve regional benefits.

And it's interesting that even after Metropolitan Life--

Unidentified Justice: In order to preserve a regional home team.

[Laughter]

Laurence Henry Tribe: --Well, I suppose.

Unidentified Justice: AAA competition, not the major leagues.

Laurence Henry Tribe: They were holding a regional meet, and they weren't ready yet to invite the big leagues in.

Unidentified Justice: Well, Mr. Tribe, could Connecticut say we'll let in New York banks, but only some New York banks?

Laurence Henry Tribe: And if they picked and choosed in... picked and chose in a wholly arbitrary, irrational way?

Unidentified Justice: Whatever way they pick--

Laurence Henry Tribe: I guess there would be potential equal protection problems.

Unidentified Justice: --Has Congress allowed them to do that?

They couldn't.

Laurence Henry Tribe: I think that under the Equal Protection Clause in Shapiro Congress couldn't delegate to them the power invidiously to pick and choose.

But even after Metropolitan Life, which in this twelfth hour attempt they might want to resurrect, even after Metropolitan Life, the point is that there is no challenge whatever by the petitioners to the findings either of the Board or of the Second Circuit that there was a reasonable basis for the line drawn, if that were an issue in the case.

And if Justice Stevens' suggestion is right and that is not an issue, then a fortiori theres' no question that need be decided, especially since it is clear that Congress delegated this power.

But there is a question that is raised by petitioners.

They say isn't it amazing that Congress didn't say so if it wanted the states to have this latitude.

It's not at all amazing.

On the contrary, there are several fundamental answers as to why this Court ought not to depart from its precedents in Prudential v. Benjamin and Western and Southern and demand specificity and a kind of laundry list, as well as clarity of Congress.

For one thing, there's an historical reason.

Congress in 1956, as the petitioners have never denied, was expressly told some bankers believe that regional approaches are a good idea.

And as we explain in our brief at pages 21 to 22, the only reason Congress then didn't mandate that solution was not disagreement with its potential wisdom, but a sense that it would override state discretion excessively to force that approach upon the states.

In addition, there are practical considerations.

As this Court held less than three weeks ago in Town of Halley, the way legislatures work and the way that statutes are written makes it unrealistic to expect a legislature to catalog.

There is finally, and I think most importantly, a reason of principle, and that is this.

If Congress is to be the ultimate protector of the states as autonomous laboratories, especially after this Court's decision in Garcia, we're to look to Congress, then when Congress chooses to protect the autonomy of the states as laboratories, not by telling them which formulas they may experiment with and which they may not, but by leaving it to them subject to an unconstitutional conditions doctrine, for this Court to deny effect to that explicit, substantive congressional judgment would at one and the same time deal a blow to natural legislative supremacy and to the sovereignty and autonomy of the states as laboratories in the interest, so far as I can tell, of an aesthetic concern that all states are created equal, even when, as in this case, limiting the region to New England has the effect of excluding 53 of the nation's 54 largest bank holding companies.

Now, we can imagine no purpose to be served by suddenly declaring this perfectly reasonable step by the states of Massachusetts and Connecticut to be outside the reach of the very broad authorization delegated by Congress.

And if there were any doubt about the proper reading of the statute, deferring to the statutory reading that the Board has given in the face of its own policy misgivings is surely the answer.

And if one says why shouldn't we let Congress resolve it, I thin the answer to that is clear.

Congress did in 1956.

Thank you.

Chief Justice Warren E. Burger: Do you have anything further, Mr. Shapiro?

You have four minutes remaining.

ORAL ARGUMENT OF STEPHEN M. SHAPIRO, ESQ., ON BEHALF OF THE PETITIONERS -- REBUTTAL

Stephen M. Shapiro: Mr. Chief Justice, and may it please the Court:

Counsel's remark about our position being a mere aesthetic concern about the equal status of the states in the Union ought to be the starting point for my rebuttal.

This isn't a mere aesthetic concern.

As the Court said in the Eisenberg case, we could not exist as a nation if states could pick and choose among sister states, and a fortiori, when groups of states join together to boycott other states and effectively injure their economies, this goes to the very core of the concerns of the Founding Fathers that made us one nation of co-equal and indestructible states.

Now, respondents' position is that Congress meant to approve this.

It meant to approve the ganging up.

It meant to approve the picking and choosing.

It meant to set aside the protections of the Commerce Clause without a single word to that effect.

The Court should not mistake what's being asked for here.

This is a giant step beyond what Congress ever considered, what Congress ever stated in the history or in the statute.

And it is the better part of wisdom, we say, to leave this issue to Congress, which is now considering whether this is good or bad for the United States of America.

And if we're all patient, we think Congress will come to a sensible resolution considering the interests of all concerned.

Unidentified Justice: However we decide the case, we're leaving it to Congress.

Stephen M. Shapiro: Yes, but in the interim serious harm could be done to commercial interests in boycotted states like the state of New York.

That's why this Court's decisions say go to Congress first if you're going to depart from constitutional precepts.

And we submit that that is the appropriate course here.

Let Congress resolve these policy questions.

Unidentified Justice: You are renewing your Equal Protection Clause argument here.

Stephen M. Shapiro: We are, sir.

Yes, sir.

Unidentified Justice: Which is wholly aside from Commerce.

Stephen M. Shapiro: Wholly aside from Commerce and wholly aside from Compact.

Thank you very much.

Chief Justice Warren E. Burger: Thank you, gentlemen.

The case is submitted.

Featured:

Board Of Governors v. First Lincolnwood Corp. - Oral Argument

Sun, 20 Jun 2010 20:42:32 +0000

Case:

Board Of Governors v. First Lincolnwood Corp.

Media File:

77-832_19781011-argument.mp3

Related Transcript:

77-832_19781011-argument.xml

Transcript:

Argument of Stephen M. Shapiro

Chief Justice Warren E. Burger: The case is submitted.

We'll hear arguments next in 832, Board of Governors of the Federal Reserve against First Lincolnwood.

Mr. Shapiro, I think you may proceed when you're ready.

Mr. Stephen M. Shapiro: Mr. Chief Justice and may it please the Court.

This case is here on the Federal Reserve Board's petition for certiorari to the United States Court of Appeals for the Seventh Circuit.

The Seventh Circuit set aside an order of the Board which it denied respondent permission to become a bank holding company under the Bank Holding Company Act of 1956.

This case presents the question whether the Board may deny a bank holding company application where the proposed bank subsidiary is undercapitalized and where the proposed holding company would be so encumbered by debt that the bank would remain undercapitalized for a period of at least 12 years.

Chief Justice Warren E. Burger: You mean by that question is whether they have the authority to do it or whether they have the discretion to do it?

Mr. Stephen M. Shapiro: Whether they have the statutory authority to deny the application and we're here today to contend that the Board may indeed deny such an application unless it entails the capital deficiency's remedy.

Respondent is an Illinois corporation.

Justice William J. Brennan: Do I correctly understand that the undercapitalization is conceded here?

Mr. Stephen M. Shapiro: That's correct.

In respondent's brief, the point is made that the capital ratios were low that is recognized in Seventh Circuit opinion and indeed it's recognized in all of the other submissions from the Comptroller and from the Federal Reserve Bank and from the Board's staff.

Respondent is an Illinois corporation which plan to acquire 80% of the voting stock, the First National Bank of Lincolnwood.

It stated in its application that it would assume not only the stock but also a debt in the sum of $3.7 million.

Respondent also planned to cause the bank to issue an additional million dollars in debt securities after formation of the holding company and an additional million dollars in equity after the holding company was formed.

The application was initially reviewed by the Chicago Federal Reserve Bank.

The Reserve Bank recommended approval of the application despite its recognition that the capital level in the bank was below the Board's current guidelines and would remain below those guidelines during the 12-year period needed to retire the debt.

The Reserve Bank believed however that the competence of management and possible improved earnings were positive factors which outweigh the low capitalization factor and in the brief letter, the Comptroller of the currency joined in that affirmative recommendation.

When the application was received by the Board in Washington, it was reviewed initially by the Board's Division of Research and Statistics and then again by its Division of Banking Regulation and Supervision, both of which recommended denial.

They pointed out again that the bank was seriously undercapitalized at present.

The ratio of capital to assets was 5% when it should have been at least 8%.

That meant that the bank needed an additional $2.5 million in equity capital to meet the Board's minimum standards.

Justice Byron R. White: But denying the application wasn't going to give it that additional capital though, was it?

Mr. Stephen M. Shapiro: That's quite correct but the insistence in this category of cases, the capital be replenished as a prerequisite to getting the desired change and status is the motivation that makes applicants come up with the additional equity capital.

Justice William H. Rehnquist: In other words, the Board kind of has the red light and says, “Unless you meet -- unless the bank meets particular qualifications which we would not independently enforce if you're holding company application, we will deny leave for formation of the holding company.”

Mr. Stephen M. Shapiro: The light is red until the Board examines the financial resources of the parent and the subsidiary and has to find that each is adequate under the Board's current standards and in this case, it found a serious deficiency in the bank and it found that the holding company by extracting dividends from the bank would keep the bank would keep the bank in that undercapitalized state for a period of at least 12 years.

Justice William H. Rehnquist: Well, wouldn't the dividends be extracted by the present owners if there is no holding company?

Mr. Stephen M. Shapiro: That's correct.

That is quite true.

Justice William H. Rehnquist: So, what good does it do to deny the application?

Mr. Stephen M. Shapiro: By insisting on replenishing of capital in this kind of case where there's a serious deficiency, the Board has obtained an injection of badly needed capital in some 400 separate cases and an injection of some $2 billion in badly needed equity in the banking system.

That's the good that's done and that's what at stake with this application approval power.

The power has been used effectively and successfully to augment the capital base in the nation's banks.

Justice Potter Stewart: It discharges the price, in other words, for somebody who wants to form a single bank holding company and get the tax advantages of that, he has to pay the price by improving the capitalization of the bank.

Mr. Stephen M. Shapiro: That's correct.

There is a test that has to be passed.

Justice Potter Stewart: Even though the capitalization of the bank was unchanged -- would be unchanged absent Board action, whether or not it was owned as before by individual owners or owned thereafter by a holding company.

Mr. Stephen M. Shapiro: That's precisely the point and this procedure is identical to the procedure under the Federal Reserve Act which Congress stated was the model to be applied here.

When an applicant seeks membership in the Federal Reserve System, it doesn't matter whether the change in status would cause a worsening of its condition.

It hardly ever will.

It's inconceivable that it would.

The question though in this context is whether minimal standards are met and if they're not met, the applicant is told to go back, improve the situation and come back at a later date for a Board approval and that's the approach that's been applied consistently under the holding company.

Justice Potter Stewart: Mr. Shapiro, having interrupted you, may I ask you this which doesn't seem to be very clear from my reading of the briefs at least.

Do the individual owners, if this should become a holding company, do the individual owners remain guarantors of the debt?

Mr. Stephen M. Shapiro: Yes, they are.

They are indeed guarantors, secondarily liable.

Justice Potter Stewart: So -- so, if that's true, the situation remains as before from the point of view of the stability of that indebtedness and --

Mr. Stephen M. Shapiro: The situation --

Justice Potter Stewart: And any advantage of the holding company however is light as in that advantage then, isn't it?

Mr. Stephen M. Shapiro: That's correct.

The situation remains in the state of serious undercapitalization.

There's no improvement over a 12-year period and that's the crux of our different --

Justice Potter Stewart: No improvement in the capitalization of the bank and there wouldn't have been, had there been no holding company.

Mr. Stephen M. Shapiro: That's correct and that's why at this juncture, the Board insists, there now be an improvement to remedy --

Justice Potter Stewart: As a price -- as a price for this people getting the tax advantage of forming of one bank holding company, what do you get --

Mr. Stephen M. Shapiro: It's not a price, it's the statutory criteria.

Our financial resources --

Justice Potter Stewart: It's a condition.

Mr. Stephen M. Shapiro: Correct.

Correct.

Justice John Paul Stevens: Mr. Shapiro, if I understand you correctly, if the holding company were a multi-million dollar concern, just all cash and no-risk business in it, no multiple bank situation, you would nevertheless and if the advantage at the results of the formation of holding company would be totally to the benefit of the bank because they get the tax deduction, they don't now get.

You would nevertheless disapprove the application unless they poured additional capital into the bank.

Mr. Stephen M. Shapiro: That's correct.

Until the 8% standard has been satisfied, the subsidiary's condition is seriously deficient and that has to be remedy as a prerequisite for approval.

That's quite correct.

Chief Justice Warren E. Burger: Is there not some value to the guarantees resulting from the Holding Company Act, from a holding company status?

Mr. Stephen M. Shapiro: There certainly is very significant advantage in having the holding company status.

The holding company for one thing is in the position to issue debt securities without the restrictions under regulation cue that apply to individual banks with the holding company based additional business activities can be entered into.

There are numerous benefits in addition to the tax advantage.

Justice Byron R. White: In most banks, almost.

Justice Potter Stewart: But not in Illinois.

Mr. Stephen M. Shapiro: But not in Illinois, that's correct.

Illinois has limits on branch banking.

One facility within 15,000 yards, the second facility within two miles and that's it but in many states, of course, where there are limits on branching, you can get around those limits by setting up a holding company with multi-bank subsidiaries.

Oklahoma and Texas are clear examples of that situation.

Justice Potter Stewart: But if your answer is accurate that the original owners here remain as guarantors of the indebtedness then there is the advantage of now there being two sets of debtors instead of just one.

Mr. Stephen M. Shapiro: Well, the holding company.

Justice Potter Stewart: The holding company is now added as an additional debtor.

Mr. Stephen M. Shapiro: But --

Justice Potter Stewart: And the original debtors remain debtors, correct?

Mr. Stephen M. Shapiro: The holding company under this application would remain simply a shell.

It would have no additional working assets --

Justice Potter Stewart: It assumed the indebtedness, doesn't it?

Mr. Stephen M. Shapiro: That's correct.

It assumes the indebtedness.

Justice Potter Stewart: So there's an additional debtor?

Mr. Stephen M. Shapiro: And would have no income other than the dividends paid from the bank which would otherwise be otherwise be paid to these guarantors that you referred to so it wouldn't be --

Justice John Paul Stevens: Otherwise, it would be paid to Uncle Sam in half, wouldn't they?

Justice John Paul Stevens: A lot of those -- the dividends for the most part you're talking about are the product of the tax saving?

Mr. Stephen M. Shapiro: That's correct.

In the first year, the saving would be roughly a $130,000.00 diminishing every year down to --

Justice John Paul Stevens: The Government's position is that its better to have that money go to the Government really.

Mr. Stephen M. Shapiro: Well, the Government's position is that if this new valuable status is sought, it is incumbent upon the parties seeking this new advantage to shoulder the responsibility of maintaining adequate capital in the bank, that's the Government's position in Mitchell.

Justice John Paul Stevens: And your position is based entirely on the statutory language that the Board shall take in to consideration the financial and managerial resources of future prospects of the company or companies in the banks concerned.

Mr. Stephen M. Shapiro: And its based on the long history that we cite on the brief, one pertinent portion of that is the analysis or the analogy to the practice under the Federal Reserve Act where an applicant can't obtain membership in the system unless its capital as adequate relative to assets and relative to liabilities in the judgment of the Court.

Justice John Paul Stevens: No, there of course you're talking about membership in the system of banks all of which affect one another in their operation; we don't have any consideration like that here, do you?

Mr. Stephen M. Shapiro: There is a certainly economic differences but Congress said that they are inconsequential and that the same pattern is applicable under the Holding Company Act.

Justice John Paul Stevens: Does the Government still concede as it did, at least Judge Fairchild have quoted you in the Court of Appeals to saying that in any economic analysis of this, the formation of the new company can only be beneficial to the bank can't cause any harm.

Mr. Stephen M. Shapiro: I think that that concession has been estrange a bit but we do agree that a hundred and $130,000.00 benefit is better than no one $130,000.00 benefit and that's a positive factor.

Justice John Paul Stevens: And you can't point to any harm other than the failure to do something you wanted to do.

Mr. Stephen M. Shapiro: We can point to possible harm and the Board did that in its opinion.

It pointed out that there could be a weakening of the banks financial condition and what it meant by that was what the staff had indicated in its projections of the condition of the bank for a 12-year period.

Capital ratios could decline slightly to a 4.8% starting at 5.2% but that was based on a number of assumptions and it was caused by a number of factors.

Justice John Paul Stevens: All of which would have applied if there've been no bank holding company involved here?

Mr. Stephen M. Shapiro: Well, some of which would not have applied.

The issuance of the million dollars in debt securities was a new step and that gives rise to new debt service requirements of a hundred thousand dollars every year, that was a new element but we do not say that there's any assurance that this bank subsidiary would be worse of 12-years hence, it's a possibility and there are other possible dangers that result from the affiliation of a bank and a leverage holding company.

The Beverly Hills National Bank case is a vivid example.

In that case, the holding company issued commercial paper, debt – short-term debt securities and it was unable to meet its obligations on that commercial paper.

Only $2 million in debt and that caused the run on the bank.

Justice John Paul Stevens: Yes, but that was a situation --

Mr. Stephen M. Shapiro: Even though the bank was sold.

Justice John Paul Stevens: -- in which they did not maintain the 80% necessary to take advantage of the tax advantage which is the whole purpose of this transaction, isn't it?

Mr. Stephen M. Shapiro: I'd -- I have never seen that fact referred to Your Honor that there was less than 80% control in the Beverly Hills National Bank case.

I believe that there was 80% control.

Justice John Paul Stevens: Oh, I'm sorry I'm confused.

Mr. Stephen M. Shapiro: The difficulty was that that the holding company couldn't meet a relatively small obligation on its debt securities and even though the bank resounds, this caused the panic among depositors.

$30 million in deposits were withdrawn in three days.

This is a possible difficulty that results from the combination of a highly leverage holding company with large amounts of debt outstanding and the possibility of not being able to meet its obligations.

This is a danger imposed on the bank that wouldn't otherwise exist.

We're not saying that will happen.

The Board made no finding that it necessarily would result but that's the sort of danger that the Board takes into account when it talks about possible weakening which it referred to in its opinion.

Chief Justice Warren E. Burger: What criteria do you suggest were taken into account by the Federal Reserve Bank of Chicago in recommending approval of this application?

Mr. Stephen M. Shapiro: The Reserve Bank in Chicago recognized the low capitalization problem and recognized its persistence but it felt that there was a strong management in this bank and that the management had done a lot of good for the bank which we don't dispute and that this management shouldn't be faulted for taking over the bank at the time of difficulty and a sop if you will should be thrown to them and that possible improved earnings could reduce the string on the capital but the Board simply disagreed concluding that the low capitalization factor was such a serious problem that steps had to be taken out.

That persuasion and suggestion and urging of improvement wasn't enough and that the Board had to insist upon application of its 8% rule.

Chief Justice Warren E. Burger: And what about the Comptroller's view of this?

Mr. Stephen M. Shapiro: The Comptroller originally recommended against the transaction on the ground that the bank's capital was too low.

Later, he changed his mind on the theory that the injection of million dollars of debt and the million dollars in equity would be some improvement in the situation and indeed it would initially capital in the bank would be raised somewhat but it would still be $1.5 million short and that's the objection of the Board.

Even with this injection of capital it's not close to the standard that it should be.

Justice William H. Rehnquist: What sanctions are available on the part of any federal agency for the bank's failure to meet the standard you're referring to apart from the application for a holding company?

Mr. Stephen M. Shapiro: Apart from denial of the holding company, it is in theory possible that the Comptroller could commence a cease and desist proceeding involving a trial --

Justice William H. Rehnquist: He didn't do it here?

Mr. Stephen M. Shapiro: He didn't do it here.

He has relied extensively on moral persuasion and urging for improvement and the reason for that is obvious.

This trial procedure is a highly cumbersome and time-consuming proceeding that may end up nowhere.

By that I mean that if there's an order to cease and desist from being under capitalized and market conditions are such that stock can't be sold, there may be no way to comply with the order.

Justice William H. Rehnquist: So the holding company is kind of a goody that's held out in exchange for giving up this rather extended proceeding that would be necessary if the bank didn't want a holding company?

Mr. Stephen M. Shapiro: If the Board or the Comptroller had to conduct trial and an appeal in the judicial enforcement proceeding every time that they needed to correct the capital deficiency in some 400 cases of the Board alone, they'd be doing nothing else but conducting these kinds of trial, it would be totally infeasible.

Justice William H. Rehnquist: Well, in the criminal law area this has been outlawed for years, I suppose you realize that they're making someone give up a right to jury trial in that sort of a thing like the case right behind you is not too different from that.

Granted this is of -- this is the area of civil or right in criminal but don't you have any hesitation about advancing that argument?

Mr. Stephen M. Shapiro: I don't because no right here is being given up.

There is no right to holding company status unless and until its determined that the resources of the bank and the holding company are adequate in the judgment of the Board and what that means is that this 8% test has to be met and its perfectly common in this industry for a bank that seeks the changing status to have to pass the test in financial soundness and until it does that, the application's approval is withheld.

That's a common procedure under the Federal Reserve Act, Under The Federal Deposit Insurance Company Act --

Justice William H. Rehnquist: Those Acts specifically authorize that sort of test, don't they?

Mr. Stephen M. Shapiro: And this Act, the legislative history makes very clear, incorporates these same standards.

Congress said that the very same considerations that are used under the Federal Reserve Act and under the FDIC Act should be applied under the Bank Holding Company.

Justice William H. Rehnquist: They didn't say it say it in this Act?

Mr. Stephen M. Shapiro: They said it in the House Report that a company that -- and they used the term financial resource and what after all is a resource.

The literal definition of that term means something set aside in extra additional support, that's the dictionary definition of the word resource and that's just what capital is in the banking system.

It's a cushion, something extra, something set aside as insurance against poor earnings, against bad loans, against unexpected demands from depositors rather creditors.

So resource adequacy is what we're talking about and we're talking about capital adequacy.

I think the statute literally read supports us directly.

This history that I referred to keying the statute to the Federal Reserve Act supports us directly and the whole history before that under the 1933 Act supports us directly where Congress expressly said that the holding company should be a source of strength to an undercapitalized subsidiary and that if capital was inadequate at the application stage, that's a ground for denial.

That's been the pattern since 1933 and for that reason we think that not only the history but the literal text is four square behind us.

We would expect respondent to point to something in the history that suggest that the Boards inference is incorrect about its own statutory authority but respondent hasn't done that I think that that's a testimony to the support of nature of this history.

Justice John Paul Stevens: Mr. Shapiro, I just want to clear one thing up in my mind.

You mentioned that if you had to get a cease and desist order in under capitalization situations, it should be engaged in almost constant litigation because I gather from that and is this a correct inference that the problem of banks not complying with your 8% rule is a very common problem, a lot of banks don't comply with it, is that right?

Mr. Stephen M. Shapiro: Since 1970, 400 applications have been held to be deficient under the standard under holding company --

Justice John Paul Stevens: 400?

Mr. Stephen M. Shapiro: -- act alone and that's just one agency as scrutinizing capital in banks and in each of this cases the Boards insisted on --

Justice John Paul Stevens: You mean the 400 applications in which the acquired banks capitalization didn't meet the 8% test and that was the reason for denial?

Mr. Stephen M. Shapiro: That's correct and the denial was combined with an improvement at the later stage resulting in a replenishing of the needed capital and Board's testimony before the Senate in 1976 was that this has resulted in the injection of some $2 billion in additional capital and so we're talking about a recurrent problem that's dealt with, we think economically under the statutory provision.

Justice John Paul Stevens: Well if there --- if there are 400 banks that this was a problem and that it were subject to application, I presume there must have been a lot of other banks that weren't involved in proposed transaction that also were deficient in capital, is that right?

Mr. Stephen M. Shapiro: That's correct and the --

Justice John Paul Stevens: So that -- that maybe it's almost a characteristic of the banking industry that they don't satisfy this particular criteria?

Mr. Stephen M. Shapiro: Well, we know that that isn't true because the Board has made statistical analysis of banks within different peer groups and within this peer group which is a size criterion, the average nationally is 9% and so the Board's 8% standard is somewhat lower than the national average.

It's a problem in many cases but on the average, the banks do better than the Board's standards but that's not to say that it isn't a recurrent problem that has to be dealt with in an economical way under the Board's supervisory powers.

Justice John Paul Stevens: And is it a flat rule of the Board that no one bank holding company will be permitted to be organized if the bank to be acquired has a capital ratio of less than 8%?

Mr. Stephen M. Shapiro: I am informed that it is as close to a flat rule as it could possibly be, I believe that it is.

Justice John Paul Stevens: Is the rule contained in a written regulation anywhere?

Mr. Stephen M. Shapiro: It's contained in the uniform system of bank classification which is in the bank examiner's manual which has been in existence since 1969.

It's referred to from time to time in Board opinions, its contained in the banking treatises that bankers rely on and it's constantly the subject of discussion between bankers and bank examiners when there's a case of under capitalization.

Justice John Paul Stevens: And they basically what they do?

They never allow any change in status or anything to the bank unless it will make a change to comply with this standard?

Mr. Stephen M. Shapiro: Well, a bank that was below the 8% standard wouldn't get into the Federal Reserve System until it improved.

The holding company that sought to acquire would not get holding company status until it was improved and FDIC insurance wouldn't be had until the capital deficiency was improved.

It's a very serious matter, its one of the prerequisites of banking.

Justice John Paul Stevens: Would the bank lose their FDIC insurance when they get below this amount?

Mr. Stephen M. Shapiro: Pardon me?

Justice John Paul Stevens: Will the bank lose its FDIC insurance coverage if its capital ratio falls below this percentage?

Mr. Stephen M. Shapiro: That is such a draconian sanction that it's never been done.

Justice John Paul Stevens: It just won't grant new insurance to a bank that doesn't comply?

Mr. Stephen M. Shapiro: Well, if this bank were denied its FDIC insurance, it would mean that it would go under receivership.

It's a national bank and it has to have it and so methods other than the ultimate weapon are used and one weapon of course is just urging from the regulatory authorities to improve but that's proven to be inadequate and this case has proven to be inadequate.

The Comptroller urged this bank repeatedly that its capital funds picture should be replenished and restructured to a fully acceptable level and that the Board of Director should take immediate steps to achieve that end.

The Comptroller understands in 73 --

Justice John Paul Stevens: But of course in the denial or the application has not achieve the end, I gather.

Mr. Stephen M. Shapiro: Not --

Justice John Paul Stevens: Still as under the --

Mr. Stephen M. Shapiro: Not to the state because it's still in litigation and of course they hope for success which would --

Justice John Paul Stevens: Even if the FDIC wins the litigation then its objective will not be achieved?

Mr. Stephen M. Shapiro: Well, we hope that it will be achieved through the offer of new equity securities by the bank, by finding new ventures at the holding company level, or by retaining the earnings for a period of time in the bank, any of these steps could be employed to replenish the capital base and if that occurs and it should occur within a reasonable period of time, then this respondent is free to return to the Board to get a fresh appraisal of its application.

We're not being obstructive.

We're not standing in the way.

When this improvement takes place, we'll give the application -- a first consideration and we welcome that return from respondent.

This is not the death knell to the formation of the holding company I would stress.

I will also stress that the Board's interpretation of this law which has been in existence since the early 60's and has been applied again and again in denials of holding company applications which have been published.

This interpretation has been in existence.

During the period of time when Congress amended the law, it amended it in 1966, it amended it again in 1970 and it didn't express even the slightest disagreement with the Board's policies and under this Board decision, this Court's decisions when Congress amends the law without disagreeing with a visible and obvious policy of this sort that amounts to ratification by Congress of the agency's interpretation and this Court has said repeatedly that the greatest discretion is owing to an administrative agency's interpretation of its own enabling statute and that argument applies a fortiori we say when there have been two amendments of the law without any hint of disagreement.

And of course this policy of strong capitalization has been at the base of the congressional concerned in this area since 1913.

Justice Potter Stewart: Mr. Shapiro, has any other Court -- considered this question in any Court other than the Court of Appeals of the Seventh Circuit?

Mr. Stephen M. Shapiro: No Your Honor, no other Courts has and you'll notice that the Seventh Circuit relies upon general reasoning rather than the citation of any precedent and that's because there is no case law in this area.

We have to turn to the statute, its literal text and its history had --

Justice Potter Stewart: One more question, who wrote the opinion for the panel?

Mr. Stephen M. Shapiro: It was senior --

Justice Potter Stewart: September 7, 1976, it doesn't --

Mr. Stephen M. Shapiro: Senior Judge Hastings wrote the panel decision and Judge Fairchild who had dissented in the original case wrote the decision for the en banc court.

Justice Potter Stewart: Doesn't appear who the author was of the panel of --

Mr. Stephen M. Shapiro: I notice that myself Your Honor with some embarrassment but those are the authors of the opinions.

Justice Potter Stewart: Just go on.

Thank you.

Mr. Stephen M. Shapiro: Respondent asserts that because a capital deficiency already exists here that there is no rational ground for us to stand on the way.

That were being arbitrary and capricious because the milk has already been spilled, the damage is done they say and there's no reason to make a fuss but we say that the situation should be improved and that new powers, a new status should not be conferred until that improvement takes place and I don't think there's anything arbitrary or capricious about that.

The old maxim about greater rights, pre-supposing, greater responsibilities we think applies fully in this case.

Chief Justice Warren E. Burger: Now, where -- how do you relate that specifically to the statute, that doctrine?

Mr. Stephen M. Shapiro: Under the statute the Board is directed to consider an every case financial resources and the legislative history says that these considerations of financial soundness and managerial soundness, the so-called banking factors are the basis for granting or denying and if the applicant has not shown sufficient responsibility to raise capital to minimally adequate levels, then the statute we say authorizes a flat denial and tell the applicant improves the condition of the bank and meets minimum Board standards.

Mr. Chief Justice, I see that the white light is on and I would request your leave to reserve the remainder of my time to reply.

Argument of George B. Collins

Chief Justice Warren E. Burger: Very well.

Mr. Collins.

Mr. George B. Collins: May it please your -- may it please the Chief Judge in this Honorable Court.

The transaction here involved does not change anything except for the better.

The Federal Reserve Bank of Chicago wrote an analysis of this transaction which was quite full and which pointed out that the -- I think their exact language was that the bank would be severely prejudice or severely hindered if the transaction were not allowed.

The reason for that is that by this transaction, by the formation of this holding company, the bank will or the entity consisting of the bank and its owners will benefit by $130,000.00 per year.

Right now, the amount would be a $160,000.00 a year because it's based upon the current average interest rate.

Now, if the Court please that is a large benefit and that is why the bank sought holding company status.

In Illinois, having a bank holding company, a one bank holding company is of no particular great benefit from a business point of view.

You can't open branch banks with it.

You can't have multiple holding company banks.

You can't do anything with it except really do what the voting trust does now.

Now, the bank has a voting trust right now where the four men who were involved belong to this voting trust and that voting trust does exactly what the holding company will do which is sit there and vote every year at the time of election of directors and receive a dividend and use the dividend to pay interest on the loan which exists.

Now, in this transaction, there is absolutely nothing new created by the transaction, there is only a reshaping in form from a voting trust to a holding company which will perform precisely the same function as the voting trust.

So there --

Justice Lewis F. Powell: Mr. Collins, I take it you're not defending the judgment below on the theory espouse by the Seventh Circuit however?

Mr. George B. Collins: I am Your Honor.

Justice Lewis F. Powell: You are not.

Mr. George B. Collins: That -- I am, I do.

I do contend that Judge Fairchild wrote correctly.

I contend that Judge Fairchild wrote correctly when he said that in order to strike down a transaction or to deny a transaction, there must be something about that transaction which in some manner causes some detriment to some banking factor.

The Board denies this Your Honor on the basis of a policy decision, a basic economic policy decision and I think in that respect, I differ very much with counsel.

Counsel puts that to Your Honor here today that the Board has the right under their reading of the statute to decide basic economic policy to fix an 8% rate which they affix no place in any written regulation.

They have not one piece of paper, not one thing that's published as a regulation that I know of says 8%.

They have the right to say that and then to deny on the basic --

Justice Potter Stewart: They have the power to say that?

Mr. George B. Collins: Well, they might have the power to make such a regulation.

Justice Potter Stewart: And that's the argument.

They probably have the right?

Mr. George B. Collins: But they surely haven't made such a regulation.

The -- I don't know that they have the power.

Justice Potter Stewart: Well now, you say they don't?

Mr. George B. Collins: Well, it would seem to me to be this that they have the power --

Justice Potter Stewart: It doesn't.

Mr. George B. Collins: -- only to relate it to the specific transaction.

Is this transaction a good one or a bad one?

Now, if Your Honor please, the Board has many powers, the power over money policy United States which does not involve hearings, it does not involve a record.

They meet once a week and decide if we're going to be richer or poorer whatever they decide.

But that is not what this is.

This is supposed to be a judicial type decision where you take a record in a case and decide yes or no.

Justice William H. Rehnquist: Certainly, the Board could have a general rule though by which it treats a number of applications?

Mr. George B. Collins: If they do, it does not appear from their opinions.

They simply say that in this instance, we think there would be a strain on the bank's -- on the bank's capital or that in this instance there would be no strain.

You can't read their opinions and come a way with any understanding of any policy other than that, sometimes they say it will cause its strain and sometimes they say it won't.

It is -- they're not written like judicial opinions.

One of them is here and many are cited in the brief.

They are not judicial opinions.

They don't appear to be even.

They don't really go with precedent.

They simply say that this is a strain and that's not.

In this instance, I would suggest that the primary regulation of a bank is sue the Comptroller of Currency.

And I think it important that the Court understand that banks are heavily regulated by a most responsible and competent regulatory authority.

There are basically three, the FDIC, the Comptroller of Currency and the state banking authority.

In this instance it's a Comptroller because it's a national bank and a member of the Federal Reserve System I would add.

Chief Justice Warren E. Burger: Well, do you take the position that the Board had no authority to deal -- make this decision at all?

Mr. George B. Collins: No, no sir, not -- please don't put me on that, no sir.

They had authority to decide the case.

Chief Justice Warren E. Burger: Well, you said the Comptroller of the Currency had that authority?

Mr. George B. Collins: No, they had the authority to decide the case but this is how it is suppose to work according to the statute.

The bank applies or the holding company applies.

The Comptroller is then asked to pass judgment upon it before the FRB does.

The Comptroller -- if the Comptroller says no because the banking factors are adverse, then you get an evidentiary hearing before the Federal Reserve Board or some delegate thereof.

If the Comptroller says yes on banking factors, then you still have the competitive factors, the antitrust factors that must then be decided and the Board can then decide the case on the antitrust and competitive factors and review the Comptroller on the so-called banking factors.

Now, as Congress wrote and as it would appear to me to have been intended to be written and as Chairman Burns said when it was -- when the 1971 Bank Holding Company Act was passed, the Federal Reserve Board does not pretend to want to regulate what goes on inside a bank and Mr. Burns said that -- Governor Burns said that.

He said, “We don't want to regulate banks, that's up to the Comptroller.”

Now, the Comptroller has plenary powers over banks.

They have vast and enormous powers.

It's not some involved court thing.

One of the cases cited in the Government's reply brief here.

The Malone case I believe gives an example of the breadth of that power.

They can go on a bank and say you're closed and you are.

It's really very little you can do about it.

You go to a hearing later.

So the Comptroller has very full powers to do as he wishes with the bank and he has the primary responsibility and in this instance, the Comptroller exercise a very basic primary responsibility and said, after there was a change, go ahead.

The ironic thing is that the change the Comptroller proposed, the Federal Reserve Board didn't like.

They said, one of the items in the record here says that the Federal Reserve Board regards it as less -- less favorable that the changes that the Comptroller required is making the proposition less favorable.

So you have the situation where you have essentially two regulatory bodies having input into one decision.

But its suppose to be a judicial --

Justice Lewis F. Powell: Mr. Collins.

Mr. George B. Collins: Pardon me.

Justice Lewis F. Powell: May interrupt you just a minute?

Mr. George B. Collins: Yes, sir.

Justice Lewis F. Powell: The difficulty with your argument you are now making as I perceive it is that the Comptroller has authority only to make a recommendation to the Federal Reserve Board with respect to the formation of a holding company.

The Congress made the choice of putting the decision making authority in the Federal Reserve Board with respect to a holding company.

Mr. George B. Collins: Very much so.

Justice Lewis F. Powell: The Comptroller can only -- can only make a recommendation.

Mr. George B. Collins: May I respond on that point Your Honor?

Justice Lewis F. Powell: Please do.

Mr. George B. Collins: The Comptroller has the -- has the duty to respond to the application.

He may respond yes or no.

If he responds yes, then it is decided by the Federal Reserve Board without any hearing.

They simply take the papers, the documents that are presented.

If the Comptrollers says no, then the Federal Reserve Board is obliged to grant a hearing.

My point is that some status is given by that statutory scheme to the Comptrollers acquiescence or non-acquiescence and the Comptroller remains in all events the primary regulatory authority over the bank and the Federal Reserve Board does not pretend according to its chairman at one point to govern what goes on inside a bank or to concern itself with the day to day capitalization of the bank.

Now, --

Justice Lewis F. Powell: Well, that's true but Section 3 imposes obligation on the Board to consider the financial --

Mr. George B. Collins: Correct.

Justice Lewis F. Powell: -- condition not only of the bank but of the holding company?

Mr. George B. Collins: Correct.

Justice Lewis F. Powell: And the future prospects of both?

Mr. George B. Collins: Well, --

Justice Lewis F. Powell: So show that your --

Mr. George B. Collins: There are ways --

Justice Lewis F. Powell: -- on the Comptroller seems to me to be perhaps misplaced to some extent.

Mr. George B. Collins: Well, if Your Honor thinks so then certainly misplaced but --

Justice Lewis F. Powell: Well, it's relevant -- it's relevant --

Mr. George B. Collins: But the point that --

Justice Lewis F. Powell: -- but I'm talking about the ultimate responsibility.

Mr. George B. Collins: But the point that I would make is that the decision that they're to make is suppose to be a judicial decision and not an economic decision.

That the Federal Reserve Board --

Justice Lewis F. Powell: Well, what authority do you have for that?

Mr. George B. Collins: Well, that it's a statute.

That it impose an obligation to decide the competitive factors.

That it comes out of the Bank Merger Act.

It's taken whole right out of the Bank Merger Act.

The legislative history to which counsel adverts just doesn't exist for this statute except through the Bank Merger Act.

Are you arguing that financial condition of a bank is a judicial decision rather than --

Justice Lewis F. Powell: No, sir.

Mr. George B. Collins: -- an economic or banking decision.

Justice Lewis F. Powell: I'm arguing -- I am -- well, no, I think its up to the Comptroller whether or not a bank should open tomorrow morning and he makes that decision everyday as to every bank in America and I don't know that that's a judicial decision unless there was a case of gross abuse and I don't know that there's ever been such a case but I think that and my point to Your Honor is that the decision of whether to allow or to withhold the privilege of a bank holding company is one which is accorded or not accorded in accordance with judicial principles and not as part of the money policy of the Federal Reserve Board.

Justice Potter Stewart: Oh!

Except, except Mr. Collins, maybe I'm simply repeating the concern expressed by my brother Powell but the statute enacted by Congress clearly provides that in every case, that is in every application to become a bank holding company, the Board shall take into consideration the financial and managerial resources of the banks concerned.

Mr. George B. Collins: Correct.

Justice Potter Stewart: It imposes a statutory duty upon the Board to --

Mr. George B. Collins: I have -- I have no --

Justice Potter Stewart: In every case to take those --

Mr. George B. Collins: Right.

Justice Potter Stewart: -- concerns into consideration.

Mr. George B. Collins: And I have no quarrel with that because to me, what that means is that you view this case in this record and if there's anything about this transaction which harms anyone of those considerations or does not even or you could even say does not benefit the situation upon this considerations that it is entirely proper for the Board to take that into consideration.

Justice Potter Stewart: Or has to in every case?

Mr. George B. Collins: Well, certainly.

Justice Potter Stewart: That's the rule of Congress.

Mr. George B. Collins: Well, certainly but the point is that in this case, they are denying this status, I suggest as part of their basic monetary policy of the United States and not because of anything good, better and different about this case.

Now, I think that's a difference between the open market committee or the money type actions of the Board and this particular item.

Justice Potter Stewart: Well, the Board simply says we took into consideration the financial resources of the bank concerned.

Mr. George B. Collins: Well, that's what they in their opinion --

Justice Potter Stewart: At which was Congress directed us to do in every case.

Mr. George B. Collins: The most that can be said is that they claim in their opinion which is in the petition.

They take the position that because the owner of this bank, the holding company will owe money which already owed and has been owed for three, four years now.

Because the old money that the holding company could -- that this debt could prevent the holding company from resolving any unforeseen problems that may arise at the bank, that the language right out of their opinion at 26 (a) of the petition for certiorari.

Now, if it is the point of the Seventh Circuit opinion and I believe it to be correct, I hope it is, that they have to see something wrong with this transaction, with this particular transaction some way in which this transaction is harmed by a holding company status before they can deny the benefit of a $160,000 a year tax saving to this ownership entity now.

The ownership entity exists right now and right now it owes $3.7 million.

If there's a holding company, they still owe it -- they still owe it personally because they have to guarantee the note as the lender would require and does require.

So nothing changes except that there's a $160,000.00 benefit per year that goes towards reducing that debt.

That's $160,000.00, it doesn't -- its not created now.

So essentially, what is done here by the Federal Reserve Board is they are saying that the tax laws of the United States may -- you may not have the benefit of this tax law because you didn't do something else that we want you to do which in our monetary policy, we believe you should do.

Now, their monetary policy is not really written because it changes so much.

There is evidence in a book that the Government cites called --

Justice Thurgood Marshall: Do you think they should ignore “monetary policy?”

Mr. George B. Collins: Well, I would hope --

Justice Thurgood Marshall: How could they?

Mr. George B. Collins: Well, I think that --

Justice Thurgood Marshall: In one grant you say that that's their job.

Mr. George B. Collins: Well, let me --

Justice Thurgood Marshall: And then your next grant you say, but they shouldn't do it when it comes up against my bank.

Mr. George B. Collins: I think that's the difference between this Court in any judicial body and an administrative body and I'll agree with Your Honor that they'll have a hard time doing that but I think they have the obligation when they have a judicial decision to make which this is.

Justice Thurgood Marshall: Where in the legislative history did you get any of this?

Mr. George B. Collins: The legislative history if I may, the legislative history is that this is a judicial type decision and a judicial type decision means you got to be fair to both sides and act equally among all parties and that's what a judicial decision is.

Justice Thurgood Marshall: Well, I should assume that any administrative body is obliged to do that whether it's judiciary or anything else.

Mr. George B. Collins: But in an open market money committee meeting at the Federal Reserve Board, there's no plaintiff and no defendant and they simply decide on the basis of some administrative rule what they're doing.

Justice Thurgood Marshall: Well, what's wrong with what was done here?

Mr. George B. Collins: What was done here, what is wrong is done here --

Justice Thurgood Marshall: What you wanted, do you take the rules says that once the Comptroller meets and decides in favor of the bank that all the Federal Reserve Board does is rob his time?

Mr. George B. Collins: Not at all.

The obligation --

Justice Thurgood Marshall: What if -- what is different from that on the other --

Mr. George B. Collins: Alright, the obligation of the Federal Reserve Board is they could definitely I think overrule the -- suppose the Comptroller had a bank that was in a failing condition and he said well, start a holding company and that'll pull it out.

I think they definitely have a function here but they have to exercise it in a judicial and not economic manner.

It's been documented that the Federal Reserves --

Justice Thurgood Marshall: Listen, it's a Federal Reserve Board, it's not the Federal Reserve Court.

Mr. George B. Collins: Well, it is in this instance -- when they're exposed to make a judicial decision and decide between parties on the basis of a record, they're suppose to do it so fairly and I think that that's different from their general administrative responsibility over the money systems.

Chief Justice Warren E. Burger: When you say between the parties, who are those parties?

Mr. George B. Collins: Parties would be the applicant and the respondent which should be the staff of the Federal Reserve Board which shows to go against this.

They made a submission against it --

Chief Justice Warren E. Burger: That's not a party situation in the normal context of --

Mr. George B. Collins: Well, not in -- in the administrative law context, I think it might be considered that the Federal Reserve Board of Chicago strongly recommended this and the strongest of term, they said it was the bank would suffer severe detriment if it were not granted.

The people at staff here, of course we don't know that as it goes through, you only learn that when you get the record but the staff here said no, they didn't like it because it was in conflict with the current posture was their words.

The current posture of the Board, the current policy of the Board and so they said this doesn't comply with our current policy.

Alright, then the Board has to decide what's right and what's wrong and I think that when they decide that, they're deciding between two contentions.

Justice Lewis F. Powell: Mr. Collins, I'm having little difficulty following you when you talk about the Board's decision in this case being based on the Federal Reserve Board's monetary policy, is that referred to by the Board in its decision?

Mr. George B. Collins: No it is not.

I based that upon an analysis in a book that the Government cites called Heller, a guidebook to holding company law.

Its -- I believe page 128 to 130 of that book which I just read yesterday and which says plainly that up until 1974, they were very liberal with the formation of this holding companies and they intended to approve them.

Then, in 1974 when there was economic difficulty in the country, they decided that they will change their policy and attempt to get more money into the banking system by refusing the holding companies and by making the banks come up with more money in order to start them.

Now, Mr. Shapiro this morning, my good friend here argues that their right because they have the right to require more money simply as part of their general governance of the American economic system but --

Justice Lewis F. Powell: That's not really what the Board said in this case though.

Mr. George B. Collins: No, it is not.

It is -- it was the observation of their author of that book that whatever they said in their opinions, what they do is they decide things on the basis of policy.

Now, the Internal Board Report which is the staff report to the Board which is in the appendix uses the words current posture.

Counsel argues here today forcibly that it is policy that causes them to do this and if they have the right to deny this tax advantage because of policy that banks should have more capital.

Justice William H. Rehnquist: Well, anytime you're adjudicating a case involving a particular applicant like your client here, you make the adjudication on individual factual determinations but then you apply policy to them, don't you whether its legislation or rule making or what?

Mr. George B. Collins: Well, my point is that should be at least some kind of written policy that someone can know and for them to simply to deny it on the basis of a record when in fact on the facts of the particular case nothing but benefit flows from it.

I think that there -- I think that's just plain arbitrary wrong and capricious because when the problem will be on its way to being solve if they will grant the holding company status which in Illinois means nothing as far as other business are concern.

If they were but granted, then we're a $160,000.00 a year towards solving every problem that there is.

If they deny it, we aren't.

Chief Justice Warren E. Burger: But suppose the Federal Reserve Board and looking down the road is their business includes that anything that will encourage speculation and bank stocks at a particular time is bad for the whole monetary system, then do you say they cannot take that policy into account?

Mr. George B. Collins: Well, if they -- if that policy were applied to this case, they would grant the holding company because when four people own stock that's tied up for many years that is not readily salable because its closely held and where they have to keep the 80% block together to qualify for the tax consideration, then in this case it wouldn't -- the application of such a policy would leave them in an arbitrary and capricious position.

What -- I don't know what the deciders of great questions consider.

I have never decided anything.

But to me, if they have a record before them, they should decide their case on the basis of the record before them and upon the harm or good to be done out of that transaction.

Chief Justice Warren E. Burger: Just for this one transaction and this mean --

Mr. George B. Collins: I would think so.

You so judge if a man does an armed robbery, you judge the one transaction; you don't convict him because of a general policy on that.

Chief Justice Warren E. Burger: Well, but the Federal Reserve Board has got to somewhat different function, has it not?

Mr. George B. Collins: Well, I think in this instance, the way the statute and the procedure is written.

I think they have the duty of deciding any two antitrust questions and I think you could consider this part as part of the antitrust consideration or you can consider separately.

Now, in the Third National Bank case which was written and decided in this Court 11 years ago, the same language out of the Bank Merger Act was held to apply it to the specific transaction as viewed through antitrust or an antitrust prospective.

So this language has been precisely interpreted in that statute as having to do only with the antitrust considerations of the case and having to do only with that specific circumstance and not otherwise.

Now, --

Justice Lewis F. Powell: Mr. Collins?

Mr. George B. Collins: Yes.

Justice Lewis F. Powell: I've read a few of these opinions over the years and uniformly the Federal Reserve Board and also the courts treat about three basic elements in analyzing this request.

The competitive factors are one, the antitrust division.

Second guess is the Board on those, then the banking factors are second package of things but the Boards and Courts look at.

And finally, the Board looks at the convenience of the community whether or not the community will be better served, the convenience and needs of the community.

So I don't quite understand how you can say that all the Board is concerned with is the competitive factor.

Mr. George B. Collins: I was pointing out if Your Honor please that the same language in the Bank Merger Act, it has exactly the same language.

Justice Lewis F. Powell: Yes, that's right.

Mr. George B. Collins: Has been so interpreted by this Court.

Justice Lewis F. Powell: Oh really?

Mr. George B. Collins: I agree that the Federal Reserve Board certainly looks at it as Your Honor describes.

Justice Lewis F. Powell: Yes.

Mr. George B. Collins: But the Bank Merger Act was not so construed in the Third National Bank case from which where this involved banks at National Tennessee.

It just -- was done differently and I want to bring up one other point.

In the legislative history argument, they go back to statutes -- to a statute passed in 1933 which would appear to require the holder of bank stock if a corporation to have certain financial standing.

Well, if Your Honors please, that was because in the 1930's, there was a law that said that bank stockholders were personally liable on their bank stock to the extent to the par value of that stock in case the bank fail.

Now, there was such a law once upon a time.

It was -- its Section 64 of the National Banking Act and in 64 (a) repeals that as to bank stock acquired after some day back in the 1940's and it is no longer the law.

Now, there was once a very real and precise reasoning -- reason for requiring the owner of bank stock to have a certain financial status.

Now, the Board here tries to make that old law back into the law by saying that the owner of bank stock if it's a corporation should have a lot of money so that if there is trouble at the bank they can come up with the money and that's what they say in the opinion in this case, that they want the applicant, the holding company to have money to come up with.

If the -- if that isn't the law anymore, the owner of bank stock can own nothing except that bank stock if he's an individual, he can be as poor as can be and its not against the law to own bank stock no matter how poor you are in other matters.

You can only own that stock and you can owe on it to a 100% of its worth and you can still lawfully own it.

I think that the legislative history that counsel cites is undercut by the fact that in the initial writing of the laws on this subject, there was then existent, this law requiring that you make up any loss in a bank if you're a stock holder to the extent of the par value of that.

If the Court please, we contend that the Seventh Circuit was right that if it doesn't make any difference, it shouldn't make any difference.

If this transaction does not harm anyone and that it is a correct transaction and I thank you all.

Rebuttal of Stephen M. Shapiro

Chief Justice Warren E. Burger: Very well, Mr. Collins.

Mr. Shapiro, you have three minutes, do you have anything further?

Mr. Stephen M. Shapiro: Mr. Chief Justice and may it please the Court.

I would differ with Mr. Collins with great deference on the question of monetary policy.

This case has nothing to do with monetary policy in simple terms.

Monetary policy is concerned with the level of money in the general economy and it's regulated through open market transactions, reserve requirements and through the interest rate of the discount window of the --

Chief Justice Warren E. Burger: How would you say -- how would you say that relates it all to the desirability or undesirability of speculation and bank stocks at any particular period?

Are there some nexus there?

Mr. Stephen M. Shapiro: I believe that that's a separate question, Your Honor.

The point I'd like to make if I may is that this case is dealing not with money supply with the safety of banks.

It's not concerned with aggregate demand of the economy but with the cushion of equity in the banking system and Mr. Collins referred to Mrs. Heller's treaties, I think if the Court reviews that, it will make very clear that the policy that we're talking about here is the capital cushion for bank safety.

In 1974, that became an issue because banks were failing.

There were several large failures including the Franklin National Bank and the Board decided that at this point in time that the strict capital standards were essential to the safety of the banking system.

The argument was made that the Board's opinion was too cursory.

I'll refer the Court briefly to Camp versus Pitts, 411 U.S. 138.

This is a case we haven't cited but it deals with the adequacy of banking agency's opinion and denying an application.

The opinion is about three years old of this Court, 411 U.S. 138.

And I would say in closing that the Comptroller does not have the final word here as this Court said in the Whitney National Bank case, Congress had no intention to give the Comptroller a veto over the Federal Reserve Board under the Federal Bank Holding Company Act.

And we think this case should be viewed from that perspective because the statute is explicit, that the Board makes this decision and the Comptroller merely advises.

Thank you very much.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.

We'll hear arguments next in --

Featured:

E. I. Du Pont De Nemours & Co. v. Collins - Oral Argument

Sun, 08 Aug 2010 17:08:07 +0000

Case:

E. I. Du Pont De Nemours & Co. v. Collins

Media File:

75-1870_19770302-argument.mp3

Related Transcript:

75-1870_19770302-argument.xml

Attribution:

The OYEZ Project

Featured:

U.S. v. American Bldg. Maint. Industries - Oral Argument

Thu, 23 Aug 2012 18:25:59 +0000

Case:

U.S. v. American Bldg. Maint. Industries

Media File:

73-1689_19750422-argument.mp3

Related Transcript:

73-1689_19750422-argument

Transcript:

Argument of Bruce B. Wilson

Chief Justice Warren E. Burger: We'll hear arguments next in 73-1689, United States against American Building Maintenance.

Mr. Wilson, I think you can proceed now.

Mr. Bruce B. Wilson: Mr. Chief Justice and may it please the Court.

I was interested in listening to the prior argument because we were dealing with matters of economic reality, serious matters and matters which concerned individuals.

I think this case is a little different and it involves matters of economic reality which concern the national economy.

This case is here today because in 1950, the Congress was concerned with increasing concentration in that national economy and it was concerned with increasing concentration which was resulting from mergers and acquisitions.

And it was concerned with acquisitions by national companies of local firms and that kind of acquisition which was attributing -- contributing to that increasing concentration.

Now, this case squarely presents the question of whether Congress effectively executed its expressed intention to prevent that kind of mergers and acquisitions.

There's really only one issue or decision in this case, whether Congress in Section 7 of the Clayton Act intended to exercise the full scope of its power to reach mergers and acquisitions not only in commerce, in the flow of commerce but also those which affected commerce.

Now, if Congress didn't so intend and if Congress did not so effectively legislate then a series of acquisitions could occur, acquisitions of intrastate firms which could result in a situation which Congress clearly sought to avoid.

It sought to avoid that situation in a statute which it denominated as a supplement to the Sherman Act.

And as we shall see, Congress in the Sherman Act intended to exercise the full range of its power.

And the facts of this case are as follows.

In 1971, the United States filed this civil action under Section 7 challenging a transaction in which the American Building Maintenance Industries --

Chief Justice Warren E. Burger: We'll resume there --

Mr. Bruce B. Wilson: Right.

Chief Justice Warren E. Burger: -- at 1 o'clock Mr. Wilson.

Mr. Bruce B. Wilson: Fine, thank you Mr. Chief Justice.

Chief Justice Warren E. Burger: Mr. Wilson you may continue.

Mr. Bruce B. Wilson: Thank you Mr. Chief Justice and may it please the Court.

Just before the luncheon recess, we had outlined the central issue in this civil antitrust case which was filed by the Government in 1971.

In this case, the Government challenged under Section 7 of the Clayton Act, a transaction in which affirmed American Building Maintenance Industries acquired control of two janitorial service firms doing business in Southern California.

One was the Benton Maintenance Company, the other was the J.E. Benton Management Corporation.

In terms of market shares at the time of the Acquisition, American controlled about 10% of the janitorial service market in Southern California and the Benton Companies combined had about 7%.

Now, of course, the statute with which we deal here today, Section 7 of the Clayton Act, prohibits the acquisition by any corporation engaged in commerce of the stock or assets of another corporation, engaged also in commerce where the effect of that acquisition maybe to substantially lessen competition or tend to create a monopoly.

And this case involves the meaning of four words in that statute.

Those four words being a corporation, also engaged in commerce.

There's no question as to whether the acquiring firm, American was engaged in commerce.

No such question has been raised.

But the decision on the District Court was on a motion for summary judgment on the grounds that the acquired firms were not corporations engaged also in commerce.

The Government introduced various affidavits, none of which I think are disputed showing that Benton had provided janitorial services necessary to support the interstate operation of its customers.

The Benton had purchased substantial quantities of janitorial supplies manufactured outside of California.

That it negotiated at least to major contracts without a state customer and that it did although to -- admittedly minor extent utilized interstate communications facilities in its business.

The court below entered summary judgment in 1973 and in doing so, it adopted almost rebut him the findings of fact and conclusions of law submitted by America but proposed prior to the time that the United States had filed its affidavits.

Of course, once the Court had concluded that, it resulted in a holding that Section 7 had no application to this case.

But there was however in the court below, no opinion explaining the Court's reasoning as to how it reached its conclusion.

The first issue which this appeal raises and when which is easily disposed off, is whether the power of Congress could reach this kind of a transaction.

This Court disposed of that question in Mandeville Island Farms against American Crystal Sugar in 1947.

There, the question was whether an agreement by Sugar Refiners which sold sugar in interstate commerce could agree on the price.

Whether they could agree on the price which they were going to pay to sugar beet growers located in Northern California.

This Court in that case clearly held that such an agreement on price was an agreement which affected commerce and one that was in -- within the reach of the Sherman Act, the first antitrust statute.

Now, of course, when we're dealing with the Sherman Act and with the Clayton Act, we are not dealing with the same statutes.

But we are dealing with statutes in which Congress sought to address substantially the same problem, the problem of monopoly, the problem of trust, the problem of anticompetitive effects on the American economy.

When Congress passed the Clayton Act in 1914, it made clear that that Act was intended to supplement the Sherman Act which Congress had enacted in 1890.

In the light therefore of Mandeville farms, the holding of this Court in that case, there doesn't seem to be much question but that Congress if it so desired and intended could have made the scope of the Clayton Act equally as broad.

It could have reached a merger or acquisition of the type with which we deal here.

And this brings us I think down to the central issue, did Congress intend in Section 7 of the Clayton Act to exercise as it did in the Sherman Act the full extend of its power under the commerce clause?

I think if one looks at the history of the antitrust laws, one can conclude only that Congress in enacting Section 7 did intend to exercise the full extent of those powers.

In the Sherman Act, we have not only Mandeville farms, we have South-Eastern Underwriters in 1944 again holding that in that Act, Congress wanted to go to the full extent of its constitutional power in restraining trust agreements and in restraining monopoly agreements.

And thus, given the history of that act, Senator George in 1890 stating that Sherman was ingeniously drawn to cover every case that is within the commercial power of Congress and Senator Sherman after whom the Act was of course named noting that the bill was just as broad and as sweeping and as explicit as the English language couldn't make it become then to 1914 and we see that Congress in 1914 dissatisfied and disappointed with the application of the 1890 law.

We find that Congress disappointed and dissatisfied with its efforts to control trust and monopolies.

And so in 1914, we find the Congress enacting a law, which according to its title was to supplement the existing laws against restraints and monopolies.

The Congress in that act wanted to arrest such restraints in their incipiency and they intended to do that insofar as it was possible to do so and they did it in Section 7 of the Clayton Act.

Justice Byron R. White: Had the department taken out after any merger such as this before?

Mr. Bruce B. Wilson: I think so Mr. Justice White, I think we have --

Justice Byron R. White: Can you give me a couple of examples?

Mr. Bruce B. Wilson: Bennington Bank where the question was as to the jurisdictional -- not the jurisdictional reach of the act but rather --

Justice Byron R. White: So it wasn't a question, that wasn't the question then.

Mr. Bruce B. Wilson: No but it's a merger of the same type --

Justice Byron R. White: Well, that I know but --

Mr. Bruce B. Wilson: -- and that I think is very important because a question here is, does the jurisdiction of the act extend to this kind of a merger?

The act -- the question in Bennington was whether Bennington Vermont was indeed a section of the country.

Justice Byron R. White: Well, you wouldn't do and suggest the department regularly since 1914 as to take in this position and has attempted to apply the act to corporations that were engaged solely in intrastate commerce.

Let's just assume that they were here.

Mr. Bruce B. Wilson: Well, I think the problems with which we are dealing --

Justice Byron R. White: Well, has it or has it not?

Mr. Bruce B. Wilson: I think in recent years, yes sir it has.

But not consistently since 1914, I think the appellee is correct on that.

Then until we get to such cases as Bennington, until we get to problems within let us say the last 10 years, the department indeed has not challenged that kind of a merger.

Justice Lewis F. Powell: Mr. Wilson, on page 36 of your brief at the top of the page of the first sentence states that previous Section 7 cases have involved both acquiring and acquired firms that have been engaged in the floor of commerce.

I take that to mean that this is the first case the justice department had brought in which the acquired firm was not engaged in commerce, is that correct?

Mr. Bruce B. Wilson: Mr. Justice Powell, I agree that this is the first case in this Court which clearly presents the question of whether the acquisition by an interstate firm.

By the -- no question on the acquiring corporation of an acquired firm dealing primarily in intrastate commerce but with the interstate contacts that we have here serving interstate firms, buying supplies from out of state.

I think this is the first case which presents this kind of a set of facts.

Justice Lewis F. Powell: You referred to the dissatisfaction of Congress in 1914 with the limitation of the Sherman Act.

Has Congress indicated any dissatisfaction with the failure of a justice department to bring this type of suit before in the last 60 years?

Mr. Bruce B. Wilson: I think the Congress Mr. Justice Powell has indicated that it wants us to bring this kind of a suit where the result of the acquisition is going to be in the words of the statute substantially to lessen competition.

And it is indicated that time and time again, it did again in 1950 when it amended the statute.

Justice Byron R. White: Yes, but it refused to put the words affecting commerce in the Act.

Mr. Bruce B. Wilson: Oh, I don't Mr. Justice White, I don't think it has.

Justice Byron R. White: Though there have been -- I'll put it this way, there have been proposals.

Mr. Bruce B. Wilson: There have been proposals but one cannot rely as this Court has recognized on the failure of Congress to act on a specific proposal as an indication of Congress' intent in enacting a statute which has already enacted one way or the other.

Justice Byron R. White: But you certainly wouldn't rely on a failure to amend the statute to show that Congress expresses some dissatisfaction or is the way the department of justice for enforcing the act?

Mr. Bruce B. Wilson: Oh, heavens, no, One has to --

Justice Byron R. White: Well, what other evidence is there?

Mr. Bruce B. Wilson: Well, there is the evidence of Congress and it's -- the statements of its intention in 1950, again, it came back to the Clayton Act in 1950.

And in a --

Justice Byron R. White: Well, I take it then that the -- under your -- under the department's position now that the act don't mean exactly the same if the words engaged in commerce or any act at all?

Mr. Bruce B. Wilson: Read, engaged and/or affect in commerce.

Justice Byron R. White: Well, I know but lets just take them out.

Mr. Bruce B. Wilson: Or indeed --

Justice Byron R. White: Let's just take them out.

No corporation shall acquire directly or indirectly the whole or any part of the stock of any other corporation if the effect would be to substantiate us in competition with any line of commerce.

The Act would be precisely what you say it is now.

Mr. Bruce B. Wilson: Yes sir.

Justice Byron R. White: The way you want to construe it.

Mr. Bruce B. Wilson: Yes sir.

Justice Byron R. White: So those are just surpassing.

Mr. Bruce B. Wilson: I think that is correct.

Justice Byron R. White: And you must take that position?

Mr. Bruce B. Wilson: Yes sir.

Coming back to 1950, Congress then made the Act applicable to asset -- acquisitions of assets as well as the stock of competing corporations.

And the House Report indicated that the 1950 amendments made the Act less restrictive prohibiting mergers and acquisitions where in any line of commerce in any section of the country, the effect of that acquisition might maybe to substantially lessen competition.

And the report made it clear that what Congress was trying to do was go even further if they could than they went in the Sherman Act.

One can't conclude looking at that legislative history that Congress intended that the reach of the Clayton Act should be less than the reach of the Sherman Act but there was a concern raised in Congress at that time.

That the Act might be construed to prohibit the acquisition of a local business by another local business in the same town.

These concerns are addressed in the legislative history and rather than narrowing the reach of the jurisdiction under the commerce requirement that Congress limited the terms of the substantive offense.

The original draft provided that the Act would be violated, if competition was substantially lessened in any community and that language concerned the Senate and the Senate noted that that language was dropped and the phrase "in any section of the country" was substituted in order to get rid of that concern.

But even so, the Senate also concurred in the view that it was the purpose of this legislation to assure a broader construction of the more fundamental provisions that are retained than has been given in the past.

Then we come and now retrogressing a little bit to the questions of the 1936 amendments which inserted in the Clayton Act provisions governing price discrimination.

But those provisions and the merger provisions of Section 7 have very different jurisdictional test.

And the jurisdictional tests under the price discrimination provisions were those construed by this Court in Gulf Oil Corporation against Copp Paving Company decided earlier this term.

The Court there expressly declined to decide the decision and to decide the question which we are dealing here with today.

If one examines those jurisdictional provisions, the differences are immediately apparent.

To violate the price discrimination provisions, one must be engaged in commerce.

Yes, the same language which we have under the merger provisions.

One must also make a sale in the course of such commerce and finally, either or any of the purchasers involved in the price discrimination must be in commerce.

So, we have there a three part test for jurisdictional purposes, not the single test which is involved in Section 7.

Second, I think we have to note that this Court has recognized that the Congressional enactments dealing with commerce reveal a process of legislation which is words of I believe Mr. Justice Frankfurter strikingly empiric.

The Court has uniformly looked to what Congress was trying to do in enacting particular statutes.

Again, Mr. Justice Frankfurter said, if we do -- if we do not do that to search for a dependable touch zone is as rewarding as an attempt to square the circle.

So, we have to look to the intent of Congress in passing this statute in 1914, in amending it again in 1950 and the construction which this Court has since placed on Section 7 of the Clayton Act.

The Court in Von's Grocery noted that the 1950 amendments were designed to broaden the scope of the antitrust laws.

Justice Potter Stewart: But the amendment simply added the acquisition of assets to stock acquisition, that was basically what it did, isn't it?

Mr. Bruce B. Wilson: That's right, it did not Mr. Justice Stewart in any way change what the jurisdictional requirements had been in 1914.

Justice Potter Stewart: Right, that's what I thought and it -- does it carry a very far to -- now you undoubtedly must think it does because you spend a good deal of time in your brief on oral argument but I wonder how far does it carry you just to say that Congress intended to implement, add to, effectuate, amplify the Sherman Act both in 1914 and again in 1950 when it enacted and then amended the Clayton Act because we -- it's clear from the language of the Clayton Act that in many ways it did add to the Sherman Act but in certain other ways, it very clearly have -- was more limited than the Sherman Act quite apart from the question now before us.

For example, the Sections -- what is now Section 7 of the Clayton Act applies only to corporations, whereas, the Sherman Act applies to individual people as well as corporations.

Now, that certainly is a more limiting jurisdictional coverage, isn't it?

Mr. Bruce B. Wilson: Well, I think it is more limiting in the sense that it limits the substantive offense under the Clayton Act that there is no indication in any of the legislative history that Congress intended the jurisdictional reach of the Clayton Act to be less than the jurisdiction which Congress had exercised under the Sherman Act.

Justice Potter Stewart: You can argue about what jurisdictional means but certainly no matter how strangling of competition potentially at least, the acquisition of an individual person's assets might be even though that person was engaged in commerce by somebody else engaged in commerce, Section 7 simply doesn't reach it as a matter --

Mr. Bruce B. Wilson: Simply by it terms.

Justice Potter Stewart: Statutory scope or jurisdiction if you want to call it that, isn't that correct?

Mr. Bruce B. Wilson: Well, I don't think the substantive offense --

Justice Potter Stewart: Precisely.

Mr. Bruce B. Wilson: -- is so defined.

Justice Potter Stewart: Precisely.

Mr. Bruce B. Wilson: Now, if Congress jurisdiction --

Justice Potter Stewart: Even though the -- well, go ahead.

Mr. Bruce B. Wilson: If Congress jurisdictionally wanted to reach that, there's no doubt that they could and the question is did they intend to reach this kind of a merger.

Justice Potter Stewart: And there's no doubt that if Congress wanted to exercise their full power, the same Sherman Act power and with respect to Section 7 of the Clayton Act, they could, everybody agrees on that.

The only question is here, did they?

Mr. Bruce B. Wilson: And our answer to that is yes.

Justice Potter Stewart: Yes.

Mr. Bruce B. Wilson: They did.

Justice Potter Stewart: And your brother's answer is no, they didn't?

Mr. Bruce B. Wilson: That is correct.

Justice Potter Stewart: That's the case.

Mr. Bruce B. Wilson: Now, coming back just for a moment to Mr. Justice White's question as to what kind of acquisitions was Section 7 designed to reach.

Well, we have in Von's Grocery, a curious parallel.

And I think to this case, we've already discussed the Bennington Bank case, the whole issue in that case, everything else was conceded was whether the Bennington area of Vermont was a section of the country for the purposes of Section 7, that's how the Congress limited the reach of the statute in addition to limiting its reach to corporations rather than natural persons.

Then I think Von's Grocery is a good example of something which is a purely local merger.

There were two grocery companies.

They had seven-and-a-half percent of the Los Angeles market.

And by coincidence in this case, we are dealing with precisely the same market with which the Court dealt in that case.

And this Court noted that in that case Congress had passed the 1950 amendments to prevent a destruction of competition.

It noted that the cases since the passage of that act have faithfully endeavored to enforce that congressional command and the United States believes that the Court should today continue to enforce that congressional command.

Let me sum up, in our view the scope of the Clayton Act is coterminous with that of the Sherman Act, the act which it was designed to supplement.

Mr. Chief Justice, if I could remain -- reserve the remainder of my time for rebuttal, I would appreciate it.

Chief Justice Warren E. Burger: Very well.

Mr. Mattson.

Argument of Marcus Mattson

Mr. Marcus Mattson: Mr. Chief Justice and may the Court please.

I'm not here to deny the Clayton Act was intended to reach areas not reached by the Sherman Act.

I'm not here to deny that as to specifically limited transactions and specifically limited entities, Congress exercised far reaching commerce powers or that they exercised all of their commerce power, I don't -- only history can tell because only ingenuity can define how far those powers go.

Obviously, Congress exercised its power only with regard to acquisitions.

Contrary to the Sherman Act, it was every contract.

It exercised in Clayton 7 only with regarded corporations engaged in commerce.

Now, this Court has already said in Gulf Oil versus Copp that that language appears to denote only persons or activities within the flow of interstate commerce, the practical, economic continuity in generation of goods and services for interstate markets and their transport and distribution to the consumer.

With that legal principle, the past enforcement pattern of the Department of Justice has until now agreed as Mr. Justice Powell has indicated from page 36 of the Government's brief, this case marks the advent of a new policy in the Department of Justice in the enforcement of the Clayton Act 7.

And the fact that this policy as stated on page 36 of the Government's brief precisely conforms with the explicit terms of Section 7 is according to the Government's intimation only coincidental.

This conformity says the Government, simply reflects the fact that the Government has devoted its limited enforcement resources to areas where the need is most pressing.

The Government's new so-called application of the statute and I was surprised to hear that counsel now says that the words that we rely on are surpluses.

But they now -- they say in their briefs that their application is that the words engaged in commerce includes not only activities in the flow of commerce but also local activities that substantially affect interstate commerce and those are their words.

The statute of course is doubly explicit to the contrary not only must they acquire incorporation be engaged in commerce but also the acquired corporation must be engaged also in commerce.

The repetition of those terms demonstrates that they were obviously important to Congress.

This importance has until now and for more than 60 years than recognized by the department of justice as it's passed enforcement pattern and that's what it caused it.

There are additionally important features in the record which indicate that the new policy of the department of justice was not in mind when it initiated this case.

And as not even yet given it adequate consideration, thus file the Government positively states on page 36 again that it is true and this is the Government's words.

It is true that previous Section 7 cases have involved both acquiring and acquired firms engaged in the flow of commerce.

Justice Byron R. White: Do you think this was inadvertence?

Mr. Marcus Mattson: I think that this was -- that this -- their argument that they're making in their brief and their argument they make today is an effort to reach a problem which arose in this case and this is the first time that they've used it as a means of taking care of this case.

Justice Byron R. White: But you don't -- you think -- you don't think this case was brought, was the idea of reaching farther with Section 7 that hadn't been reached before?

Mr. Marcus Mattson: I do not.

Justice Byron R. White: You take the idea in the first place was that these corporations were engaged to commerce?

Mr. Marcus Mattson: I thought perhaps they felt that they're -- they hardly conceive that there was anyone who had such local operation as the Benton Corporation.

They assumed that everybody could be included within commerce.

They didn't understand what the janitorial business was about when they brought the case.

And that's my judgment as to why this case was bought -- brought.

Now, they say in their -- to continue and may perhaps this is along the line of your idea Mr. Justice White.

They say in their reply brief that the Department of Justice has never taken that position that is that the -- that they had a past enforcement pattern along the lines.

They say that they had in -- on page 36 of their brief in chief.

So they go out of their 860 year history under Section 7.

They were able to select only two cases to support the denial of what they said in page -- on page 36.

One was the Bennington National Bank case.

Now, every one knows that banks are engaged in commerce.

That's a long since been decided, there are no question about it.

So, that case doesn't indicate one way or another.

The other is the Von's Shopping bag case.

There, the Government proved its allegation that both the acquired and the acquiring corporations were supermarket chains and its allegation and I read from the complaint, such chains operate purchasing offices which are in contact with suppliers located throughout the United States to purchase and affect the shipment of substantial quantities of groceries and related products from producing facilities located in the various states to the change distribution centers and supermarkets in the Los Angeles area.

The facts here would not support any such allegation and none was made.

And as Mr. Justice White asked, we looked -- we -- it is reasonable to assume that if the Government had in mind a new application of the statute, a new extension of the statute and was prepared to prove it, its complaint would have reflected these facts and yet you look in vein for any allegation in this complaint that Benton, the acquired corporation was engaged in local activities that substantially affected interstate commerce, there's nothing of that in the complaint.

If you look in vein for any allegation which would describe the commerce so affected or which was state -- what the effect had been?

The most that is found are the allegations in paragraph 8 of the complaint that the acquiring corporation maintains offices and serves customers in various states of the United States.

But as to Benton, the acquired corporation, there is no comparable allegation.

As to Benton, it is alleged only that some of its customers and some of its vendors were engaged in interstate commerce.

This state of the pleadings, evidences and inconsistency with the Government's new application of the statute and shows a total disregard of the explicit jurisdictional requirements of the statute.

I mentioned that I didn't think they understood the janitorial service business and I think that perhaps that's one of their basic failures in bringing this case to start with.

Justice William H. Rehnquist: But you're not suggesting are you that the case went back to the District Court Mr. Mattson.

The Government were to amend its complaint to supply this deficiencies and you had the same affidavits that then the District Court ought not -- ought to deny the motion for summary judgment?

Mr. Marcus Mattson: No, I don't think they could support the situation at all.

I'm only indicating that because there seem to be a question that why did they bring this case at all.

And that my only indication is from the complaint itself, they didn't have a basis.

They made a mistake.

Now, janitors don't manufacture a product.

They don't sell a product.

Their raw material is unskilled labor which necessarily must be obtained locally for the rendering of a local service.

Janitors can't go in to other than their local areas to compete for unskilled labor their raw material or to get it at lower price.

A janitorial firm can of course expand and go national as the acquiring corporations in here or it can elect to remain local as Benton, the acquired corporations here.

Of course, janitors need mops, pails, soap and that sort of thing but these supplies are incidental and are extensively available from local vendors just as they are to the local housewife.

Benton to an extraordinary degree limited these activities to the Southern California area.

When the Government's discovery efforts developed at Benton's interstate purchases aggregative $140.00 and then its interstate telephone calls cost only $19.78, the Government was driven to a conceding in its footnote number 5 that Benton's interstate purchases were admittedly small.

Further confirmation of that fact is -- and the fact that Benton's operation were intensely local, it's shown by the fact that no officer, no employee of Benton traveled outside of California on business.

There is every evidence that Mr. Benton who founded the business was convinced that if he satisfied the local people.

That if he cleaned their buildings properly and they were the one with whom he had to a deal.

He need not waste the firm's money on any non-essentials connected with interstate commerce.

There's -- I think the Government also started from a false premise as to the legislative history.

We were willing -- we would have found no necessity of going to legislative history because the statute is explicit.

It was the Government that went to the legislative history here.

And the unrestricted freedom with which the Government exercised their reference to the explicit language of Section 7 is based upon a misunderstanding of the legislative record.

The Government persist in urging that Congress had not considered the meaning of the words engaged also in commerce in connection with Section 7.

That of course is an unflattering conclusion because the legislators must have known that they were putting that language in at least.

Justice Byron R. White: I suppose -- suppose one of these building companies are both -- say both the janitor companies, maintenance companies were -- bought a couple of $100,000.00 a year of piece of goods from outer state, would that --

Mr. Marcus Mattson: You mean directly from out of state?

Justice Byron R. White: Yes.

Mr. Marcus Mattson: You would have a more difficult question.

Justice Byron R. White: But at least they would have -- to some extent they would be then engaged in commerce?

Mr. Marcus Mattson: They might have come within -- then come within part of the Government's contention if you could prove that those purchases affected interstate commerce.

Justice Byron R. White: Well, let's assume they -- well yes, for jurisdictional purposes.

Mr. Marcus Mattson: Yes.

Justice Byron R. White: They'd still have -- they'd have a problem of proof about the line of commerce of whether there would be affect on commerce.

But for jurisdictional purposes, they would have been in commerce.

Mr. Marcus Mattson: I'm not prepared to concede that.

I think the words engaged in commerce means that you have a business which does -- which is day to day engaged in commerce.

Justice Byron R. White: Well, they've -- all their supplies or most of their supplies, they buy it from out of state directly, let's assume that.

Mr. Marcus Mattson: If that's an assumption, it is possible to so state.

I think however, their basis --

Justice Byron R. White: But instead of buying from 10 suppliers from out of state, they buy it from wholesaler in California who buys in turn all those supplies from out of state, you see that breaks the flow.

Mr. Marcus Mattson: Yes I do.

And moreover, I would say if they bought directly, it maybe that that is an incidental part of their business.

And then I go back to the fact that the janitorial business is local.

Justice Byron R. White: Well, I will change my -- let's assume that you would concede that if they bought directly from out of state, they would be engaged in commerce first.

Mr. Marcus Mattson: I'm willing to start in that assumption.

Justice Byron R. White: But I know you don't want to agree with that.

Mr. Marcus Mattson: Right.

Justice Byron R. White: But you say it makes all the difference if they -- instead of doing it directly, they buy from a wholesaler, from the California wholesaler?

Mr. Marcus Mattson: Right.

Justice Byron R. White: That changes the case completely, no jurisdiction.

Mr. Marcus Mattson: That's the assumption.

Yes.

Justice Byron R. White: You say that would be the legal result?

Mr. Marcus Mattson: Right.

Justice Byron R. White: That the flow of commerce has broken with the wholesaler?

Mr. Marcus Mattson: Yes, very much so.

Justice Byron R. White: And that's some -- some Clayton Act cases, jurisdictional cases on that point?

Mr. Marcus Mattson: I don't think this is the first case.

Justice Byron R. White: There aren't any, are they?

Mr. Marcus Mattson: There aren't any and I think the reason for that is that the statute is so explicit.

Justice William J. Brennan: But what is the factor or does this record show what the factors -- where the mops and the pails and things?

Mr. Marcus Mattson: Yes.

Justice William J. Brennan: Are they purchased from a wholesaler?

Mr. Marcus Mattson: They're purchased all in California.

Justice William J. Brennan: Yes I know, but from a wholesaler?

Mr. Marcus Mattson: Well, or a distributor or whatever you might call him.

Justice Byron R. White: But those distributors also shows, those distributors buy from out of state.

Mr. Marcus Mattson: Yes, they buy it part from out of state.

The affidavits talk about a portion going from out of state, the closes they got was an estimate of one man who said that 40% came from out of state.

Justice Byron R. White: Of the distributor?

Mr. Marcus Mattson: Yes.

The distributor's purchases were 40% of out of state.

Justice Byron R. White: You don't have any figures on what these two maintenance companies bought, what supplies they bought that had the origin on the state.

Mr. Marcus Mattson: The record doesn't show any figures that you can point to with that regard.

Portions where the -- for instance the -- what anybody who isn't -- the janitorial business purchase a lot of paper goods.

Paper -- we don't have paper for us in California so you got the raw -- the paper comes from out of state.

It came to -- in some cases it was reprocessed in California but it came to a wholesaler and we bought the -- or the Benton bought the paper from the wholesaler.

Justice William J. Brennan: How about -- any of these employees, maintenance employees, window washers will have to heights?

Mr. Marcus Mattson: Oh yes.

Justice William J. Brennan: The wear of harness?

Mr. Marcus Mattson: Yes.

Justice William J. Brennan: I take it those come from out of state?

Mr. Marcus Mattson: I really don't know.

The founder of my client was a window washer.

The father of the two men who operate the American building maintenance was a window washer in San Francisco in the bank of America building and he started this business from there and it has expanded.

The legislative history is particularly significant when you come to the 1950 amendments.

And mind you, in 1950, the Clayton Act 7 was extensively reviewed and you can find that in Brown Shoe.

They spell out to the extent to which that length, the Federal trade commission from starting in 1928 proposed changes in Section 7.

So I say that Section 7 as reenacted in 1950 was just like a reenactment of that statute.

And they -- and our brief will show you there were -- in the 7 years prior to 1956, bills were introduced in which mentioned affecting interstate -- affecting commerce.

In other words, would have change the words engaged in commerce to affecting commerce.

Now, those were -- as a part of Section 7 in a pre-merger notification proposal that was made.

And the significant, highly significant is that in 1958, there was a bill entered or two bills introduced which would have said -- which was provided that if either corporation, either acquired or the acquiring corporation was engaged in commerce, the action could proceed.

And Senator Sparkman was in the hearings.

He was the proposer of one of those two bills and he explained that his bill made section applicable if either company was engaged in interstate commerce.

And he explained that the existing situation was that in cases where the acquired corporation is engaged exclusively in intrastate commerce, the enforcement agencies lack jurisdiction.

And Paul Rand Dixon spoke up at that hearing and he said, the in commerce test is quite different from the affecting commerce as you recognized.

And as late as January of this year, Congress changed the Federal Trade Commission Act Section 5.

So that it now reads in or affecting commerce.

But Congress didn't at that time embraced the opportunity to change Section 7.

The -- and the 1950 amendments of course came subsequent to this Court's decision in Federal Trade Commission versus Bunte in which the Court said this case presents the narrow question of what Congress did, not quite it could do.

In other words, that's the question here.

And we merely hold that to read unfair methods of competition in interstate commerce as though it meant unfair methods of competition in any way affecting interstate commerce requires in view of the relevant considerations much clear manifestations of the intention of Congress than it furnished.

Chief Justice Warren E. Burger: I recall some discussion of the proportion of the total cost of the acquiring company and of the acquired company particularly and it's overwhelmingly the cost of labor, is it not?

Mr. Marcus Mattson: Oh yes.

This is the labor oriented business.

Chief Justice Warren E. Burger: Only a small percentage in the material?

Mr. Marcus Mattson: Right, very small, it's 3% as I recall.

I believe --

Chief Justice Warren E. Burger: The cost --

Mr. Marcus Mattson: -- its total gross income is in the -- the Government's position with reference to the legislative history is ambivalent.

It relies upon post 1914 history itself on page -- on the number of pages but would apparently foreclose us from doing that.

Justice Byron R. White: Well, as in -- are you suggesting in your argument that in order to -- of course that the issue is not here I take it but are you suggesting that the -- that to satisfy the latter part of Section 7, the impact on any line of commerce, that the impact, the substantially lessening of competition would have to result only from activities in commerce?

Mr. Marcus Mattson: No, I do not.

Justice Byron R. White: Yeah, alright.

Mr. Marcus Mattson: The commerce part of Section 7 is the first part, they engaged in commerce.

Justice Byron R. White: I understand.

Mr. Marcus Mattson: The operative part.

Justice Byron R. White: But the effect on the line of commerce could be delivered by wholly intrastate?

Mr. Marcus Mattson: Exactly.

Justice Byron R. White: Okay, thank you.

Mr. Marcus Mattson: And this case is brought upon that theory.

They allege only that the effect is in Southern California.

Justice Byron R. White: Thank you.

Mr. Marcus Mattson: But you have to get in to -- the only way to get in to Court perhaps is by means of the jurisdictional point.

Justice Potter Stewart: In any section of the country can be purely intrastate?

Mr. Marcus Mattson: Yes.

Justice Potter Stewart: As it was in Von's for example --

Mr. Marcus Mattson: Right.

Justice Potter Stewart: As alleged to be here.

Mr. Marcus Mattson: Right correct, and as it could be here.

Justice Potter Stewart: Or as alleged to be here?

Mr. Marcus Mattson: Yes.

Justice Potter Stewart: Southern California again?

Mr. Marcus Mattson: It is alleged only in Southern California.

The -- for the purpose of trying to foreclose us from using 1950 legislative history, which they apparently would like to avoid besides Philadelphia National Bank, the Court -- there the Court was dealing with the assertion that after the 1950 amendment to Section 7, some members of Congress and for a time the Justice Department, this is quoting from the opinion.

Some members of Congress and for a time the Justice Department forced the view that bank mergers were still beyond the reach of the section as to which this Court said, the views of a subsequent Congress form a hazardous basis for the intent of the early one.

Now, that may have been perfectly valid there but here, we're not presenting post 1914 legislative history for the purpose of inferring anything into the statute.

We are using the legislative history to confirm the explicit terms of the 1914 statute and for the purpose of showing that Congress when it reenacted Clayton Act in 1950 had an intent consistent with the explicit terms of the statute and inconsistent with the new application of the statute which the Government is now asserting.

In Philadelphia Bank, the defendant was attempting to avoid the language of Section 7 and to use for that purpose matters outside of Section 7 like the Bank Merger Act of 1960.

The Government here is trying to do the same thing, they're trying to avoid the explicit language of the statute.

We on the other hand are supporting it.

Now, I perhaps should refer to the Standard Oil case because that's been referred to by counsel and I think it confirmed some of the things that I -- we've said in our briefs and perhaps I didn't treat it fully there.

The Standard Oil company of California case confirms our position.

The Court there was dealing not with the narrowly directed jurisdictional question of Section 3 as we are here with Section 7.

Standard Oil company was obviously engaged in commerce with any question about it.

And under Section 3, it was necessary that only one of the corporation making the contract be engaged in commerce.

Standard Oil Company was the question which this Court faced and determined in the Standard Oil case was whether the requirements contracts lessened competition under the broadly phrase portion of the statute.

The -- since the contracts prevented service station operators from dealing with suppliers from outside of California as well as within the state and because the large number of such contracts, competition was lessened in both intrastate and interstate.

But again, that was the operative portion, not the jurisdictional portion of the statute.

There was no issue as to whether standard was engaged in commerce and the operative portion of Section 3 was satisfied by extensive evidence on the structure of the industry.

And the substantiality of the number of requirements contracts, and I think that case will demonstrate to the Court that there has been no satisfying the requirements of the Government's own proposal with regard to Section 7 and they say it should read that local activities which have a substantial effect on interstate commerce but they have proved no such effect.

All they have shown is that we receive money.

They said 80% to 90% of our revenues form interstate operators.

That shows only in effect on Benton not in interstate commerce.

And they have shown nothing with regard to the structure of any product which we bought.

They merely show that we bought -- I think it's a $150,000.00 worth according to the briefs, I can't find where they got that figure in the record but be that as it may, they've shown no market structure of any kind with regard to any market of goods that passed in to interstate commerce before we bought them.

Thank you.

Chief Justice Warren E. Burger: Mr. Mattson.

Do you have anything further Mr. Wilson?

Rebuttal of Bruce B. Wilson

Mr. Bruce B. Wilson: Mr. Chief Justice, I arise to make but one short point.

It seems that page 36 of our brief is becoming fairly notorious and I would only wish to point out that our enforcement policy can in no way stop what the Congress tried to do in a statute.

Even if it's a new policy, even if this is the first case brought and we do not believe it is.

Maybe the first case we have brought but certainly the --

Justice Byron R. White: Has the Government abandoned the notion that these companies were engaged in commerce?

Mr. Bruce B. Wilson: They were engaged in commerce within the meaning of that -- of those words for the jurisdictional purposes of the Clayton Act.

Justice Byron R. White: Are you saying they were engaged in commerce without having to rely on the effect notion?

I mean you certainly argue in your brief.

Mr. Bruce B. Wilson: No, I think we have to say that the affecting commerce in any section of the -- in any line of commerce in any section of the country, that's what gets this merger within the scope of the Section 7 of the Clayton Act.

Justice Byron R. White: But you argue that -- you argue that these people were sufficiently dealing directly in interstate commerce.

Mr. Bruce B. Wilson: Well, they were, there were certainly dealings in interstate that gives directly in interstate commerce.

Justice Byron R. White: Well, on that basis you don't need any change, any redefinition of engaged in commerce at all.

Mr. Bruce B. Wilson: Well, the District Court of course found that those dealings were de minimis.

Justice Byron R. White: But you don't agree with that.

Mr. Bruce B. Wilson: If -- we don't agree with that but if one accepts the District Court's findings, we say that nevertheless --

Justice Byron R. White: Well, you're not abandoning your --

Mr. Bruce B. Wilson: Oh no sir.

Justice Byron R. White: -- charge to the District Court's findings.

Mr. Bruce B. Wilson: No sir.

And there is one case --

Justice Harry A. Blackmun: Go ahead.

Mr. Bruce B. Wilson: There is one case which is directly on point.

The Third Circuit decision in Transamerica by -- decided by a panel of judges, Maris, Goodrich and Kalodner which deals directly with the point at issue here, did Congress intend in this statute to exercise the same full range of its jurisdictional power which it exercised in the Sherman Act.

The Court there so held that is coming back to that last point.

Justice Harry A. Blackmun: Mr. Wilson could I interrupt you here.

Mr. Bruce B. Wilson: Yes sir.

Justice Harry A. Blackmun: Before you sit down, would you expand a little bit on what your response is to your oppositions rely on some of the comments to Senator Sparkman and member Dickson in the 1958 debate?

Mr. Bruce B. Wilson: Well, I think one has to come back to the -- a position taken by an administrative agency cannot be used subsequently to stop the intent of Congress in passing a statute.

If the statute means what we contended means, the fact that we have been mistaken, the fact that a -- another committee have been mistaken and the fact that the federal trade commission may have been mistaken in some of the positions, it is taken in the past should not prohibit a new construction, not really a new construction, a real construction, a true construction of the statute and its meaning.

Chief Justice Warren E. Burger: At what point could you fix the time when this sort of maintenance became a nationwide business on a large scale?

Mr. Bruce B. Wilson: Well, I think one has to look at the growth of the service industries generally.

I don't think as in the antitrust business as we deal with it everyday.

One can precisely put a time.

Chief Justice Warren E. Burger: Not precisely but at something in the last decade, 15 years?

Mr. Bruce B. Wilson: Yes sir, 10 to 15 years.

Thank you sir.

Chief Justice Warren E. Burger: Pretty much the same history as the -- or at least comparable history to the private security business protecting industries and office buildings, things of that kind.

Mr. Bruce B. Wilson: I think that's correct, Mr. Chief Justice.

Thank you.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.

Featured:

U.S. v. Citizens & Southern National Bank - Oral Argument

Thu, 23 Aug 2012 18:26:17 +0000

Case:

U.S. v. Citizens & Southern National Bank

Media File:

73-1933_19750319-argument.mp3

Related Transcript:

73-1933_19750319-argument

Transcript:

Argument of Friedman

Chief Justice Warren E. Burger: We'll hear argument next 73-1933, United States against Citizens & Southern National Bank.

Mr. Friedman.

Mr. Friedman: Mr. Chief Justice, may it please the Court.

The Appellee, the Citizens & Southern National Bank is the largest banking organization in the City of Atlanta, Georgia.

There are six banks located in the suburbs of Georgia in each of which C&S as I shall refer to it, has a 5% stock interest.

Each of these banks is an independent corporation with its own officers and its own Board of Directors, but virtually since the organization of these banks, C&S has treated them and operated them as though they were de facto branches of C&S.

This is an appeal from a judgment of the United States District Court for the Northern District of Georgia which after trial dismissed a Government civil antitrust suit challenging the relationship between these five percent banks and C&S.

The questions presented are first, whether the arrangements between C&S and the banks which virtually eliminated all competition between them constitutes an unreasonable restraint of trade in violation of Section 1 of the Sherman Act.

The second question is whether as the District Court held the questions respecting the legality of the relationship between C&S and the five percent banks is a matter committed to the exclusive primary jurisdiction of the Federal Reserve Board of Governors.

The third question is whether the acquisition by C&S of these five percent banks, thus making permanent this existing relationship which depended largely on the inter adjustments between them and the five percent stock interest whether that acquisition of the complete interest in the five percent banks violated Section 7 of the Clayton Act.

Now with respect to the Clayton Act issue, it should involves only five rather than six of the five percent banks because with respect to the sixth bank, the Bank of Tucker, the Federal Deposit Insurance Corporation which has jurisdiction over these mergers rejected that merger.

So the Bank of Tucker is involved only in the Sherman Act aspect of the case, not in the the Clayton Act aspect.

Chief Justice Warren E. Burger: Did the FDIC state reasons Mr. Friedman for rejecting as to the sixth bank?

Mr. Friedman: Yes, what it said was that with respect to the Bank of Tucker which was founded in 1919, there they said the initial acquisition by C&S in the 1960's of an interest and the development of this relationship was itself anticompetitive because prior to the time, Tucker and C&S had been fully independent and competitors, whereas it distinguished the other five situations where they had said there was no competition between them from the outset.

Now, at the end of the 1950's and in the 1960's, Georgia law had two limitations upon it, which affected the ability of C&S to expand into the suburbs of Atlanta.

First, it prohibited C&S from opening branches beyond the City of Atlanta and secondly, it prohibited a bank from acquiring more than five percent of the stock in another bank.

In this period, the Atlanta suburbs like the suburbs of many metropolitan areas were expanding rapidly and C&S devised a method by which it hoped to avoid the state law limitations on branching.

What it did was to assist in the organization of these suburban banks acquired a five percent interest in each of these banks which was the maximum permitted under state law and then played a role in the operation of these banks in supervising them and advising them and managing them that made them virtually a branch of C&S.

Chief Justice Warren E. Burger: Does the government here have the burden of showing that the situation would different after the acquisition that it was under the five percent arrangement?

Mr. Friedman: Well, I would -- may I answer the question this way Mr. Chief Justice.

Our position is that the acquisition is bad, because were it not for the five percent arrangement, the acquisition would violate the standards that this Court has announced and our position is that you cannot rely on what we believe to be the illegal situation that led to the initial elimination of competition to justify the claim that the acquisition now it is not substantially less in competition.

I add one other factor which I adverted to earlier that the effect of the acquisition is to make permanent, to make permanent, a situation that (Inaudible) has existed as a result of relationships.

There are two instances, one relating to C&S and other one relating to the Trust Company of Georgia in which banks in this situation of the five percent banks broke away, broke away and became independent banks.

Once of course C&S acquires these banks that's the end of it.

They are part of the C&S system.

Thereafter, I assume they would be operated as branches in fact rather than the de facto branches under which they're not.

So I think to that extent, we do show that there's a different situation, because it becomes permanent.

It's cemented together would be a different situation after the acquisition that exists now.

But our other answer is, the more fundamental answer is they cannot justify, they cannot justify these acquisitions by the claim that there's no lessening of competition because there was no competition where the result of the lack of competition itself we believe violated and flowed from a violation of Section 1.

Chief Justice Warren E. Burger: Then what does the language lessening competition mean?

Mr. Friedman: Maybe substantially to lessen competition.

Well we think Mr. Justice, the whole policy, the whole policy of Section 7 of the Clayton Act, the purpose there preserving competition of avoiding restraints in their incipiency, in order to avoid things before they develop into full violations of the Sherman Act, we think that policy would be subverted, would not be effectuated, if we would say that because they had previously eliminated the competition.

Therefore, they can now rely on that as a justification and the word substantially lessen competition, we think we do come within that standard, because as we discussed in our brief, looking at the concentration figures in the Atlanta Market which this Court has indicated are sufficient to establish a prima facie case of violation.

The effect of this acquisition would be significantly to increase the already concentrated Atlanta bank market.

So we think within the literal terms of the statute, we have established our burden.

The only question is whether it can be offered as a defense and answer to this increase in concentration where really the increase is insignificant here, because the result of our prior violations -- it's results of our prior violations, we have eliminated the very competition that Section 7 is intended to promote.

Chief Justice Warren E. Burger: Let me see if I understand what you're saying thereby putting it into a hypothetical case Mr. Friedman.

Are you suggesting that one of these five percent banks may conceivably be located in an area that experienced a sudden growth and great deal of business and finally concluded, its directors concluded, that it could stand on its feet, independent of any relationship or guidance or help from the home office and then they would regard themselves as emancipated?

Even though the Atlanta Bank owned five percent?

Mr. Friedman: It could well and as I've indicated.

Chief Justice Warren E. Burger: That's the kind of situation you are talking about that you think the antitrust law must reach this in its incipiency?

Mr. Friedman: Yes Mr. Justice -- well what I was suggesting with something Mr. Justice, what I was suggesting was that Section 7 is intended to reach anticompetitive acquisitions in order to prevent the development of a situation where there would be the actual elimination of competition as distinguished from the potential for eliminating competition that Section 1 is designed to reach.

That's what I was trying to suggest in speaking about reaching them in their incipiency.

But we have two instances in this record one, a C&S bank, another a different bank which did breakaway for various reason and these banks are now independent and are now growing.

It may well be that if these markets develop some of these other banks would decide to break away from the control.

Now, let me just prefer briefly to the kind of control that C&S exercised here, both in the organization of the banks and in their operations.

Justice Lewis F. Powell: Mr. Friedman, before you go into that you've said a few moments ago that so far as the Sherman Act was concerned, there was an initial violation in the formation as I understand it of these five percent banks.

Mr. Friedman: I'm sorry Mr. Justice, perhaps I misspoke myself.

The violation was not in the formation of these banks.

The violation that we are challenging is the operating relationships between C&S and the five percent banks which stemmed from the way in which they organized them, but it was developed as time went on when they assumed virtual control over all the operations of the bank.

It's not just the organization.

We're not challenging the organization of the bank itself.

We don't say when they acquired five percent, this violated Section 1.

What we say is the whole relationship starting with the five percent acquisition then the other things they did in organizing the bank and then the way that they operated with the bank and said whole series of relationships we say violate Section 1 because it did amounts to an elimination of all competition between C&S and these independent banks.

That's our theory, not just the initial violation.

Justice Lewis F. Powell: Well, may I ask you a question on that basis of that theory.

If Georgia law had been different and these five branches had been organized as branches, would there had been any violation of the Sherman Act?

Mr. Friedman: No, no, of course, not, Mr. Justice.

Justice Lewis F. Powell: But what is the economic difference?

Mr. Friedman: Well, I think the difference Mr. Justice, the difference is that the thrust of Section 1 of the Sherman Act is against restraints upon competition created by independent entities which combined.

There are many things that an individual firm can do if it's a single entity, the two independent firms can't do.

To give a simple example, if the firm has a western division and an eastern division, it can obviously direct that the Western division will sell in the west, and eastern division will sell in the east.

But --

Justice Lewis F. Powell: I understand that, but historically, I've also understood that it was a policy of the antitrust division to encourage banks to open branches which stimulate competition.

So my question directed to you related to the economic injury, in other words what interest is the Government protecting here that would not be involved or implicated if Georgia law had been different as indeed it should have been perhaps to allow banks to follow their customers into the suburbs as they move to the suburbs.

What is the economic injury?

Mr. Friedman: Well I think Mr. Justice, the economic interest here is the whole basic concept that under the Sherman Act, you cannot use -- make arrangements between independent entities which eliminates competition.

It would have been a very different case if Georgia law had permitted it and we would have no objection.

We would have no objection at all if these banks were merely sponsored and assisted.

If C&S had treated these banks the way it treats many banks which it has sponsored with whom it has correspondent relationships, there would be problem.

Our problem in this case is that while they purported to be creating independent competing entities, independent entities that are supposed to operate independently, in fact they weren't independent.

And we think this Court's decisions that we've cited some of them in our brief have recognized that once you use the vehicle of separate corporations for whatever reason, for whatever reason, once you have used the vehicle of separate corporations, you have got to treat them as separate entities.

You can't combine them together and say, “Well, they are separate entities for various purposes, but in terms of seeing whether what these entities are doing with each other, whether that's permissible under the Sherman Act, we shall ignore the separate entities and treat them as a single entity.”

This Court many years ago in the Shanley case, an Interstate Commerce case recognized the situation.

There was a situation, the question was whether a wholly owned subsidiary of distiller was engaging in private carriages, it held as it contended or in contract carriages, the Interstate Commerce Commission had held.

And the argument was, well ignore the separate corporate entity.

It's true maybe -- it seems to be contract carriage, but we're doing it for our parent and therefore it should be treated as private carriage and this Court said “no.”

This court said, “When you elect to operate as separate corporations, you have to comply with the requirements that the law imposes on separate corporations.”

Now --

Chief Justice Warren E. Burger: Mr. Friedman suppose and this is not hypothetical, but it involves your projection.

Suppose you had not taken an appeal here at all.

And five years from now, the fears which you have expressed or the concerns about lessening competition were demonstrable in the view of the antitrust division, would you be in a position to move in at that time and seek a divestiture?

Mr. Friedman: If we had an appeal, I would very much doubt it Mr. Justice.

I don't know.

I don't know of a case like that that has happened, but if it will held that the acquisitions were valid, I would think would be hard pressed to turnaround later on and say, “Now, you should hold that they were invalid.”

I mean, we might conceivably if C&S reach the point where it began to assume monopoly power in the Atlanta markets, we might proceed against them under Section 2.

But I find it very difficult to see how we could in effect re-litigate the issue of the validity of the acquisitions under Section 7 of the Clayton Act.

Once they had been consummated, I would say it would be comparable for example Mr. Chief Justice I'm sorry, if we had never bought this suit after the Federal Deposit Insurance Corporation had permitted the merger.

If we never brought the suit and under the statute if we don't challenge it within 30 days, the order becomes final.

I don't suppose if five years later things got much worse, we could then turnaround and challenge these acquisitions.

I assume would tell you five years too late.

I would think the same thing would apply in this situation.

Now what C&S did in the organization of these banks was about as follows.

First, they helped them obtain a charter.

That's a normal situation when they're sponsoring the bank.

They help them select a site, that's a normal situation.

They helped them sell stock that perhaps gets a little more.

They in effect selected the directors.

This gets a little more seriously.

And then in each case of each one of these five percent banks, they provided the Chief Operating officer.

Beginning in 1965, all of these five percent banks started using the C&S name.

Justice Potter Stewart: But may I say -- but you told us up to now, you do not contend this as a violation of the antitrust law?

Mr. Friedman: No, no, of course, not, but we're just -- I'm just trying to set the background.

Justice Potter Stewart: You're giving us the history, but I just wanted -- right.

Mr. Friedman: Setting the background in the light of which what they did thereafter.

Justice Potter Stewart: But all of this sponsorship and creation and everything that went with it what you told us about so far, you do not submit there is a violation of --

Mr. Friedman: No, we don't -- may I make something very clear Mr. Justice in light what our opponents say.

We don't claim that any particular individual thing itself is a violation, what we claim is that the whole relationship under which all competition was limited.

Justice Potter Stewart: But all of these components, the whole totality that you told us about up to know you would not say was a violation.

Mr. Friedman: No, not, but the last thing -- the two last things that I come to a beginning to develop reach into -- one is the selection and the placing as Chief Operating Officers of the banks of officials of C&S.

And the record shows that officials were shifted back and forth.

Every instance, the Chief Operating Officer of the bank, one of the five percent banks was the C&S official and in several instances when C&S was displeased with the way the officials were performing, they selected a new official.

Justice Potter Stewart: It seemed to me -- it would seem to me, if I may think out loud that your case would be is stronger if you do not rely on the sponsorship in creation of these banks, but rather analogize them to banks that were independently sponsored.

Mr. Friedman: Well, they purported to be independently sponsored.

Justice Potter Stewart: Right.

Mr. Friedman: But, but things began to develop.

Starting in 1965 each bank used the C&S name.

That is instead of it being a first National Bank of Sandy Springs, it was the C&S National Bank of Sandy Spring.

Justice Potter Stewart: There are some pictures here.

Mr. Friedman: There are some pictures showing that and they also used the logo gram which is this lollipop like thing with a distinctive letter C&S, so when the public pass by these banks, they seemed to be C&S banks.

Now, one rather interesting thing I've mentioned previously is that the bank, the first bank that they organized was something called the Bank of Stone Mountain.

And the Bank of Stone Mountain which was first one in this group was the first one out.

Stone Mountain is no longer a member of the C&S team.

And what happened was when they came around to these various banks after Georgia law had been changed in 1970 permitting banks to expand beyond the city limits of Atlanta, they wanted to merge with Stone Mountain and Stone Mountain didn't want to merge with them and the result was C&S sold its interest in the bank and Stone Mountain is now an independent functioning bank.

And it's rather revealing I think that the former President of C&S, the man named Mill Lane testified that they had a very unhappy relationship with Stone Mountain.

He said the Board of Directors of Stone Mountain was very different from the Boards of Directors of the other five percent banks.

The reason was that the Board of Director of Stone Mountain wanted to tell --

Justice Lewis F. Powell: Mr. Friedman.

Mr. Friedman: Yes.

Justice Lewis F. Powell: Excuse me to interrupting you, but I wonder whether the Stone Mountain as I recollect it is fairly comparable, wasn't there a stockholder who owned more than 50% of that bank?

Mr. Friedman: I believe 30%.

Justice Lewis F. Powell: 30%.

Mr. Friedman: It always 30% Mr. Justice.

Justice Lewis F. Powell: For SEC purposes, it's more than abundant for control?

Mr. Friedman: Yes.

Justice Lewis F. Powell: In any event, the stockholders of the other 5 percent banks as I recall were for the most part employees, officers and directors, and the stockholders of C&S.

Mr. Friedman: I'm not sure for the most part, there was substantial number.

There's figures in the records and it varies from bank to bank, but I don't believe that there maybe have been one or two, I don't believe in most part that even the employees, officers of C&S or C&S affiliates were majority stockholders of any of these five percent banks.

C&S general policy was not to get away with a situation unless their five percent block was the largest.

But Stone Mountain was operated up to this point as one of these five percent C&S banks, it had the name, C&S Bank of Stone Mountain.

And the complaint was, the complaint that Mr. Mills had was the Board of Directors of Stone Mountain wanted to tell him the President of the Bank what to do and did so.

In other words, they disconnected, they disaffiliated with Stone Mountain, because they couldn't control Stone Mountain.

Stone Mountain was an independent bank and had the (Inaudible) to try to be an independent bank and they didn't like that.

Now, the District Court spelled out in its findings at pages 50 (a) to 55 (a) of the Appendix to our jurisdictional statement and while these findings are made in connection with the Section 7 discussion of the District Court, the facts they set forth are equally applicable to the Section 1 issue, exactly what it is that C&S does in its relationship between these banks.

As I indicated, the officials move around from bank to bank for purposes of the C&S pension and profit sharing plans, service with the C&S bank is considered the same as service with one of the five percent banks.

C&S people review after they have made certain loans made by the subsidiary banks.

A C&S official sits on the Board of Directors of everyone of these banks as an Advisory Director.

C&S has an organization called “The Branch Supervisory Department” and its supervises these allegedly independent banks.

The customers of the banks have available at anyone of the five percent branches, all the services rendered and made available to customers of C&S.

And particularly significant, the officers and officials of the five percent banks receive and rely upon the manuals, directives and instructions that C&S puts out and these include specific instructions and advice with respect to their pricing practices.

Now, a number of these instructions show at the bottom of the instruction that a copy goes to the President of the five percent bank, which C&S describes as a correspondent associate for information only.

That's what it says.

But I think when you look at the text of these things, it's quite clear that these copies for information only would just not sent out in order to keep the officials of these five percent banks informed as to what C&S was doing or what C&S was thinking.

They leave no doubt, we think, that C&S intended them to be followed.

Let me just cite three examples.

Chief Justice Warren E. Burger: To what point now do you direct these examples Mr. Friedman?

Mr. Friedman: This is to show --

Chief Justice Warren E. Burger: Are you speaking of the past situation aren't you?

Mr. Friedman: Well, not that far.

Chief Justice Warren E. Burger: The five percent arrangement.

Mr. Friedman: The five percent arrangement.

This is directed to show that in fact this wasn't just a situation in which C&S gave out some ideas and these banks voluntarily said, this sounds like a good thing to do, we will independently follow.

This is well designed to show that in fact -- in fact what you had in this situation was an agreement in violation of Section 1 of the Sherman Act between C&S and the five percent banks that they were to eliminate competition.

And in everything including price and one of the purpose of these examples is to show that C&S was in effect telling the five percent banks what to charge, what practices to follow.

Let me just --

Chief Justice Warren E. Burger: Does that not also suggest, doesn't that lessen the distinction that you were previously making between the situation as it was and the situation as it will be after the acquisition?

Mr. Friedman: No, no.

Chief Justice Warren E. Burger: I think you're narrowing the gap when you press that point.

Mr. Friedman: Mr. Justice, obviously if as we say and as they concede in effect, there is no competition barring the acquisitions will not indirectly increase competition.

What it will do though is to keep alive the potential for possible de-concentration of these concentrated banking markets, which this Court has recognized repeatedly is one of the functions under Section 7.

But in addition to that, coming back to what I had said before just to repeat it, that we don't think they can rely on the violation of Section 1, a violation of Section 1 has a justification for a merger that is prima facie in violation of Section 7.

If I may refer to these, couple of these things, the first one is at E140 and I should mention that this record is paginated that the exhibit volumes are separately paginated beginning with E1.

This is a note which goes not just to the C&S officials with an information copy, but this is directly written, typed out to the Presidents of the correspondent associates which are the 5-percent bank.

Effective November 12, the C&S National Bank, that's the lead bank, lowered its prime rate to seven and one quarter percent.

For the time being, this will affect only those rates that are tied to the prime.

All other rates will remain the same until further notice.

If you should have any questions, please give me a call.

This is from the Assistant Vice President of the Division of Branch Superintendent.

Then at E145 is to all of the managers and the affiliates with again information copy to the President of the five percent banks, encloses a memorandum and revised rate chart from Gordon Trulock as always, the chart reflects the minimum rate which should be charged and then at the bottom of the paragraph, loans to local corporations should carry a rate of at least 10%.

And finally at page E147, the 1969 memorandum saying, “Rates on all L&D loans except prime customers should be adjusted to 8%.

And then it goes on at the bottom of that page and says, “We are still not making speculative real estate and development loans.”

Justice William H. Rehnquist: Mr. Friedman, you say this supports -- would support a finding of an agreement not to compete?

Mr. Friedman: We act out stronger than that.

I go stronger than that Mr. Justice.

This, we think, compels the conclusion that what was done here was the result of an agreement, of a combination of a concert of action.

Justice William H. Rehnquist: Did the Government submit proposed findings to the District Court to this effect?

Mr. Friedman: Yes, yes, we did.

Justice William H. Rehnquist: And the District Court refused to make this finding.

Mr. Friedman: What the District Court found -- the District Court found in this case that this was not the result of any agreement because as it put it, this denied that the service or information received by these banks from C&S was the result of any tacit or explicit combinations rather than the natural deference of the recipient to information from one with greater expertise or better sources.

Justice William H. Rehnquist: Then the Government to upset the District Court's conclusion has to say that it's clearly erroneous.

Mr. Friedman: We think the ultimate finding, the ultimate finding of no agreement in this case is clearly erroneous.

It's clearly erroneous, because we think it fails to recognize the many decisions of this Court defining what constitutes an agreement for purposes of Section 1 of the Sherman Act.

Under Section 1, you don't have to have an explicit agreement.

It's rare that you have that.

It's a course of conduct and you look to the entire course of conduct to determine whether what happened was the result of wholly independent business judgment or whether it was the result of some tacit understanding.

Now, I suggest that it's difficult to believe that wholly independent banks, that wholly independent banks with their own officers, with their own Boards of Directors responsible to all of the stockholders would permit a five percent stockholder to have an advisory director sitting with them at all the board meetings to have a five percent bank stockholder review their loans would follow all of these instructions raising prices, changing prices, failing to change prices when C&S objected that they would have done that without there being some tacit understanding that this is how the banks were going to operate and we think this is very clear from the whole record in this case that it was understood.

It was understood that this is how it was going to operate and this is the way it operated.

Let me give one very --

Justice Byron R. White: Plus the name.

Mr. Friedman: Plus the name, thank you Mr. Justice.

Normally an independent bank without some understanding wouldn't permit its business to be operated under the name of someone else and wouldn't permit its customers to have available at it, all the services that are supplied in a five percent struggle.

Let me just give one very illuminating example I think of the kind of relationship in control you had in this case, which is something we cited in our reply brief.

The President of Bank of Chamblee, one of the five citizens in Southern Bank of Chamblee wanted to raise his interest rates on deposits from 3.5% to 4%, because he felt he needed this to compete with another local bank in the area.

But before he undertook this step, he felt it necessary to write to C&S and find out if they had any objection to it.

So he so wrote and he then had a discussion with a C&S official who objected and the result of it was the President of Chamblee did not raise his interest rates to 4%.

We had another example described in our main brief at pages 11 in the lengthy footnote, footnote 2 that C&S put out an announcement that it was changing and increasing its service rates on checking accounts.

It didn't state the date.

This was in February 1970.

Many of the five percent banks had different service rates, but on the first of April, all of a sudden all of them, all of them, everyone of them suddenly adopted uniform rates and not only the special checking accounts but the regular checking account, rates that will uniform with those that C&S had adopted.

Now, the argument is made to which Mr. Justice Powell alluded earlier that this was perfectly alright because if it hadn't been for the restrictions of Georgia banking law, the banks would have been organized initially as branches of C&S and if they had been branches of C&S everything that we challenge would have been permissible.

Now, these banks as I want to repeat again because I think it's at the crux of our case.

These banks are separate entities.

These banks are separate entities and a separate entities, and the separate entities.

These banks have to operate the way the Sherman Act requires the separate entities.

They cannot themselves eliminate and restrain competition between them.

Let me if I may read two sentences from the Court's opinion in the Perma Life Muffler case in 392 U.S. where that was a private case and the Court of Appeals had dismissed the Sherman Act claim on the theory that the two respondents Midas and its apparent which owned all of the stock international were a single entity, and therefore incapable of conspiracy and the Court rejected that argument.

What it said was, “But since the respondents Midas international avail themselves of the privilege of doing business through separate cooperations, the fact of common ownership could not save them from any of the obligations that the law imposes on separate entities.

That was the case where there were wholly own subsidiaries.

This is a case where they're only 5% subsidiaries.

Now, let me turn to one other aspect of this case, the Court -- District Court set as an alternative ground of dismissing the complaint that this was a matter that lay wholly within the exclusive primary jurisdiction of the Federal Reserve Board.

It's rather technical argument, it turns on the language of the Bank Holding Company Act.

We have I believe fully covered it in our brief.

I will just summarize in the sentence or two that the Bank Holding Act authorizes the board to approve acquisitions, mergers or consolidations or acquisitions of control and that's the only thing it gives the board jurisdiction of it.

I challenged -- I've indicated is not to the acquisition or to the control as such but to the way in which they exercised it.

And there is a specific provision in the Bank Holding Company Act which we have set forth at page 47 of our brief that says, “Nothing in this in anyway prevents the liability under the antitrust laws.

And we think that whatever one may think of the role of the Federal Reserve Board in dealing with this situation quite clearly, it is covered by this exemption.

Now, the District Court in this case assumed for purposes of discussion under the Section 7 issue, the markets that the Government had posited.

It didn't define the markets.

And if we are correct in our submission to this Court, the case must be remanded for the District Court to define the relevant markets.

And it also set forth in considerable detail the increases in concentration that would result in the event this merger took place.

But then it said all of this really is beside the point, because as a result of what is previously happened, there is no competition now between C&S and the five percent banks.

In other words what they're saying is that the defendants can overcome the prima facie illegality of this merger under the settled standards, because of their own violations of Section 1.

We think as we've said in our brief, this would just stand Section 7 on its head.

The purpose of Section 7 is to prevent these restraints at the outset, in their incipiency before they develop into full blown violations of Section 1.

Now the claim is that the full blown violation of Section 1 somehow saves from illegality a merger which had it not been for that violation under this Court's standards would be illegal.

We don't think that is the way Section 7 can be read and we think that under this Court's decisions, this merger the arrangements violate Section 1 and the merger cannot pass muster under Section 7.

Chief Justice Warren E. Burger: Well, are you saying that each of these five percent situations was violation or only that taken all together against this whole background?

Mr. Friedman: I would say each one -- I would say each one Mr. Justice was because in each case, each five percent bank was an independent entity and in each instance what you had was the complete elimination of competition between C&S and the fives.

Indeed, in the one case, the Bank of Tucker that I mentioned earlier, for -- from 1919 to 1965, Tucker was a wholly independent bank.

And then C&S acquired to 5% interest rate in Tucker changed its name to the Bank of Tucker and proceeded to treat it as though it were a branch.

I think this is the clearest example, but the others never had even a chance to develop as independent entities.

From the outset C&S stifled their competitive potential.

Justice Byron R. White: Do you think we need any market analysis in the case at all on the Sherman Act?

Mr. Friedman: I don't believe so Mr. Justice.

Justice Byron R. White: Well, just tell what is the -- what is the per se violation, just an agreement not to compete?

Mr. Friedman: An agreement and understanding not to compete at all in anyway.

Not just fixing prices, but not to compete in anyway.

Justice Byron R. White: And so if the price fixing agreement is per se this is a fortiori.

Mr. Friedman: That's correct.

That is our position.

Justice William H. Rehnquist: Well, if what the bank in Birmingham agreed with the bank in Atlanta not to compete and in fact there was no real realistic possibility of competition between, would that be a violation of the Sherman Act?

Mr. Friedman: If there was no realistic possibility at all, if they were completely independent, I doubt it very much, but that's not this case.

That's not this case Mr. Justice because C&S itself had three subsidiaries in which it owned 90% or more of the stock which puts conceivably -- might have been competing with these banks.

We don't know.

Justice William H. Rehnquist: But don't you have to know something about the market then in order to answer Justice White's question.

Mr. Friedman: Well, I think I interpreted --

Justice William H. Rehnquist: You know that.

Mr. Friedman: Yeah, I interpreted Justice White's question as meaning whether it would be necessary to define a market in the way that it is normally defined for Section 7 purposes, my answer is no, not under Section 1.

But this is all -- this is in the Atlanta area and these are suburban banks and there is -- there is -- for example the record shows that not infrequently people may want to -- there's a question whether you want to bank where you live out in the suburbs or whether you're going to bank in town.

If it's an independent bank, you may decide to bank in the suburbs and not bank in town.

So there could have been we think very real competitive potential between C&S and truly independent banks in the suburbs, independent banks that were not operated by C&S's branches.

Thank you.

Chief Justice Warren E. Burger: Mr. Hodgson.

Argument of Daniel B. Hodgson

Mr. Daniel B. Hodgson: Mr. Chief Justice, may it please the Court.

We would like to approach our argument today this way.

First, we would like to touch on some of the facts that we believe should have emphasis in order to land the importance to our sponsors to the Government's grave charges.

Secondly, we would like to make our argument that because C&S and its associated five percent banks have been so closely related from the very beginning without change, no lessening of competition would result from the acquisitions.

And then we would like to add Sir, the department's charges that these relationships are in violation of the Sherman Act.

In some instances, it appears to be claimed per se by virtue of the entire association between these banks and then again it appears to be per se basically on the price information memoranda that had been discussed this morning.

Then we would like to discuss what is perhaps the most important charge whether or not the association amounts to an unreasonable restraint, absent a per se finding.

And then we would like to conclude without thesis that an affirmance by this Court would bring only beneficial competitive results.

Now the department is very lightly and selectively touched upon some of the facts although it is surely not misrepresented there.

I think it's important for us to place ourselves in the environment in which all of this conduct took place.

The City of Metropolitan Atlanta has exploded in the last two decades, or decade and a half.

There are no geographical barriers or restrictions to this growth and it has been heavy.

But the political response to this growth has not been comparable.

The City of Atlanta has been restrained since 1952 to a bare city limits of a mean radius of seven miles and there seems to be no hope to get that remedy.

It is surrounded by numerous small towns and villages and small cities.

At the time the case was tried, the Standard Metropolitan Statistical Area encompassed five counties with the rough radius of 25 miles, much larger.

And today the SMSA is 15 counties with a rough radius of 40 miles.

Now as these political restrictions on city limits are clear, it is also clear that the limitations on internal, extension and expansion by banks in the State of Georgia has been seriously restricted.

Because beginning as early as 1927, no branching has been allowed in the State of Georgia except within the city limits where the bank is located.

And until 1960, it could -- they could not expand even where they had owned any branches.

Only 13 states continue so absolutely to restrain internal bank expansion.

None of Georgia's neighbors does.

C&S system is expansive mandate.

It is aggressive.

In 1928, it met these barriers by forming a holding company which over a period of the next 20 odd years, formed a majority owned affiliates throughout the state, three of which are in the Metropolitan in Atlanta.

But in 1956, a barrier was put up again and today no bank -- no bank holding company may expand through the holding company affiliation realm in the State of Georgia.

The legislative forces supported by the protectionist demanded the unit bankers in the state as we see it have drawn hard barriers against competitive expansion, all market extension, barriers drawn sharply at the city limits.

Now the purpose of this historic exercise is to demonstrate why this was done.

There was no purpose here to do anything in violation of antitrust laws.

It's simply that was developed an innovative and entirely pro-competitive expansion procedure which had to observe their requirements, their restrictions on stock ownership required by the state bank holding company law.

So here's what was done.

Let's leave out, Tucker for a moment.

With respect to the five banks which are before this Court today on the Section 7 charge.

If C&S organized these new banks, it didn't participate with all of us in doing so, it organized them.

In areas where banks had never been before and beyond the city limits of Atlanta where C&S could not go and could not compete and could not until the law was changed allowing these applications for merger.

Second, it did so in instances where other local interest had tried and failed and this is in the record.

Had tried and failed because the absence of significant financial footings and banking knowhow.

It was done in every instance with the expectation of everyone involved all of the shareholders and the record is replete with this.

The neighbors, the competitors, all knew that it was formed this way under C&S sponsorship to be managed by C&S so far as law permitted ultimately to merge into C&S.

And this procedure was supported by the responsible bank regulators.

State and federal realizing that the strength of C&S Financial and managerial support would be behind these new little banks and thus would ensure their solvency and their success.

And serve the convenience and needs of these communities which otherwise were not being served and the record is clear that others had tried.

These historic organizational factors are unique and they were complete from the beginning.

They did not change.

The department said this was competitively insignificant when made, the District Court found there were no changes in this respect.

And the burden was on the Government to prove it if it were so from the time they were formed until the time this case was trialled.

I would not mention the Stone Mountain Bank except that it's been brought up here, because the record is so clear, so clear.

C&S did not organize that bank.

It had been in existence two years before any affiliation occurred.

C&S was asked by the Stone Mountain Incorporators, do you have anyone who can help us?

They said, “Yes sir.

There's a fellow named Arthur Drew who used to work for C&S.

He is retired.

He might help you.

He was the motivating force there.”

It is clear that the McCarthy family owned 35% of the stock of that bank.

It is also clear that there was continued resistance to support and advice from C&S to that bank and the District Court found that it was not a comparable circumstance just as it did with the Peachtree Bank & Trust Company.

The trust companies affiliate in the Chamblee area which likewise had serious distinguishing characteristics which do not appear in this case.

They are not appropriate for argument that these banks would break away, would become independent competitive forces and the District Court found that is a fact also.

Now, during the decade of the 60s, all six of these little banks including Tucker for this purpose retained the following important characteristics which further distinguished them.

The ownership of shares -- stock shares over and above that held by the holding companies, the five percent permitted by state law was spread among many individuals.

There were no blocks.

Any concentration being in the Chief Executive Officer of the five percent associated bank and many offices, directors and friends of C&S generally who were aware of the purpose and intent of this program to supply these services in these areas.

These five percenters were authorized to use the C&S names and share a joint identification with C&S services advising the public they were competing as C&S banks.

Now, the point is made, this happened later.

Justice Potter Stewart: This was in no way of violation of state law to use the C&S name.

Mr. Daniel B. Hodgson: No sir.

If Your Honor please, it is not.

As long as you get consent from the commission of banking finance then superintendent of the banks is perfectly alright, just as it is for the Coca-Cola Company to authorize the Coca Cola-Bottling Company of Thomasville, the Coca-Cola Bottling Company of Albany and so forth.

Chief Justice Warren E. Burger: Franchisees?

Mr. Daniel B. Hodgson: Very some, if Your Honor please, in an area where at this point in time C&S could not go, could not have its own direct operation.

Let me say something has been made to the fact that the name was not part of the original package where for most it was, the later one.

And the earlier ones it was no surprise to anyone, the record is complete.

That all knew these were C&S banks.

The Citizen's Bank of Sandy Springs for example had its lollipop, C for Citizen's and S for Sandy Springs.

There was no doubt in anyone's mind that these were C&S banks owned by other stockholders because this was required, but operated by C&S in order to supply these services there.

A third critical distinction is that full C&S services in advice were regularly and systematically supplied and no one offended the requirements of corporate law and fiduciary duties imposed upon directors and officers to serve their shareholders.

But this information expertly was supplied by C&S to these little banks including categories of services that were not routinely furnished to correspondents.

There were no secrets about these services, none whatsoever.

Anyone can see anything they want to see.

Most importantly, these services were expected and relied upon by these little banks.

Otherwise, the regulators would not have issued charters in the first place.

And as I suggested there was the expressed intent and expectation to merge just as soon as state law, the restrictive branching law, or the restrictive holding company law permitted this to be done de jure.

May we observe at this point that when the General Assembly of Georgia allowed branch expansion into the counties which isn't much, immediately indeed, foreseeing this in January 1, ‘71 these applications were filed.

And they were described in the application a copy of which went to the Department of Justice as being virtually operated and directed as de facto branches.

There was no secret about it then as they had never been.

This was the very language, which the department used before this Court, four years later in the Marine case to describe what it called a sanction pro-competitive procedure in instances where de novo branching -- de jure branching was denied.

The regulators knew it and all of the competitors of C&S and these banks were precisely interviewed by the Commission of Banking and Finance to see whether or not they had objection and they had none, why?

Because they were C&S banks from the beginning.

And then the department filed this suit, which stated the acquisitions, charge for the first time, the first news we had that these were charges of having engaged in violation of Section 1 of the Sherman Act.

We argue of course, that because C&S and its associated banks have been so closely related from the beginning that no lessening of competition could possibly result from these acquisitions.

The department relies on market statistics, you've heard the argument this morning.

But the department neglected to present any evidence for relating those statistics to the circumstances of this case so far as Sherman 7 is concerned.

Most importantly its own economic expert Dr. Scott Tait testified that he did not take into account the relationship between C&S and its associated banks when he was examining the economic consequences of the proposed transactions.

That which he did not take into account is at the heart of this case.

Our case is, C&S market shares for purposes of applying the standards of the Bank Merger Act or of Section 7 of the Clayton Act have always included the market shares of its associates.

Since the five percent banks have never competed as anything but C&S banks.

They were created de novo by C&S for that very purpose.

They are part of a single enterprise in fact and in substance though they take the separate corporate form only to avoid violation of the state bank holding company law.

And without that organization, the evidence is clear that the separate competitive forces in DeKalb County and beyond the city limits of Atlanta would not be in the marketplace today.

Put in another way, at the very time that these small banks were organized, the de facto merger took place.

De facto by open and notorious behavior and declared intent not that de jure because of restrictive state law.

The form being used only in order to allow market extension without the violation of that law.

The substance was to produce de facto branches.

And for purposes of applying the antitrust laws which deal with competitive and anti-competitive purpose in effect the teaching of this Court to us to look to substance and not form, indeed the department's own authorities take us this way and indeed this is the very procedure, the department sanctioned in Marine and this is what it said, “Banks in the state of Washington have achieved de novo entry and to areas foreclosed to de novo branching by sponsoring the organization of an affiliate bank and later acquiring the bank.

Since the associates were created by and have always competed as C&S banks to this entire history for every intended purpose.”

There is no possibility that a former corporate reorganization will produce anything but the same corporate substance and the same competitive statistics.

The department said that when the original sponsorship of the new banks and C&S commitment to the charting authorities was made.

This did not violate the act.

The obligation on the part of C&S and the expectation of these little banks that C&S would supply them full management counsel and advice, the department declared was competitively insignificant.

The District Court found later, the Government has not carried its burden of demonstrating any substantial increase in the degree of control or change in quantity of competition between the date of initial acquisitions and the date of trial.

If competitively insignificant when created and if all that's happened since that time has been the carrying out of the original obligations openly declared.

The perpetuation of an association must likewise be competitively insignificant where no change has occurred.

The District Court so found.

The only thing that would prompt any further argument before this Court today is the charge made by the department that the relationships that are involved here violate the Sherman Act.

And so we turn to those charges.

As we do so, we asked the Court carefully to notice the department's total failure to prove a nexus between the alleged Section 1 violations that are so broadly and vaguely talked about here today.

And the Section 7 complained.

The department assumes take away the behavior which it's hard to describe, it charges violate Section 1 and the summit holding the association would break apart.

And C&S and its associates, banks will compete aggressively with one another.

The assumptions are not proved anywhere in this record and they are not logical.

The name and the public identification would not be removed.

The associated operations would remain.

The expectation of being merged and the realization of being part of the C&S system would remain.

The nature of the competitive posture in the marketplace would not change.

They would continue to function as C&S banks and the public and the competitors would continue so to see them as they always have and to use them that way, a single competitive force in separate markets as they've always been.

Even if the issuance of these memos that so much is made off, or the obtaining of the information from the C&S related to pricing and ours were condemned even though it's used only as a part of a large bit of information that these small banks exercised to determine the only competitive strategy.

That would not affect the relationships not because the conduct is in this case trivial which it is, but because the associate bank officers would continue to determine their charges and their rates independently with their boards as they have testified they now do.

Finally --

Chief Justice Warren E. Burger: Could it be -- they would be capable of the -- this emancipation that I discussed with Mr. Friedman, would they not?

Mr. Daniel B. Hodgson: Oh, Mr. Chief Justice indeed they would be capable of this emancipation as they always have been.

As I believe in almost in any similar circumstances.

But the evidence is clear from all parties in the pulls and the testimony was broad spread and comprehensive shareholders, directors, officers, employees everyone alike that there was no probability of this.

Before the FDIC this question was raised.

That's a very tough agency over there and they raised this question, the probability of disaffiliation.

And we supplied tremendous amounts of information to demonstrate that this was though possible was absolutely improbable which is the standard that this Court must apply.

The same procedure was followed through with the District Court.

Surely, the possibility is there.

But this is no Stone Mountain situation.

This is no Peachtree Bank situation.

No one wants them to break apart.

They all like it like it is.

These are C&S banks.

They are C&S banks just as much as a branch would have been, had it been allowed to go out there from the beginning.

There is absolutely no difference, so far as the laws under which this case has been tried or concerned.

The District Court sir --

Justice Byron R. White: Do you know -- does the record show whether there were restrictions on the transfer of the bank stocks.

Mr. Daniel B. Hodgson: Restrictions on transfer of bank stock?

Justice Byron R. White: Internally, when the bank -- when the stock was issued to bank people, were there any buy and sell arrangements --

Mr. Daniel B. Hodgson: There is no evidence to that effect and I can ensure Your Honor, so far as I know there are none.

Justice Byron R. White: So the stock was -- could be free transferred.

Mr. Daniel B. Hodgson: Oh, yes sir, yes sir, freely transferable stock, no limitations and then not let away --

Justice Byron R. White: People sometimes need money and sell their stock and sometimes they die.

So the stock --

Mr. Daniel B. Hodgson: Yes sir, but I believe--

Justice Byron R. White: In the same hands forever.

Mr. Daniel B. Hodgson: Yes sir.

But I believe that such could have been the case in Trans Texas of course, which really proves another point, stock ownership alone may not be so strong a summit, in our judgment it's not nearly so strong a submit as the circumstances of this case.

But -- sir --

Justice Byron R. White: The economics?

Mr. Daniel B. Hodgson: Yes sir, the economics of it.

In this case I should say though that the record is clear, that there is very little movement.

There was very their little movement in sale to the stock in the critical period.

Chief Justice Warren E. Burger: In a hypothetical bank what Mr. Justice Rehnquist I think asked you about the bank over in Birmingham closely set out on a plan to buy above the stock that's got available in anyone of these five banks, against the possibility that one day they might want to enter that market.

Mr. Daniel B. Hodgson: I don't believe much would be sold if Your Honor please, but it's totally hypothetical.

There's a series of affidavits in the filing of this case that we got up with the FDIC, and went on and solicited all the shareholders and they all affirmed that they like it with C&S and they weren't interested in to selling and they know C&S management and they know the success of C&S in the State of Georgia.

They know C&S knows its business.

I really believe they would not be inclined to sell.

It's kind of hard to roundup that kind of stock.

Most importantly as we --

Chief Justice Warren E. Burger: Also very difficult hypothetical question for you to answer to me, because it is possible isn't it?

Mr. Daniel B. Hodgson: Oh, if Your Honor please of course it's possible.

And I could not responsibly stand here and argue to the other -- to the opposite as much as I would be inclined to believe.

Justice Lewis F. Powell: It is also a fact, an economic fact in some localities that when banks of this kind are organize the stockholders looked down the road to the day when laws will permit mergers and then they will acquire the stock of the C&S bank.

Mr. Daniel B. Hodgson: If Your Honor please, there is expressed evidence in this record to that effect.

These are the affidavits of the shareholders that we obtained that there is suggestion of FDIC and they were so put before the Court.

And that --

Chief Justice Warren E. Burger: We'll resume there after lunch.

Mr. Daniel B. Hodgson: Thank you Your Honor.

Chief Justice Warren E. Burger: Mr. Hodgson you may continue.

Mr. Daniel B. Hodgson: Mr. Chief Justice and may it please the Court again.

May we conclude our argument with respect to the Section 7 charges by reminding the Court that the District Court's finding just like that of the corporation before it foresaw no probability of a change in the relationship which is a finding exactly like that of the District Court in General Dynamics we submit.

Where the Court foresaw no new coal reserves being found and likewise that finding unless its charge is being clearly erroneous which it has not should be affirmed by this Court.

Turning to the Sherman Act charges, let me say that it is our strong view at the outset that this just is not a Sherman Act case.

And we believe that through our briefs and argument we can satisfy the Court, it is nothing more than a means the department would use in this case to frustrate these mergers.

Let us look at the charges that the department makes as being violations.

First, sort of a two-headed charge the best we can determine of a per se violation.

Now, preliminary maybe I say one other thing, we are not asking this Court for any exemption or pardon from any Sherman Act violations.

But we do urged this Court not to extend it's per se doctrine to the totality of the pro-competitive and beneficial behavior that the record discloses in this case.

And we ask this Court to restrict the application of the per se doctrine to such pernicious conduct as real price fixing, real market allocation and real boycotts.

Otherwise, it is so extended.

It occurs to us would require that a merger agreement itself would become a per se violation and obviously that cannot be the case.

Now, we would think that a real per se violation is glaringly evident to anyone especially to the public officers charged with enforcing those laws and to the competitors of the charge defenders.

We all know that's where they are first ascertained.

They were and they are glaringly and immediately evident in all of the cases cited by the department to prove conspiracy in the absence of an expressed agreement.

Why?

Because the behavior reflected in the records in those cases, so clearly reflect a clear, flagrant, naked and offensive purpose and effect, either to fix prices, to restrain trade, to allocate markets to customers or eliminate competition.

There is none such here much less a combination of separate firms to maintain prices above a competitive figure, a classic definition of a cartel.

Now, if a per se violation exists by virtue of the totality of behavior that was openly involved in the associations of this case, well known to the regulators and the public alike.

Why did not the department see it and at least call attention to it when they participated in 1968 now, in the Federal Reserve Board hearing.

It can only be because it was not perceived as such.

It simply wasn't recognized as such.

And we cannot perceive it as such today.

It was to this very argument I make that the District Court found.

The Department of Justice acquiescence in 1968 in an understanding involving the more substantial elements of what it now claims to be Section 1 violations is indicative to at least a smaller degree that such practices were not so violently anticompetitive as to constitute per se violations.

In action, the District Court said by the Department of Justice with such a knowledge would have been a violation of each public duty and the Court does not impute such negligent in action to it nor do we.

The very same associations, the very same transactions involved in this case with this five banks was involved in 1969 with the acquisition of a small bank, all the C&S Belvidere Bank.

What did the department perceive then, Sherman Act violations?

Not a one and yet we must concede that none were perceived because the factors were the same.

And the department noted that the Citizens and Southern Holding Company has had full management control of Belvidere Bank since its inception.

Going on to say, the situation is not unlike de novo branch banking in those states where such activity is lawful.

The department noted no violations in its first competitive report in this case.

When it noted the reorganizations were essentially internal and the parties had never represented independent competitive forces.

A competitive posture of the department now says that C&S and its associates in separate markets must take toward each other just for one reason only, just because they are organized in the form of separate corporate bodies.

And even when the department reversed its competitive position letter, in February of ‘71 it did so not on the grounds that the relationship and the behavior between the persons violated the Sherman Act because of the very opposite, it concluded that the associated banks were not necessarily controlled by C&S.

Now, we've never understood the consistency of the department's position with respect to our transactions, but that's really beside the point.

We want to make it clear today that we do not charge the department with bad faith on the contrary and we surely do not claim an estoppel, I doubt it would be available.

But we cite this instances to clearly and unequivocally demonstrate that no Sherman Act violations were apparent even to the expert eye.

In the sponsorship and managerial relationships that are part of these associations much less per se violations, if not then not now.

Indeed, the first time that the Chairman was charged was in the complaint denominated vaguely a close working relationship.

In the jurisdictional statement to this court, the charge became interchanges of information personnel and other resources leading to lack of competition.

We say there never was any, you could not lead to it, if there never was any.

The ingredients of a per se charge did not even then appear and the nature of the restraint did not appear.

Only in the brief before this Court did we first hear that we were charged with a per se violation.

The brief says in one place, not merely the exchange of past price information which affects current pricing practices that's contained on its progeny, but a mutual understanding to fix actual current prices a classic per se offense.

Citing Socony-Vacuum and Park Davis, not even the most biased reading of the evidence in this case will reflect a single factual circumstance similar to Socony-Vacuum and Park Davis or any of the other per se cases cited.

Masonite, Baush & Lomb, Keefer Stuart, General Motors, Celine, PermaLife, they are all flagrant violations, clearly so.

And everyone of the sets and circumstances in those cases, the sole purpose and the overwhelming effect was to fix prizes, really fix them to maintain markets, allocate customers.

Its strange reason to suggest that the relationships here between C&S and its associated banks that it formed, many of these services at the heart of the correspondent bank relationship, many of them essential to franchise dealings.

Many of them the focal part of management consultation services, indeed anyone's imagination familiar with the commercial world can come up with many similarities to these sorts of relationships.

All of them in this case calculated to supply new competitive forces to new markets.

And if it's followed by such advice as to make the successful operation of these little banks as associated competitors in their separate markets, it's strange reason to suggest that such relationships could possibly be found to be conspiracies in restraint of trade much less of such predatory and unconscionable character so lacking in redeeming virtue.

That is to allow no inquiry into the purpose or effect or the reason to administer of the association.

A conclusion entirely necessary for there being categorized per se.

Take the entire relationship as an onion.

Peel back the layers of explicit behavior.

Even the department admitted here today that each layer standing alone is no violation possibly the pricing memoranda which we will come to.

Yet somehow the whole onion taken together becomes a cartel.

Use of the common name is no violation.

This Court has allowed this in Topco.

Loose common ownership over the bulk of the stock is no violation, Trans Texas and many others.

Non stabilizing furnishing of price information is not a per se violation container and progeny.

Surely the supply of personnel, operational, security, accounting and all of the other services cannot be violations of the Sherman Act.

Anyone with the time and this Court hasn't the time I fear, but anyone with the time going through two volumes of a joint appendix, the consumer credit guide that inadvertently got in the record, but I'm glad it's there now.

If you have time in some through two volumes being just the consumer credit guide look at the multitude of information that has to be available to a young bank, a small bank in order to compete in today's complex highly regulated market.

How can this be a per se violation?

The District Court found it non-violative and should be affirmed.

But now the department charges that certain memoranda circulated to five percent banks and incidentally everyone else in the system relating to rates, charges and hours were conclusive evidence of price fixing and therefore a per se violation.

Now, if it were the law, if it were the law, that the existence of such memoranda standing alone creates an irrebuttable presumption of price fixing in violation of the Sherman Act then coupled with authorities holding that a per se violation is such a violation as can have no redeeming virtues, the District Court would summarily have found that this particular behavior was unlawful and he would have enjoined it.

He found to the contrary.

We know of no law or decision further that says that such memoranda standing alone create an irrebuttable presumption that a conspiracy to fix prices exists.

Or that any other per se violation has been proved.

Further, it is clear from the record that these memoranda alone are but a small and unimportant aspect of the entire relationship between C&S and its associates much more important to the branch banks to which they went.

And their prohibition would in no way if you would eliminate them all affect the closeness of the relationships or the propriety of the acquisitions.

What rational purpose could have been served by C&S and these associated banks making an agreement or having a tacit understanding to fix prices in these separate markets.

The department has suggested none and we can conceive of none.

We can only believe that it would be harmful.

There was no evidence whatever that the occasional transmissions of this information relative to price in anyway resulted in stabilization.

Now, C&S in its system has always been extremely conservative and cautious about the Sherman Act.

And although one could well make an argument that this being a single enterprise, sorts of conduct that are generally prosecutable under this Act couldn't occur.

But to be doubly cautious memoranda have been consistently going out in the end of this record obliging separate entities to make their pricing and their charging decisions separately and independently all were reminded frequently of the criminal illegality of agreements between banks relating to prices.

And everyone who's testimony was taken in this case without exception.

The testimony of every principal officer of the five percent banks, of directors of the five percent banks, said that out of an abundance of caution we set our own pricing standards and our own charges.

Sure, we use the C&S information it was handy and they're pretty good too.

And we took that into account.

But we also probe the competition.

We took the various financial journals.

We knew what was going on at the Fed and we knew what was going on particularly with respect to our competitors and then we set our prices.

Furthermore, a close look at the evidence discloses that while the Government points an accusatory finger at these memos which standing alone might have been a circumstance that could lead to a determination that you had a violation.

It neglects to note that his memoranda were but the smallest part of the whole continuing advisory service to all branches affiliates and associates, fails to note that the information contained in these memos was only a portion of the market and information obtained by the associate banks in setting their prices.

Fails to note that there is a multitude of evidence that all of these men, well knew what the service charges deposed on deposit accounts and the interest paid on savings account were among all of the competition.

And changes of such rates and changes of such deposit charges are typically announced in full paid newspaper adds and radio and TV spots.

They are no secret.

The department fails to observe that the evidence is clear in this case that shows extreme variations of rates charged on the loans.

And substantial variations on service charges and interest paid as between the C&S and its associates.

Now, Mr. Friedman has argued about Mr. Harris testimony about consulting downtown about something.

Allow me, if I may to give you some other of his evidence.

And the best way I know to do is to put this to you this way and if you have time to read the depositions of each of the bank officers of these little banks, it would be extremely profitable.

You will see that this is a charge without substance.

Question to Mr. Harris, how did you decide on the initial service charges on checking accounts when the bank opened?

We took those that were used by every bank in Atlanta (Inaudible).

Question, before making a change in service charges on checking account, would you also review that with C&S?

Yes, we would, but we would have to review more with the area generally than to just C&S.

Because I can't have a charge out there that varies too widely from the other banks.

Because people move their account from one bank, after all, all the banks have offices around there.

I've got to stay pretty close to what the downtown banks charge.

I used C&S every way possible to help in making decisions.

I confer with them on many points.

Then we discuss it with the directors and we try to get all the information from whatever source we could.

We took every banking magazine, periodic, trying to stay abreast of what was going on.

So that with many of those things that was just part of the movement in the money market and you had to follow it.

This testimony is not just an earnest denial of no violation or no unlawful conduct.

It's an honest report of telling it like it is.

Information obtained from C&S along with information that obtained from many other sources, competitors, the market journals and publications was used to arrive that independently established rates, charges, and hours.

I would not have mentioned this but Mr. Friedman makes much of what we thought we'd put to rest in our brief this morning.

The change by all of these banks suddenly to a lower service charge.

He didn't mention it was lower but it was.

Now, the testimony is clear and it's specifically referred to in our brief that here's what happened.

Trust Company of Georgia, a major competitor came out with full page ad one day, that said “We are reducing the service charge on our deposit accounts from a minimum of 500 to a minimum of 250.”

Well, now what do you think everyone did when they saw that?

They said, “Good Lord, they are going to take all our account.

We got to find out about this.”

And they all scattered around and found out what happened.

What did C&S do?

Now, C&S has a more significant research department than to the five percent banks.

It determined that this could be done without a significant threat to the profitability of the operation of this deposit accounts and it's so advised everybody.

So what did they do?

They met the competition of the lower service charge.

Now that's what happened in this case if you really examine the record.

I do not believe that that is a sort of thing that this Court is going to condemn as a per se violation of the Sherman Act.

The department has cited no authority that requires that these behaviors either the entire associate relationship with the furnishing of these memos be found the violation of the Sherman Act much less per se, nor that the facts permit such a conclusion had the District Court been so inclined.

We would have been here on the appellant's side.

But instead the District Court found, these activities however do not amount to collusive price fixing.

If there is no per se violation then the question becomes how the party is so combined as to produce an unreasonable restraint.

The department argues just because apparently, just because they are incorporated separately, they are obligated to compete vigorously or at least the C&S should abandon the sponsored bank.

No authorities have cited for this proposition.

And totally ignores the single reason for the choice of the separate corporate form which turns out to be a nuisance.

That is to avoid the restrictive state branching laws that prevented C&S from competing.

The only response the department produces to fill the void of any legal mandate for C&S to compete with its own associates consistent cases holding first, if the corporate relationships are not determinative of the applicability of the Act, it suits us, or second where corporately related entities combined to enter in to expressed agreements to commit naked per se violations of the Sherman Act by fixing prices and allocate territories in markets.

While holding themselves out to be competitors with one another, they will not be able to allowed to defend behind the veil of corporate separateness.

It would not well serve antitrust principles to leap from authorities which condemn flagrant and clear violations which would defend it only by a plea of common ownership.

That was the only defense to a condemnation of the entirely beneficial and pro-competitive associations of this case because the entities are separate informed.

The department asks this Court to pronounce an unreasonable commitment to form over substance.

In area traditionally devoted to substance over form.

A totally novel doctrine that would require one company and its de facto subsidiary held out to the public to be a subsidiary with the same name aggressively to compete with one another.

Is it being asked to beat it, it's a little prodigies brings out with vigorous competition, confusing the public, delighting the competition and amazing them somewhat.

Infuriating the regulators who had depended upon C&S to furnish this service, betraying the shareholders, officers and employees of the sponsored bank and destroying the bank of what purpose would this sponsorship be under those circumstances.

What would be left with which ultimately to merge or should it be supported and competed with the same time.

Or should there be maybe just a little bit of competition enough to keep the wolf from the door.

There is no element of reality in this position.

What rational expensive mandate, but well managed Bank Holding Company would follow such a course.

How would it ever develop that this bank could be merged?

We urge this Court also to recognize that no floodgate of adverse circumstances would occur if this Court affirms.

This plan -- this unique plan, no precedent or anything else would take place.

And finally this can't ordinarily happen again.

If someone wants to go to this procedure again they have got to go to the Fed under Section 382 and after making application get approval for the formation of subsidiary with the department notifier who can come in and participate.

If they don't like it they can file a petition for review to the nearest Circuit Court.

No floodgates will be open, only beneficial results will occur here.

And this unique little case will take its place on the dusty shelf of this Court and I dare say never be looked at again.

Thank you Your Honor.

Chief Justice Warren E. Burger: Mr. Friedman do you have anything further?

Rebuttal of Friedman

Mr. Friedman: Yes, Mr. Chief Justice, I'd like to just answer two or three things -- say two or three things.

First, we are not of course, suggesting that there should be any court decree ordering these banks to compete.

What we're asking is that a Court decrees stop these restraints upon competition that have been imposed through this relationship.

The reason we didn't challenge this relationship in 1968 when the Federal Reserve Board staff had an investigation because we didn't know all the facts at that time, indeed Mr. Layne told the Federal Reserve Board hearing that they'd always follow the philosophy of influencing but not controlling these banks.

It wasn't until we really began to investigate this case after we received notice from the FDIC that these applications for merger had been filed that we discovered all of the facts.

Now I also want to make it very clear that we have no objection to the organization of these banks, to their assistance in organizing those banks.

And indeed, in the Marine Bank Corporation case to which reference has been made, there our argument was that this was a permissible method of a bank entering into a new market by sponsoring a new bank and ultimately perhaps acquiring it.

But sponsoring a bank and joining a normal correspondent relationship with it as a far cry from what C&S has done in this case.

Now the argument that's been suggested -- this whole thing is an exercise in futility, because if we were to prevail there is no reason to think that the C&S five percent banks would disassociate from C&S things would be continued in their previous manner.

I think the answer to that is if we are correct in our argument that this arrangement violates the Sherman Act, steps will have to be taken to terminate this kind of a relationship.

They are not going to continue in the same way despite a holding that the arrangement violates the Sherman Act there undoubtedly going to have to stop using the name, they're going to have to stop reviewing their loans.

They're going to have to stop having a director sitting as an advisory man on the Board of Director.

There's going to be some changes in the relationship.

And once these changes have taken place it may well be that some of these five percent banks, that are so satisfied with the present relationship may take another look at it.

They may then decide that without this crutch, without this control on operation by C&S maybe they'd be better off in an independent basis.

Now whatever the reasons there may be for C&S wanting these banks not to compete, the question was put to why on earth would C&S want to stop these banks from competing?

The fact is for whatever reasons that's exactly what they have done.

They have an arrangement between them under which the banks don't compete and they in effect tell the banks how to compete.

We challenge the basic underlying arrangement.

You can't segmentize an arrangement eliminating competition by saying, “Well this memo didn't do it and that piece of paper doesn't do it.”

I think you've got to look at the totality of the relations.

And when you look at the totality of the relationship I think the fact that the five percent banks are independent banks that they are not branches of C&S.

They were started originally as independent banks.

C&S has always claimed that they are independent banks.

C&S says, “We don't control these banks.

They are independent banks.”

But when you look to see how they behave in the light of their understanding with C&S, we see they are not independent banks at all.

C&S treats them as though they were branches.

They are not branches, they are independent entities with independent duties and responsibilities and as independent entities, they can not understand and agree with the C&S to eliminate all competition between.

Chief Justice Warren E. Burger: Thank you Mr. Friedman.

Thank you Mr. Hodgson.

The case is submitted.

Featured:

United States v. Itt Continental Baking Co. - Oral Argument

Thu, 23 Aug 2012 18:25:43 +0000

Case:

United States v. Itt Continental Baking Co.

Media File:

73-1290_19741113-argument.mp3

Related Transcript:

73-1290_19741113-argument

Transcript:

Argument of Friedman

Chief Justice Warren E. Burger: We'll hear arguments next in United States against ITT Continental Baking company.

Mr. Friedman you may proceed whenever you are ready.

Mr. Friedman: Mr. Chief Justice, and may it please the Court.

The Clayton and the Federal Trade Commission Acts provide a civil penalty of up to $5,000 for any violation of an order of the Federal Trade Commission.

The statutes further provide that, where the violation consists of a continuing refusal or neglect to obey the order of the Commission, then each day for which the violation continues is a separate offense.

The question in this case, which is here on the writ of certiorari to the Court of Appeals for the Tenth Circuit is whether where a respondent under a Commission order, prohibiting certain acquisitions without the prior approval of the Commission, makes those acquisitions in violation of the order, each day that the respondent continues to hold the illegally acquired property is a separate offense, or whether as the Court of Appeals held in this case in conflict with a decision of the Eight Circuit, there is only a single offense committed in each of those situations, that is the single act of acquisition and what happened in this case for these acquisitions only single penalties of the maximum of $5,000 was imposed.

In 1960, the Federal Trade Commission issued an administrative complaint against the respondent's predecessor, the Continental Baking Company, in which it charged that since 1952 Continental, which was one of the largest baking companies in the country, had engaged in what it described as the continuous practice of acquiring bakeries throughout the country.

The complaint alleged that seven specific acquisitions of bakeries made by Continental, violated Section VII of the Clayton Act, and it also alleged that various practices committed by Continental, violated, constituted unfair acts and practices in violation of Section 5 of the Federal Trade Commission.

After some hearings were held before an examiner, the case was settled in 1962, through the entry of a consent order.

They ordered the two things basically.

First it directed Continental to divest itself of a principle acquisition challenged in the complaint, a firm called Armour Bakeries, which it was believed was the eighth largest bakery in the United States.

And secondly, it imposed a prohibition upon Continental for ten years, against making certain acquisitions without the authority previously given by the Commission.

Justice Harry A. Blackmun: Mr. Friedman, do you think that, that provision indicates that the court felt the holding of the other acquisitions was not improper, when it so specifically spelled out Armour?

Mr. Friedman: I am sorry Mr. Chief Justice this is in the Commission complaint.

Justice Harry A. Blackmun: Alright.

Mr. Friedman: I don't think that there was let me say, there was, at the time that they entered into the consent order, there was also an appendix that the parties signed which they said would provide a basis upon which the Commission could determine whether it was in the public interest to enter this order.

And in the course of that's which was, it was the part of the agreement to settle the case on consent, and in that agreement with respect to at least two of these acquisitions they concluded that there was not a violation of the act.

But I don't think the fact that the Commission limited the divestiture to Armour could be fairly viewed as any indication that it concluded that the rest of the acquisitions were not illegal, this was a consent order, and this was a settlement.

They agreed to give up the major acquisition they've made in return for which the Commission allowed them to keep some of the others and that they both agreed to include this ten-year ban on further acquisitions.

Now that provision is set out at pages 88–89 of the record, and what it says, directed the respondent to cease and desist for ten years without the prior approval of the Commission from acquiring directly or indirectly, through subsidiaries or otherwise, the whole or any part of the stock, share capital, or assets of any concern, corporate, or non-corporate engaged in any state of the United States in the production of the sale of bread and bread-type rolls.

Now, as I've indicated, the agreement which the party signed consenting to this order stated two things.

First, it stated that in construing this order, any of the parties could properly, the Commission and the parties could properly refer to the complaint itself.

And in two provisions of the complaint, that we think are significant in determining the purpose of this ban on acquisitions for ten years without prior Commission approval.

One of the allegations was, that as result of these acquisitions Continental had eliminated these acquired bakeries as independent competitive factors.

The other thing that the complaint referred to, was there was a substantial trend to industry wide concentration in the baking business.

These two allegations are set forth at pages 67-68 of the appendix.

Now, in addition there were certain things stated in the appendix which was made a part of the agreement on the consent order, which bore on what the Commission was thinking when it approved this order.

The reason for that is the parties stipulated, that these were factors that the Commission could consider in determining whether it would be the public interest to adopt this consent order.

And at pages -- page 84, which is the end of the appendix, I would like to read just two sentences at the -- just before the first full paragraph.

The parties said that, if this order is adopted by the Commission, the respondent's alleged continuous practice of acquiring companies baking and selling bread and bread-type rolls will be brought to a halt and the major acquisition forming the gravamen of the complaint will be undone.

Competition may be restored essentially as it existed before the accusation of Armour Inc. and the public interest will be well served.

Now, it seems to us that rather clearly, what the parties intended this order to do is two things.

One, to bring to a halt the alleged practice of Continental of increasing concentration by acquiring one bakery after another and secondly, to undo one of the principal adverse effects on competition resulting from these acquisitions by requiring divestiture of the major accusation, the Armour bakeries.

This order was approved by the Commission in May, of 1962, and in 1966 the Commission undertook an investigation to determine whether certain conduct by Continental violated the order.

Specifically, it looked into three transactions which formed the violations involved in this case.

The transactions are substantially similar.

In each case, there was an independent bakery which previously had both produced bread and roll, and distributed it and in each case the independent bakery agreed in effect with Continental, that it would give up its production of the bakery products, and would instead distribute to its previous existing customers, the products that were made by Continental.

In other words Continental in effect, took over, took over the routes and provided the bread for these customers that had previously been the property of the independent customers.

The stipulated facts in this case, on the basis of which the district court decided it, are that the independent bakery distributed these products of Continental exclusively under Continental's name over the routes and to the same customers that it had hitherto distributed its own product.

And since -- there's a question here as to what, whether this was an acquisition of assets, I think it's not insignificant that each of the written agreements under which Continental took this over, are captioned sales agreement.

After investigation of these, nine of these transactions, in 1968 the Federal Trade Commission certified the case in accordance with the statute to the Attorney General asking that penalties be sort for these three violations of the order.

In the interim, and the complaint was filed in December 1968, in the interim in September 1968, Continental Baking was acquired by the present respondent ITT Continental, a wholly on subsidy area of International Telephone and Telegraph.

The government's theory upon which it sought these penalties, was that these transactions violated the ban and the order against acquiring directly or indirectly the whole or any part of the assets of a bakery firm.

The District Court held that two of the violations violated the order but that the third one didn't.

The Court of Appeals affirmed the findings of two violations but disagreed with the court of -- with the District Court as to the third and held that all three of them violated the order.

I think the rationale of these holdings is well set forth in the District Court's finding that it said, this is at page 14 (A) of the appendix to our petition.

It said particularly in businesses where route salesman are involved, customer lists have a peculiar value and that they frequently represent the principal asset of a business.

And it said that in connection with these transactions, the most important assets that Continental acquired were the sales routes and sales volume and in reversing the one transaction that the District Court had held did not violate the order, the court.

Court of Appeals said that the market, that is the customers and the volume, the business of distributing the bread was acquired and this was a principle asset of the bakery.

This determination reflected one of the facts stipulated in the District Court which is at page 31 of the appendix that route books and customer lists are asset of any person, firm or corporation engaged in the distribution and sale of bakery products.

The complaint in this case sought penalties of $1,000 a day for each of these three acquisitions, for each day that they held them from the time of the acquisitions and the transactions until the filing of the complaint.

The District Court rejected this claim ruling that this was not a continuing violation within the meaning of the penalty provision, but was merely a single violation and necessed a penalty for each of the two violations, the maximum statutory penalty of $5,000.

What the court said is that the order prescribes only the active acquisition not any retention and it said once these two acquisitions were accomplished, the violations were completed.

And the Court of Appeals of the Tenth Circuit confirmed that holding saying that the -- once again the order does not bar the retention of assets illegally acquired but only the acquisition itself.

Now subsequent to the decision of the Tenth Circuit in this case, in a case which is now pending on certiorari called Beatrice Foods v. United States, the Eighth Circuit reach the contrary conclusion.

It held in a very similar situation involving a dairy however and not a bread company but it was a continuing violation and it accordingly approved in the Beatrice Foods case, the assessment of daily penalties of $200 a day from the date that Beatrice Foods took over the supplying of milk to the dairy, to the point that the complaint was filed, the total violation that was approved in the Beatrice -- I am sorry that was approved in the Beatrice Foods case, was $156,000 and in --

Justice Potter Stewart: How many dollars would have been involved here if the government -- if the District Court and the Court of Appeals had watched your claim completely?

Mr. Friedman: Well, if the court gave us the $1,000 a day for which we asked it would have come to better than $1 million, but of course we don't know what penalty would have been -- the penalty would have been if the court had give $200 a day --

Justice Potter Stewart: But you asked for a 1,000?

Mr. Friedman: We ask for a 1,000 --

Justice Potter Stewart: And did you ask for a 1,000 for each one of these acquisitions?

Mr. Friedman: Yes we asked, there were three counts each count --

Justice Potter Stewart: So that's a $6,000 a day for the --

Mr. Friedman: $3,000 a day there.

Justice Potter Stewart: Yeah, I beg your pardon.

Mr. Friedman: $3,000 a day for a period from 1965 to 1966 up to the filing of the complaint in 1970.

It would be a very substantial penalty --

Justice Potter Stewart: Well over a million dollar.

Mr. Friedman: Well over a million dollars, but we do think Mr. Justice, that that's what Congress intended in the penalty provision.

Justice Potter Stewart: And as you point out, of course to the Court, the $1,000 is a maximum.

Mr. Friedman: Well, the $1,000 is the maximum, that's all we ask, but $5,000 is the maximum and not infrequently the courts when they do access penalties give less than the government asks for.

Justice Potter Stewart: Thousand would have been a maximum in this case.

Mr. Friedman: In this case, yes.

That was all we asked for.

Justice Lewis F. Powell: Mr. Friedman, has the Federal Trade Commission imposing daily penalties for comparable infringements as uses of orders consent decrees of this kind over the past years?

Mr. Friedman: Well, fortunately Mr. Justice, this is a relatively infringement of commerce, the violations.

There have been very few cases in which continuing penalties were sought.

I think the reason, the reason is that in most instances, these orders merely bar acquisitions without getting the approval of the Commission.

In most instances, what happens is the people come in and seek the Commission's approval.

If the Commission's turns them down, they don't go ahead with the transaction.

If the Commission gives them approval, they do go ahead, so it's been a relatively infrequent situation.

Justice Lewis F. Powell: In this case, it was Eighth Circuit --

Mr. Friedman: I don't know which came first but they were relatively simultaneous, I don't know exactly when the Eighth Circuit case --

Justice Lewis F. Powell: So far as you know, these are the only two cases?

Mr. Friedman: As far as I know, these are the only cases involving daily penalties with respect to these acquisition type orders.

There maybe other cases involving daily penalties.

Justice Lewis F. Powell: Is there any regulation under Commission or any other means by which authority might be notified that the Commission took this interpretation of the statue, that is that daily penalties were appropriate when an acquisition was made?

Mr. Friedman: The Commission's position, the Commission does not give ordinarily give notice to parties of this fact and I think the theory of it is Mr. Justice is that the parties are subject to the order.

They know they are prohibited from making acquisitions without getting the approval of the Commission and the Commission assumes that these parties, if they have a transaction which is at all dubious, we will come in.

Of course, in this case, the Commission did make inquiries of these people and there was an extensive investigation before the penalty suit was sought, but the Commission does not follow the practice of giving notice.

The theory and I am supposing the assumption say that the theory is that the order itself is notice to them that they cannot acquire directly or indirectly the whole or any part of the assets that the firm engaged in manufacturing and sale of bakery product.

Justice Lewis F. Powell: I understand that but it does seem to me as evidence by the fact that we are here today that it's arguable whether the statute means what the Commission says it means.

That being so, I was wondering whether there had been any sort of regulation or notice given in any other way?

Mr. Friedman: No, there is no regulation.

I would suggest Mr. Justice that this is a factor that the District Court might properly take into consideration in determining the size of the penalty to be assessed.

This Court has of course discretion to decide how large a penalty to be assessed.

I just like to refer to one thing that the Court of Appeals said in the Beatrice Foods case when it indicated its disagreement with the judgment of the Tenth Circuit in this case.

It said that the such a limited construction of the order is barring only acquisitions and not retention ignores the crucial effect of an acquisition and would render non-acquisition orders virtually meaningless.

Justice Harry A. Blackmun: That would indicate that the Tenth Circuit case came first, if it's --

Mr. Friedman: Oh yes, the Court of Appeals decision in the Tenth Circuit came first.

But I wasn't -- in answer to Mr. Justice Powell's question, I couldn't say which suit was filed first.

Now there are --

Justice Byron R. White: Well, it wouldn't make it meaningless, wouldn't make the acquisition order meaningless because I take it that divestiture is an appropriate remedy for a violation of an acquisition order?

Mr. Friedman: I would think so Mr. Justice and since this case, the Federal Trade Commission Act has been amended specifically to provide for equitable remedies in penalty suits.

But meaningless I think what the court was meaningless in terms of accomplishing the purpose of the firm, in terms of accomplishing the purpose of these penalties to provide enough of the penalty --

Justice Byron R. White: Define penalty?

Mr. Friedman: Define penalty, yes and of course, divestiture isn't a penalty, divestiture is merely from needs --

Justice Byron R. White: But it hurts.

Mr. Friedman: It hurts, yes but I don't think that the fact that someone is subject --

Justice Byron R. White: Well, one of the theory of that divestiture for violation of an order; is it because continuing it, and to hold it violates the order?

Mr. Friedman: It seems to me, it must be Mr. Justice, it must be because what you are trying to do is undo the violation.

The violation was the acquisition and the retention and the way you want to do it is to divest the illegally acquired asset.

Justice Byron R. White: Because holding is continuous to violate the order?

Mr. Friedman: I would think so, I would think so.

I think implicit, implicit in an order prohibiting an acquisition is that if you make the acquisition in violation of the order, that is a continuing violation.

It's all part of one thing.

Justice Byron R. White: But suppose if all of it's taken and changing a couple of words in your consent decree, is then to make it clear --

Mr. Friedman: Well --

Justice Byron R. White: -- now on --

Mr. Friedman: Well, there's a problem with that Mr. Justice from now on --

Justice Byron R. White: That they won't consent.

Mr. Friedman: They won't consent, and there are 67 of them.

There are 67 of these orders --

Justice Byron R. White: But since now that they know what your position is they shouldn't consent anyway.

Mr. Friedman: [Attempt to Laughter] And some of -- by the way, some of these orders are not consent orders, there are numbers we have set up in our Appendix, 10 or 12 of them that were orders ended in trial and litigation.

Chief Justice Warren E. Burger: But your view of the matter Mr. Friedman is that it's something like a Contempt Order of $1000 a day and you give the contemptnor the opportunity to terminate it whenever he wants to.

Mr. Friedman: Yes, I think the Second Circuit --

Chief Justice Warren E. Burger: But everybody understands that in a contempt order, without any ambiguity, isn't that not so?

Mr. Friedman: Yes, the Commission's position, the Commission is not included in these orders, the words or retention.

It has limited these orders both the consent orders and the litigated orders to the word acquisition --

Justice Byron R. White: Well, I think the issue here is whether it's continuing violation.

Mr. Friedman: Yes.

Justice Byron R. White: Because if it is a continuing violation of a statute is perfectly clear that each day is a separate violation?

Mr. Friedman: Yes, that's the question, that's the question in this case.

And the reason we think, it is a continuing violation is because of the purpose of the order, that is there's nothing wrong with the acquisition itself.

The reason, the acquisition is prohibited is because of the consequences of the acquisition.

The acquisition is the means by which a firm acquires a share of the market, and makes a change in the structure of the market and what is intended to be prevented it seems to us by both underlying Section 7 of the Clayton Act and by an order of this type is to prevent the kind of changes in the structure of the market that result from acquisitions.

Now, it just seems to us that it doesn't make much sense to say, yes, the order prohibits the acquisition and there's a penalty for that.

But once the order is violated and the acquisition is made, at that point, that's the end of it, that's the end of it.

Once you have acquired it, in effect you can continue to acquire it because the defendant theory seems to be, it's not a continuing violation.

Justice Byron R. White: But the judge on the other hand could accept to his theory and still fairly, flatly defended on to this, I think may give $5 a day.

Mr. Friedman: That might be an abusive discretion, I don't know Mr. Justice, but certainly, the judge has considerable discretion and all we are saying, all we are saying is that the judge should exercise that discretion, should not attempt to limit, not attempt to limit the penalties to the single $5000 and view just the acquisition as the offense.

Now, this case we think is a very different case from the Armour decision, on which the courts below relied and upon which respondent heavily relies in this case.

Armour, we think, involved a different situation, a very different situation than this one.

In Armour the question was whether the Greyhound Company would have violated the Meatpackers consent decree by acquiring Armour.

The judgment prohibited Armour from acquiring an interest in a food company.

Greyhound, according the Government's theory, was in a food company, and the Government's theory was that even though the language of the decree only prohibited Armour from having an interest in the food packing company, more broadly the purpose was to effect a separation between the Meatpackers and the food companies, that the decree was concerned with a relationship and this Court rejected that reading.

This Court said no, we think what that consent judgment meant, what that consent judgment meant was that it banned certain action by Armour, taken by Armour and did not ban action taken against Armour by Greyhound.

And it's in that context that this Court used the words which are relied on by our components and by lower courts that the meaning of a consent decree must be discerned within it's four corners and the consent judgment must be interpreted as written.

In Armour of course, the question basically was whether what Greyhound was proposing to do, violated the consent judgment.

In this case, that's not the question.

The courts below held that what Continental Baking had done, did violate the consent order.

The question in this case, is whether, after the violation took place, whether the continued holding of the assets, whether the continued holding of the assets constituted a continuing violation.

Justice Potter Stewart: Yes, whether the continued holding violated the consent order?

Mr. Friedman: That's right.

Justice Potter Stewart: The courts below held no, it didn't.

Mr. Friedman: That's right.

Justice William H. Rehnquist: But Mr. Friedman, supposing I commit the offense of robbery and take $100 from you.

Now, you wouldn't say that each day I keep your $100 I am committing events of robbery, would you?

Mr. Friedman: No, Mr. Justice, but I think that's a different situation, I think.

Justice William H. Rehnquist: Well, and the court could require me to make restitution just as you in answer to Justice White said that divestiture can be regarded, even though robbery is a one time offense?

Mr. Friedman: Yes, but the restitution it seems to me, that's a different thing.

That's to make hold the victim of the robbery, but here we are dealing with an order, which it seems to me, is not designed merely to protect one individual against the theft of his property.

Here the purpose of the order is to deal with competition in the bakery business and we think that's a very different situation.

Justice William H. Rehnquist: It dealt with it in terms of acquisitions?

Mr. Friedman: It dealt with it in terms of acquisition, but we think, inherent in the ban on acquisition is a further ban upon retaining any assets acquired in violation of that prohibition, that's what we think it is.

I should add two other distinctions, if I may, between this case and Armour.

In Armour all that you could go on, basically was the consent judgment.

Here what we have, it is the agreement of the parties, the complaint can be referred to and also this Appendix which the Commission had before it in dealing, in deciding to adapt the order.

Secondly, all that was involved in Armour was the interpretation of the judgment.

In this case, we have to interpret the consent order in the light of the statute specifically dealing and providing penalties for continuing offenses and we think that the Armour case does not support the decision below.

Chief Justice Warren E. Burger: Did I understand you correctly, in answer in response to Mr. Justice White, that this consent decree could have been made so clear and unambiguous that there wouldn't be any question to litigate?

Mr. Friedman: Well I --

Chief Justice Warren E. Burger: Except the amount?

Mr. Friedman: Well, it could have been.

That is the Commission could instead of using the word acquisition, it could have used the word acquisition and retention.

It has not done that Mr. Chief Justice and it hasn't done it I think because it felt it was unnecessary.

Over the years, and it's a large number of these orders containing the same thing.

Chief Justice Warren E. Burger: But did you not give some intimation or it was that from other some other source, I got the intimation that if it was made that clear, you wouldn't get consent decrees and --

Mr. Friedman: No, I did not say, I did not --

Chief Justice Warren E. Burger: You did not intimate that?

Mr. Friedman: I think, perhaps Mr. Justice White suggested that defendants might not consent, but we think that this is what this order means.

We think the notion that someone would say, I will not consent to an order, that tells me that if despite the ban I violated and retained the assets, I am only -- I am not subject to divestiture or subject to penalties.

I find it hard to believe that the parties to these orders didn't understand, didn't understand, that what these orders prohibit is certain acquisitions and an awareness of the fact that if they make the acquisitions and they keep the acquisitions they prohibited from making, they are acting illegally.

Chief Justice Warren E. Burger: Do we have an issue here about the construction of the document according to the authorship?

Mr. Friedman: I don't think so, Mr. Justice.

Chief Justice Warren E. Burger: The only consent decrees I ever had to deal with, except for the Government, were drafted and all of them had to do with, both for government and otherwise were drafted by the government much like a union contracts submitted?

Mr. Friedman: I don't know how this was drafted but I suspect as is true in most of these judgments, there was a great deal of give and take.

But, I think we gained --

Chief Justice Warren E. Burger: But on this part of the decree?

Mr. Friedman: No, I don't think there was any dispute.

I think this was kind of what it's always been assumed.

This is what had been done.

There are 67 of these outstanding, all of which say ban acquisition and there is no reference to retention and I think, it was just the Commission and I am sure assumed that --

Chief Justice Warren E. Burger: But in any event your point is there is no ambiguity to resolve?

Mr. Friedman: That's right, we think fairly read the word acquisition includes retention.

I just want to say one other thing before reserving the rest of my time for rebuttal.

The respondent makes three other arguments which it says it before the court.

They are offered allegedly as basis for affirmance of the judgment of the Court of Appeals.

Two of them, we have dealt with them extensively in our reply brief, we don't think they are properly before the Court because of the respondents' failure to file a cross petition, two of them don't relate to the question of whether or not, hence multiple penalties are available but only to the period for which the penalties would run, that is whether the multiple penalties could continue after ITT took over continental baking or for the period after which the Commission had concluded that there was a violation.

The third contention is that the actions of ITT in this case, the Continental in this case, this transaction didn't violate the order at all.

That issue was resolved against the respondent by the Court of Appeals, but it now appears to be saying as well somehow we should be permitted to argue in support of the judgment that no penalty should have been attached, therefore you shouldn't attach higher penalties.

We think that that is not a permissible method of affirming the judgment, that contention does not seek affirmance of the judgment but in effect seeks reversal of the judgment.

We think the decisions of this Court have made it very clear that respondents can argue points, the effect of which would be to support the ruling below, that is you can support the decision of the lower court on grounds not given by the Court of Appeals, but you can't come in and say we support on the grounds that it's wrong.

That is not supporting it, that is seeking to a return.

Justice Harry A. Blackmun: Mr. Friedman, isn't that precisely what the government did in the Audi case the last session?

Mr. Friedman: As I recollect Mr. Justice in the Audi case, it was contended that the question presented was broad enough to cover the various points that the government made, that was my recollection.

Chief Justice Warren E. Burger: That was the contention.

Justice Harry A. Blackmun: As I am sure your opposition is contending here.

Chief Justice Warren E. Burger: Mr. Schafer.

Argument of John H. Schafer

Mr. John H. Schafer: Mr. Chief Justice, may it please the Court.

What this case involves is an attempt by the government to secure a retroactive rewriting of a consent decree which prevents only acquisitions, so as to permit the imposition of daily penalties in addition to those that already have been imposed, for something that's not barred by that consent decree, that is the retention of acquisition of access required.

The government's position flies directly in a face in our judgment of the Armour decision of this Court, the Hughes decision, the Atlantic Refining decision.

And our case I believe is a fortiori to those cases because contrary to those cases which arose basically in terms of a construction of those consent decrees, here we are dealing with a penalty action in which the government is seeking as I say, retroactively to interpret this consent decree so as to impose multi-millions of dollars of penalties on ITT Continental Baking Company.

So the underlying rationale of this Court's decisions prevent that and I think that if that rationale is ever to be applied, it should be applied in this kind of a case where we are dealing not with a prospective interpretation of the consent decree, what does it mean, what we are dealing instead as I say a penalty action.

The government's position and our position would substantially weaken the anti-trust, another enforcement activity because as we all know, much of anti-trust enforcement is conducted by way of consent decrees and consent judgments as true with the STC and other agencies as well.

If regarding to now as the government urges you to do to import into consent decrees, vague concepts of purpose, purpose of the underlying Statutes, purpose of the consent decrees, you are going to instead of resolving litigation through consent judgments, you are going to foster litigation.

Chief Justice Warren E. Burger: Just how do you separate the purpose and objective of the consent decree from the underlying statutes on which it would --

Mr. John H. Schafer: Well Mr. Chief Justice, what Armour teaches, what Atlantic Refining teaches and what Hughes teaches, is that you look at the document and as written, it's a contract composed between two opposing parties designed to do nothing but to eliminate the litigation.

It doesn't have by itself any purpose and if there is a statutory purpose, that's irrelevant.

What we are dealing with is a construction -- excuse me.

Chief Justice Warren E. Burger: Even when you construe contracts, even if the lawyer, the draftsman haven't been careful enough to put in all the necessary desirable preambles, it doesn't stop the court from looking at the totality to interpret the language of the contract, does it?

Mr. John H. Schafer: If there is ambiguity Mr. Chief Justice in a contract, that's true of course under Standard Contract Law, it is permissible for the court to look at the background of the negotiations.

The government doesn't claim any ambiguity here.

It simply wants you because of what it says as the purposes of this consent decree to add some words to it.

It wants you to say the consent decree doesn't proscribe acquiring, that it proscribes acquiring and holding or acquiring and owning or any other language you want to say.

Justice Byron R. White: Are you suggesting that fair reading the consent decree by defendant would be that you can make an acquisition, violate the order and at the maximum it will cost you $5000.

Mr. John H. Schafer: On this decree, that's the fair reading --

Justice Byron R. White: Sole price for violating the decree.

Mr. John H. Schafer: No, not the sole price, because as you pointed out, divestiture is a very real price.

Justice Byron R. White: As far as the fine is concerned, it's $5000 price, that's all for violation?

Mr. John H. Schafer: That would be true, that would be true.

The government can avoid that by writing a different consent decree, but that's true.

The sole penalty price would be the 5000, that's true, now 10,000 under the new statute, but you do have divestiture.

Justice Byron R. White: I take it, you would probably also argue that if both of you had known this is what the decree was supposed to mean, the government would have written it that way in the first place, they would have --

Mr. John H. Schafer: Unless they're trying to play tricks on us, I would assume that they would write it that way, yes.

As I say, the government in its brief, it didn't do it today but in its brief it argues that unless you construe this decree our way it's going to be a toothless, unenforceable decree and that's not so.

Not only is the penalty involved, but that's really seems to me tantamount to arguing that Section 7 of the Clayton Act is toothless and unenforceable.

The only belief there is divestiture.

No one to my mind has ever suggested that Section 7 of the Clayton Act is unenforceable.

Justice Byron R. White: (Inaudible)

Mr. John H. Schafer: It was denied, the government did not make assuring warning divestiture in the judgment of this Court.

Justice William J. Brennan: Could the government do that again in this very case, and now make a better shot and go back?

Justice Byron R. White: Can they bring an independent action?

Mr. John H. Schafer: Oh, surely they can charge these with the Section 7 violations, no question about that, yes.

Justice Byron R. White: And theoretically they can make a difference?

Mr. John H. Schafer: That's quite right and they are arguing and been sustained in the courts below that they don't even have to bring Section 7 in order to ask for divestiture.

Justice Byron R. White: Why can't they try that over again, I guess they tried out the -- that doesn't your matter, it's important to do.

Mr. John H. Schafer: Well, I don't know if you really would say Mr. Justice White that they really tried it out, they claim they were denied but they never made -- in the District Court's judgment they never made a showing on divestiture, they had it in their complaint.

Justice Byron R. White: They got a Section 7 (Inaudible)

Mr. John H. Schafer: I haven't thought it through, but I think that you would have different issues, I think you would have different issues.

Now, I should say -- let me go if I may to the factual framework of these so called acquisitions.

These are simply supply contracts.

These are contracts by which Continental agreed to supply these former producers of bread and rolls that Continental would supply them their requirements of bread and rolls, that those foreign producers would distribute those bread and rolls in there trading areas.

They were pure requirements contracts or distribution agreements whatever you want to call them.

Mr. Friedman expresses some -- they're called sales agreements.

Well they are sales agreements, they are agreements to buy and sell bread, that's all they are.

Justice William H. Rehnquist: But the bakeries acquired, agreed not to bake anything more of their own, didn't they?

Mr. John H. Schafer: Mr. Justice Rehnquist, that comes out of a stipulation we agreed, the lawyers brought up stipulation to resolve this dispute and we agreed to stipulate that it was the understanding of both sides that those former producers would stop selling and what that simply meant was that we knew when we took on the obligations to supply them that they were no longer going to supply themselves.

We did not bargain for that.

Justice William H. Rehnquist: It was a better deal for them to get it from you then to keep making the --

Mr. John H. Schafer: The economics of this industry are that the small producer is increasingly non competitive.

These three companies in the Missoula, Montana, in Cheyenne, Wyoming and in Durango, Colorado concluded independently and for their own reasons as stated in the appendix to cease the production of bread.

They did however want to stay in the bread business.

So, they agreed with Continental to purchase Continental bread and to sell it in their trade areas.

They remained independent, competitive entities.

Justice William H. Rehnquist: Where does Continental make the bread that it supplies to Missoula and Durango and Cheyenne?

Mr. John H. Schafer: The Missoula bread came out at Spokane bakery, Spokane, Washington, the bread for Durango and Cheyenne came out of it's Denver bakery.

These companies remained independent, the sole-owned companies.

They own their own assets.

They own their own trucks, they hire their own personnel, they own their own sales roots.

Their customer lists -- there are number, they owned all their assets, they were not acquired by Continental.

There is nothing here, but a distribution agreement, a requirements contract, a sales agreemnt, whatever you want to call it.

Justice Lewis F. Powell: Mr. John H. Schafer, did the agreements with Continental prohibit these three smaller companies from producing bread in the future?

Mr. John H. Schafer: No, it did not Mr. Justice Powell.

Justice Lewis F. Powell: They were free to do that, isn't it?

Mr. John H. Schafer: They were free to do that, yes.

The fact is that Shepherd Baking Company, after this record closed, Shepherd Baking Company in Durango, for its own independent reasons concluded to switch suppliers, so that Continental no longer supplies Shepherd in Durango.

Justice Byron R. White: You did stipulate that the understanding was that the companies would not continue to produce?

Mr. John H. Schafer: Yeah, we knew they were no longer going to be producing, they told us that.

Justice Byron R. White: And that was the understanding -- the fact it may not have been explicit?

Mr. John H. Schafer: It was not an understanding in a contract bargained for sense Mr. Justice White.

It was simply our understanding that as a matter of fact, these companies were no longer, for their own independent reasons, going to bake bread.

Justice Byron R. White: You had – if you would have thought they were -- if you had it -- unless you had thought, they were not going to make bread, you thought (Inaudible)

Mr. John H. Schafer: They would have never had no interest whatever in buying Continental bread if they are going to bake their own bread.

Justice William H. Rehnquist: Would a resumption of production on their part been actionable so far as Continental was concerned?

Mr. John H. Schafer: Not at all, not at all.

Justice Lewis F. Powell: Mr. Schafer --

Chief Justice Warren E. Burger: Did Continental agree to supply all their requirements?

Mr. John H. Schafer: It did agree to supply all their requirements.

They were free to purchase bread from other -- items from other bakeries, but Continental had the right to approve that, and the record shows that on some occasions, application was made to purchase other products from other bakeries and that approval was granted.

Justice Lewis F. Powell: Mr. Schafer, you have mentioned the economics of the bread business. One of these companies had sales of $300,000 a year.

What would the profit margin among the sales of that magnitude be in the bread business?

Mr. John H. Schafer: Well, today it would be a substantial loss.

I don't if the record reflects that, that's not high volume.

Justice Lewis F. Powell: I understand.

Mr. John H. Schafer: And it would depend upon the economies of scale that he could achieve in his producing plan.

Now with that kind of volume, he probably had production costs running something like 75% of his total wholesale prices and you are not competitive at that level.

You have got to be producing the bread, it's something like 45-50% of the total price that you sell it for and the rest of your, and then your distribution costs account for another 40% or so and then you are looking at the maximum or 50% profit.

But a small volume baker is running very high production costs, and for that reason, these bakers, as I say independently concluded to withdraw from the production end of the business, but to engage as independent companies in the sale of the bread.

Justice Harry A. Blackmun: Mr. Schafer do you think the Eighth Circuit's Beatrice Food case is at all distinguishable from your case?

Mr. John H. Schafer: I think that the underlying issue of violation is much – is clear, relatively clear there Mr. Justice Blackmun.

We contend we did not violate the order; I don't know, I don't make that contention as to Beatrice.

I think there was an acquisition there.

We are contenting there was not, but the continuing penalty question is not distinguishable in our judgment.

Justice Potter Stewart: -- that issue.

Mr. John H. Schafer: It's a clear conflict Mr. Justice Stewart on that issue.

The Beatrice Court adopted in toto the arguments being urged upon this Court in this case and that were urged on the court in the Tenth Circuit case.

They adopted in toto the government's argument that to enforce the purpose of this consent decree, you have got to construe this transaction, this consent order in the way we want you to.

And as I say, that in our judgment is contrary to all of the decisions that this Court has rendered on the matter.

Now we also contend that the government, even if you were to look to purposes, even if you contrary to Armour and the other cases, if you were to agree with the government that you could look at purposes, it doesn't help the government here at all, because this was a complaint directed against the act of acquisitions.

The Section 7, the Clayton Act, under which the complaint was filed, of course reads on acquisitions.

You are concerned about concentration and what not, is completely handled by a ban against acquisitions.

The retention argument just doesn't make in our judgment any sense; you don't need that.

If I acquire my competitor or if I acquire my competitor's supplier, or my competitor's customer, that act of acquisition is what Section 7 reads on, and if there is any adverse impact on competition, it's that act.

It doesn't matter whether I scrap that acquisition and sell it to the junk man, or whether I retain it.

If I buy my competitor, he is out of business who is no longer in competition.

So it's the acquisition that the --

Justice Byron R. White: If you don't sell it to the junk man and don't scrap it, and you continue to hold it and operate, I suppose that you might be entitled and maybe forced to divest?

Mr. John H. Schafer: That's true, that's true.

Justice Byron R. White: On the theory that you are -- at the time of the divestiture, you are still injuring competition.

Mr. John H. Schafer: In the penalty action, you mean we are not in Section 7 case.

Justice Byron R. White: I mean Section 7.

Mr. John H. Schafer: Yes, I think that's right, you are still injuring because the act that you committed back in 1917, if you will, the act that you committed at the time of suit can be said to be causing an adverse impact on competition.

Justice Byron R. White: Divestiture is normally not ordered if at the time of the order, there's the -- nobody is being hurt?

Mr. John H. Schafer: Well, I suppose there is no violation.

Justice Byron R. White: Well, my question is what's the theory on which a divestiture is ordered?

Mr. John H. Schafer: As I understand the theory which comes of course out of this Court's decisions that divestiture is almost mandatory, where a violation of Section 7 is found, divestiture is virtually mandatory, because that's the only hope you have of reconstituting the industry before the illegal act occurred.

Justice Potter Stewart: And the divestiture is the antonym of acquisition, that's the way you unring the bell of acquisition is by divestiture?

Mr. John H. Schafer: That's the good word, yes, that's my understanding of the concept.

Justice Byron R. White: But you don't order divestiture at the time the remedy question comes up, there is no longer an injury to competition?

Mr. John H. Schafer: That may be, I am having hard time understanding how that could then be a violation Mr. Justice White, if there is no --

Justice Byron R. White: Well it was at the time?

Mr. John H. Schafer: Well, at the time of suit.

The question is whether or not at time of suit, there was adverse impact on competition.

If they were none, I take that there'd be no violation of Section 7.

If there were, the routine solution is divestiture to put the industry back to where it was before.

Now, in our judgment the government position here, as I guess I have suggested violates the two basic principles of consent decree construction, settled by Armour, settled by Hughes and other cases.

One is that the language is to be construed as it's written, it's like a contract.

And this language is the government really admits in its oral argument, and in its briefs, this language has to be changed in order to support this claim for daily penalties.

It has to be changed to read beyond acquisition, it has to incorporate the concept of holding and retention, and that is not construing then the consent decree as it was written is construing in a different way.

The second tenant of construction is that this Court's decisions instruct us that you don't as I say look to the purposes underlying the statute or the purposes so called underlined the consent decrees.

As I have said that the government's position simply doesn't support its claim that you look to our concentration.

You saw when you concerned about concentration by banning the act of acquisition, that's what this order did.

There is no basis in this record certainly for a so called concern on the part of the government, that if you don't construe this consent order to afford the basis for daily penalties that you are going to have flagrant violations of these consent decrees.

As Mr. Friedman admitted, as far as everybody knows there is only been two situations like this come up in all of the years of Clayton Act enforcement.

Section 7 as I have said, seems to me to be self enforcing even though the only remedy there is divestiture, And anyway such fears in enforceability or un-enforceability of consent decrees are really irrelevant to how you construe a consent decree. As we struck the bargain in 1962, we labored over it.

The government wanted the 20-year ban, we wanted the 5-year ban, we ended up with a 10-year ban.

The government wanted to proscribe acquisitions of any companies engaged either in the production or the sale of bread and we didn't want that, because we wanted to be free to buy, acquire companies without violating the order, that were engaged only in the sale of bread, because of that time there were many such independent little companies strung around the country, who were basically one man shows, and who from time to time came to Continental and wanted to be acquired because they were getting old or something.

So we bargained for that and we changed the word production or sale in the order to production and sale.

So these are very important words that we bargained of.

As the District Court found this, there was a reasonable basis for reading the order the way we read it, not to ban these transactions.

There is no basis here to say that this was a flagrant violation of this order.

As I have said there had been no record except for the Beatrice case of any other situation like this coming up.

And moreover these so called fears of the government about flagrant violations continuing can surely be amply accommodated by changing the outstanding orders they have through proper procedures with proper hearings, and by writing new orders which read on the situation as they want this one to read.

As I have said that in our judgment, the government's argument here is short sighted.

Consent negotiations, consent decrees, and consent judgments are extremely important to the antitrust enforcement program.

They are important to the -- I know the SEC and to other government agencies, and if we are going to now import all kinds of vague concepts of purpose into these consent decrees, we are not going to -- we are going to certainly chew any enthusiasm, anybody might have for disposing a litigation and abandoning the right to trial by coming up with a consent disposition of a case.

The government, turning if I may briefly to the question raised by the government as to whether or not we are permitted or may should be permitted to raise the other issues that we have raised in this case, for many years, at least up through the American Express decision this Court routinely held as consistent with appellate practice, that a party can present any argument in support of the judgment below.

The government now claims this Court has gone away from that standard and has adopted new standards.

Government now claims that we may not without cross-petition for certiorari, may not raise an issue where the logical impact of that issue would be to secure reversal below even though the party isn't asking for it.

We have cited the Court to Mr. Stern's article in Harvard Law Review on this matter of practice.

It says virtually everything there is to say.

Justice William H. Rehnquist: But it says our Strunk opinion is wrong too, doesn't it?

Mr. John H. Schafer: It says the Strunk opinion and others can be read in a number of ways.

It says they can be read, so as not to bar a party from raising issues in support of judgments below and Mr. Stern of course urges this Court to make that clear.

He does point out the tremendous burden that would be imposed upon this Court, and upon the Solicitor General's Office, and upon parties if they were required to file what really be useless anticipatory petitions for certiorari.

In this case isn't a good example.

We do not know that government was going to petition for certiorari until after the period of time expired in which we could petition, because the government, as is not unusual got it an extension of time at the last minute.

We got notice of that in the mail after the time had run.

So we didn't have an extension they did, and they filed a petition.

Now to protect ourselves, we would have been, under the government's interpretation we would have to file a precautionary petition for cert with this Court.

I don't see any real reason to require that.

There is no policy judgment that I can figure out that would warrant that because in our response to the government's petition we listed in our brief in opposition, the points that we would raise or feel were relevant, in the event the case came up.

The government thereby was not prejudiced when they prepared this brief on the merits, it knows all the issues that we planned to present, it can address itself to it.

So I don't think that there is any reason to insist upon these -- really what, without a strict rule of practice would be unnecessary petition for certiorari.

Justice William H. Rehnquist: How about our control of our own docket.

Now when we grant a petition for certiorari we know that the issue is going to be limited to one or two issues.

Now we could have a cross-petition and deny that, thereby indicating we just don't want to consider those issues.

You are suggesting I take it, that if a cross-petition is filed it would be automatically granted.

Mr. John H. Schafer: No, I am not Mr. Justice Rehnquist.

I said that it seems to me the proper practice is as we did here to list in our brief in opposition to the Cert Petition, those issues which we feel the Court should reach if it gets into the case.

Now the Court at that time could easily say in its grant, we are limiting this grant to these issues.

The Court is informed in other words and the Government is informed in other words without a labeled petition for Certiorari, the Court and the Government are informed that the issues sought to be presented and the Court can at that time or later on control its own jurisdiction by concluding that the issues that one seeks to present are not cert worthy issues on their own.

I think these issues are clearly cert worthy that we are trying to present.

The underlying issue of whether there was a violation here or distributorship arrangements, requirements contracts normally --

Justice Byron R. White: [Inaudible]

Mr. John H. Schafer: Well, they are important -- the question is Mr. Justice White, whether or not a --

Justice Byron R. White: [Inaudible] you decide it on your own --

Mr. John H. Schafer: Oh yes!

We were content to leave the case where it was, it didn't warrant to coming up here for that penalty, that's true and the order had expired, order has long since expired.

There was no continuing dispute here that warranted our seeking this Court's attention.

As I say that the issues we are seeking to present in our judgment are cert worthy.

It is a requirements contract normally thought of if at all under Section 3 of the Clayton Act, is that an acquisition of the sort that Section 7 of Clayton Act reads on.

Is the commission permitted to reach a conclusion that a party is incurring daily penalties of up to ten thousand, in this case thirty thousand dollars per day because the statute has been amended, is it permitted to do that without putting the party, the respondent on notice that it is in jeopardy.

I think that is a very serious issue.

Several District Courts have agreed with us on that.

I think it's clearly an important issue for this Court to reach.

If it disagrees with us that daily penalties may be imposed here, if the Court doesn't -- if the Court in other words adheres to Armour and adheres to Hughes and Atlantic Refining and the others, of course these issue are not reached.

It's only if the Court should disagree with us and conclude that daily penalties may be asserted, then we feel that the question has to be reached that was there a violation here, is the Commission permitted simply the stand lightly by and let a respondent pile up penalties.

And thirdly, is ITT Continental Baking Company a successor of Continental where there is in the consent order no successors and assigns language.

Armour of course flatly says, that where there is no successors and assigns language in a consent decree, the decree is not binding on successors and assigns.

I would think that would be dispositive of this --

Justice Lewis F. Powell: Mr. Schafer is there any difference between you and Mr. Friedman as to the maximum amount of the possible penalty on the Government's theory?

Mr. John H. Schafer: In their complaint they asked for thousand dollars a day, Mr. Justice Powell.

The Court, for reasons that were not stated assigned to penalty of five thousand a day for one days violation for two different transactions, without an amendment to the complaint.

We did not oppose that.

I think, frankly I think the government could have put in a proforma complaint amendment and cured that.

The statute now permits ten thousands dollars per day, it's been amended since.

Now, if that amended provision is applicable to this case and I suppose it is retroactive, you are looking at a possible penalty claim of upwards of twenty millions of dollars in this case.

Thank you very much.

Chief Justice Warren E. Burger: Thank you Mr. Schafer.

Thank you Mr. Friedman.

The case is submitted.

Featured:

United States v. Marine Bancorporation - Oral Argument

Thu, 23 Aug 2012 18:26:37 +0000

Case:

United States v. Marine Bancorporation

Media File:

73-38_19740423-argument.mp3

Related Transcript:

73-38_19740423-argument

Transcript:

Argument of Friedman

Chief Justice Warren E. Burger: We will hear argument first this morning in 73-38, United States against Marine Bancorporation.

Mr. Friedman, you may proceed whenever you are ready.

Mr. Friedman: Mr. Chief Justice and may it please the Court.

This is a direct appeal from a judgment of the United States District Court for the Western District of Washington dismissing after trial a government civil anti-trust suit challenging a bank merger under Section 7 of the Clayton Act.

The acquiring bank, the National Bank of Commerce at Seattle is both the second largest bank in the State of Washington and the second largest bank in the City of Seattle.

The acquired bank, the Washington Trust Bank, is the third largest bank in the City of Spokane.

It is conceded that the two banks are not in competition with each other because the National Bank of Commerce does not operate in the City of Spokane.

That is in the metropolitan area of Spokane, which the District Court held to be the relevant geographic market in this case.

The theory upon which the Government challenged this merger was that the National Bank of Commerce was a significant potential entrant into the City of Spokane and that by going in for through a major firm in Spokane, the effect of this maybe substantially to lessen competition by eliminating an important potential competitor.

The Court had a similar question before it last term in the Greeley Bank case of Colorado in which by an equally divided Court, it affirmed the District Court’s judgment in that case dismissing the Government’s complaint.

And the United States has brought this case here and brought the question back to the Court because a major effort of the Department of Justice in recent years has been attempting to stop what we consider a very serious trend in the banking industry under which large banks headquartered in the major cities of the state are acquiring market leaders in local and regional markets.

This is a relatively new phenomenon in banking.

In the 1950’s, we had a great wave of bank mergers in which bank in the same city who are competitors would combine.

That trend basically stopped after this Court’s decision of Philadelphia Bank case.

And what is been happening in recent years is that more and more throughout the country, banks, the major banks have been around the state acquiring a large number of significant banks.

And the effect of this trend is to bring more and more of a state’s banking resources under the control of a small number of banks.

In the State of Washington itself, for example, 75% of all the deposits are now controlled by five banking organizations, even though there are some 90 different banking organizations in the state.

In some states, it’s even more concentrated, a smaller number of banking organizations hold a larger percentage of the shares of the market.

And the government believes that if this trend is permitted to continue, the inevitable result will be a significant and serious diminution of competition in the banking industry.

Since 1968, the Government has brought 20 cases in which it has challenged bank acquisitions on the theory that it eliminated the potential competition which the acquired bank was likely to supply in our view in the market where it made the acquisition.

Now, let me just briefly refer to --

Justice Potter Stewart: It’s the acquiring bank?

Mr. Friedman: The acquiring bank.

Justice Potter Stewart: Right.

Mr. Friedman: That the acquiring bank is the substantial competitor and it eliminates potential competition which it would supply in the market into which it goes through the acquisition.

Now let me just briefly refer to the facts.

The National Bank of Commerce is a very large bank.

As I have indicated, it is the second largest bank in both the State of Washington and in the City of Seattle.

It has net assets of $1.8 billion and its deposits are more than $1.6 billion.

It has approximately 22% of all the bank deposits in the State.

It operates a 107 branch offices.

The acquired bank, the Washington Trust Bank, is the third largest in the City of Spokane.

It has total assets of $112 million, deposits of $95 million and has eight offices in the City of Spokane.

So, it itself is a very substantial bank.

It is a prosperous bank.

In the five-year period from 1966 to 1971, its totaled deposits increased 60%; its total loans increased 70%.

It’s considerably a well-managed bank.

It pays very high salaries.

The Spokane area in which the bank operates is itself a prosperous and growing area although admittedly not growing as fast other areas of the State of Washington.

The District Court found in the parties who are in agreement that commercial banking is the relevant product market in this case.

Commercial banking in the State of Washington is extremely concentrated.

As I’d indicated, the five largest banks have 75% of all the deposits and additionally have 60% of the banking offices.

The two largest banks, one of which is the National Bank of Commerce and the other is the Seattle First National Bank together, have approximately half of all deposits and more than one-third of all the banking offices.

This pattern of concentration is repeated throughout the state but not surprisingly when you get into smaller cities, it becomes even more concentrated, and in Spokane, the three leading banks have 92% of all the deposits and loans, and there’s almost as higher concentration in the Eastern part of the State of Washington which is geographically separated from the Western part of the State by a very high mountain range.

Now, in 1971, the two banks submitted to the comptroller an application to merge the Washington Trust Bank, the Bank in Spokane, into National Bank of Commerce, the Seattle Bank and the second largest bank in the State.

In accordance with the requirements of the statute, the view’s resort of the two other bank regulatory agencies and the Department of Justice, all three of these groups advised the comptroller that in their view the merger would substantially lessen competition primarily because of its tendency to increase concentration in the state.

The comptroller, however, approved the merger and the Government filed this suit, which had the effect of staying the merger.

After a lengthy trial, the District Court from the bench gave a brief opinion in which he announced that he was holding against the Government on all of its claims and would dismiss the suit.

Following this in accordances with his request, the defendants submitted detailed proposed findings which the District Court adopted without any change.

The theory of the Government’s case was that the National Bank of Commerce could end the Spokane by alternative means, specifically either by making a so-called toehold entry of a smaller bank or by, in effect, opening a branch through a procedure that I will discuss shortly known as sponsoring a bank and subsequently then acquiring it.

The District Court made the following rulings in rejecting our case: First, the District Court held that although there is a high level of concentration in Spokane, nevertheless the market is competitive.

This is on the basis of expert testimony that in fact there’s a great deal of competition in the market because of the large number of sub sizable banking organizations.

Then the District Court held that there was no reasonable likelihood that the National Bank of Commerce would end the Spokane either by sponsoring the bank or by making a toehold acquisition and that this merger was the only way the bank could get in.

Then the Court held that there was no reasonable likelihood that the Washington Trust Bank itself might expand outside of the Spokane region.

This was another theory on which we urged that the merger would substantially lessen competition by eliminating potential competition or that the bank would join other banks in forming a new holding company, a smaller holding company that might compete against the large banks in the state.

And finally, the Court held that even if this merger had, as he discussed, the Court describe that some oral of the anticompetitive effects which the Government alleged nevertheless those effects would clearly outweigh by the effect of the merger in meeting the convenience and needs of the Spokane community.

I will discuss these four grounds in the course of my argument.

Now, last term in the Falstaff case, this Court left open the question as it phrased it, whether a merger would violate Section 7 on the ground that the acquiring company and I now quote “could but did not entered de novo or through toehold acquisition and that there is less competition, then there would have been had entry been in such a manner.”

We think this case presents that question and we urge that the Court should answer it affirmatively, and then, on the principle, it should hold that this merger does violate Section 7.

Chief Justice Warren E. Burger: Excuse me.

At some point, I take it, you will discuss the relationship between this transaction in the Falstaff case an unregulated business and a banking, the National Bank, which is regulated.

Mr. Friedman: Let me deal with that right now Mr. Chief Justice.

It is true there is regulation of banking, but this Court in the Philadelphia Bank case has indicated its view that it thinks that the basic principles, the governing Section 7, particularly the stress on market structure and concentration, are equally applicable to banking, even thought it is a regulated industry.

The fact that there is regulation means there is not quite the same ease of entry into the market as in an unregulated industry.

But nevertheless, we still think it is important to preserve -- to preserve these alternative sources of competition.

And, we don’t think that the fact that the comptroller has indicated that he doesn’t think he would approve a merger on the basis on what he now knows without any application or in this case that he’s assistant, the Regional Administrator testified that he didn’t think there was any reasonable likelihood that a new charter would be granted.

We don’t think that that is enough to overcome the significant effects upon concentration in banking that exist, and that for which we think this kind of entry poses the only possibility of some help.

The same argument, of course, was equally applicable in the Philadelphia Bank case, in the Phillipsburg case where, again, you had to have regulatory approval before the merger would take place.

Now --

Justice Potter Stewart: Was there a legislative change after the Philadelphia Bank case?

Mr. Friedman: There was a legislative change Mr. Justice to this extent that after the Philadelphia Bank case, Congress, in the 1966 Bank Merger Act, added the convenience and needs defunct.

But at the same time, at the same time, Congress indicated that it wished bank mergers to be tested under the standards that had adhibit to been applied under the antitrust laws under Section 7, and we think that what Congress did in the 1966 amendments was to say that you continue to evaluate competitive effect the same as it’s always been evaluated.

And I will mention in a minute, this Court has always stressed the structure of the market based on concentration ratios.

But then said, if it turns out that a merger has the prohibited anticompetitive effect, then and only then, it’s the court to consider whether this otherwise a illegal merger is saved.

Justice Potter Stewart: By convenience and needs.

Mr. Friedman: By convenience and necessity, yes.

Convenience and needs, I am sorry.

Justice Byron R. White: Mr. Friedman, if you lose on the question, which you said that it was left open in the Falstaff, is that the end of the case, as far as you are concerned?

Do you say this case poses that question?

Mr. Friedman: Yes that --

Justice Byron R. White: If you lose on the question, should the judgment be affirmed?

Mr. Friedman: No Mr. Justice --

Justice Byron R. White: Alright, that’s all what I want to know.

Mr. Friedman: We’ve discussed this in our brief that we also claim that this was a perceived entry but the major thrust of this case in the District Court was on this theory.

We are not conceding that if we lose on this theory, we lose the case, but this is the theory which was the major focus in this case.

Justice Potter Stewart: There are two aspects, there is the actual potential entry and then there is the perceived entry, is that right?

Mr. Friedman: That’s right.

Justice Potter Stewart: And they are separate.

Mr. Friedman: And the question which is left open in Falstaff was the former.

But we do not concede that if the Court would reject that theory that we lose this case because we’ve indicated in our brief.

We do think there was evidence showing that this bank was to perceive the entrant.

And we also have the other point which I’ll just mention, I’m alluded to previously that if this -- the effect of this merger by making Washington Trust a part of the National Bank of Commerce would be to eliminate whatever potential Washington Trust has as a large significant independent bank and the Spokane market of expanding beyond that area and perhaps combining.

Now, the reason we think that the question left open in the Falstaff case should be resolved in favor of the United States position is the whole intent of Congress when it amended Section 7 in 1950 to strengthen, and what Congress was concerned about was what it viewed as the rising increase in concentration in the American economy.

Congress recognized that more and more proportions of the economy were being brought under the control of a small number of large firms.

And Congress, when it strengthened the statute in 1950, was concern about the long-range prospects of the American economy.

It was not looking unlike the Sherman Act to the immediate effect whether a particular transaction restrain commerce; it was looking to the long-range effects.

It wanted to basically to channel business growth into procompetitive channels to stop the practices by which American business was gradually taking more, bringing more and more of the economy under control.

As this Court stated in the Philadelphia Bank case that one premise of Section 7 was that corporate growth by internal expansion is socially preferable to growth by acquisition.

Now, when a market becomes concentrated, what happens according to the economists is that the vigor of competition tends to diminish.

You have a small number of firms in the market; you have accommodation, parallel practices begin to develop.

And the only real hope, frequently, for even deconcentrating the market or shaking it up, so that there will be more competition in the market, is if someone new comes in.

And someone new comes in, in a way that is going to force this new firm to compete vigorously by what, an antitrust jargon is called de novo entry, that is they come in anew either by themselves starting the branch of the business or alternatively by making a toehold acquisition, getting a small segment of the market which enables them to get into the market and from that base by vigorous competition growing and expanding.

But it is essential to stress that in that situation, you have a new firm, a new firm, coming in to the market.

And when a firm that is on the outside and is a likely entrant by one of these two methods, comes in by applying a large share of the market, 22% in this case you’ve not only eliminated the potential for bringing some competition and hopefully eventual deconcentration into this market, but all you have done is substitute one for the other.

So, you’ve not only lost an additional competitor in this process, but you’ve eliminated the potential for improving the competitive situation in the market.

Now, as I have indicated in my response to the Chief Justice, we think that these principles are equally applicable --

Justice Harry A. Blackmun: You have eliminated the competitor in the market?

Mr. Friedman: No, you’ve eliminated the potential of --

Justice Harry A. Blackmun: Well, you only done one thing, you have just eliminated the potential of a new entry.

Mr. Friedman: Of a new entry.

Justice Harry A. Blackmun: You just have a different competitor in the market.

Mr. Friedman: You have a different competitor in the market but you have no new competitor.

You’ve eliminated Mr. Justice the potential.

Justice Harry A. Blackmun: He may act differently but for your purposes, you’re assuming that he will be exactly the same?

Mr. Friedman: We say basically there’s been no change in the obstructure of this market.

Justice Harry A. Blackmun: Yes.

Mr. Friedman: It’s the same as it was before with four or five or whatever number it is.

But although the structure of the market hasn’t change, the structure surrounding the market has changed because the one on the outside when they come in has been eliminated.

Justice Lewis F. Powell: Mr. Friedman, a new competitor would be a stronger bank, what is the Government’s position as to whether or not competition with the new bank in there would be more effective than it is at present?

Mr. Friedman: Well, Mr. Justice, we think that Congress in Section 7 has made the judgment that you cannot justify an acquisition coming into a market in the normal situation on the claim that you will be able to compete more effectively against the large bank.

We think if it all the claim that the new bank will be a more effective competitor in the market is what Congress intended to be studied under the convenience and needs defense, but that that is, we think is a relevant factor in determining the initial threshold question whether there has been anticompetitive effects.

And as we develop in our brief and I hope to get to, we think in this case that the so-called benefits, so-called benefits, which the District Court found this merger would bring to the City of Spokane, those benefits we do not think constitute the kind of benefits that Congress intended to recognize.

Justice Lewis F. Powell: You lose me a little bit when you say that the -- and the action said the opposition is that the Government is interested in improving competitive conditions and yet if a stronger competitor enters the market, you don’t lose a competitor, you obtain a stronger one.

How is the public adversity affected by that?

Mr. Friedman: I think Mr. Justice because the stress of Section 7 is on the long-term picture, on the long-term picture.

Initially, it may well be that a bank coming in substituting itself for a somewhat weaker back, may produce an immediate floury of competition, a little more competitive.

But in the long run, in the long run we think, it’s anticompetitive because it stills a concentrated market and you’ve lost one of the significant potentials for deconcentration.

I may add in this case, this is not a case of the acquiring bank coming in because the acquired bank is weak or floundering.

This is a successful, very prosperous, good bank.

It’s a large bank.

It’s a bank that’s roughly $100 million to claim here is defy the larger bank coming in, it will enable the new bank to provide certain specialized services which, because of its smaller size, it’s not been able to provide.

Services, which I might add, are available in Spokane through other banks already in the market.

And we think that that kind of benefit is not enough to justify this merger.

The whole purpose of Section 7 is to try to stop the increases in concentration, to try stop these what Congress believed to be deleterious friends in the economy, and banking itself unfortunately tends to be concentrated.

Banking tends to be concentrated.

Most cities except perhaps with city like New York, we have a large number of banks, you find that banking is concentrated, and this, it seems to us, is all the more important in banking to preserve the possibility of deconcentration resulting from the entrant of a potential competitor, a strong, significant, powerful firm that seeks together into the market.

We think that’s the whole purpose that Congress had when it amended Section 7 in 1950 in order to strengthen it.

Justice William H. Rehnquist: Mr. Friedman, you commented earlier about the Government’s view of the desirability of de novo entry.

What has been the history or does the record show over the past several decades of de novo entry into the banking market in Spokane?

Mr. Friedman: Not in Spokane Mr. Justice, but let me explain --

Justice William H. Rehnquist: Does the record show anything about the history of de novo entry into the banking market in Spokane?

Mr. Friedman: No Mr. Justice for the reason that under state law, a bank that has its headquarters in one city is not permitted to branch outside of that city or the county where its headquarter is or into an incorporated village that does not have a bank.

We do not have in the City of Spokane any history of de novo branching.

We have one bank that was found in the 1955, but what we do have Mr. Justice, what we do have is a history in the State of Washington of a practice by banks of sponsoring banks, assisting in their organization, helping them get started and then subsequently acquire them.

We do have that practice.

We do have --

Justice William H. Rehnquist: Is that concededly legal under the laws of Washington?

Mr. Friedman: There’s a dispute to that.

The appellees contend that the practice is illegal.

We think it is legal.

Let me just briefly -- I will come to it later.

Let me just briefly refer to what the practice has been and what the record shows.

One of the banks in Washington, the fifth largest bank, the Old National Bank, itself has assisted in the organization of five banks, which it subsequently acquired.

And according to the deposition of a Mr. Witherspoon, who is the Chairman of the Board of the Old National Bank, they assisted and sponsored these banks and I would quote “with the hope and belief that we would be able to acquire them in the future and make branches of the Old National there.”

And that’s at page 608 of the record.

He also stated in his deposition that they had informed the comptroller of what they intended to do, the way he described it as the informer comptroller of their efforts to establish branches by this means.

That’s at page 610.

And when he was asked to the comptroller object to this, he said on the contrary, in one instance it was the comptroller, that is, rather the assistance comptroller in the presence of the comptroller who suggested that they follow this practice.

And in subsequently approving merges of banks in the State of Washington between the sponsoring bank and the sponsored bank the comptroller has recognized that the bank did play this role.

Now, the acquiring bank in this case, the National Bank of Commerce, itself on one occasion sponsored a bank in the so-called Columbia Shopping Center.

Now, the claim is that they had no intention of ever acquiring it.

Well, this record shows that from months on end, a number of important officials of the National Bank of Commerce were concerned with all the details of this bank.

They aided and they found help find the manager for the bank.

On one occasion, the Board of Directors of the National Bank of Commerce personally selected a man who subsequently declined the post to be the president of this new bank, and, as they say, they say “Well, we hope to be able to acquire the bank”.

And it seems to us in the light of this, it’s much more than they hope.

They obviously anticipated that they would be able to do that. On another occasion, there’s an internal memorandum in which, in 1971, the Director of Marketing Research for the National Bank of Commerce suggested to an Assistant Vice President of the bank that perhaps I might spoke the word he used was “sponsor” a bank in another smaller city in Oregon, Pullman and that’s shown in the record.

Justice Lewis F. Powell: Did CNB acquire this bank that you say was sponsored by it?

Mr. Friedman: That has not yet come to past?

Justice Lewis F. Powell: What is it require in terms of waiting period?

Mr. Friedman: There is no waiting period with respect to federally chartered banks with respect to state chartered banks, there is a requirement that accept with the consent of the State Superintendent of Banking, “no bank can sell any of its shares that controlling it for ten years from the time of acquisition”.

But the normal theory of this is that we concede that you could not, under state law, form and sponsor banks solely for the purpose of acquiring it or with an expressed intention, expressed understanding or agreement to do so.

The way it’s done that the bank and sponsor that has to be on its own two feet; it has to get going and at that point then the acquisition takes place.

Justice Lewis F. Powell: Can I conceal your intentions?

Mr. Friedman: Well, I wouldn’t say conceal, I wouldn’t conceal Mr. Justice.

What I would suggest is that this is a recognized technique in the State of Washington by which banks get into markets where they are not directly permitted.

Justice Lewis F. Powell: What’s the total number of banks in that are established as banks and later acquired by the other bank?

Mr. Friedman: I could not tell you -- I couldn’t tell you exactly that.

The record shows I think for between 1960 and 1967, there were I believe 14 banks acquired in the State of Washington.

I don’t know that the record shows which of those were sponsored and subsequently quo.

We do know, we do know Mr. Justice however, that at least five banks that were sponsored by the Old National Bank were subsequently acquired by that bank in the State of Washington.

Justice Byron R. White: Well, Mr. Friedman, Even if the acquisition doesn’t take place, the fact of organization of the new bank via the efforts of an established organization is undisputed.

Mr. Friedman: I am sorry.

Your question is you mean there’s no question that the existing organization does organize the bank?

Oh yes, there’s no question about that.

Justice Byron R. White: And which is a substantial benefit in itself in term of --

Mr. Friedman: In the organization of bringing a new competitor in.

Justice Byron R. White: In terms of correspondent advantages and things like that.

At least it goes on all the time and the organization of other units by an existing bank, whether is later acquired or not.

Mr. Friedman: There is not question for that, yes.

Justice Byron R. White: Which makes your point just as well doesn’t it?

Mr. Friedman: I’m not certain Mr. Justice.

Justice Byron R. White: Well, if it’s a new bank, it’s gonna be a new entry?

Mr. Friedman: It provides --

Justice Byron R. White: Mr. Justice Rehnquist asked you about de novo entry, which is much broader question an entry by an existing organization.

How many new banks have been organized in Spokane in the last ten years, any?

Mr. Friedman: One new bank that I know.

Justice Byron R. White: Has been organized as started from scratch?

Mr. Friedman: Started from scratch.

This is something called the American Commercial Bank and this is --

Justice Potter Stewart: The 1950s?

Justice Byron R. White: That was at 55 --

Mr. Friedman: 1955 and this is one of the banks as I will come to -- that we think was available as a toehold entry by this bank.

Justice Byron R. White: But there is no particular legal barriers to new entries in the Spokane area by this new banking organization?

Mr. Friedman: No, this new banking organization -- in fact, this banking organization now has four branches since it started with a single and it’s grown and now it has four branches which is only three fewer than the Washington Trust Bank.

Justice Byron R. White: Well, now why do you say Mr. Friedman that your point isn’t made as well whether or not the newly organized unit is later acquired?

Mr. Friedman: Well, I think if the newly organized unit is not later acquired, you don’t -- and it maybe more difficult to say that the putative acquiring bank is eliminated as a substantial competitor, that is -- what I am suggesting is if it’s --

Justice Byron R. White: Well, this eliminated, certainly is eliminated as a possible source of the impetus and energy and perhaps support to organize a new bank.

Mr. Friedman: Well, if the new back is -- once the new bank has been organized and once the new bank is in the market, that --

Justice Byron R. White: That is a competitor?

Mr. Friedman: That is a competitor.

Now, that fact itself of course does not necessarily eliminate the sponsoring bank as an entrant to the market although --

Justice Byron R. White: This would go back and organize another one to compete with its new bank --

Mr. Friedman: Well, the basic problem there, I suppose, is whether the market would stand two additional banks.

In other words, it may depending again on its relationship -- ordinarily the relationship is one would expect between the sponsoring and the sponsored bank is very close.

They normally have that correspondent relationships and stuff.

But the fact is that, of course, this does inject a new bank into the market.

But the question really, it seems to me, is whether fairly viewed, if the acquiring --

Justice Byron R. White: I doubt if the bank here NBC acquires the bank in Spokane, which it has or wants to, is about to turnaround and organize another bank --

Mr. Friedman: Surely not.

Justice Byron R. White: Whether it ever acquired it or not?

Mr. Friedman: Surely not.

Justice Lewis F. Powell: Mr. Friedman, I had understood that the Government, in effect, conceded that it has no case under the theory of potential competition unless it is legally feasible and economically justifiable to enter the Spokane market.

That is the NBC that handle that market, is that correct?

Mr. Friedman: I think that is correct Mr. Justice.

The question we posed is on what basis is the Trial Court to decide that question.

Justice Lewis F. Powell: Right, but you have suggested two methods of entry and you have been talking so for the sponsor method and your other suggested method is that you acquire some smaller bank.

Mr. Friedman: That’s right, and we think there are two banks in the market that it could have acquired.

One of them is the American Commercial Bank which we has been discussing that was organized in 1965, which is a bank with 15 million in deposits, four branches in the City of Spokane, roughly 3% of the market.

Now, the reason that the District Court held on the defendant’s contend, this would not be a suitable candidate for acquisition is that under the ten-year limitation on State Law, and this, of course, is the state organized bank, this bank would not be available for acquisition until 1975.

Again, my answer to that is we are dealing here with very long term trends.

The question is whether if the National Bank of Commerce would not be permitted to go under the market through this merger, is it a reasonable likelihood that they would have found some other way to go in?

Now, and in addition to this other bank, there’s another bank the Farmers & Merchants Bank which is a little smaller that it has three offices.

These of course are offices in the suburbs and the interest of the National Bank of Washington in this bank, I think is shown by the fact that shortly before the merger, they were discussing a possible acquisition.

Justice William H. Rehnquist: Mr. Friedman, supposing that the National Bank of Washington had decided to absorb the 65-form bank, the American Commerce Bank in Spokane, you say there is only three fewer branches in Washington trust.

Wouldn’t the government probably have challenged that merger too as having been anti-competitor?

Mr. Friedman: No Mr. Justice, no Mr. Justice.

Our position is that the -- we do not oppose, we do not oppose, the entry by large statewide banks into local and regional banking markets, but we say those -- that entry should take place in the least anticompetitive way and we think an entry, if they had acquired -- attempted to acquire this bank with only 3% of the market, we would have view that as a so-called permissible toehold acquisition.

Justice William H. Rehnquist: Well, then It just becomes a question of decree, doesn’t it, and the District Court has got to have some latitude in making a finding one way or the other.

Mr. Friedman: Well, the District Court did not find Mr. Justice, the District Court did not find that this was no difference than a toehold acquisition.

The District Court did not -- and I think at some point the matter of decree becomes a matter of quality, but it’s not just quantity, because when they acquire a bank with 22% of the market, that to us is a very different thing from acquiring a bank with 3% of the market.

They acquire back with 3% of the market, they’re not going to be satisfied, it seems to me, a bank like the National Bank of Commerce, coming into Spokane with 3% of the market and setting there with 3% of the market.

They’re going to compete as vigorously as possible and attempt to get into that market and to expend their share of the market.

Whereas if all they do is acquire this 22% share there in the typical situation where you have a small number, three in these case of the bank with 92% of the market.

What you have is you have the same basic structure inside the market and you don’t have the same kind of incentive to compete to be -- to bring and inject some new vigor into the market to possibly deconcentrate the market that you would have if they came in by acquiring a small bank, a bank with a very small share which would be the basis for growing.

Now, let me turn to something else which is we have been discussing how they get in.

I think it’s important to find out is that the sort of thing they would likely to do, that they want to get in to Spokane.

How important was it to this bank to get into Spokane, so that if they were unable, if they were unable to get in by making this large acquisition, they do everything they could to get in by some on to that.

We think there is no question about that, that this is one of the things that the National Bank of Commerce has wanted to do for a long, long time.

To begin with, although the National Bank of Commerce is the second largest bank in the state, it’s the only one bank that is represented in only one of the four largest cities.

It is represented only in Seattle.

It is not represented in Spokane, the second largest Tacoma or Everett, the next three largest cities in the state.

The parties to this case stipulated that representation in Spokane has been a long sort goal of NBC.

That’s at 367 of the record.

The Former President of the National Bank of Commerce who is now the President of Marine Bancorporation, which is the bank holding company that has all of the stock of the bank, stated that his bank has been interested in getting into Spokane for a long, long time.

He said since prior to 1933, roughly more than 40 years.

He explained in the deposition that it was important for the National Bank of Spokane to get in there because all of the other major banks are represented there, and he said we feel there’s business available to us in Spokane if we are represented there, that’s at Page 139 of the record.

And similarly in the -- its 1970 report to stockholders, the holding company in commenting on this merger said that this finally brought the National Bank of Commerce “within sight of one of its long sort goals representation in the City of Spokane.”

That’s at Page 1270 of the record.

And indeed in a brief filed with the comptroller in support of this merger, a so-called economic brief, discussing the economics of the area and probably the economics of the merger itself, what the bank said was and I quote again from Page 1743 that “If Commerce is to maintain its present relative position with its competitors and maintain the business of its major national customers, Commerce must have representation in Spokane.”

“Must” was the words they used, not that they like to, not they thought it was so, they must have representation in Spokane.

Chief Justice Warren E. Burger: Well if they have been wanting this for 35 years Mr. Friedman, that means they have been keeping their eyes open for opportunities I assume, does it not?

Mr. Friedman: Yes, and one example I suppose Mr. Justice, one example, was their attempt shortly before this merger took place to purchase the stock of the American Commercial.

Chief Justice Warren E. Burger: But you don’t suggest there is anything per se wrong or questionable of they’re wanting to get into that market?

Mr. Friedman: No.

I’m sorry Mr. Justice, I didn’t make my self clear.

Chief Justice Warren E. Burger: Well --

Mr. Friedman: We’re not suggesting there is anything wrong.

In fact, it’s quite understandable and quite appropriate for this bank to want to get into the Spokane market.

What we are arguing is the fact that this bank was so anxious and felt it’s so important to get into Spokane is clear indication and shows that it would have done everything it could to try to get in by these alternative means if it were not permitted to go in by acquiring this large bank in the market now.

I’d like to reserve the balance of my time.

Chief Justice Warren E. Burger: Very well Mr. Friedman.

Mr. Moen.

Argument of R. A. Moen

Mr. R. A. Moen: Mr. Chief Justice and may it please the Court.

There has been a question about the desire of the National Bank of Commerce to get into the Spokane market, but if the question is whether or not they would be willing to go into any manner other than this one of this particular merger, there are four principle banking markets in the State of Washington: Seattle, Everett, Tacoma and Spokane.

At the present time, the National Bank of Commerce has all of its officers in the Seattle market.

It does not have any representation in any of the other three markets.

But of course if they, at some acceptable means of entry, were to be developed, they would be very happy to go into that market.

Mr. Friedman referred to the trends and although there is no specific finding on the subject, the evidence in this case shows that there is no discernible trend in the State of Washington towards concentrating -- concentration of banking.

As a matter of fact, the number of banks have increased.

In 1960, there were 87 banks; today, there are 92.

In 1960, there were 378 banking offices in Washington; today, there are 681.

If you want to look at the share of the market during the past 10 years, the share of the market which Commerce has picked up has increased from 18.9 in 1960 to 19.1 today, so that the share of the market is practically constant.

So whether you look at the number of banks or you look at the number of branches or whether you look at the share of the market, there is no discernible trend in the State of Washington towards concentration.

Now, justice is really asserting three ways in this merger in which it consummated lessen competition so as to violate Section 7 of the Clayton Act.

First, they contend that but for this merger, these two banks will someday be in direct competition.

Of course, this can happen only in the event that the two banks get offices in the same market.

Either Commerce will have to move into the Spokane market or spoke or the Washington Trust Bank is going to have to move out and into some market where Commerce is doing business.

They make a second contention as to the violation of the act and that they argue that Commerce is now on the fringe of the market and exert some competitive influence on the competitors that are in the market.

The argument upon which they lay the greatest stress is that -- but this merger, these two banks will become direct competitors.

And if the merger is enjoined, Commerce will enter Spokane by establishing a branch of its bank de novo or what they call tantamount to de novo, that’s the sponsored bank procedure, or by foothold entry.

Now, the Court is asking questions with respect to foothold entry.

The Trial Court made a finding that there is no bank in Spokane today, which could serve as a foothold entrant.

There are only two banks in the City of Spokane, which are smaller than Washington Trust Bank.

One is the American Commercial Bank, the state bank to which Mr. Friedman alluded.

That bank was formed in 1965, but it has, in its charter, a prohibition against its merger or its sale or combination of any other bank for a period of ten years.

Justice Potter Stewart: It’s required by law, as I understand it.

Mr. R. A. Moen: That’s required by statute of the State of Washington.

Justice Potter Stewart: Right.

Mr. R. A. Moen: And that period will expire in 1975, but of course, the National Bank of Commerce or no one else has any knowledge or information at this time that that bank will be for sale at the end of the ten year period.

And even if it were for sale, of course, there is no assurance that National Bank of Commerce would be the successful purchaser.

These banks, like any other product, are sold to whoever makes the highest bid, and if this bank were for sale for which we have no reason to believe that would be, it undoubtedly would go to the highest bidder, which might be the Bank of Commerce or it might be one of its competitors.

They’ve also argued --

Justice Potter Stewart: Then there is the other but the other is small.

Mr. R. A. Moen: Farmers & Merchants Bank.

But the Farmers & Merchants Bank is not within the city of Spokane.

Justice Potter Stewart: In the suburbs?

Mr. R. A. Moen: The Farmers & Merchants Bank has a branch in the shopping center about five or six miles east of the Center of Downtown, Spokane.

So, we contend that even getting into -- if we were to acquire the Farmers & Merchants Bank, it would not be entry into Spokane.

All of the witnesses conceded that you can’t service Downtown Spokane or be a part of the Spokane market if your only branch is out in the suburbs.

Justice Potter Stewart: Once you were there, would the law forbid 20 year --

Mr. R. A. Moen: Once you were there, you still can’t get into the City of Spokane.

Justice Potter Stewart: Same county or --

Mr. R. A. Moen: It’s in the same county.

But you can’t go into the city.

The only banks in the city that can give a branch in the city are the banks that have their head office in the city.

Justice Lewis F. Powell: If you acquire a bank by merger that becomes a branch of the acquiring bank from which no other branches can be put under Washington law.

Mr. R. A. Moen: That is correct.

The branches or the bank that you may acquire such as Washington Trust Bank can go out and establish new branches in the City of Spokane.

But once the National Bank of Commerce acquires the Washington Trust Bank, then it can no longer branch in the City of Spokane or in the county, which only in the city where it has its principal place of business and in the county where it has its principal place of business.

Justice Potter Stewart: You made a pass at acquiring Farmers & Merchants?

Mr. R. A. Moen: There are -- there were negotiations for the purchase of the Farmers & Merchants Bank that didn’t even get closer to the price.

I think the record here shows that Commerce have it price in mind to somewhere as maybe one-and-a-half or $2 million and the lowest asked price was somewhere nearly $5 million.

The negotiations did even get the point where the amount of money which Commerce is willing to pay was even transmitted to the Farmers & Merchants Bank.

Justice Potter Stewart: And how long before this present acquisition, those negotiations occur?

Mr. R. A. Moen: I would say maybe a year or two.

Just a very short time, but I would like to press upon the Court the fact that acquisition of Farmers & Merchants does not put you into the City of Spokane.

Justice William H. Rehnquist: So that the National Bank’s acquisition of Farmers & Merchants Bank, if it had come about, would not have been a realization of there desire to get into the City of Spokane?

Mr. R. A. Moen: It would not if given the main consents of the City of Spokane.

Now, our defense to this case is not only legal, but factual.

We think that this case primarily is a factual case.

And the Trial Court rejected all three of the arguments of Justice Department and assigned a factual basis for all of them.

The Trial Court found that even the absence of these statutes the bank, the National Bank of Commerce would not go into Downtown Spokane if they had to go in by de novo entry or by the acquisition of a small toehold bank.

The Court found that it wouldn’t be compatible with prudent business practice in commercial banking for a major or full service bank such as Commerce to enter a major metropolitan area such as Spokane with a limited service bank or a small bank which would be compatible with the amount of deposits that they might reasonably expect to obtain.

As we’ve just mentioned if they did go in and they couldn’t branch and that branching in Washington is almost essential to affect the competition in the metropolitan areas, such as Spokane.

There happens to be a very good example in the City of Spokane of the imprudence of attempting to go in with a small branch.

The Pacific National Bank is a subsidiary of Western Bancorporation, the largest bank holding company within Mississippi.

It’s the third largest bank in the State of Washington.

Now, ten years ago in 1964 it did, in fact, go into the city of Spokane by toehold entry, by acquiring a small branch or a small bank which had two branches; one in downtown Spokane and one out on the Whitworth College campus.

Since that time in ten years, they have not been able to increase their share of the market.

But today, they are the smallest bank in Spokane measured by Spokane deposits and there is really no reason to believe that if Commerce attempted to go in by foothold that they could do any better than Pacific Nationals Bank has done.

The growth in Spokane during the last ten years has been slow.

The lower court found that there has been some growth in the last ten years.

I think the town has in fact lost 10,000 population and county has grown about 3%.

Now this compares with other markets where Commerce isn’t now located such as Everett which is increased 10,000 during the period the Spokane has lost 10,000 and the county in which Everett is located has increased in population almost 35%.

The City of Tacoma, which is another market in which Commerce isn’t -- doesn’t presently have offices has actually increased about 15,000.

Now, the importance of this is simply that if Commerce did decide that they want to go into one of these other markets and wanted to spend their capital for that purpose, the chances are that they would go into Everett or Tacoma much sooner than they would go into Spokane.

And this was just another reason if the Court assigned as to his finding as to why it was not likely that Commerce would go into Spokane if they had to go in by de novo entry.

The Regional Administrator of National Banks in Washington took the stand and testified that in his opinion it was not likely that there would be any future charters for banks granted in Spokane in the reasonably foreseeable future.

He based this on the population growth of the city and such other factors as the comptroller considers in passing on new bank applications.

Now, as I said we have these factual findings.

What the Court really found was that there just wasn’t sufficient economic incentive to put Commerce into Spokane if they had to go in on a de novo basis.

And of course in addition to that, we have the statutory barriers that Mr. Friedman alluded to.

The statute which prohibits branching in Washington is found in Remington’s Code of Washington, 30.40.029.

It’s reproduced at Pages 4 and 5 of our Brief, and I would like to call the Court’s particular attention to the last paragraph of the statute which appears on Page 4.

Now, this statute provides, this is plainly as it can provide insofar as it’s pertinent to this case that Commerce cannot go into Spokane with a de novo branch.

Justice argues that the statute maybe evaded or circumvented an entry tantamount, a de novo entry maybe achieved by their so-called sponsored bank procedure.

I’d also like to tell the Court this that this word “sponsor” has been a very misleading word in this case, because practically, all new banks in Washington are sponsored in one way or another when they are formed, and the comptroller, of course, encourages this because it’s been official, both to the sponsoring bank as well as to the sponsored bank.

But that does not mean that they have control over the bank or that they can branch when they wanted.

For example, Commerce which has 107 branches, testified that they don’t have one single branch that was ever sponsored bank, I mean the bank that they sponsored.

It’s true that they assist these banks in various ways, but Columbia Center was brought up here.

There is both the Chairman of Columbia Center testified that they’re not obligated to sell their bank to Commerce at any time either the assets of the bank or the stock, and the officers of Marine Bancorporation testified that they have no agreement either oral or written to acquire the bank at any time.

Now it’s true that they --

Justice Thurgood Marshall: Mr. Moen I am having a little trouble with you say you can help the bank and assist the new bank, but you don’t sponsor it.

What do you mean by sponsor?

Mr. R. A. Moen: The word “sponsor” as we have used it means to aid or assist.

I think the word sponsor as justice has referred to it means to have control of it.

So that they can force the sale of the bank.

Justice Thurgood Marshall: But which one are you talking about?

You said there’s not a single one of your branch bank that you sponsored, but you did assist it.

Now, where is the line in your book?

Mr. R. A. Moen: Well the sponsored bank procedure, as referred to by the Justice Department, means to have control of it.

What I’m saying is that Commerce has never acquired any bank and we say even assisted -- and of course the only bank that I could say that they sponsored was Columbia Center.

I would concede that they sponsored that bank, but even there they sponsored in the sense that they went out and they helped it get management, they helped it get directors.

What really happened here was that the --

Justice Thurgood Marshall: And just the interest of building that competition?

Mr. R. A. Moen: No, that did it to satisfy a commercial customer.

The allied stores are putting a shopping center into Central Washington, and of course they wanted a banking service there.

Chief Justice Warren E. Burger: Is this the suburb bank that was referred to?

Mr. R. A. Moen: No, it’s just -- we referred to the suburb bank of Farmers & Merchants.

Chief Justice Warren E. Burger: This is in the City of Spokane?

Mr. R. A. Moen: No, I think what Mr. Justice Marshall is referring to is a bank in Central Washington.

Justice Potter Stewart: Columbia.

Mr. R. A. Moen: At Columbia Center, yes.

Now it’s true that in that bank, in that particular case, in order to bring banking service into the community, Commerce did, I would say, sponsor a bank in the sense that they went out and help them get management.

They furnish them with about three directors out of seven, but the important thing to me is the purpose for which this was done.

This is not a case for Commerce deciding they wanted to get into bank and sent out people or stockholders to organize a bank.

What really happened was that the business people of the city applied for a bank and they were turned down by the Regional Administrator for the reason that they did not have anyone in the organization that had any particular knowledge of banking.

And so, they came to the National Bank of Commerce and sought that assistance and they obtained it.

But here again as I say that that doesn’t give Commerce any assurance that they are ever going to acquire that bank, and the only thing that’s important with respect to this procedure is whether or not it affords to Commerce some method of getting into the city.

What we are talking about here is means of entry.

We contend we don’t have any means of entry in the Spokane that regard by our statutes.

They come back and say we can get into Spokane and they can get in this particular manner, which they call the sponsored bank method.

And we deny that and what I’m saying that so far as Columbia Center is concerned that that does not afford to us in means of entry into Spokane.

Now, let me mention these five branches with Mr. Whiterspoon contented that the Old National Bank picked up.

They apparently did, on two occasions, they actually sent someone out to attempt to organize the bank and obviously, or Mr. Whiterspoon said, for the purpose of actually acquiring the bank.

Now, the record here isn’t entirely clear as to this is what they did, but what I contend is that it really doesn’t make much difference.

One of these arrangements was made in 1959, two of them were made in 1962, and two of them made in 1964.

And since that time, so far as this record shows, there hasn’t been any such acquisitions or any such means of entry by any other bank.

Well, my co-counsel here has given me a note to make it clear that Columbia Center is not in Spokane, but I think I answered that question that it’s down in Central Washington.

Justice William H. Rehnquist: Where is it, down on the Columbia River there?

Mr. R. A. Moen: It’s down in Kennewick or in the Richmond area which is near the Columbia River area.

Now, as I’ve said that this statute which prevents us form branching in Washington as one statute, which we are concerned with, there is a second statute, the Holding Company Statute, which prohibits any bank holding company in Washington from owning or controlling more than 25% of the capital stock of another bank.

Now, I point that out to show that we are not only stopped from branching, but we are only stopped from holding company expansion, because the holding company can’t possibly own more than 25% of the stock of the back.

And of course, you cannot control either the seller of the bank or the purchaser of the bank if you only have a 25% control.

In Washington, you have to have 67% of the stock of the bank; you have to have a consent of 67% of the shareholders before you can sell.

So that on this withholding company, this holding company statute, we have new -- we don’t have the power or the authority to expand in that way.

The penalty provided in the statute is forfeiture of the holding company charter.

So, no prudent person is going to attempt to expand in that manner.

Now with respect to this so-called Wings Theory, justice is also contending that Commerce, by reason of its positions of the Wings, exerts a beneficial pro-competitive influence on the competitors in the market.

Justice concedes on Page 27 of their brief that this was not the primary basis upon which they tried the case, but it is in the pleadings and always mentioned by two or three witnesses.

But I like to point out that in this respect, all they showed was the proximity to the market and there is utterly no evidence in the record to show that they had any effect upon the competitors in the market.

So that the mere physical proximity, of course, without any showing of, in effect, on a better consumer market, doesn’t show or can’t develop into any blasting of competition.

There were four witnesses for the bank, two bank officers and two economists who testified that Commerce, prior to the announcement of the merger, exerted no influence at all on the Spokane market.

With respect to the Washington State Bank moving out into other areas, I just want to point out that justice did not try the crew what banking markets or what sections they might move out into.

They simply argue that the bank has the capability of expanding and, therefore, its elimination would be a lessening the competition under Section 7.

Now, in conclusion, I would want to point out that both parties in the case are urging what they considered to be pro-competitive action.

What the Justice Department’s case really boils down to simply that they’re saying that it’s pro-competitive to save Commerce for some future entrant into the market.

We contend that if we move into the market right now, a bigger bank, a much stronger bank that that is also pro-competitive.

It’s -- the Trial Court found that the Spokane Banking market actually needs another competitor of the size of Seattle First.

And what I think that the real issue for this Court is to which is the more pro-competitive, is it to say this to the bank that they might enter the Spokane market ten years from now, and then maybe spend another ten years in attempting to build their deposits to a point where they can actually compete or wouldn’t it be more pro-competitive for them to go in immediately.

I’d also like to say --

Chief Justice Warren E. Burger: You’re now moving into Mr. Loevinger’s time Mr. Moen.

Mr. R. A. Moen: Yes I’m afraid I am.

I will bring my argument to the close.

Thank you.

Chief Justice Warren E. Burger: Mr. Loevinger?

Argument of Lee Loevinger

Mr. Lee Loevinger: Mr. Chief Justice and may it please the Court.

I appear for the Comptroller of the Currency and such I believe I speak for the Government.

Normally of course the Department of Justice speaks for the Government.

The Comptroller however is an order agency than the solicitor general of the antitrust provision and indeed older than the antitrust laws themselves.

However, that is not the basis on which I assert this.

The important point is that the Department of Justice in these cases is interested only in protecting a single element, the competitive element, and of course with the antitrust law --

Justice Byron R. White: Well, let me ask what is the authority of the --

Mr. Lee Loevinger: Sir?

Justice Byron R. White: What is the authority of the Comptroller of the Currency to represent himself in this Court?

Mr. Lee Loevinger: Statutory, Your Honor.

Justice Byron R. White: What does it say?

Mr. Lee Loevinger: I don’t have the statute at hand Mr. Justice, but it is our statutory authority of the Comptroller to appear in these cases and as such he represents the interest of the Government embodied in both the banking and the antitrust laws as I shall hope to demonstrate the Comptroller is interested not simply in banking interest but also in competitive interest and therefore represents the entire public interest which I believe is the viewpoint of the Government and --

Justice Byron R. White: So I should ask the Department of Justice what there authority is, I suppose?

Mr. Lee Loevinger: Perhaps sir.

In any event, I have six substantive points that I hope to make.

I shall appear twice and I hope to be able to get to them.

I will tell you what they are and then proceed to them.

First, the plaintiff’s argument is basically circular in question begging, because it assumes that Section 7 requires the banking agencies to permit de novo entry.

Second, Section 7 does not supersede the federal banking statutes as plaintiff somewhat explicitly and certainly implicitly contends.

Third, potential competition does not have the same application to banking as to one regulated industries.

Fourth, the plaintiff’s sponsorship scheme does not only illegal dubious means of -- legally dubious means of circumventing state law, but is actually anticompetitive in its effect, as I shall demonstrate.

Five, Section 7 does not forbid a merger, which lessens potential competition, but it increases actual competition in the relevant market, which is somewhat different in the question left open in Falstaff.

And finally, the plaintiff would rewrite Section 7 so that potentiality attenuates substantiality to triviality.

Now first, the plaintiff’s argument is basically circular in question begging, because although plaintiff has the burden of proving the violation of Section 7, not depends upon proving that the merger would probably lessen competition.

Plaintiff admits there is no actual competition.

Therefore, the theory of plaintiff entirely is that absent a merger, the acquiring bank here would enter the market de novo.

This however requires the permission of the banking authorities.

There is objective evidence that this permission would not be given.

Plaintiff attempts to surmount this barrier by assuming that administrative permission is required.

Thus, in the brief in this case at Page 51, plaintiff says, “It must be assumed that the regulatory decision will reflect the national policy in favor of market extensions by internal expansion rather than not by acquisition.”

There is a similar statement in plaintiff’s Connecticut brief at Page 53.

Thus, plaintiff’s entire argument is based upon the assumption that Section 7 requires the permission of the administrative authorities for de novo entry and once you eliminate that assumption, plaintiff does not have an argument on potential competition, but that assumption is the very matter to be proved.

It’s the very question and issue before this Court.

Therefore, it’s an entirely circular and question of begging argument.

Second, plaintiff in effect asserts that Section 7 supersede the federal banking statutes.

Plaintiff clearly argues that in a bank merger case involving potential competition that Section 7 standards must be applied at Page 52 of the brief in this case, plaintiff asserts.

Justice Thurgood Marshall: Mr. Loevinger, you keep saying plaintiff, who is the plaintiff?

Mr. Lee Loevinger: The plaintiff is the antitrust division under the Department of Justice represented by the solicitor general.

Justice Thurgood Marshall: Well, I know but your brief says the United States of America.

Mr. Lee Loevinger: That is a formality Your Honor in a sense, the Court is the United States of America.

I believe this Court represents the United States as I do and as Mr. Friedman does.

Justice Thurgood Marshall: And your brief said, your brief says your brief is to the Comptroller of the Currency?

Mr. Lee Loevinger: Yes sir, and the Comptroller of the Currency is an agency --

Justice Thurgood Marshall: United States of America is the appellant.

But you keep arguing about plaintiff, you don’t mean the United States of America?

Mr. Lee Loevinger: I mean the interest represented by Mr. Friedman and the antitrust division sir.

I don’t really wish to quarrel with the Court about this.

I don’t regarded that an important substantive point.

I think it is somewhat of formality but I think it helps to keep the matters --

Justice Thurgood Marshall: I think it’s more than the formality because usually the question up most in my mind is who represents “the United States of America”?

Mr. Lee Loevinger: Well sir the Comptroller has been representing the United States of America since about 1863, which is long before Sherman Act was passed.

So, as I say I would --

Justice Thurgood Marshall: How many times that the Comptroller of the Currency argued in this Court in all of those hundreds of millions and years?

Mr. Lee Loevinger: I don’t know.

I’m sorry Mr. Justice I can’t argue that.

I can’t discuss that question.

I would if you will permit me --

Justice Thurgood Marshall: I don’t know as of now what the position of the Government is.

Mr. Lee Loevinger: May I proceed with my argument Mr. Justice?

Justice Thurgood Marshall: Well, of course.

Mr. Lee Loevinger: I would like to point out that the Department’s position is that Section 7, in effect, supersedes the Federal banking statutes.

Does it -- Page 52 of the Washington brief says only if new entry might threaten the stability of the existing banks, could the Comptroller properly permit -- properly refuse to permit new competition.

Now and again, this is repeated in other briefs, and in the plaintiff’s reply brief and Connecticut that argues that the appropriate number of banks is not to be determined by administrator or judicial fiat, but by the market, through the processes of competition.

One wonders if the same statement would be made about the ICC, the CAB and the FCC.

But in any event this is not the law.

In the Philadelphia National Bank’s case, this Court speaking of Mr. Justice Brennan said and I quote it “A charter for a new bank, state or national, will not be granted unless he invested capital and management of the applicant of his prospects for doing sufficient business to operate at a reasonable profit, if adequate protection against undo competition and possible failure.”

Now there is no such policy -- no such policy embodied in the antitrust laws.

That is strictly a banking standard.

This rule was not changed by the Bank Merger Act of 1966 and in the Third National Bank of Nashville that this Court said, the purpose of the Bank Merger Act of 66 was to permit certain bank mergers even though they tended to lessen competition.

Congress felt that the role of banks in a community’s economic life was such that the public interest would sometimes to be reserve by a bank merger, even though the lessens competition.

Justice William H. Rehnquist: But that’s then was about the defensive part of the -- that was added in 1966, was it not the basic competitive analysis?

Mr. Lee Loevinger: If that the -- apparently the Court said that the basic competitive analysis was to be made first, then the public interest was to be determined on the basis of the competitive analysis as balanced against the other interest.

However, as I shall, point out what happens in a potential merger cases to merge that you don’t have to clean cut kind of dichotomy that you do in an actual competition case where first you see that competition is being extinguished.

And the reason for that is very simple, is that in a potential competition case which you are talking about is potential entry.

But there is no potential entry unless there is a community need and service to the community convenience by that entry.

Therefore, before there can be a potential entry or a probable entry, as this Court has held, there must be a showing of the convenience and needs argument consequently in a potential competition case.

It seems to me as a matter of logic that the Department has the burden of meeting both sides of the equation.

It may have to show both that there is a -- well, they don’t even get the competition until they have dealt with community needs, because without community need and probable entry there is no potential competition.

Justice William H. Rehnquist: But there would be true just of a nationally chartered advantage?

Mr. Lee Loevinger: No sir, that would be true of both national and state banks as was pointed out in the Philadelphia case because the standards are essentially similar.

There are some differences.

Now potential -- and this is the reason why I say that potential competition theory does not have the same application to banking as to regulated industries.

The purpose of regulating and limiting the entry into the banking field is to protect the public interest in bank functioning and bank solvency, as the Ninth Circuit has said a bank failure is a community disaster.

We cited in our brief from Mr. Paul Samuels, economist about bank failures.

Bank failures are not all together a thing of the past, although they have been largely minimized.

Only last October, one of the largest bank failures in the history of the company of U.S., The National Bank in San Diego a billion dollar bank failure.

There had been some bank closings every year since 1934.

There had been 635 bank closings because of financial difficulties.

The FBIC now has 156 banks on its problems list.

The entry into banking requires a showing of community need, of prospective profitability, and of other factors subject to judgment by administrative expertise.

Furthermore, even the perceived entry as distinguished from the actual entry which Justice -- Mr. Justice Marshall distinguished in his concurring opinion in Falstaff is different in banking.

Because in an ordinary industry, the contending and competing units must look at those standing on the fringes to see whether economic factors are likely to move them into the market.

However, in banking if one of those standing on the fringes wants to enter the market, he must make application to an administrative agency without exceptions state or national and the banks in the market have an opportunity to go in and to be heard and to oppose the entry of the new entrant.

Consequently, there is no unperceived entry; there is no unperceived potential entrant in banking as there may be in other cases.

Furthermore, the determination of the propriety of the organization of a new bank and its entry into the market, this Court has said is specifically a matter for determination by the banking agencies.

And therefore, I submit, it is not appropriate for determination in the case such as the present one and what the National Bank versus New Orleans case which is a very complicated case explained at Page 55 of the Marine Bank brief.

Basically in order to avoid the restrictions of state laws to branching, to form the bank holding company as the department would have the defendant banks do hear and it organize a new bank.

There was a litigation below, which resulted in an injunction against the bank charter being issued.

When the case came to this Court, this Court held that the lower courts have no jurisdiction to pass upon that question and remanded the matter to the federal reserve or the banking agency in that case saying, we have concluded that District Court that it is the exclusive function of the Federal Reserve Board to act in such cases.

In cases raising issues of fact not within the conventional experience of judges or cases requiring the exercise of administrative discretion, agencies created by Congress for regulating subject matter should not be passed over.

Therefore, we submit that this Court should not, by and grafting the potential competition theory of the Section 7 and then applying that to banking, pass over the expertise of the banking agencies as to who and when there should be entry into the banking field, which is what potential competition means, potential entry.

Now let me say a word about the sponsorship scheme proposed by the department.

It is true as my colleague Mr. Moen has said that there is a good deal of ambiguity about the use of this term sponsorship.

In fact, there is evidence that banking executives like others in other businesses, sometimes help new institutions that they give advice.

Old lawyers do this to young lawyers.

This is not an unknown procedure.

However, sponsorship as used in this case by the Department of Justice means and I think must mean if it is to have significance that contribution of capital and the holding of some sort of a significant legal entrance in the bank, but it doesn’t mean that it means nothing.

Anybody can go and get fringe.

I suppose I could go down and ask my friendly banker how I go about organizing a bank.

However, in the first place this method, if approved by this Court, would be available only to national banks.

There is no contention that Mr. Friedman has conceded.

It wouldn’t be available state banks.

This immediately would destroy the competitive equality between national and state banks which Congress clearly intended, as this Court has often said in cases cited in our brief.

Second place, this would undermine the dual banking system and handicap the state banks by giving the federal banks a technique not available to state banks.

2/3 of all the commercial banks in the country today are state banks, only1/3 are national.

They happen to be the larger banks but this would give the advantage to the national banks.

Further, at best, this scheme is expensive, difficult, and risky unless available not only -- not to all banks but only to the larger banks.

It is clear from the records here that the cost of forming a holding company and organizing a bank is upwards of $2 million.

The statutory minimum is a-million-and-a-half dollars.

However, of all the commercial banks in the United States, 25% are under 5 million in deposits; 48% under 10 million; and 78% under 25 million, both state and federal.

And I submit that as a practical matter, this is a method that would be available really only to the top 5% of the banks in the United States.

Furthermore, this scheme would endanger new and small banks by offering and threatening undue competition.

This appears in the record in the present case at Page 1034.

The Court asked the Department of Justice counsel and I quote, “Your theory is that if a new bank went in there, Spokane, they would take some deposits from the other banks and therefore the other banks wouldn’t make as much money and therefore would increase competition, is that your theory?”

And the department counsel said “Yes sir.”

In other words, new and small banks are likely to be the victim of this procedure.

These are the ones that are owned and by small business and by the minority groups that are struggling for recognition today.

These are the ones that are protected by the bank regulatory agencies.

Under plaintiff’s theory there would be no protection.

Consequently, if the plaintiff’s sponsorship scheme were approved by this Court, this would insure growth by the largest banks.

It would insure the foreclosure of markets to small and medium size banks and it would probably lead to the failure of small banks and thus ultimately to the much greater concentration of banking business in the United States.

Now fifth, Section 7 does not forbid a merger, which lessens potential competition but increases actual competition in the relevant market.

I trust I need not point out that the Court did in Falstaff.

That the Courts opinion said that the question left open was whether a new entry that neither help nor hurt competition was illegal merely because the acquiring company could but did not entered de novo.

That question is not reached here because in both cases, there is evidence that here the entry will make the market more competitive.

The Court found in this case, this merger will make the Spokane market even more competitive as it will replace a bank with a limited competitive ability with one with greater capacity to provide loans and it will remove its competitive disadvantage.

Now, plaintiff, in effect, answers this by saying that to the extent the Court relied on the theory the merger would replace Washington Trust with the bank able to compete more effectively that these are factors to be considered on the community needs and convenience defense and not in asserting the competitive impact of the merger.

If I may be disrespectful, I say nonsense, to say that an increase in competition cannot be considered in appraising the competitive impact simply doesn’t make sense under the antitrust laws or under any other laws.

In fact, Justice Marshall in concurring in Falstaff said that if a company would have remained outside the market but to the possibility of entry by acquisition and if it is exerting no influence as a perceived potential entrant, then there will normally be no competitive loss when it enters by acquisition.

Indeed, there may even be a competitive gain to the extent that it strengthens the market position of the acquired firm, which is exactly the case here.

Furthermore, in Brown Shoe, this Court said, Congress recognized the stimulation to competition that might flow from particular mergers.

When concerned as to the act’s breadth was expressed supporters the amendment indicated, it would not impede, for example, a merger between two small companies to enable the competition to compete more effectively with larger corporations dominating the relevant market.

Here admittedly, there is no change in market structure or concentration.

There is only a strengthening of one competitor, which has already stimulated new competition in Spokane as we point out at Page 53 of our brief.

And this does not lessen competition but increases competition which is the purpose of Section 7.

Finally, let me come to my last point, last former point and then I will now or later answer some points of the department that the plaintiff would rewrite Section 7 so that potentiality really reduces substantiality to triviality.

There has been some talk as to what potentiality means, and Mr. Friedman has candidly said, they’re looking at very long range effects.

As a matter of fact, this was confirmed by a speech by the acting Deputy Assistant Attorney General the Antitrust Division made the day after we filed our brief and published an ATRR April 16, 1974.

It is number 699 at Pages (d) 1 to 5 in which he said the departments concern for preserving competition is premised upon the belief that existing market structures are not immutable over time. Changes in law, technology, business philosophy and imperatives of the market place may result in future market entry with attended increased competition in a manner, which would not have been predicted at an earlier time.

The department’s efforts, he candidly states, are aimed that these market extension cases, which involves theories of potential competition.

Now I submit that to say that potential competition, which the Department of Justice is now protecting, is the possibility of future market entry in some presently unpredictable or unforeseeable manner, is to say that we are dealing with something that is improbable.

The law simply cannot deal with the unpredictable or the unforeseeable.

The essence of legal probability is foreseeability.

Thus, plaintiff is seeking to have the standard of proof in Section 7 cases, reduced from probability and substantiality to possibility and triviality.

Plaintiff asked the Court to forbid any merger, which might foreclose any unforeseeable future possibility of competition.

But this is impossible to do because the unforeseeable we simply cannot deal with.

This is unreasonable, unworkable, unprecedented, and I submit a formula for stagnation not competition.

Furthermore, in my brief I have submitted to the Court that I believe that this standard, if it becomes established in the law, is a formula that will threaten civil liberties.

The brief was filed April 8.

I suggested that the potential enemies in authoritarian countries are prosecuted as the department would go after potential competitors here.

On April 15, the week after we filed our brief, the Washington Star News published a little item saying that Aleksandr Solzhenitsyn, the well known Russian author, had been exiled because, it was said by a leading Russian spokesman, as he was guilty of making “potentially dangerous proposals”.

They said that he was accused of writing Utopian and potentially dangerous ideas.

Now this is the language of authoritarianism.

This is the doctrine which the Department of Justice would have this Court accept in which I submit if accepted in these cases cannot be confined of these cases.

If we -- if potentiality in the sense of unforeseeability, unpredictability that which cannot be really met by present proof, cannot be dealt with on the basis of the contemporary record, then there are simply no standards.

There is no way that we can deal with the data presented with the evidence if the Court is going to permit this kind of proof.

My time is up.

Chief Justice Warren E. Burger: Thank you.

Mr. Friedman you have about four minutes left.

Rebuttal of Friedman

Mr. Friedman: Thank you Mr. Chief Justice and may it please the Court.

There has been some reference by Mr. Moen to the testimony of the President of the Columbia Bank, the bank that was sponsored in, and we referred to the Columbia bank not that that’s a way of getting into Spokane, but to show, to show that this is a method by which banks do enter markets where they are not permitted directly to branch.

I would like to invite the Court’s attention to two documents in the record.

The first is at Page 1514 of the record.

It’s a letter from Mr. Buck, who was the Senior Vice President of the National Bank of Commerce to a Mr. Looney.

Mr. Looney was an attorney in the area where the Columbia Bank was being formed who became -- he had done some work for the branch of the National Bank of Commerce in this area and he ultimately became the Chairman of the Board of the new bank.

So, he was the man who was intimately concerned in the formation of the bank and understanding what was happening.

Now, two paragraphs I’d like to refer to.

The first is in the middle of that page.

At 1514 he said that there’s been no --Mr. Bulk said, there has been no written or oral agreement or understanding with respect to acquisition of the proposed bank.

On advice of counsel, we have been extremely perhaps excessively cautious to avoid this.

It is true nevertheless that our bank has inspired submission of the application and is hopeful that in appropriate future time, it will possible to acquire the bank for incorporation within its present system.

At the bottom of the page, I pointed out that the way the bank was being arranged, the majority stock will be in hands friendly to the National Bank of Commerce.

In order to insure as much as possible its future as a branch of that bank, it avoids certain legal problems, which could arise if we were to agree or contract with respect to its acquisition.

Then at Page 1573 is a letter from Mr. Looney back to Mr. Buck written a few months later and these letters were all contemporaneously written at the time the Columbia Bank was being organized.

And what Mr. Looney said to Mr. Buck at the bottom of page 1513 is “We need a clear definition in understanding of the management responsibilities as between the directors of the unit bank and the management of the National Bank of Commerce.”

That’s between the bank that was sponsoring and the bank that was sponsored.

For example, many of the steps taken initially will have a barring on the long range operation of the bank many years after it has changed from a unit bank to a branch bank.

Now, this seems to us to indicate very clearly that the whole purpose of this arrangement was ultimately to permit the National Bank of Commerce to acquire it.

Now Mr. Loevinger has suggested that because the authorization of the regulatory authorities is needed before a bank can enter the market.

If the regulatory authorities suggest, they would not charter a new bank, that’s kind of the end of a thing.

Well, to begin with, I just point out that that argument of course has no application to the possibility of entry by making a foothold acquisition.

But more fundamentally, it seems to us this is basically not the scheme of Section 7, this is not what Congress did not intend to give the Comptroller of the Currency the authority to veto, the authority to veto that the enforcement of Section 7 of the Clayton Act.

When the Comptroller says that he does not think it’s likely that he would charter a new bank, to begin with of course, his testimony is given in defense of a merger that he is already approved.

But more importantly, of course, the regional comptroller only makes a recommendation, but a regional official may think today he is not going to charter tomorrow or next week changes may occur.

And we do believe that in this situation, the Comptroller’s view that he would not permit a new bank to be charted cannot be this positive on this question.

Thank you.

Chief Justice Warren E. Burger: Thank you Mr. Friedman.

The case is submitted.

Featured:

United States v. Connecticut National Bank - Oral Argument

Thu, 23 Aug 2012 18:27:20 +0000

Case:

United States v. Connecticut National Bank

Media File:

73-767_19740423-argument.mp3

Related Transcript:

73-767_19740423-argument

Transcript:

Argument of Howard E. Shapiro

Chief Justice Warren E. Burger: We’ll hear arguments next in 73-767, United States against the Connecticut National Bank.

Mr. Shapiro, I think you may proceed whenever you’re ready.

Mr. Howard E. Shapiro: Mr. Chief Justice, may it please the Court.

Like the case which the Court has just heard, this case is an appeal by the United States from an adverse decision by the District Court in a suit under Section 7 of the Clayton Act, challenging the merger of two banks.

Like the preceding case, it also raises questions concerning the application of the doctrine of potential competition to bank mergers.

The merging banks in this case are the Connecticut National Bank headquartered in Bridgeport, Connecticut and the First New Haven National Bank headquartered some 20 miles away in New Haven.

The Bridgeport and New Haven metropolitan areas are beyond the New York City commuter zone in the southwestern corner of Connecticut.

What we’re concerned with in this case is both the impact of the merger on the Bridgeport and New Haven metropolitan market and its impact on the State of Connecticut as a whole.

This case, unlike the preceding case involves, however, a question as to the line of commerce, a question as to the section of the country, questions as to competitive effect, regulatory effect, as well as convenience and needs.

I will describe the banks first and then I would like to briefly give an overview of the case before stating what the District Court did.

First New Haven, the New Haven Bank, has assets of $333 million, deposits of $272 million, loans of $224 million.

It’s the eighth largest commercial bank in the State.

It’s an important bank, it has a loan limit of $2.3 million and it operates some 22 offices, 17 of them in the New Haven metropolitan area.

Three of them are really over in the Bridgeport metropolitan area.

Together -- well, the Connecticut National Bank, the acquiring bank is the State’s fourth largest commercial bank.

As of 1972, it had assets of $463 million and deposits of $412, loans of $253 million and a loan limit of $2.8 million.

So it too is a big and healthy bank.

It’s been expanding vigorously through the Bridgeport metropolitan area and it’s gone beyond it.

It has offices as far east as New Haven, or almost in New Haven and as far west as Stanford.

The two banks, when they’re put together, will account for about 11.7% of the total deposits in the state.

Now banking in the State of Connecticut is concentrated.

The state has, I think as of this moment, there are some 72 banks chartered in the state.

At the time of trial, I think it was 61.

There have been some new entry which I will come to in a moment.

The top ten banks account for about 83% of all of the deposits in the state and those top ten banks are therefore extremely significant in the development of banking in the state.

Justice Lewis F. Powell: Mr. Shapiro, are there any standards used by the government or otherwise in determining when there is a concentration, an undue concentration of banks in a particular area?

Mr. Howard E. Shapiro: Yes, Your Honor.

Justice Lewis F. Powell: What is the test?

Mr. Howard E. Shapiro: We have used the test of the Philadelphia Bank case.

When you have a situation in which the top ten banks in a particular area as large as the state reach 80%, the top five banks reach 40% while we think that this is a serious situation from the standpoint of concentration.

Justice Lewis F. Powell: You apply that only to the state?

What would you do --

Mr. Howard E. Shapiro: No, we would use it in a local market also.

In the local markets, the concentration is equally high.

The 11 major metropolitan areas in Connecticut, the three largest banks, with the exception of Norwalk, this is true anyway, the three largest banks account for over 80% of the deposits.

Justice Lewis F. Powell: Are there any communities in Connecticut with only one bank?

Mr. Howard E. Shapiro: There are smaller communities with one bank, yes Your Honor.

Justice Lewis F. Powell: What do you do about those?

Mr. Howard E. Shapiro: We recognize it in the local community.

There may be some small communities that can’t support more than one bank but the test really is not a mechanical one of population but a test of threat to solvency.

Congress has, in effect, prescribed in the Bank Merger Act and in Section 7 that competition shall determine what the structure of banking should be, subject to safeguards to prevent the failure of banks, to prevent insolvency.

Justice Lewis F. Powell: Do you consider a ratio of banking offices to population in this equation?

Mr. Howard E. Shapiro: No, Your Honor, we do not because the test of competition is always a test of independent decision making entities.

It’s the firm, it’s the bank which is the competitive measure.

Banking offices represent a convenience factor for the community.

Let me give an example.

Suppose you have a community with one bank that operates two offices or three offices.

Now, that simply is not a competitive relationship because the three offices are all owned by one bank.

On the other hand, if you have two banks in the community, each operating one office, then you do have competition.

So the competitive measure is not a question of ratio of offices to population, but a ratio of banks to banks.

Now, returning then to the situation in Connecticut, I have mentioned that the state’s general deposit situation is highly concentrated, the ten largest banks controlling over 80%.

The same concentration appears in the local markets and it appears particularly in the markets with which we are concerned, Bridgeport and New Haven.

The merging banks here each have very large percentages in their respective markets.

Connecticut National has about 40% of the deposits in the Bridgeport area.

First New Haven has 40% of the deposits in the New Haven area.

Now I am measuring this by deposits in the area because there are other banks, the two Hartford, well, I will come in a moment to those.

The banking structure in the state, dominated by the ten largest as we view it, has been changing.

There are two very large banks in Hartford.

They have been expanding steadily in a series of foothold acquisitions and de novo office expansions.

They moved steadily to the point where they are substantially bigger than the next eight banks.

Then you come to another breaking point in the state’s banking structure.

Below the first 10, the banks become quite, become relatively small.

So these first ten banks are probably the place where the strongest competitive potential is concentrated.

The Bridgeport and the New Haven banks that are merging here have been moving toward each others markets.

In fact, they actually were in competition with each other in an area involved in this case, a so-called four town area.

A little to the north of New Haven and somewhat to the east of Bridgeport and that aspect of the case led us to allege that there was a diminution of actual competition, but the defendants proposed to the District Court to divest themselves a certain of those offices and the District Court accepted that offer so that that actual competition factor is not itself an issue in this case.

However, what that actual competition offer does show is that these two banks were coming into conflict with each other.

These are not just potential entrants on some theory of having the capacity to enter the market.

They are next door to each other right now.

They are on the edge of each other’s markets and they are, for that reason, along with their great economic strength, the most likely entrants we contend into each other’s markets.

The District Court rejected our arguments on a number of grounds.

It found first of all that banking in Connecticut -- Commercial banking in Connecticut is not a line of commerce.

It concluded that savings bank competition in Connecticut is so strong as to destroy the distinctiveness of commercial banking or rather, as I shall argue; it concluded there was a broader line of commerce called banking which included both commercial banks and savings banks.

It also concluded that the metropolitan areas in the state of Connecticut are not banking markets.

The only banking market it recognized was the state as a whole.

When we contended that if that is true then the Standards of Philadelphia Bank should apply to the concentration that appears in the state, the court rejected this view on the ground that concentration didn’t really apply here and the defendants now argue that well it doesn’t mean they are in head to head competition, it just means the state as a banking market.

The court concluded that it would be impossible for the defendant banks to enter by any means that the Government had described and I shall come to those.

It concluded that the regulatory factor showed that competition was not seriously injured by any potential competition contention of the Government and finally it sustained the “convenience and needs” defense.

Now before I go to these many issues, I think I should at least try to make an overview of what it is the Government thinks that you are doing in this potential competition cases.

We start with the premise that in the Philadelphia National Bank, this Court concluded that Section 7 applies to banking and that concentration ratio is our primary index to the diminution of competition when banks merge.

This was followed in 1966 by a thorough congressional reexamination of the problem in the Bank Merger Act of 1966.

Out of that came a conclusion that the antitrust laws remained applicable to banking, that antitrust standards should apply in banking, subject to a new defense the convenience and needs defense which was to apply.

The Bank Merger Act of 1966 also provided that the bank regulatory agencies would be permitted to intervene as parties to defend their own decisions.

Now viewing this history, the Government has concluded that Section 7 is extremely important in preventing a consolidation of banking among the various states to the point where only a few institutions dominate all of the states’ banking.

In Connecticut as a whole, the 10 largest banks have been considering merger with each other since 1968.

Since 1969, there have been four mergers approved by the regulatory authorities among the 10 largest banks.

Now the two merging banks here are the fourth and eighth largest in the state and they are right next door to each other.

They have spread to the point where they actually competing with each other.

Each is a big, strong and healthy institution and they are well managed.

They are the dominant local banks, 40% of deposits in their primary markets in Bridgeport and New Haven.

Those markets are concentrated and each bank, therefore, can bring important new competition into the market of the other, if they will come in by independent entry.

Now those markets are attractive and each bank has strong incentives to expand into them.

So long as the attractive and profitable merger route is open, however, large banks will not give serious consideration to alternative means of entry.

Their management, anxious to find merger partners will squelch any proposals for independent entry and their managements will argue that we have to merge with other large banks because we all have to grow until we are as big as the biggest and the result is of course that the biggest becomes the measure of the size of all of the banks and you have a trend that cannot be stopped if this standard is the one to govern.

This Court rejected that view in Philadelphia Bank and I think it did so rightly.

Justice William H. Rehnquist: Well, if you are right as to the standard, Mr. Shapiro, why is the Government had such a miserable record in the District Courts with these challenges to bank mergers?

Mr. Howard E. Shapiro: Because potential competition is a doctrine I think that lawyers instinctively react hostilely to.

It’s an economist’s concept.

I think part of the doctrine is very well stated, one side of the doctrine is well stated in the brief for Connecticut National Bank where the wings aspect of the doctrine is summarized.

The other aspect, the de-concentrating aspect is really not just an economist’s concept, it is a concept which is derived from Section 7 of the Clayton Act because it’s a concept which aims at Section 7’s purpose, as this Court described in Brown Shoe to stop the rising trend toward concentration so the Government has taken potential competition and argued you can use that as, you can use Section 7 through the potential competition doctrine as a device to channel the desirable expansion of banks into pro-competitive directions.

Most courts simply find this novel.

It’s much the same with many of the other antitrust laws.

In the beginning, people had difficulty with them.

But it’s a very American concept, Your Honor, that we should have an atmosphere of competition and that the structure of industry should not be decided by administrative or judicial fiat.

Someone saying as the District Court here did, that there should be four or five large banks in the state.

Rather structure is to be determined by the processes of competition and that’s what Congress decided when it made Section 7 applicable to bank mergers, not just reiterating the general view that an administrative agency must give attendance to the doctrines of antitrust but rather making it specifically applicable.

Now --

Justice Potter Stewart: What was the genesis of potential competition?

Was that in the Pen-Olin case?

Mr. Howard E. Shapiro: The first statement of it was in the Pen-Olin case.

Justice Potter Stewart: And that was not a -- it is not a genesis in economic fraternity, it was in this Court, it was a judicial genesis?

Mr. Howard E. Shapiro: I think the Court has been ahead of the economist, Your Honor.

Justice Potter Stewart: Maybe.

Mr. Howard E. Shapiro: In this respect and although there was in the Pen-Olin --

Justice Potter Stewart: Only ahead is not quite the right word.[Laughter]

Mr. Howard E. Shapiro: Well, in the in the Pen-Olin decision, there actually is a reference to one of the T&AC report which initially summarized the doctrine and there are traces of it in earlier cases, although it really received its first general recognition.

Justice Potter Stewart: And we just first really articulate it in the Pen-Olin case, is it not?

Mr. Howard E. Shapiro: In the Pen-Olin case.

Yes, Your Honor.

Justice Byron R. White: That was just one part of it?

Mr. Howard E. Shapiro: That was one side of it, the wings aspect.

Justice Potter Stewart: That was the potential competition and then the genesis of the perceived potential competition, was in Falstaff?

Mr. Howard E. Shapiro: No, no, wings --

Justice Byron R. White: (Inaudible)

Mr. Howard E. Shapiro: Wings, that’s right.

Justice Potter Stewart: Both the actual and the perceived?

Mr. Howard E. Shapiro: Yes sir.

There is a general review of it in the concurring opinion in Falstaff which sets forth the different categories and how they were recognized.

Well to return just briefly to my overall summary.

Justice Potter Stewart: And then the third, which was in the previous case, I am not sure if it is here, the possibility of the acquiree itself expanding into the other market that was in the Washington case.

Is that reflected in any decision of this Court in the Section (Voice Overlap)

Mr. Howard E. Shapiro: No that’s a --

Justice Potter Stewart: It's a brand new doctrine, it’s genesis in the Justice Department, right?

Mr. Howard E. Shapiro: We think it is genesis in the general policy of competition.

But what we’re concerned about mainly, the reason we keep finding these genesis is that Section 7 is, as we see it, something to channel its expansive force, that the banks are undergoing now into pro-competitive direction so that you will determine banking structure by the pro-competitive entry of banks Now the large banks in this case claim that they have to merge because they have to meet the competition of the great banks in Hartford, they say --

Justice Potter Stewart: There is a shadow of New York City in this case?

Mr. Howard E. Shapiro: And there is a shadow of New York City, they contend.

We have to meet that.

Well, I think the shadow of New York City is somewhat overstated, but on the competition with the Hartford Banks, they say they can’t really make it unless they can get bigger, that they can’t enter any other markets unless they get bigger.

I just like to point out that since this case was tried in Connecticut, there has now been eight new bank charters issued and five of those bank charters are in the Bridgeport metropolitan area.

Now when District Court said, “Well, you see you don’t have to worry about potential competition because there will be new banks coming in all the time.”

But of course those are very small banks and the defendants were very large banks say we can’t overcome the economic barriers to get into these markets when the little banks can and these big banks would bring a much more important competitive contribution for the very reasons they claim that they have to meet the competition of the Hartford banks which over the state wide area has such important resources.

Now what the effect of this merger trend in Connecticut is going to do is to increase statewide concentration and create a danger with the system wide pricing that is characteristic in Connecticut, but you’re going to have a statewide oligopoly.

It will deny the Bridgeport and New Haven markets the competitive benefits of independent entry by these large banks which are poised right at the doorstep and it invites other mergers from the few remaining banks.

In fact the fourth merger approved by regulatory agency was approved on April 4 and it’s a merger of the third largest and ninth largest bank in the state.

I don’t see how, under the standards the District Court adopted here, the antitrust division or the regulatory agencies are going to be able to apply the antitrust laws as they must to stop this trend and now I would like to turn specifically to the issues in the case.

Chief Justice Warren E. Burger: I think we will resume there right after lunch.

[Luncheon Recess]

Mr. Shapiro, you may continue.

Mr. Howard E. Shapiro: Thank you, Your Honor.

I was about to turn to the specifics of the case, the District Court’s rulings on line of commerce in section of the country, the problem of condition of entry, competitive effects and convenience and needs.

With respect to the line of commerce, the District Court found that there is in Connecticut a broad line of commerce called banking, consisting of the commercial banks and the mutual savings banks.

We need not, for purposes of this case, contest the existence of this broad line of commerce, or as we view the matter, under this Court’s decision in United States against Continental Can, the existence of the broader line of commerce does not preclude the existence of the more specific lines, commercial banking and other types of financial institutions.

In fact in the Phillipsburg case, this Court recognized that there was significant competition among thrift institutions for the same kind of business that the small banks in the Phillipsburg area were competing for.

Now the commercial banking business in Connecticut has been cutting into the province of the savings banks, particularly with respect to competition for real estate loans.

Today those -- there’s no doubt that savings banks and commercial banks in the State of Connecticut compete for real estate loans.

They also compete for some types of personal loans and they have competed for time and savings deposits, but there isn’t a significant difference of kind involved.

Savings Banks in Connecticut are important, there are 68 of them and the have total deposits, I think slightly greater than the total deposits of the State’s commercial banks.

But Dr. Miles the Vice President of the Savings Bank Association, explaining the role that savings banks in the state said that they are focused primarily on service to the individual and the family.

95% of the business of the loans of savings banks are real estate loans and only 5% is in the other category.

64% of the business of commercial banks is in a non real estate loans.

The big area for commercial banks, the distinctive area is of course the commercial and industrial loan.

Savings Banks just are not a competitive factor in this area in Connecticut.

I think they loan some $26 million in what they classify as commercial and industrial loans and this is less than one half or 1% of their total loans.

And of course savings banks don’t offer any of the special services that commercial banks do, the very special services which the District Court in this case used under the convenience and needs defense to justify the merger.

There are no savings banks trusts, there are no savings banks computer services, there are no service for savings banks corporate services to business.

Even in the loan area, savings banks are quite limited in their function, they can only loan up to 8% of their assets for personal expenditure loans.

Commercial banks are not restricted in this way.

Well, I could go on but it boils down really to again a distinction between the unique capacity of commercial banks on the one hand and the -- particularly in serving commercial business and the very useful and important competition that savings banks have in the area of serving the family and the individual and those who want to borrow on real estate or for real estate purposes.

Now there is another important development in Connecticut that was quite significant in the District Court’s opinion.

The State of Connecticut adopted subsequent to the trial in this case a statute permitting savings banks to enter the area up to now exclusively the preserve of the commercial banks, the demand deposit.

Connecticut savings banks will be able, after 1976, though still not in effect yet, to offer personal checking accounts.

They will be able to offer these only to individuals, however, and only for personal use, not for business purposes.

Of course, demand deposits in commercial banks are not so limited.

Moreover, experience elsewhere has indicated that checking account powers held by savings banks does not mean a mass exodus from commercial banks to savings banks to use some of the words of Dr. Miles.

The States of New Jersey and Connecticut both permit savings banks checking accounts and they also permit them on a somewhat broader scale in Connecticut because in those states business savings accounts are allowed.

Nonetheless, looking at them only as -- looking at checking accounts only as a proportion of the savings banks accounts is relative, it’s quite low, I think it’s only 5 or 6%.

So it’s unlikely that the competition, while it’s important and useful and desirable is going to destroy the distinctive nature of commercial banking in Connecticut.

Now we’ve approached this case from the standpoint of Philadelphia Bank in Phillipsburg which recognized commercial banking as a distinctive line of commerce.

We did not argue that commercial banking is a line of commerce as a matter of law.

We had, we would have objected to the introduction of evidence on this issue.

We did contend that this is the starting place.

We showed that commercial banks in Connecticut are just like the commercial banks in the rest of the country, and that therefore, there is a sufficient basis to treat them as a distinctive line of commerce.

Now, once we were past the line of commerce problem though, we had to consider the section of the country.

We approach that as we had, most other banking cases, we look to a metropolitan area or region as being a practical compromise between very large customers and very small customer banks and we suggested that the proper measure was the metropolitan area in Bridgeport and the metropolitan area in New Haven, consisting of a central city, the cities of New Haven and Bridgeport respectively and the surrounding towns and we used a general measure, the Standard Metropolitan Statistical Area or SMSA which is a useful device.

It requires that there would be a central city of not less than 50,000 population, surrounding towns of not less than 15,000 population, not more than 15,000 population, no less.

And that there be a commutation on a significant basis, 25% out from the town, in from the suburbs into the town and 15% out from the town into the suburbs.

We thought this was a practical test in this area because in this area, metropolitan areas are small.

We are not dealing with great, small -- sprawling agglomerates as in Washington metropolitan area or New York City or even Philadelphia.

It was relatively small close end area.

Now the SMSA concept is not ipso facto definition of a banking market.

It’s just a tool, but we thought it was a practical one and so we used that as our test.

The District Court rejected it because we did not show what percentage of accounts from within the metropolitan area, actually were in the banks in that Metropolitan area and the reason we did not show it is because we couldn’t show it.

The only way you can get that kind of information is by taking a full scale census of the SMSA or having some wondrous computer work done by all of the banks involved at great expense.

In fact, what we did in this case, the difficulty what’s required is demonstrated by the experience that the defendants had with the New York banks.

Defendants argue New York banks are a factor in this market and they wanted to show the extent to which accounts from Connecticut.

People in Connecticut had taken their business to the New York banks.

So they asked the New York banks for statement of addresses broken down in various ways and the New York banks, the six leading banks in the country and possibly the world, the most modern world, simply could not do it in the time available at the cost involved and we had to settle for less.

So the Government, what it did do is prevail upon the defendants at least to show by a sampling of their headquarters’ offices and some of the surrounding towns just what percentage of the business arose within the SMSA in these sample offices and the results were not surprising, about 80% to use an average of the business was within the SMSA.

Now, we thought therefore that we had proved that metropolitan areas are a proper market.

The District Court rejected this and said that the only market is the state at large.

Now this is a very surprising view because it means that you don’t have local banking markets in Connecticut for any practical purpose, you just have a great big thing called the state at large.

Chief Justice Warren E. Burger: You think there would be a difference Mr. Shapiro in that approach if you are in a state like Connecticut, on the one hand or state like Alaska on the other?

Mr. Howard E. Shapiro: No, Your Honor.

The size of the state while it is a factor, well just doesn’t mean that there aren’t local banking markets.

To illustrate the defendants in this case contend that the Philadelphia bank standards should not be applied to them because on a statewide basis.

They say the state is the market but Philadelphia bank should not be applied to them because they aren’t head to head competitors.

They are not competing with each other.

So they are really kind of denying the existence of a statewide market in any traditional sense and that sense of course is that it'd be a practical compromise based on the customer-supplier relationship which measures an area of effective competition among banks.

Now, the Hartford banks in Hartford do not compete with the defendants in New Haven.

The Hartford banks, when they have an office in New Haven do compete with the defendant banks in New Haven so it is a local market that we are talking about, not a statewide.

Justice Potter Stewart: Well, I suppose there might be states where, as we don’t know because we don’t have a case and we don’t have any record proof, but a state like Rhode Island might just be pretty much providence and that’s it or a state like Delaware might be --

Mr. Howard E. Shapiro: Certainly Rhode Island (Voice Overlap).

Justice Potter Stewart: But Rhode Island (Voice Overlap)

Mr. Howard E. Shapiro: Rhode Island would come close although even there in the southern part of the state or out on the island that is off the coast that might be possible to say that is distinct but well, Hartford is 42 miles away or 50 miles away by car I think from New Haven and that’s a littler far to go banking.

Justice Potter Stewart: (Voice Overlap) Western Connecticut too.

Mr. Howard E. Shapiro: And it sprawls, there are 11 metropolitan areas in the state and they are fairly distinctive, we contend.

Now there is the matter of the New York banks.

New York banks cast a long shadow in the banking in our country.

In fact they cast a shadow not only over Connecticut but over in New England and the Middle Atlantic States in the country at large.

They are big banks and they are doing the business on a National basis.

It’s also true that Connecticut, in its very southwest corner, there is a little panhandle that sticks out of southwestern Connecticut, kind of, into New York and that is a commuter area.

It probably runs up a little beyond Stanford and people who live in that area can get into New York City to work and do get into New York City to work and there are substantial, there are undoubtedly commuter accounts in the New York banks and a fairly reasonable number of them, a fairly high number them.

But when the defendants brought in a report through Special Masters appointed by the District Court on the effect to the New York banks, what they found was that there are about $487 million in so called Connecticut accounts and that’s accounts from the state as a whole which were in the New York banks, that is roughly 7% of the total deposits in Connecticut commercial banks, divided among the six biggest New York banks and then when we looked a little closer at it we found this.

The average size of those deposits was $20,000.00.

Now the average size of Connecticut bank deposit was $1,700.00.

This is in Government exhibit 130.

Now, what this suggests is that the New York banks are really competing for the larger business accounts, that is where the bulk of the big account is coming from, that is where the bulk of that money is coming from.

Now, New York banks compete across the country, this was recognized in Philadelphia.

In Philadelphia, the Court excluded the New York banks from the market, saying it would draw the market to a broad and it also, despite the geographic proximity, excluded other states in the Philadelphia area, I think Pennsylvania and Delaware and I think the same rule would apply here.

So under a Philadelphia test and the facts we show, we don’t think that the New York banks are the fact that the defendants make them.

Now, we did agree that the state is a section of the country, not a banking market in a traditional buyer seller sense, but a section of the country in which certain distinctive competitive effects could be measured and we argue that Philadelphia Bank would necessarily apply.

It applies because there is a competitive danger when these big banks are merging, that you are going to get a statewide oligopoly.

The defendants deny that.

They say Philadelphia shouldn’t apply but they do not really explain why, if the state as a market as they contend, it shouldn’t, except that they say we are not head to head competitors.

Well there are other competitive effects besides head to head.

I turn now to the problem of entry which is an important consideration here.

I think the first important thing to remember about entry in these cases is that when a merger is denied, a bank will seek an alternative way of getting into a market which it says it can’t get into.

Now that’s demonstrated dramatically in this case.

Connecticut National attempted to merge with one of the big Hartford banks.

The Department of Justice sued and they abandoned the merger.

They told the Comptroller of the Currency in Government exhibit 125, in their application that there was no way that Hartford Bank could get into the Bridgeport market, except by merging with Connecticut National Bank and then when the merger was frustrated, the Hartford Bank went in and bought a little bank in Bridgeport made of foothold entry into Bridgeport City itself and then made a de novo branch entry into the city of Fair -- in the town of Fairfield which was then an open town.

So that this problem of seeking alternatives is demonstrated by this record in G. Ex. 125.

Now, there are three ways we think that people could enter in Connecticut.

First, I have to explain that under Connecticut law, there is a home office protection provision which says that a bank cannot enter another bank’s headquarters’ town so that any town that has a bank headquartered in it is closed to de novo branching.

I shouldn’t say can’t enter, I should say de novo branching.

It is close to the opening of a new branch office but there were towns around New Haven, there were towns around Bridgeport which were open for de novo entry and we contend that if you view the area as a metropolitan area, you could make effective entry into those towns and be an effective functioning competitor in the metropolitan area.

A second method for entry was by purchasing a foothold bank.

There are no foothold banks left in New Haven because the Hartford banks picked them up two years ago, but there are foothold banks in the surrounding towns and they did offer a means of entry.

Now the same thing was true around Bridgeport.

What’s happened in Bridgeport is that there were six towns open for entry, five towns open for -- six towns open for entry and there has now been new banks created in those towns, Fairfield, Trumbull, some of the others and the result is that those towns are now closed to de novo branching because they’ll be a bank headquartered in them.

But those new little banks form potential foothold entrants so there is a way of getting in by that method.

Finally, there is the use of the holding company which is authorized under Connecticut law.

Connecticut does permit the holding companies.

There is no reason why a holding company could not sponsor.

I shouldn’t say sponsor, actually create a subsidiary and acquire it.

It was argued that this might be illegal but the comptroller.

I am sorry, the commissioner of banking in Connecticut testified that he had never been faced with this kind of request before.

The bank holding company law in Connecticut has only been in effect since 1969.

In fact, there were a couple of young vice presidents in the First New Haven Bank who suggested this route in 1969 but at that time, First New Haven was looking around for a merger partner and they were not about to be listened to and of course Connecticut National was also engaged in looking for a partner among the top ten so no one was going to pursue these routes.

Finally, I would like to say one brief word about the convenience and needs defense in this case.

That defense was that there would be special banking services of a kind which would serve, particularly in the interest of business but perhaps the shortest and quickest answer to the convenience and needs defense here is that the bank examiner who went out when the application for these banks was submitted, when the merger application was submitted.

The bank examiner who went out came back and said both of these banks are adequately serving the convenience and needs of their community, and they are, they are good banks and the community is well-banked.

There is plenty of alternative service in the Bridgeport metropolitan area and the other, and the final point on that issue is that if you are going to engage in a balancing of competitive effects against convenience and need, you have got to be right about the competitive effects.

Our overall position is that the District Court here was wrong on the line of commerce, was wrong on the section of the country, was wrong on the condition of entry, failed to give -- failed to weigh adequately competitive effects and therefore couldn’t adequately measure convenience and needs.

Chief Justice Warren E. Burger: Very well, Mr. Shapiro.

Mr. Reycraft.

Argument of George D. Reycraft

Mr. George D. Reycraft: Mr. Chief Justice, and may it please the Court.

This case was decided against the Government after a trial in which the District Court heard testimony from 24 witnesses whose testimony covered more than 2500 pages and after the District Court reviewed more than 240 exhibits, approximately seven months after the conclusion of the trial, the District Court made 293 findings of fact and taken apart from proposed findings submitted by the Government and part from those submitted from the defendants.

This lengthy record covered in detail as required by branch to the history, structure and probable future of banking in Connecticut.

The Government called only three witnesses in this case in chief.

The first witness was Dr. Glans who testified only as to how Standard Metropolitan Statistical Areas are delineated.

He was not offered as expert in banking markets.

In effect, he disclaimed any expertise in banking markets.

He agreed that SMSA’s are determined strictly on commuting patterns and that banking is not one of the criteria used in determining an SMSA.

He said that cities and towns in the New England area are much more meaningful ways of analyzing SMSA’s and building SMSA’s than counties as in other parts of the country because of the relatively large size of counties in Connecticut.

He testified that New Haven and Bridgeport were two separate and distinct areas, that there was very little, if any cross commuting and very little, if any, economic integration between the two.

He said that the city of -- the population of the City of New Haven had declined by about 20% during the 20-year period from 1950s and 1970 and that the population of the city of Bridgeport declined by 1.4% during the same period.

The second witness called by the government was Dr. Neil B. Murphy, a former staff member of the Federal Deposit Insurance Corporation who had worked on bank mergers there.

Dr. Murphy did say the commercial banks were unique financial institutions, but he relied primarily on the demand deposit function which he says virtually unique to commercial banking.

He said its the most important service offered by commercial bank which is not authored by savings banks.

Now, its an undisputed fact as Mr. Shapiro had said that savings banks in the State of Connecticut do now have the power, effective January 1, 1976, to offer checking accounts and accept demand deposits in the State of Connecticut, thereby eliminating that most important distinction.

He generally agreed with the Government, that as Dr. Murphy that SMSA’s at the outset were at least a useful starting point for determining banking markets.

But he agreed also, Dr. Murphy that they were not used to analyze banking markets.

Dr. Murphy himself, the Government’s expert said in an article he wrote that increase in competition among commercial banks and savings type institutions or savings type liabilities suggest to some reconsideration of the product line may be an order and he said this is especially important if savings banks are successful in obtaining the checking account privilege which they now have in Connecticut as of year-end 1975.

He agreed that savings banks are reasonable substitutes for commercial banks in Connecticut for personal loans.

He agreed that savings banks in fact now treat savings deposits as it withdrawable on demand even though they do have the right to ask for a 30-day notice before allowing withdrawal.

Dr. Murphy, the Government’s expert agreed that 79% of Connecticut National’s loan portfolio now is subject to competition from savings banks.

He agreed that a commercial banker, considering a new market should take into consideration the presence of savings banks.

He agreed that the fact of the population of New Haven had declined about 20% from 1950 to 1970 meant that it was not a very good place to put a new bank office as far as retail business is concerned, and he said that they found objective evidence he would not put a bank there.

He agreed that banking in Connecticut has become more competitive between 1955 and 1971 because of more alternatives available to consumers.

He agreed that the proposed merger will have no adverse effect at the present time on small borrowers, small depositors or small businessmen in either New Haven or Bridgeport.

The third witness called by the Government was Mr. Benjamin Blackford who is President of State National Bank in Bridgeport, a competitor of Connecticut National Bank.

State National Bank is a wholly owned subsidiary of S&H Green Stamps combined Connecticut State National and S&H Green Stamps have assets in the neighborhood of a billion dollars and earnings in a neighborhood of $30 million a year compared to $3.75 million for Connecticut National Bank.

Mr. Blackford testified, if he was not familiar with the phrase Standard Metropolitan area and he did not know what made it up or what it meant.

He also testified that State National was a one price bank, that is it does not charge discriminatory prices and charge the same throughout its service area.

He said that State National is in competition with Savings Banks with one hand tied behind our back.

He said that every bank in the area he feels they compete with New York Banks for trust business.

He said State National has a lot of customers who work in New York.

He said a few of these big mutual savings bank around here gives us all the competition we need, and he said he takes into account savings bank competition when he considers opening a new branch because as he said, “If you can’t beat them on price, you got to beat on service.”

Mr. Blackford was a concluding witness in the Government’s case in chief.

The Government called only one other witness.

That was Mr. Peter Stass, the President of Lafayette Bank and Trust Company who is called in rebuttal.

Mr. Stass also said that he did not consider the SMSA concept one way or the other as being the market of Lafayette.

He testified, “I think we have our own description of what our market is” and he said that the bank’s market was primarily where it had its offices.

He testified also that competition -- that his competition included every other bank and he specifically include savings banks within that competition.

The defendants and intervenor called 20 witnesses, including two economists, one Dr. Burton J. Peck, the Chairman of the Economics Department of Yale University and the other Dr. Charles Dopes, the former Chairman of the Economics Department of University of Bridgeport.

Both of these witnesses who detailed familiarity with the market and the area, geographic area in Connecticut and both of whom are experts in structural competition and potential competition testified that as economist, they saw no adverse effect on the structure of potential competition or any of its parts on the proposed merger.

Dr. Peck took the Government’s assumptions on the significance of potential competition and he applied them to Connecticut.

He assumed that commercial banking was a line of commerce.

He assumed that entry into the close towns of New Haven and Bridgeport might occur sometime in the future and he assumed that potential competition has some significance in the field of banking.

He prepared a detailed study of the structure of potential competition in Connecticut based on these three assumptions of the Government and concluded that even on these assumptions the proposed merger will have no adverse effect on the structure of potential competition in Connecticut.

He found that following a proposed merger that would be no less than four firms identified by the Government as potential entrants in each for the major banking markets in Connecticut.

The District Court found based on Dr. Peck’s testimony that no first rank potential entrant would be eliminated by the merger and then the 21 of 40 closed towns, there are now 48 closed towns of 169 that theoretically eliminated potential entrant ranked seven out of ten.

The court also based on Dr.Peck’s testimony that in 52 open towns, nine potential entrants identified by the Government as having statewide expansion capability would remain after consolidation.

In 15 large towns in Connecticut with over 50,000 in population, Dr. Peck testified and the District Court found that there are no fewer than four banks identified by the plaintiff as capable of expanding in the statewide systems which would remain as potential entrants after the proposed consolidation.

For example in Hartford, First New Haven ranks fifth in size among the ten largest theoretical potential commercial bank entrants.

At the present time, First New Haven would rank no better than fourth among theoretical potential entrants into Bridgeport.

Now, Mr. Shapiro has said First New Haven is the most likely entrant into Bridgeport.

I simply don’t understand that.

Hartford National which has $1.7 billion of assets is not now in the City of Bridgeport and on the Government’s theory that is the mostly likely entrant into Bridgeport.

Under the Government’s theory, the second most likely entrant into the city of Bridgeport is Union Trust Company with over $700 million of assets.

It is not now in Bridgeport.

Under the Government’s theory is the third largest potential entrant into Bridgeport is Colonial Bank and Trust Company of Waterbury which is larger than First New Haven.

The District Court found based on Dr. Peck’s testimony before the merger, there are five potential entrants into New Haven ranked by the government as capable of becoming statewide banks.

After the consolidation there would be four.

The District Court found that since five of Connecticut’s largest commercial banks already operate in New Haven, they have more impact on competition there than there is possibility of potential entry by Connecticut National.

The five banks in New Haven now are Connecticut Bank and Trust Company --

Justice Byron R. White: Mr. Reycraft, if there is a difference between actual potential entry and perceived potential entry, to which of these concepts is your present argument more relevant to?

It’s the perceived --

Mr. George D. Reycraft: Mr. Justice White, the Government offered no evidence on perceived potential entry.

Justice Byron R. White: Well, that may be evident but that isn’t -- I am asking what about what you’re talking about?

Who is the most likely potential entrant?

Is that record both of these concepts?

Is it relevant to the (Voice Overlap) or not?

Mr. George D. Reycraft: I understand Mr. Justice White that in analyzing either of these concepts, the Government does look at who is the most likely and then --

Justice Byron R. White: Why is that significant when you are talking about an actual potential entrant?

Mr. George D. Reycraft: I deny that Connecticut National is national potential entrant into New Haven.

The discussion of potential competition in the State of Connecticut was based on the Government’s assumptions, namely that --

Justice Byron R. White: Well, let’s assume though that you have four actual potential entrants if you could -- I know you say that it still here, assume that they were.

Would it make any -- and that you could rank them first, second, third, and fourth in terms of the likelihood of the entry.

Does it really have to be the most likely the --

Mr. George D. Reycraft: I think the most important thing that the Government is to show Mr. Justice White is that the potential entrant, the claimed potential entrant would have entered the town, but for the acquisition.

I say of course that the Government did not prove that.

New Haven is a closed town and Connecticut National could not enter New Haven.

Justice Byron R. White: What if -- but the Government could show and did show it.

It really wouldn’t make so much difference if it was the first or the second or the third most likely entered, would it?

Mr. George D. Reycraft: Well, I would think so Mr. Justice White.

Justice Byron R. White: Why?

That’s what I am asking.

Mr. George D. Reycraft: I would think so because if the most likely entrant is the one who is most likely -- I do not know what’s to add to that, and the question is, what is the importance of eliminating a less likely entrant if the fourth most likely entrant is being eliminated theoretically then there are three left who are more likely.

Justice Byron R. White: That’s what we perceived (inaudible) but if someone actually would have been (inaudible) even the third most likely.

Actually, if you could prove that these are very likely independent and it is like (inaudible)

Mr. George D. Reycraft: Yes, Mr. Justice White, I think that if the Government had proved that Connecticut National would have entered the city of New Haven by other means then they would have advanced their cause.

I agree with you they did not prevail.

Justice Byron R. White: That the Hartford Bank would not be so -- would be a substantial if the Government loses something.

Mr. George D. Reycraft: Well, I think that it is a question of fact as to whether they would have entered and in my conception of the evidence in this case, the Government didn’t make a serious attempt even to prove that they would have entered.

Justice Byron R. White: Other than just the so called argument and objective facts of the bank has a capability?

Mr. George D. Reycraft: Well, on objective facts Mr. Justice White, I would say that the objective facts as to likelihood of entry would be based upon the size of the potential entrant and that the larger the entry the more likely --

Justice Byron R. White: That’s a fact, we believe that but it still would mean that the bank (Inaudible)

Mr. George D. Reycraft: If the Government is correct that New Haven banks can enter the City of Bridgeport and if First New Haven was eliminated as one of the less firms which would have, but did not then the reserve question, Mr. Justice White, I would say that would -- the Government would argue so that was a loss of competitor in that area.

Justice Byron R. White: I would have said you wouldn’t agree with it.

Mr. George D. Reycraft: [Laughter Attempt] I would agree that six competitors generally mean more competition than five.

It’s a question of substantiality however, whether the likelihood of that, elimination of that possibility would substantially lessen competition and that is what I say the Government has failed to prove.

Professor Stokes, who is on leave from the University of Bridgeport, also testified that the proposed merger would have no effect on the structure of potential competition in Connecticut.

The defendants and the intervenor called 18 other witnesses who were bankers and businessmen from the City of New Haven who testified generally on competition and generally agreed that commercial banks and savings banks were in very substantial competition within the state.

The structure of Bank in Connecticut is highly competitive.

The number of commercial banks has increased during the last 11 years and the alternatives available to consumers has increased in majority of Connecticut’s 169 towns.

As of year end 1963, there were 64 commercial banks in Connecticut, as of the close of the record there were also 64 commercial banks in Connecticut.

Since the close of the record as Mr. Shapiro has indicated eight new commercial banks have been chartered, so there are now 72 commercial banks in Connecticut compared to 64 twelve years ago.

So that this alone demonstrates that the most likely entrance in the commercial banking in the City -- in the state of Connecticut are investors and not other banks.

There has been no occasion in the history of banking in Connecticut when any bank holding companies or bank has followed the route proposed by Mr. Shapiro which is to the so called holding company new charter route.

The State Commissioner of Banking testified that it had never happened in the State of Connecticut.

He said that if it were done, it would result in a beguile call of fury from other banks with litigation.

The State of Connecticut also has a form which applicants for a new bank charter are required to fill out.

That form says this bank is not be to organized for the purpose of selling, merging or combining with any state bank or trust company or national bank now in existence.

So in order to file a procedure that the Government is suggesting in this case, it would require full statements by the applicants in order to get a state bank charter.

The Comptroller of the Currency has only charted three banks in the state of Connecticut since 1963 and two of these banks were what are called interim banks which were formed for the purpose of facilitating the elimination of minority shareholders in a bank holding company in Hartford.

For the State as a whole, commercial banking options for retail customers have in increased in 94 of the 169 Connecticut towns and they have decreased in only three towns between 1955 and 1971.

There are more alternatives today in Fairfield County in 19 of 23 Fairfield County towns than they were in 1955 and a more alternatives in 22 of 27 New Haven County towns than 1955.

Among the 119 towns in Connecticut outside Fairfield and New Haven counties, the number of commercial banking options has increased in 53, remains unchanged in 65 and decreased in only one such town.

Even Dr. Murphy, the Government’s expert witness conceded that banking in Connecticut has become more competitive since 1955.

The Government has raised essentially four issues here, whether the two banks are significant potential entrants into each others markets, whether Standard Metropolitan Statistical Areas are really without more banking markets, whether the two banks are significant potential entrants into other local banking areas in Connecticut, and fourth whether existing competition from savings banks and existing competition from New York Bank should be totally disregarded in determining the impact on the structure of potential competition in Connecticut.

Now, the District Court found against the Government on all of this issues which are essentially factual, which are factual issues.

The Government’s argument on Standard Metropolitan Statistical Areas apparently was important to it in this case unlike its position in the Philadelphia National Bank case, Philipsburg, Brown Shoe and Nashville because it could not show that these banks were likely entrants into the home office cities of the others because they were closed.

In order to show an entry into a banking market, it was necessary to show that entry into a suburban town somewhere near New Haven would be adequate.

The only witness who testified that SMSAs where banking markets was Dr. Murphy who did testify he had the no familiarity with geography of the banking in Connecticut.

Dr. Peck who was familiar with the area who teaches at Yale University said that the acquisition of for example a small bank in Woodridge, Connecticut would not be ineffective entry into the New Haven area and to compete with First New Haven National Bank.

The Woodridge Bank and Trust Company has about $8 million assets.

It has about one office.

It is not allowed to branch into New Haven because that’s a closed town of the eleven towns in the New Haven Standard Metropolitan Statistical Area, six are closed.

In the Bridgeport Standard Metropolitan Statistical Area, six out of eight of the towns are closed, so that new entry into those towns is not legally permissible at the present time.

On the question of banking markets, both the Government and the defendants in this case agree that the State of Connecticut is appropriate area to look at in appraising this particular bank merger.

The reason is because as defendants, we apply this Court’s test in the Philadelphia National Bank case which is at the relevant section of the country to look at as a area within which state law permits banks to branch or merge and that’s subject to home office protection is the State of Connecticut.

Now, we don’t say that the State of Connecticut is a banking market in which First New Haven and Connecticut National compete as Mr. Shapiro does.

He goes from the assumption that if Connecticut is banking market therefore everybody in the state must compete within it.

The facts are and he concedes the facts are that they do not.

Connecticut National’s primary service area is Fairfield County where most of its offices are located.

First New Havens banking area is essentially southern New Haven County and there is a small area of interaction between them and the four town area that Mr. Shapiro described, but other than that they are not in competition with each other.

There are smaller banks in the state which do operate strictly on a local basis.

For example, Woodridge Bank and Trust Company that we have referred to operates strictly in Woodridge.

The Government's own exhibit show that in the town of Fairfield, Connecticut National’s Fairfield office gets only 77.1% of its business from writ -- people who has statement addresses in the town of Fairfield and is highly localized.

They show that 83.1% of the deposits of Connecticut National Trumbull office originate in Trumbull.

So for the small customer, he is limited to the area in which he lives.

For the larger customers, however, the choice has increased dramatically.

New York banks as much as Shapiro has conceded obtained close to $500 million of banking business from the State of Connecticut.

Now that's just banking business that we are able to prove as a result of a survey done with the assistance of a Special Master.

We served deposition notices and subpoenas on New York banks and while we encountered a good deal of resistance and it took a good deal of time, we were able to prove nearly $500 million of banking businesses which these banks alone get out of the State of Connecticut.

This is significant for commuters also between New Haven and -- between Connecticut and New York, the choices are substantial.

The Government’s own exhibit showed that there are 50,000 people who cross commute between Connecticut and New York.

About 25,000 go from Connecticut to New York and about 25,000 come back from New York to work in Connecticut.

There is substantial cross commutation and the Government’s evidence shows that it’s increasing.

Now, if these commuters or these cross commuters represented only one employed person per household of five, that would be the equivalent of the city of 250,000 people which is larger either the city of New Haven or the city of Bridgeport.

In Fairfield County, the combined circulation of the New York Times and the New York Daily News exceeds by six to one the circulation of the only local newspaper circulated in Bridgeport which is the Bridgeport Post Telegram.

Television advertisement by New York banks saturates the lower Connecticut area.

The New York banks do advertise of personal loans, retail loans, savings deposits.

Now, we say for this reason that the Government’s statistics, their so called concentration ratios are highly suspect or highly attenuated not only for the reason of the effect that New York banks have on Connecticut, but also because of savings bank competition.

If a banker in New Haven were considering entering the City of Bridgeport, he would have to consider the fact that when he went into Bridgeport, he would be competing with Connecticut Bank and Trust Company with 1.8 billion of assets, Hartford National with 1.7 billion of assets.

With Connecticut National, he would be competing with people’s savings banks with over 700 million of assets and the Government’s own evidence shows that over 70% of this business is in competition with savings banks.

So, whether the Court decides that savings banks should be included in the line of commerce or analyze it strictly in commercial banking terms, the effect of that competition from savings banks is a real thing.

A banker in New Haven thinking of entering Bridgeport would be foolish not to consider that competition for that amount of his business.

I will leave the rest of my time, Your Honor, to Mr. Loevinger.

Argument of Lee Loevinger

Mr. Lee Loevinger: Mr. Chief Justice and may it please the Court.

Let me first to answer a question which I believe was asked by Mr. Justice Stewart as to the genesis of potential competition.

My research indicates it has been considered in six cases of which the first the El Paso case.

The six cases are El Paso, Continental Can, Penn-Olin which was the third case, Proctor and Gamble, Ford and Falstaff.

Falstaff is the first case in which in this Court gave rather plenary consideration to it.

The cases are discussed, beginning at page 76 of our brief in this case.

The six cases just mentioned are summarized at pages 82 and 83.

Now, it seems to me that there has been some -- there’s obviously a conflict as there are always is in cases coming to this Court, but there is a matter here that involves an apparent conflict of philosophy between government agencies.

Clearly, the banking agencies, Comptroller of the Currency, and the Department of Justice are in conflict and it has occurred to me that it might be useful if I could without really tying anybody down to anything, try to analyze the phases of this conflicting philosophy.

The Department argues in this case that if large, healthy banks like Connecticut National and First New Haven are permitted to expand by merger.

That the result will be a statewide structure in which most local markets will be nominated by a few large banks.

Now, I suggest that this is a much more likely result if these banks are not permitted to expand by merger.

As the Department itself admits, there is in the nature of local markets, there are relatively few banks.

You can’t talk about local banking markets and banking as one of the most competitive fields in the United States.

You can’t talk about local banking market because all you were taking about the national beer market as you are Falstaff.

In fact a remarkable coincidence is that in Falstaff there were 10 actual or potential competitors in a national beer market where as in a tiny little state like Connecticut, the third smallest state in United States, they are still talking about 10 competitors.

Well, when you get it down to little local markets, you don’t get large numbers and if you confine these banks by forbidding mergers which you aren’t going to get are dominant local banks.

There is simply no question about this in my mind.

Let me try to illustrate it by posing two alternative concepts.

These are admittedly highly hypothetical.

They correspond only roughly to reality because you can't construct a hypothetical that really corresponds to all of the aspects of reality.

But let us a take a state that has 50 towns in it.

Each one of which has two banks, so that there is competition among each of these two banks.

There are no large dominant banks, no large dominant cities.

Every bank has approximately 1% of the banking business in the state.

According to the Department’s theory, the state is competitive because nobody has more than 1% but every single banking market in the state, each town is concentrated because there are only two banks, and two banks have a 100%.

Now, let us take an alternative thing.

Let us say that by some miracle of legal transmutation, administrative and legal action that there are a whole lot of mergers in this state and that the 50 or rather the 100 banks in the state merge into 10 statewide banks, 10 much larger statewide banks and that as a result of this, they decide to branch out, and so each of them establishes branches in a number not in all, but in a number of states, so we end up with let us say hypothetically each town has five banks.

There are 250 banking offices in the state, as opposed to a 100 banking offices previously.

Now, the Department tells us that the difference in banking offices don’t make any difference, but each town now has five baking offices, each representing a different bank.

The state on the other hand has only 10 banks.

The same number as competitors that were nationally in Falstaff.

On the state basis, they would say that there is concentration because 10 banks have a 100%.

Indeed there is likely to be some asymmetry and it is likely that five banks have a little bit more than 50%, so they tell the state bank that this is concentrated.

On a local basis, there is less concentration certainly because each locality has five banks, although five banks still have a 100% which according to the definitions and test we have been given is still concentration and yet I submit to the Court “Which way is the public being better served?

Having five alternatives, five competitors available in every town to every bank customer or having two little banks?”

Now, I submit that this is the basic conflict in philosophy between the Department of Justice and the Comptroller here.

That the Department says that a larger number of smaller limited service, limited competition banks is preferable whereas the Comptroller without making any arbitrary commitments as to number says that a generally smaller number of larger full service, fully competitive banks will better serve the public interest.

Now, reality is always far more complex than these hypothesis, but I think that what this does illustrate is that simple per se rules just don’t work and very often will in fact work to frustrate the very objective that they are thought to be serving.

Indeed, in some respects you can see this in Connecticut here.

We have been given a test by Mr. Shapiro that the market is concentrated if the top ten have 80% or more or if the top five have 40% or more of the market and he applies this and says “We’ve got a concentrated market in Connecticut.”

Well, let’s look at the facts.

The Connecticut National and the First New Haven, the merging banks here, their share of commercial bank deposits and I refer only to those because I don’t think the line of commerce makes any difference here, that their share of commercial bank deposits from 1959 to 1972 declined from 13.8% to 10.3%.

They have a declining share of total state commercial bank deposits.

The Hartford National and Connecticut Bank and Trust, the two giant Hartford banks have 34.5% in 1959, but 41.3% in 1972.

Consequently, if you are looking for the 40% test of the top five, you can add any other three to the Hartford Bank and CBG and you get over 40%.

Now, I submit again that this simply beggar's common sense that you cannot say because the two leaders are increasing their percentage that their competitors should be precluded for merging.

If there is any sense at all to this notion of structure as a test of competitive performance, it must be that increasing concentration forecloses merger to those who are in the increasingly concentrated segment to the growing segment of the market not to those who are in the diminishing segment.

Simply makes no sense to say that because our two big competitors are increasing their share, that therefore, we will foreclose the opportunity to merge to the two smaller banks and indeed this is the very hypothesis that was rejected in Brown Shoe in the quotation that I read earlier and that is cited in our brief.

Justice White asked, “What is the difference between the first and the second in rank and perhaps those lower in rank among potential entrants, either from the viewpoint of a perceived or an actual future potential entrant?”

I think I might answer that slightly differently than Mr. Reycraft.

I think there is a difference.

I think we all generally agree or at least we assume as a matter of antitrust law that if you have more competitors, you have more competition.

If have only got one or two competitors, you are less likely to have strong competition in a market than if you have 10 or 15 in most markets in most circumstances at least.

However, what is true of the actual competitors is not necessarily true of potential competitors.

Potential competitor exerts whatever influence he exerts by virtue of the perception of those in the market.

The perception of those or in the case of the actual potential competitor as a future possibility, but the perception of those in the market is obviously fastened on the number possible entrant and whether there are 15 or 20 or 30 lined up behind them which seem to make a very little difference.

Indeed, if you will look at the economic literature on the subject, it does indeed say and there is even some recognition in the decisions of this Court that the significant potential entrant is the most likely potential entrant and maybe this holds true of the first or second, I don’t know how far down the line you go, but after you pass one or two potential entrants, those in line behind really lose all significance.

Justice Byron R. White: Well, are you suggesting -- I guess you won’t find that implications with respect to couple of reflective perceived entries?

Can you suggest where it is at (Voice Overlap)

Mr. Lee Loevinger: Well, it is -- the cases referred to the most likely entrant Mr. Justice White.

Justice Byron R. White: (Inaudible)

Mr. Lee Loevinger: This may be the discussion in those cases.

I do not recollect with that degree of sharpness, but the distinction between the actual or perceived and the dominant or potential entrants is something that really did not emerge until your Falstaff decision.

Consequently, these distinctions are not drawn in the earlier decisions and that indeed, I am not sure that this is the case for example in the leading case, the El Paso case is perfectly obvious that the Northwest Pipeline Company was the most likely entrant because they were in there just trying their hardest to get into the market.

There isn't any question that they were an actual potential entrant ever since and I think that the matter was well summarized in the words of the Court, “unsuccessful betters are a competitors no less significantly than successful ones” and this really is the genesis of the whole potential competition doctrine.

Justice Byron R. White: But they are well perceived?

Mr. Lee Loevinger: They were perceived indeed, yes, and as I say I think the distinction between the actual and the perceived entrant was not drawn until we came to Falstaff.

Now, it is interesting that plaintiff argues that commercial banks are significantly different than savings banks and should be excluded from the line of commerce and yet plaintiff or the Department also argues the importance of business financing by commercial banks is what makes them significant and makes -- and gives them particularly unique quality.

Yet, when we come around and talk about the advantages of these mergers, when we talk about the services and the competition to be secured from these mergers, the Department tells us that “Well, this is just a matter of convenience and needs and does not have anything to do with competition.”

Now, I submit they can’t have it both ways.

If it is, business financing, business services that make commercial banking a unique line of commerce for the antitrust laws which have to do with competition and competition only, then they can’t turn around and say but when you show us that a merger gives you greater services to the business community that is an unimportant for purposes of competition.

If it is important for purposes of distinguishing the line of commerce as a line -- as a competitive line of commerce, it is also important for appraising the effects of the merger upon competition in the line of commerce as well as the section of the country.

Now, the Department also argues that competitive effect may be found in a section of the country that is not a market.

I confess that there is part of this that eludes me.

I have always understood from all the prior decisions of this Court and I have searched the decisions of this Court on this subject, the section of the country and relevant geographic market review synonymously.

In some cases, one is used after the other in parenthesis.

This Court has never differentiated and what it said in the Philadelphia Bank case was that we were to look to the area in which the impact of the merger would be felt in order to determine the relevant geographic market or the section of the country.

Now, that is what the Court did here.

The Court said that in the state of Connecticut, there are two dominant statewide banks, Hartford and CBT and that if we permit this merger there will be another statewide bank that will increase the number of statewide competitors to three.

Therefore, the impact of the merger will be felt in the state as a section of the country.

That is why I would look to this.

Now, this doesn’t mean that aren’t local markets.

I think that is complete non-secreter.

There may well be in local markets, if two banks within New Haven or within Bridgeport were seeking to merge, I think we might well look to Bridgeport or New Haven as markets because that is where the impact of the merger would be felt.

But simply because the impact is felt on the state level, the court properly applying the teachings of this Court in Philadelphia said that’s where I look to see what impact this merger is going to have.

To conclude from this that every firm within that market is necessarily an actual competitor is again a complete non-secreter.

And as in my brief, I referred to Von’s Grocery, although I think it is a little easier for me to talk about the Washington metropolitan area because I know it better.

In Washington as in Los Angeles there are half a dozen, I don’t know how many, but a certain number of grocery chains that compete throughout the metropolitan area.

We are all familiar with them.

I don’t need to name them.

We probably buy groceries there everyday.

These are competitors and there’s no doubt in my mind that Metropolitan area as in Los Angeles is a relevant market with respect to possible merger of these grocery chains.

This doesn’t mean that a grocery store in Bethesda is a competitor of one in Alexandria or one is Silver Springs is a competitor in Bethesda or Alexandria, or in False Church or anywhere else and yet these communities are separated no further than Bridgeport and New Haven.

To say that we have a relevant geographic market for purposes of a merger case does not mean that every from within that market is an actual competitor and the argument which is founded upon that attempted logic is utterly without foundation and is a complete non-secreter.

Justice Potter Stewart: Now Mr. Loevinger, the statute talks about lessening of -- on the effect maybe to lessen competition in any section of the country?

Mr. Lee Loevinger: Country, yes sir.

Justice Potter Stewart: And I would agree with your understanding that the section of the country is the equivalent of what the geographic market phrase you find in Court opinion and so on.

But the lessening of the competition has to be in the section of the country or the geographic market whichever one you want to choose which implies that there is a competition in that geographic market and that’s just relevant isn’t it?

Mr. Lee Loevinger: That is correct sir and in fact -- but has been admitted by the Department, what Court found here is that there is no actual competition at all between the geographic, between the merging banks.

Therefore, the Court said, in fact, the total phrase in Philadelphia as I recall was we look to the area of competitive overlap and the area where the impact of the merger may be felt.

Since there is no area of competitive overlap, the Court said I look to the area where the impact of the merger may be felt.

Justice Potter Stewart: And he found the whole state?

Mr. Lee Loevinger: And he found the whole state, that is correct.

Justice Potter Stewart: And yet he certainly didn’t find that there was face-to-face competition in all the state, not just the opposite.

Mr. Lee Loevinger: He found that he is not.

That’s correct sir, yes, sir.

Justice Byron R. White: Well, they found that there was some face-to-face competition which he probably got rid off?

Justice Potter Stewart: Well, yes.

Mr. Lee Loevinger: Now there is non-involved in the cases that come to this Court (Voice Overlap)

Justice Byron R. White: When he looked around, he did find face-to-face competition.

Mr. Lee Loevinger: No, as a matter of fact the Comptroller found out and eliminated it sir.

Justice Byron R. White: Alright, but it was there?

Mr. Lee Loevinger: There was some that was eliminated.

Yes, sir.

Justice Byron R. White: It was there.

Mr. Lee Loevinger: It’s not here now.

Justice Byron R. White: And it might have been argued that if the merger hadn't been proposed, maybe in 10 years there would have been more face-to-face competition in some other sections of the state?

Mr. Lee Loevinger: Indeed, the Department of Justice tried to argue that and that was disproved because of the Home Office Protection Law.

This is one of the --

Justice Byron R. White: But there weren’t many open towns then?

Mr. Lee Loevinger: There just weren’t any places left that they would have there.

This is one of the interesting aspects of this case, of these two cases as it comes to this Court, it is an aspect which all together distinguishes both cases from Briley (ph) incidentally.

In Briley there were simply no question that the holding company could have entered Briley de novo as far as the law is concerned.

I don’t comment on the economic factors, but clearly they could have entered Briley so far as the law is concerned.

In both of these cases, there are legal barriers which would have to, which would require to be circumvented and I respectfully suggest that is somewhat unseemly of the Department of Justice to be arguing that the banks should resort to legal strategy as to circumvent the requirements of the state law which are designed to protect state banks and to maintain the dual banking system which has given us the tremendous amount of competition that in fact we do have now.

Indeed, as Mr. Freeman said --Mr. Freedman said, “Congress did not give the control over albeit to Section 7.”

Let me reply that Congress certainly did not give the Department of Justice control over banking entrant.

On the contrary, it's specifically provided that the Department of Justice should comment only the competitive factors involved in bank merger cases and that the decisions should be made by the Court as I have pointed out.

In Whitney, this Court said that the lower court should not even get into this matter.

That these are matters for administrative weighing before they ever come into the court and there are whole series of cases cited in our brief beginning with the Walker Bank case decided by this Court in which the Courts have said that when any of the banking agencies attempt to evade or circumvent the state law restrictions which are incorporated by reference by the federal law that they are acting beyond their power and acting improperly and that the courts will prevent them from doing so.

It seems to me to be unseemly for a government agency now to be suggesting that the banking agencies or the bank themselves should be attempting to do that which this Court has strongly suggested in Walker Bank and other cases that the banking agency should not be engaged in.

Chief Justice Warren E. Burger: Thank you Mr. Lee Loevinger.

Mr. Shapiro, you have five minutes left.

Rebuttal of Howard E. Shapiro

Mr. Howard E. Shapiro: Thank you, Your Honor.

First I would like to address the question of markets.

Dr. Peck who's study of potential entrants was referred to by Mr. Reycraft conceded that his study did not undertake a study of banking markets.

He simply looked at towns as geographic entities.

He also stated that he did not consider the question of the effect of actual entry.

He was simply looking at the potential entrants from the standpoint of the so-called perceived effect and finally he said at the close of his cross-examination that he wasn't all concerned with concentration, he considered it unimportant in banking.

So, that I don’t think that Dr. Peck’s studies really focused on the market question that he should have focused on in trying to determine who is the potential entrant.

Now who is the potential entrant?

The Government’s theory was that the most significant potential entrants were in the top 10 banks in the state.

Of those top 10 banks, two of them, the big Bridgeport Banks we said were already in the Bridgeport in New Haven areas.

Justice Potter Stewart: The big Hartford banks?

Mr. Howard E. Shapiro: The big Hartford banks.

I am sorry, Your Honor.

Hartford National is actually in -- Hartford National is not in Bridgeport, but it is in Fairfield.

So we say it is already in the metropolitan area and of course the other bank is in both New Haven and Fairfield.

Now, eliminating the top two, that leaves eight and if you eliminate the banks that are not in New Haven or Bridgeport, you get a very small number left and of those we then look to see who was large and close by.

And the most obvious entrants were the Bridgeport bank moving over to New Haven and the New Haven bank moving over to Bridgeport and we said they are the most significant entrants.

Now, Mr. Reycraft suggested that the test should be whether the banks would have entered, but for the merger, but we suggest that that test would be a test of certainty which would not fit the purposes of Section 7.

The real test is whether -- a test which would fit the purposes of Section 7, is whether if the merger route is closed, it is probable that the banks would enter given their incentive and capacity.

And this is we think we demonstrated that they had the incentive and that they had the capacity that means of entry did exist if they were encouraged to do it and we think this was demonstrated by the experience of the Connecticut National attempt to merge with the big Hartford bank.

The Hartford bank which said it could not get in to Bridgeport did try to get into Bridgeport and did succeed in doing so.

In fact, in this case, in addition to offering to divest themselves of the banks which were the subject of actual competition in the four-town area.

The defendants at pages 40 and 41 of the record also said that if they were allowed to merge, they would get themselves in the Hartford.

They said it would be difficult legally, but they would attempt to find the way, again proving that if the merger route is closed, people will seek an alternative.

Now, counsel for the Comptroller has set forth what he views as a difference between the Department of Justice and his agency over banking policy.

We suggest that it is not a question of banking policy.

It is a question of whether the Bank Merger Act of 1966 which makes Section 7 controlling is going to be controlling as Congress intended.

In the Comptroller’s brief at page 54 there is a note 23 which says that he favors merger over entry by de novo methods or by new charters.

He has an affirmative policy in favor of merger.

Now, the Department of justice believing that Section 7 is controlling here feels that the test is not whether there is going to be simply local oligopolies immune from competition by expanding banks.

We favor the expansion of the statewide bank.

We favor its entry into local markets that is our policy, but the question is how it gets in.

If it goes in on a small basis and has to fight in that local market it's going to upset the status quo.

It’s going to bring the benefits of competition to that market.

If it walks in by buying a large share it’s going to settle down and we are going to have in the local market the same kind of oligopoly we had before.

We encourage de novo entry, we encourage foothold merger.

That is why we have not challenged the expansions by the big Hartford banks because they always were careful to stay on a small scale when they went into new markets and to the extent that has happened in Connecticut, we have had an increase in local diversity which we favor, but the question is always how the expansion is achieved?

Now, the Comptroller mentioned the Washington area as an example of how market should be defined.

Well, I suggest that the Washington area is a good analogy for considering a metropolitan area as a banking market.

In this sense, the suburban banks in Washington cannot get into the Central City.

The Central City banks cannot get into the suburbs and yet there is genuine competition among those banks.

Thank you, Your Honor.

Chief Justice Warren E. Burger: Thank you Gentleman.

The case is submitted.

Featured:

United States v. General Dynamics Corp. - Oral Argument

Thu, 23 Aug 2012 18:24:27 +0000

Case:

United States v. General Dynamics Corp.

Media File:

72-402_19731205-argument.mp3

Related Transcript:

72-402_19731205-argument

Transcript:

Argument of Friedman

Chief Justice Warren E. Burger: We’ll hear arguments next in United States against General Dynamics Corporation.

Mr. Friedman, you may proceed whenever you’re ready.

Mr. Friedman: Mr. Chief Justice, may it please the Court.

This is a direct appeal from an order of the United States District Court for the Northern District of Illinois which at the trial dismissed a Government civil anti-trust case, challenging the combination of two large coal companies in Illinois as violating Section 7 of the Clayton Act.

As is true in most of these merger cases, the issues relate to the proper definition of the relevant product in geographic markets and then the final question whether within those markets the effect of the merger maybe substantially to lessen competition.

The two companies involved are the Freeman Coal Company which in effect is the acquiring company and the United Electric Coal Company which is the acquired company.

There was not a direct acquisition of one company by the other, however, the acquisition came about in this fashion.

Since 1942, a firm called Material Service Company which was primarily in the building trade in material business owned all of the stock of the Freeman Coal Company.

Beginning in 1954, the Material Service Company started to acquire stock of the United Electric, the acquired company, and by 1959, it had acquired 34% of the stock of United Electric.

At that time, the President of Freeman became the Chief Executive Officer of United Electric, and at the same time, five new members of the board where appointed to United Electric for them being people connected with Freeman and Material Service.

Justice Potter Stewart: That was in 1959?

Mr. Friedman: That was in 1959.

Justice Potter Stewart: I just -- I’m not -- you went a little fast for me.

Mr. Friedman: I am sorry.

Justice Potter Stewart: Material was the dominant stockholder in Freeman?

Mr. Friedman: Material owned all of Freeman’s since 1942.

Justice Potter Stewart: Was the sole stockholder of Freeman?

Mr. Friedman: Sole stockholder.

Justice Potter Stewart: And Freeman began acquiring Electric’s stock?

Mr. Friedman: United -- Material Service.

Justice Potter Stewart: Material not Freeman?

Mr. Friedman: That’s right, begun acquiring United Electric stock in 1954.

Justice Potter Stewart: And did so beyond the -- during the period between 54 and 59 in which time it had acquired something over 30%?

Mr. Friedman: That’s with 34%.

Justice Potter Stewart: And at that time, the -- now you’re just starting to tell that the Operations Director --

Mr. Friedman: At that time, the President of Freeman became the Chief -- the Head of the Executive Committee of the United Electric and there was a shift in the board of directors.

It was a 9-man board.

Five new members where appointed to the board, four of whom were directly connected with either Material Service or Freeman.

That is the company of companies that had control.

Justice Potter Stewart: And the other 66% of the stock of Electric in 1959 was broadly held or held out?

Mr. Friedman: Medium broadly held.

Some, it was held I think by a controllers, but I’ll come to that in a minute as to what happened.

But, I want to stress the fact that both of the expert economists in this case, both the Government’s expert and the appellee's expert testified that as a result of these events in 1959, Material Service then obtained control of United Electric.

Now, the next step in this somewhat complicated series of transactions took place a few months later in 1959 when the appellee, General Dynamics Corporation acquired all the stock of Material Service, and as result of that acquisition, it in turn got 34% of the stock of United Electric.

General Dynamics then continued to acquire the stock of United Electric and by 1967 --

Justice Potter Stewart: Through -- directly or through Freeman?

Mr. Friedman: I believe directly.

I think it has been --

Justice Potter Stewart: So then, Freeman owned 34% of the stock and General Dynamics began from zero.

Mr. Friedman: From zero, but General Dynamics --

Justice Potter Stewart: The number of shares and began building up its ownership?

Mr. Friedman: But General Dynamics of course indirectly owned all of Freeman through Material Service.

Justice Potter Stewart: But Freeman owned the 34%?

Mr. Friedman: Freeman owned the 34%, but of course at that point on, General Dynamics had complete control of Freeman.

Justice Potter Stewart: Well, I know, but there was --

Justice Byron R. White: Is that Material or Freeman [Inaudible]

Mr. Friedman: I’m sorry, I’m sorry, Material, I’m sorry Mr. Justice.

Justice Byron R. White: But not Freeman?

Mr. Friedman: Freeman did not own any of the stock of the -- and it’s my understanding that the stock after General Dynamics was acquired control of Material Service, it was then General Dynamics that in turn proceeded to acquire more United Electric stock.

Until in 1966, it had together with the 34% owned by Material Service, roughly two-thirds of the stock of United Electric.

At that point in 1966, General Dynamics made a tender offer for the balance of United Electric stock, it got all of it.

In the following year, 1967, United Electric became through a corporate merger, and wholly own subsidiary of General Dynamics.

Justice Potter Stewart: Well, what had -- when in the Government’s view was the acquisition then in this case?

Mr. Friedman: We say the acquisition was for -- in 1959, but we say moreover the acquisition continued to be solidified up until 1967, but we think 1960 -- 1959 was the acquisition and that as I will develop is an important factor in connection with the clients --

Justice Potter Stewart: Well, I know it it is and therefore, you can’t say well, it was in 1959, it was also in 1967?

Mr. Friedman: No, we think it was in 1959.

There’s a dispute as to that, but we think its just the --

Justice Potter Stewart: The date is quite important, isn’t it?

Mr. Friedman: It is, yes Mr. Justice and we think in 1959, there was an acquisition cause there's a practical matter, has shown what happened, they got control of the company.

Justice Potter Stewart: Who, not -- the General Dynamics wasn’t there at all?

Mr. Friedman: No.

United Electric got them.

I’m sorry, Material Services got control of United Electric and as result of Material Service wholly owned Freeman, this in effect at that point resulted in a combination and the kind of acquisition which Section 7 was direct.

Justice Potter Stewart: Now, is there any dispute between the parties to this case, (a) as to whether or not there was an acquisition within the meaning of Section 7 and (b) as to when that acquisition took place?

Mr. Friedman: I think -- I don’t believe Mr. Justice that they’d challenged that there was an acquisition.

I think, I’m not certain they may disagree that the acquisition took place in 1959.

I’m not sure of that.

Justice Potter Stewart: As I read your brief, you kept getting an alternative, 59 (r) of 1966, and it seemed to me that the dates can be rather critical.

Mr. Friedman: Yes -- I think Mr. Justice of -- after further study of the case, we would say the acquisition did take place in 1959.

Justice Potter Stewart: But you think there may not be agreement between you and your brothers on that.

Mr. Friedman: I think there may not.

Mr. Hedlund will have to answer that question.

Justice Potter Stewart: Alright.

Justice William H. Rehnquist: When did the Government file its complaint in this case?

Mr. Friedman: In 1969 -- I am sorry, 1967, in September 1967.

Now, there are in the United States four major coal producing areas, and the one that we’re concerned with in this case is an area in the Midwest, which we refer to as the Eastern Interior Coal Province, a phrase that is derived from the descriptions in the U.S. Geological Survey Maps.

It consists of Central and Southern Illinois, parts of Western Indiana and Western Kentucky.

All of the mines of both of these companies are not only located in the provinces I shall refer to it, but in Central and Southern Illinois.

Both of these companies, Freeman and United Electric are old and substantial companies.

Freeman got its first coal mine in 1922.

In the year 1959, it produced about 7 million tons that had revenues of $32 million.

All of Freeman’s coal is mined from deep mines.

They put shafts down and mine the coal out of the deep, out of the ground.

United Electric is even older.

It was formed in 1919 and in 1959 it had production of 3.5 million tons, sales of $15 million.

United Electric has been an extremely profitable company.

It had profits in 1959 of $1.8 million, and it has one of the highest profit margins of any company in the coal business.

It, unlike Freeman is engaged only in strip mining.

It digs a hole.

It takes a side of a mound and pulls the coal out without going deep down into the ground with the shafts associated with deep mining.

There had been some rather dramatic changes in the coal industry since World War II.

After World War II, the coal industry lost its entire railroad business which at one point had been its mainstay to diesel oil.

In addition, there was a sharp trend away from the use of coal in household heating and in many industrial uses.

And in the 7 years from 1947 to 1954, the production of coal in this country dropped sharply, more than a third.

But since 1954, coal has made a substantial comeback as a fuel due primarily to the tremendous market it has been able to develop with the electric utility interests.

And as there’s been a great expansion in the production of electric power in the last 20 years or so, so has the production of coal increased and the result is by 1967 and 1968, the production was almost back to the post war 1947 level.

Now, most of the coal that is sold to the electric utilities is sold under long-term contract, usually five to 10 years, some of them longer.

And in addition, when a utility is planning to install a large generating station, which is going to call for a substantial amount of coal over the life of the generating station, it insists quite understandably that the utility be able to be certain of an adequate supply of coal from the coal company before it will sign the contract.

That is, the coal company has to satisfy it, that it has adequate reserves.

Now, let me speak briefly of the reserves because that is a critical issue in the case.

At the time of the acquisition in 1959, United Electric had 81 million tons of strip reserves and 27 million tons of deep reserves, a total of slightly more than 100 million tons.

Justice Byron R. White: All in this area?

Mr. Friedman: All in the State of Illinois Mr. Justice, all in the State of Illinois.

The record shows that since that time, most of these strip reserves have been committed, although, they still have what we consider substantial strip reserves at this time.

They also -- after that time acquired about 50 million tons in deep reserves which have not been mined.

Now, when we talk of reserves, the description of them, they’re always spoken of as being economically minable or economically recoverable.

What is meant by that is that they treat as reserves coal which with the present level of technology and the present price structure of coal can be taken out of the ground and sold at a profit.

Of course, as we know, what maybe economically minable today -- may not be economically minable today may turn out to be economically minable next year.

Techniques for example have improved remarkably in strip mining.

Coal that 20 years ago was considered far too deep to get out of the ground can now be extracted with new modern machinery.

We’re all familiar with the energy crisis today.

It seems not unreasonable that as other fuels, fossil fuels becomes scarce, efforts will be made to mine coal that hitherto has been considered not economically minable, and it may well be that as the price of coal goes up, the reserves that were once considered rather hopeless will suddenly take a new lease on the life.

In addition to that, coal people tend to be rather concern of estimating their reserves, and the former president of the United Electric, Mr. Colby testify that every strip mine that they open in fact turned out to have more reserves than they had estimated.

That statement is at page 144 of the record.

Now, let me just describe briefly the situation within both the Eastern Interior Coal Province and the State of Illinois and I should add, I’ll come to it in few minutes, the Government alleged in this case that there were two relevant markets.

One was the State of Illinois, the other is what we called the Eastern Interior Coal Province Sales Area, which is an area comprising eight states contiguous to and surrounding the province.

The production of coal in both the province and in the State of Illinois is today highly concentrated.

Now, we’ve set forth at page 6 of our brief a table giving the statistics.

I will not repeat them here because there's a lot of statistics, but the fact is that a relatively small number producers have the major share of coal production in these two areas.

In the same period from 1957 to 1967 -- Oh!

Let me come back, one thing, in saying, these tables we have in the brief also show that from 1957 to 1967 concentration increased.

In the same period, the actual number of producers of coal in the State of Illinois dropped 73% from a 144 to 39.

Now, it’s quite true as the appellees point out that many of these coal producers disappeared because there were small producers whose mines were exhausted or lost their markets.

On the other hand, there is an exhibit in the record at pages 101 to 106 of what we call the exhibit appendices.

There are some eight-volume printed appendix before this Court.

The transcript portions and the exhibit portions of separately paginate and at pages 101 to 106, there is an exhibit showing that 21 or 22 independent coal mines in the province were absorbed through merger from 1905 to 1968.

Now within these two concentrated markets, the province and the State of Illinois, Freeman and United Electric each had significant shares.

Again, we have a detailed table at page 58 of our brief, giving these figures.

Freeman was the second largest coal producer in both the province and the state.

It had 7% of production in the province and 14% on the state.

United Electric was the 6th largest in the province, the 8th largest in Illinois.

It had 4.5% of the production in the province and 8% of the production in Illinois.

The record also shows that Freeman and United Electric sell approximately half of their production to common customers, and the major portion of that half of their production is sold to the same facilities of the same customer.

That is each of them sells coal to the same plant of the same customer and the record also shows --

Justice Potter Stewart: These customers being electric utilities primarily?

Mr. Friedman: Mainly primarily electric utilities.

There's a few heavy industry, there's some cement plants but mainly electric utility.

Justice Lewis F. Powell: May I interrupt -- is metallurgical coal use for fuel?

Mr. Friedman: No, it is not Mr. Justice.

United -- let me explain the situation on that.

United Electric does not produce any metallurgical coal.

Justice Lewis F. Powell: What about Freeman?

Mr. Friedman: Freeman produces approximately 8% of its product is metallurgical coal.

But the major share, the overwhelming share of United -- Freeman’s production is coal that is used for the same basic purpose as United Electric, that is as a fuel to produce heat, largely boiler fuel for electric utility.

The record also shows that even at the present time, salesmen from both United Electric and Freeman continue to solicit the same customers, and the testimony is they did that before the merger, as well as after.

In dismissing the Government’s complaint, the District Court basically made three holdings.

First, the District Court said the relevant market in this case is not coal as the Government contended, but a broader category which it described is the energy market, that is an addition to coal.

The District Court said, “You have to take account of oil, natural gas and nuclear power.”

Secondly, the District Court said that the Government’s two proposed geographical markets, the Eastern Interior Province Sales Area and the State of Illinois where as it described in unrealistic, and instead the District Court proposed, suggested they should be 10 different geographic markets which the defendants had proposed.

We have set them out in this colored diagram, opposite page 48 of our brief.

And in this diagram, each -- that special color is a single geographic market according to the District Court.

The way these 10 markets where determined is as follows.

There are four freight rate districts within the State of Illinois and under the Interstate Commerce Commission's Freight Regulation, all mines in a single freight district had the same freight rate to a single facility.

So, the Court said, “We will take each of these separate freight rate districts and treat that as a separate section of the country.”

But then, the District Court did not include in the single freight rate all utility and non-utility customers.

The District Court broke it up and said one market is the utility customers in the freight rate district, another market is the non-utility customers.

The District Court excluded, however, from these four freight rate districts, the largest customer of both companies which is Commonwealth Edison to which each of them sells approximately 25% of its production and said that the Commonwealth Edison plants constituted a separate geographic market.

Those are showed in the little black dots in our map and rather interestingly one of them is in one of the freight rate geographic markets, another one is in the second in the Chicago market which is the last market and another one is in the third one and three of them are not in any market.

And finally, the Court said that the Chicago air pollution controlled district in which they are certain special requirements impose with respect to avoiding pollution, limitations on the kind of fuels you can burn and so on, that was a separate geographic market.

And then the Court went on and said that in any event, if you look at these markets and it said even accepting the government’s mark, the result will be the same, said there was no adverse effect on competition.

The rationale of that decision was basically two or three-fold.

First, the Court said that United's reserves are presently committed and the Government hasn’t shown that there where any economically minable strip coal reserves that United could acquire.

It pointed out -- the court pointed out that United Electric having all is been in the strip mining business did not have the necessary skills it said to go into the deep mining business.

And therefore, you couldn’t consider United Electric’s deep mines as reflecting any potentiality to engage in meaningful competition in the coal business.

And then the Court finally said that if you -- United Electric and Freeman is complementary rather than competitive, apparently, and when reads the opinion, the theory seems to be a game because one is a strip mine firm and the other is a deep coal mine.

Justice Byron R. White: Well, it’s a -- part of -- it is a kind of coal they sell?

Mr. Friedman: It is the kind of -- it is a kind of --

Justice Byron R. White: And what kind of customers they have?

Mr. Friedman: Some of that -- but it doesn’t -- the Court doesn’t say that exactly.

What the Court says at page 61 of the jurisdictional statement where the opinion is repeated, what the Court says is, “this companies have been and are now predominantly complimentary in nature.

United Electric is a strip mining company with no experience in deep mining or likelihood of acquiring it.

Freeman is a deep mining company with no experience or expertise in strip mining.”

And then he goes on and then he says “Freeman sells metallurgical coal.

United Electric does not encounter.”

Now again as I have indicated my answer to Justice Powell’s question, Freeman sales of metallurgical coal are a very small portion of its output.

Freeman sales a byproduct known as Dust, which is primarily in front of your --

Justice Byron R. White: What about this -- excluding Commonwealth that is none of the sales by United Electric in the two year -- in the critical years chosen by you would have or could’ve been competitive with Freeman, had the two companies been independent?

How about that --

Mr. Friedman: We disagree with that.

Justice Potter Stewart: On page 62-9.

Justice Byron R. White: That is a flat finding though, isn't it?

Mr. Friedman: That is a flat finding, but our basic answer --

Justice Byron R. White: And how are we going to -- use it -- must we turn that over for you to win?

Mr. Friedman: I don’t think -- I don’t think so Mr. Justice.

Let me explain it.

Justice Byron R. White: Let’s assume you took that -- let’s assume you agreed with the District Court on his competitive, no competition findings.

Everything that he said you agreed with.

Wouldn’t it -- wouldn't it almost make irrelevant the -- whatever maybe wrong with his product in geographical market?

Mr. Friedman: No, we don’t think so.

We don’t think so Mr. Justice.

Let me explain the reason why we don’t think so.

We think that the proper approach in these cases, this Court has repeatedly said is to consider the structure of the market, consider the structure of the market to see what happens, what happens in the market.

Justice Byron R. White: I understand that, but some of the things he says that sort -- primarily on competition.

It wouldn’t seem to me to make much difference.

What the --

Mr. Friedman: Well I think, I think Mr. Justice --

Justice Byron R. White: Even if you looked at coal as the market like you suggest that you would still arrive at his conclusion and even if you use your geographical markets to derive the same thing?

Mr. Friedman: I think Mr. Justice, he is using -- when he says these sales are not competitive, he uses it in a very, very narrow sense, not as we define competition within the meaning of Section 7.

What he is saying is that, he looks and says here were 20,000 tons of shipped to this plant and 30,000 ton shipped to this plant and these are not competitive because if there had been separate companies, obviously, the one wouldn’t have sold to the other.

We think that’s not the kind of competition to which the protections of Section 7 are restricted.

What we’re dealing with here is two large firms.

Each of which is trying to sell its coal in the area, and that it seems to us is the critical thing and the critical thing about this merger.

The vice of this merger we think is that this is taken in a concentrated market, where there’s an increasing tend towards concentration.

This has resulted in a substantial increase in the concentration.

And that we think the teachings of this Court have indicate that is enough, that is enough to make the merger prima facie illegal, unless there is some justification.

Justice Byron R. White: Well, that’s -- lets assume we agreed with you that the Court erred in the product market.

The coal is a product market.

Would the Court have to get to deal at all with the District Court's views about affect on competition?

Mr. Friedman: Well, if the Court could reverse on the market definitions and remand for the District Court to consider the case further in the light of those, we would think, however, since there is a full record before this Court and since the basic facts on which we base our case are really not disputed.

We think it would be appropriate as the Court has done in many other cases if it finds there are errors in the definition of the relevant markets to then go on and decide the competitive issue in the case.

Let me address myself a bit to -- let me just say one other thing, if I may.

In the last statement, the end of the District Court’s opinion at pages 65 to 66 of the jurisdictional statement, just before the very end of it, he says, “under the circumstance that all the mine reserves had been sold and United Electric has needed the possibility of acquiring more than of the ability to develop deep coal reserves, under these circumstances, continuation of the affiliation between United Electric and Freeman is not adverse to competition nor would divestiture benefit competition even were this Court to accept the Government’s unrealistic product and geographic market definitions.

It seems to us to what the court is saying here is basically, he doesn’t -- the Court doesn’t think that divestiture relief is appropriate or that the divestiture relief would in any way improve competition.

That it seems to us is putting the cart very definitely before the horse because before you decide what is an appropriate remedy in a case, you have to decide whether or not the merger violates Section 7, whether its effect maybe substantially to lessen competitions.

Justice William O. Douglas: As I read this record, I haven’t gone to look entirely of course, but I get the impression that we have here in totality whether large monopoly -- a fuel monopoly, oil companies, gas companies, owning coal companies and owning uranium companies, is that right?

Mr. Friedman: Well, there’s no --

Justice William O. Douglas: Does that bear from this problem before us?

Mr. Friedman: I don’t think so Mr. Justice.

What we do have I think is that we have the coal business, that the coal business here, we think is controlled, that there is an ologopolistic type of market, we have this relatively small number of producers that own most of the coal and produce most of the coals.

In addition to that, we do have evidence relating to the competition between coal, oil and natural gas, nuclear power and so on that the different types of fuel.

But I -- there’s no claim here that there’s any sort of combined monopoly involving different types of energy.

Our case here is directed against the situation in the coal industry.

Justice William O. Douglas: That’s not affected by the fact that if this, if I read the record correctly, there is a monopoly of oil and gas over coal?

Mr. Friedman: Well, not -- no.

I’m sorry Mr. Justice.

What -- there is evidence is that in recent years, some of the large oil companies have gone into the coal business for --

Justice William O. Douglas: I understand 25 of them have.

Mr. Friedman: I don’t know how many, but we know there’s a substantial number.

Now, we do know for example, one of the things that I think is significant, the argument has been made here that United Electric because it’s a strip mining company couldn’t possibly mine any of its deep mines.

In 1958 or 1959, a subsidiary of the Humble Oil Company, which is a very large company opened a deep mine.

Humble Oil Company had never, had never been in the coal mining business at all.

It was able to acquire the skills and open the large deep mine and expects to produce I think 3 million tons a year, and has entered into a contract to sell this coal at the large utilities.

Justice Potter Stewart: As I understand your argument, it runs exactly counter to the suggestions contained in the question of my Brother Douglas, because the District Court thought that the relevant market was the energy market, and you said that he was quite wrong and that he should have confined himself with -- to coal alone.

Mr. Friedman: Yes.

But I feel it Mr. -- I am sorry, I have been perhaps I misunderstood Mr. Justice --

Justice William O. Douglas: That’s why the District Court got off on the -- on that trail of the (Voice Overlap) --

Mr. Friedman: Not, no.

I think what the District Court did was the District Court concluded that because there is obviously competition among these different forms of energy and selling to the utilities, he concluded therefore, you should evaluate the impact of this merger in this broader energy market.

Justice Potter Stewart: And you say -- you say that was quite erroneous that he should -- that the relevant market is coal.

Mr. Friedman: That’s right.

Well, if I may -- if I may modify that Mr. Justice.

We say that there maybe an energy market in some types of mergers, but we say that coal is an alternative market.

There is -- I think the teachings of this Court have indicated there is utility -- no single relevant product market.

There maybe product markets and sub-markets, and we think that coal under the practical indicia test announced in Brown Shoe that coal is a relevant sub-market within which to measure the impact of this merger upon competition.

Chief Justice Warren E. Burger: You don’t deny the existence of an energy market area as such, do you?

Mr. Friedman: No, and Mr. Justice -- Mr. Chief Justice, for example, if we had a merger between an oil company, a natural gas company and a coal company, the energy market might be the relevant market.

All that we say is that whether or not there is an energy market, there is an addition to that, a coal market and that a coal market is a relevant market within which to determine the effect upon competition of the merger of these two coal companies.

Justice Potter Stewart: And specifically and within the geographic market of the Eastern Interior Coal products?

Mr. Friedman: Coal and sales area, and the State of --

Justice Potter Stewart: Which is what, one of five or four provinces?

Mr. Friedman: Well, there are four -- there are basically four provinces, and we have gone beyond the province to include a slightly broader area which is where the vast majority of coal produced in the province is sold.

We say that within that and the State of Illinois is the geographic markets and viewing the relevant market for this case as coal that within that market, this merger does meet the standards that this Court has developed in a large number of cases to determine prima facie, the anti-competitive effect.

Now, the basic answer that was given by the District Court in this case and was given by our opponents here is that well, as a practical matter, United Electric really isn’t a viable competitor at all.

They say United Electric as of the time of trial was about to exhaust its resources, United Electric had almost all of its strip mines committed.

The United Electric doesn’t have the capacity to mine the deep coal, and therefore, it's here, they say the disappearance of United Electric through merger could not possibly substantially lessen competition.

This it seems to us is basically another version of the traditional failing company defense.

In the traditional failing company defense, the company is failing because of its lack of financial resources.

It’s about to go under economically.

Here, the claim is that the company is about to go under resourcefully.

It doesn’t have any resources.

Now, it seems to us that this defense has to be tested by the same standards that the -- by which the court has tested the failing company defense, and the reason is that it’s fundamentally the same claim.

It’s fundamentally the claim that although it might appear on its face that an acquisition substantially lessens competition because of the change it makes in the structure of the market.

In fact, it really doesn’t because if there hadn’t been the merger, the acquired company would’ve disappeared from the market anyhow in a short time, and therefore, the fact that it disappears as a result of a merger rather than through the operation of natural economic forces can’t be viewed a substantially lessening competition.

We think this argument is fallacious for several reasons.

The first of which is that this Court has made it clear that the validity of this defense must be tested as the time -- as of the time of the merger because the question is whether as of the time of the merger, the effect maybe substantially to lessen competition, and you have look and see whether the removal of this firm by merger had an adverse competitive effect on the basis of what it’s position was when it disappeared from the market and therefore, we think that the critical time was of 1959.

As of 1959, it’s certainly cannot be said that the condition of this company’s resources was so depleted and so hopeless that it couldn’t possibly continue for any significant period.

At that time, United Electric had substantial reserves of strip coal.

There’s nothing to indicate at that that time, all of those reserves were committed.

There’s an indication that since that time, other firms had acquired strip reserves, but more important than that, more important than that, it’s just impossible at this time on the basis of hindsight, 14 years later to say what United Electric would have done if United Electric had remained an independent firm.

How it would have solved its problems?

We do know for example, the record shows that another formerly large strip mining firm, Ayrshire Collieries, since that time, although it had been -- had no deep coal experience, first acquired two small mines, with that experience, opened a large mine which has been operating for 11 years.

The appellees point out that the mine was spectacularly unsuccessful.

It lost money nine of the 11 years.

The testimony, however, is not that it lost money because they did not know how to operate the mine, but because the mine was a bad one, the roofing wasn’t right and the man said frankly, we sold the coal for too little money.

It can’t fairly be said and we also have the experience of Humble going into deep mining, I don’t think it can fairly be said now that if United Electric had remained independent, it could not possibly either have obtained additional reserves or that it could not have acquired the skills for deep mining.

Of course, it has the skills for selling and marketing coal.

That’s what its business is.

It’s in the coal business.

Justice Lewis F. Powell: Mr. Free -- Friedman, what if free -- what did Freeman do between 1959 and the date of trial with respect to the acquisition of additional reserves?

Mr. Friedman: Of strip reserves or deep reserves?

Justice Lewis F. Powell: Any kind of reserves?

Mr. Friedman: I don’t -- I’m not certain Mr. Justice, but Freeman of course had a very large; much greater reserves than United Electric at the time of this -- the acquisition.

But I would say -- I would suggest Mr. Justice that the whole history of extractive industries in America is that you have a problem.

If you’re an industry where you’re taking -- using up your raw materials and have to go out and acquire -- they did after around 1959 or 1960, United Electric did acquire this very large deep mine.

And also the testimony is that after 1959, the United Electric was willing to acquire more reserves, but they only wanted to pay farm prices for them.

And that is, they would buy a land with strip reserves at the price as one would ordinarily pay for farmland.

Now, we don’t know what an independent United Electric would've done.

It might have concluded that it was willing to pay more for this land.

It might have decided it had to buy it.

All that I am suggesting is -- it can -- I don’t think it can fairly be said at this point of time that if United Electric had remained independent, it would have found no way to solve its problems.

Justice Lewis F. Powell: Did the total reserves of General Dynamic that is controlled by Dynamic through these two subsidiaries increased substantially between 59 and date of trial?

Mr. Friedman: I understand so.

I don’t have the exact figures.

Justice Lewis F. Powell: That would be in the record, I suppose.

Mr. Friedman: I think so.

The record is huge and --

Justice Lewis F. Powell: I know.

Mr. Friedman: Well, I have looked through the 3,500 pages, frankly, I haven’t been able to check every exhibit.

But, I’m told by my colleague who tried the case that the record does show and I think it’s a fair assumption it'd be somewhere in the 17,000 pages of record, there are statistics --

Justice Lewis F. Powell: The thought underlying my questions is that General Dynamics with its vast resources was perhaps in a better position to acquire additional reserves than either one of these companies independently would've been and I wonder whether it exercised that economic power that it had?

Mr. Friedman: Well, I -- let me say Mr. Justice, there’s an exhibit in the record that shows that United Electric was a very prosperous company.

It kept increasing its profits.

It paid substantial dividends to General Dynamics during the period that General Dynamics controlled it.

It paid off all of its long-term debt.

It might have had -- it might have -- it might have found it more difficult than General Dynamics to acquire coal, but again, we do not know.

We just can’t say, and since Section 7 was dealing with probabilities, not with certainties but probabilities, it condemns mergers that -- where the effect maybe substantially to lessen competition.

Now, let me just say one other thing with respect to this failing company or failing resources defense.

This Court in both the Citizen Publishing case and in the Newspaper case, the Comics, Greater Buffalo Press has said that among other things, for this defense to be available, you have to show that the firm to whom the property was sold was the only available purchaser.

There’s nothing in this record to show that United Electric could have sold its property or disposed off its property only to Freeman or Material Service.

The initiative for this transaction did not come from United Electric.

United Electric according to the record has nothing to show that it approached Material Service and said we’re in trouble, will you take us out?

On the contrary, the initiative came from Material Service, which looked and saw this is an attractive company and it frankly said it was attractive because it recognized that its resources were dwindling, Freeman had large resources and therefore, it would seem like an attractive opportunity for it to combine its resources with this company.

And nor is there any indication in this record that United Electric made other attempts to solve its problems such as seeing if someway couldn’t be worked out to get this coal, this deep coal out of the ground.

And we think that the appellees have not, have not made the kind of showing that this Court has said is necessary before a failing company or failing resources defense can be sustained.

Chief Justice Warren E. Burger: Thank you Mr. Friedman.

Mr. Hedlund?

Argument of Reuben L. Hedlund

Mr. Reuben L. Hedlund: Mr. Chief Justice and may it please the Court.

The Government lost this case below, not because of the legal issues that they would try to raise here, but because of the controlling facts in issue.

As I will develop in my argument, these were head on controversies which Chief Judge Robson as the trier of fact decided against the Government on the basis of a meticulous 2-year review of all of the evidence in this lengthy trial record.

Thus it is our position contrary to that of my distinguished opponent that the real issue before this Court on appeal is whether these findings were clearly erroneous.

There are five factual determinations below which are particularly --

Justice Byron R. White: You think a finding of that -- the -- that the -- this merger would not have an adverse effect on competition or it’s subject to that -- clearly erroneous?

Mr. Reuben L. Hedlund: I think that the facts which support that legal conclusion are --

Justice Byron R. White: So, your answer is no?

Mr. Reuben L. Hedlund: My answer to that is no.

There are five controlling factual determinations below which I particularly want to list briefly before focusing under evidentiary support and implications.

As to the central facts found against the Governments case these included; first, the fact that the acquired company United Electric is dead competitively in all of the market’s alleged including those urged by the Government and it cannot be resurrected.

Second, it was found that United Electric and Freeman would not and could not compete with each other to any substantial degree and that was a fact, whatever the lines of commerce and whatever the Sections of the country chosen.

Third, it was found that the combination had been in effect since 1959.

The evidence was that it had not adversely effected competition, however, that competition was defined.

Fourth, it was found that present in the markets served by the United Electric-Freeman were large sophisticated buyers, wielding substantial bargaining power and practiced in the ability of playing one coal company against the other and coal itself against alternative forms of energy.

This fact spoke convincingly, an explanation of why is the Government virtually admitted and as the Court found below there had been abundant competition in the Midwest coal industry in the past which was certain to continue.

Moreover, the fact that purchases of coal and other fuels were made by powerful sophisticated buyers, place the merger in a totally different factual context than that present in other Section 7 cases before this Court, most notably Von's Grocery, Pabst and Philadelphia National Bank.

If, based on a virtual and an unprecedented census in this record of the very consumers on whose behalf this action was purportedly brought, including carefully reasoned testimony from buyers of more than one half of all the coal produced in the Midwest.

Chief Judge Robinson found that, quoting from page 65A of the jurisdictional statement, “Evidence from numerous knowledgeable industry representatives including competitors and customers of United Electric and Freeman confirms the defendant’s condition -- contention that the challenged combination has not led and is not likely to lead to a substantial lessening of competition.”

In developing these now and turning to the facts --

Justice Potter Stewart: One of the findings that you have just reviewed was the acquisition took place in 1959 and you accept that argument, I would think so?

Mr. Reuben L. Hedlund: Yes, Mr. Justice.

In fact, that was our position at trial.

At the trial the Government took a contrary position.

Justice Potter Stewart: But now the Government agrees with you.

Mr. Reuben L. Hedlund: Now the Government agrees with us.

Justice Potter Stewart: So, my earlier questions were a red herring type.

I mean, they're not -- there’s no distinction about that.

Mr. Reuben L. Hedlund: I think they’ve been answered, Mr. Justice.

Justice William H. Rehnquist: Is there any indication why if this had the adverse effect on competition the Government claim, the Government waited eight years after the acquisition to bring the action?

Mr. Reuben L. Hedlund: There is no explanation of that in the record at all, Mr. Justice Rehnquist.

And which brings up the point that we’ve made in our brief that the -- that Section 7 cases and Section 7 itself was designed to deal with incipient mergers with anti -- a merger whose anti-competitive effects was ripening.

This factual situation far from ripening into anti-competitive effect is -- it were -- first of all it never had one and secondly, the combination is in effect over at this point.

In turning to the facts, I respectfully direct the Court’s attention to the proposed findings filed by defendants in the trial court and particularly the numerous citations to the record that appear therein.

These proposed findings are at pages 880 to 1016 of the joint appendix and are a virtual encyclopedia of the facts and the evidence in this case.

Now, among the most compelling of the central determinations made below is that United Electric is just not a competitive factor in any of the markets alleged, including those suggested by the Government and it cannot become one.

And while this was one of the most hotly disputed issues at trial, the trial court’s findings on United Electric’s terminal condition are no longer seriously challenged by the Government in this appeal.

I will say that I think that since the briefs in Mr. Friedman’s argument today that perhaps they’ve gone back to that, but in any event as the court below found, United Electric was and is a competitively more abound Illinois Coal producer which by the close of this current year will be operating only two strip mines of the six it had when the acquisition took place 14 years ago.

Virtually all of the United Electric’s minable coal reserves had been sold pursuant to long-term contracts with utilities and it has no realistic hope of obtaining additional reserves to serve any of the markets alleged by the parties to this litigation.

Precisely to this point was the trial testimony of A.H. Davis, President of Central Illinois Light Company.

When asked by the Government on cross-examination whether he was in any position to say that United Electric-Freeman combination would have no effect on his company, he responded as follows, this is at page 1213 of the joint appendix.

“Well, we have studied the United Electric Reserves, Mr. Simms and we just can’t see where United Electric has the reserves to be a factor in the coal business as far as we’re concerned.”

United Electric is in fact a company that has been in liquidation for a goodly number of years and that process cannot be reversed.

It was anticipation of this that led the company in the 1960’s, I'm sorry, in the 1950’s, unsuccessfully as the court noted below and that is at page 8A of the jurisdictional statement, “To seek affiliation with other coal producer.”

And when Freeman obtained control of United Electric in 1959, it found the company with only a short term supply of minable reserves.

Irrefutable evidence of this is contained in a lengthy memorandum by the company's land manager, United Electric’s land manager some 20 years ago in November of 1955, four years before the control took place, this appears in the appendix of exhibits at page 1646.

In this memorandum, Tom Lathermer, in a desperate plea, where United Electric to improve its coal reserve position notes that quote, “We have, during years examine something over 200 coal fields.

Of those we've taken up only seven, some of the best were dropped without going into.”

Lathermer further observes that “Practically, all of our competitors have a far better organization for prospecting than we.”

The memo ends with a follow up, again, this is 1955.“

I would like to discuss the entire problem at length with you.

Some place where we can have plenty of time to go over it thoroughly as I am afraid, we are not building up properly the basis upon which our future lies.”

Now during his deposition the company’s former chief executive officer, who retired shortly after Freeman took control, defended United’s reserve policy under his pre-merger administration on the basis that the company had other uses for its money and the company had lost half its business to gas and oil, that appears in the record at page 145.

Mr. Lathermer’s prediction of some two years ago unfortunately came true in spades.

Notwithstanding the vigorous, but unsuccessful efforts of Freeman, contrary to Mr. Friedman’s argument are documented over and over again in this record, Freeman’s and General Dynamics attempts to reverse United Electric’s liquidating position.

United Electric’s reserve position was discussed time and again, commencing at the board meetings, commencing with control by Freeman, that is in the record.

The United Electric’s Vice President for Operation testified that he had an open book, an open check book, to acquire reserves.

The company’s former President at the trial testified that he put no restrictions on the company in acquiring reserves as long as they were black.

So compelling was this evidence that even the Government stated at trial, “That after 1959 Ulysses management sought to acquire economically recoverable reserves.”

My distinguished opponent would try to walk away from that concession now, saying, “Well, that’s talking about -- that’s not talking about the future.”

But the fact is that the question of future reserve prospects is one best committed as it was in this case to expert testimony industry knowledge and not lay speculation or what we submit is an incredible plea for judicial notice contained in the Government’s brief in chief.

Finally, on United Electric’s inability to regain it’s lost --

Justice Potter Stewart: It’s an incredible plea for judicial notice?

Mr. Reuben L. Hedlund: Yes.

Justice Potter Stewart: And what are -- what --

Mr. Reuben L. Hedlund: The judicial notice that they request --

Justice Potter Stewart: What -- why do they hesitate to judicial -- to judicially know?

Mr. Reuben L. Hedlund: That United Electric will acquire additional reserves in the future, that is what the plea for judicial notice is Your Honor.

Justice Potter Stewart: I see.

Mr. Reuben L. Hedlund: Finally, on United Electric’s inability to regain its lost competitive position in the future --

Chief Justice Warren E. Burger: Excuse me, Mr. Hedlund, on this record isn’t it there some indication that estimates of future reserves were quite far over the mark when they were made just relatively in recent years?

Mr. Reuben L. Hedlund: To the contrary Mr. Chief Justice, I think the record is the other way.

While Mr. Colby did testify that the company always -- that their mines ended up having more coal than they had thought at the outset, the fact is that we have the Mary Moore mine of United Electric that closed two years earlier than anticipated.

We now have the Banner mine of United Electric which isclosing this year, a -- three years earlier anticipated.

Chief Justice Warren E. Burger: Well, and the point I was driving at, I thought this record indicated that earlier estimates proved to be too optimistic.

Mr. Reuben L. Hedlund: Oh!

Yes.

Chief Justice Warren E. Burger: And their reserves ran out much sooner than the --

Mr. Reuben L. Hedlund: That’s correct.

I'm sorry Mr. Chief Justice, I misunderstood your question.

Yes, that’s correct.

Finally on United Electric’s inability to regain its lost competitive position in the future.

We need only observe that this was confirmed in the record by Paul Weir Company, one of the world’s leading mining engineering consulting firms and one I might add, is frequently used by the Federal Government itself, by the head of the State of Illinois Geological Survey, by an experienced independent geologist whose life work had been acquiring coal fields for producers and by other knowledgeable industry witnesses.

As Frank Nugent, President of United Freeman, put it in his deposition by the Government, I think this really sums it up.

Let me answer at this way Mr. Cusack and maybe it will save sometime.

The people who are in the business, knowledgeable as I said before such as Mr. Kels, Mr. Mollins, and Norman Kelb are thoroughly familiar with the strip acreage that is available in this state and there is not any necessity for any conversation between me and people in the business as to whether there are strip reserves available.

The question is not debatable.

We know that they are not there, so there's just isn’t anything to discuss.

That goes down to Cab Engineers who have just been in the business a couple of years.

There is not a utility man in the state, a knowledgeable utility man in the state who does not know that the strip reserves are not available.

There is not a salesman selling shovels and equipments who does not know that the reserves are not available.

They have a key interest in it.

The Caterpillar Tractor Company are knowledgeable in that area.

They know the reserves are not available.

Their sales programs are directed elsewhere because the reserves are not here.

This is not a question that isdebatable among coal people.

It is an accepted fact that reserves are not here, that testimony appears at page 62 of the record.

Justice Byron R. White: Well, I gather your -- one of your arguments must be that as a -- in terms of United’s condition in 1959, anybody, no matter who the acquirer was could have acquired United without any damaging effect on competition because of its position in the market.

That it was just too – too worn out company, too ineffective competitively to be a factor under Section -- in the Section 7 case.

Mr. Reuben L. Hedlund: And that would be my position Mr. Justice White, but I don’t believe I need to go back far because in the context of this case, you have the lack of competition between Freeman and United Electric.

Justice Byron R. White: Well, would you say that Free -- did Freeman get any customers through United?

Mr. Reuben L. Hedlund: No.

Justice Byron R. White: Did they make some joint bids?

Mr. Reuben L. Hedlund: No.

Justice Byron R. White: Did they -- did Freeman help United to carry out some of its contracts?

Mr. Reuben L. Hedlund: There were four instances and I believe these are mentioned in our brief where United Electric was able to enter into long-term contracts.

This took place in 1966 or so, able to enter into long term contracts because at the tail end of the 20-year period involved, Freeman was willing to guarantee that there would be coal there for the utility.

In other words, --

Justice Byron R. White: What did that did do the other two competitors?

Mr. Reuben L. Hedlund: The two competitors of Freeman it did not to -- it has to be looked at it seems to me from the utility stand point.

Justice Byron R. White: Well, whatever the competition, the two other competitors if one or the other who might wanted to to get that utility customer?

Mr. Reuben L. Hedlund: If permitted United Electric to provide more vigorous competition against the coal companies with whom they were competing.

Justice Byron R. White: Because of the union with Freeman?

Mr. Reuben L. Hedlund: That’s correct.

Beyond United Electric’s terminal condition whether viewed in 1959 and 1967 or at any other time, a second central finding of the decision below on the basis of all the evidence was that contrary to the Government’s allegations, United Electric and Freeman would not and could not compete with each other to any substantial degree.

This salient fact, one unquestionably committed to the province of the trier of fact and subsequently determined by Chief Judge Robinson from all the evidence is inescapable as the Court below recognized even under the Government’s market definitions.

But prior to trial, the Government admitted in its answers to interrogatories that it could not name any customer of either United Electric or Freeman who had been and would be deprived of actual or potential competition because of the combination, their answers to interrogatories appear at page 305 and 318 of the joint appendix.

At the trial however, the Government relied upon charts, showing shipments to purported common customers of United Electric and Freeman in its attempt to find actual and potential competition between them.

However, based on the evidence from the very customers involved on these charts that testimony and the testimony of the Government’s own economist and the testimony of the defendant’s executives, the Government’s charts were totally discredited and the information shown thereon was demonstrated to be flat wrong.

Many of the shipments weren't even to the same plant and others were of non-competing products, albeit to the same plant to illustrate.

Freeman shipped Inland Steel metallurgical coal for making steel, while United Electric ship inland steam coal for power generation.

Others were unique situation shown at trial to be non competitive, take TVA for example.

United Electric’s shipments to TVA involved a situation where adverse river conditions precluded it from making its normal shipments.

TVA’s coal purchaser testified at trial that United Electric was not a potential supplier of TVA.

The Government’s Economist agreed, the Government’s own economist.

As he put it, this is at 1694 of the record, “the way of the thing occurred in the record, I would not say that that particular shipment represented competition.”

Executives from other consumers listed on the Government’s charts similarly denied that both United Electric and Freeman could've competed for their business.

In view of the simplicity of the proposition involved, the almost unlimited scope of pretrial discovery permitted the Government, the 11-year period that the combination had been in effect by the time of trial and the fact that the Court had before it, the testimony of purchasers of more than one half of the coal produced in the Midwest, there can logically be, we submit, one reason why the Government failed in its attempt to show that United Electric and Freeman were substantial potential competitors and that reason is simply because they were not.

And this was because of the different locations of the mines, the different modes and cost of transportation available to each and because of the varying quality characteristics of their respective coals.

And we repeat those were the facts, whatever the market’s chosen and specifically even if the market definition issues in the litigation had been resolved the way the Government wanted them to be.

Another central finding below was that since 1959, the year when Freeman obtained control of United Electric, a fact by the way brought to the attention of the anti-trust division at that time which took no action, the Court found that since 1959, the United Electric-Freeman combination had not adversely effected competition whether the markets used for that analysis were those of the Government or the defendants.

That finding was based upon an analysis made by the Court of the structure of the coal industry and its markets upon the testimony of industry representatives as well as experts and upon the Government’s own admissions.

This showed first as I've discussed that United Electric and Freeman would not and could not compete to any substantial degree.

Beyond that, the trial court specifically found that the record was not only, “Devoid of any signs of anti competitive performance and behavior in the coal industry but rather the past performance of the industry suggests there has been intense competition among coal producers.”

In fact, the Government in response to defendant’s proposed findings below was forced to concede that it and this is the Government’s own words, quote it has never asserted during the 20 years proceeding 1967 that the coal industry was not competitive.

The Government acknowledged moreover that the mine mouth price of coal in 1968 was less than at the beginning of the post-war period despite general inflation in wholesale prices and that there had been marked improvements in coal technology techniques and productivity.

The trial court specifically found, “from all the evidence presented at trial it appears that coal producers will be under continuing pressure to reduce costs and keep prices low if they are to continue to serve their last remaining large market for steam coal among the factors which made this clear where the sophistication and market power of coal buyers in the presence of a substantial number of viable coal competitors.”

In addition, the Court found particularly significance, the wealth of evidence dealing with the tremendous competitive pressure placed on coal producers from suppliers of alternative fuels.

This pressure was expected to intensify in the future particularly in light of the ever increasing environmental consideration.

Commonwealth Edison spokesman at trial summed up the situation as follows at page 1414 of the record, “Well, as far as Commonwealth Edison is concerned, we have sort of have put our eggs in the nuclear basket.

We believe that nuclear power is the best way to provide base load electric generation and we intend to move in this direction.

Indeed a representative of the Atomic Energy Commission testified that in the long-term the most economical way to generate electricity would be a combination of nuclear and pump storage facilities together with gas turbine picking units.

Moreover, even with respect to the Government’s coal production statistics which we contend were improperly aggregated and thus meaningless, an obscured the fact that United Electric and Freeman were predominantly complementary rather than competitive companies.

It was shown then on the Government’s production statistics that excluding Peabody, the production shares of the two, four and ten largest producers since 1959 remained stable or declined, this is shown at pages 1276 and 77 of the appendix of exhibits.

The effect that Peabody's increase in size has had on the Midwestern coal industry, has of course been cured to the Government’s satisfaction by virtue of the divestiture consent decree it obtained against Peabody in 1967 and deconcentration has been further advanced by the entry of the Humble Oil into coal production.

The establishment of the midland operation divested by Peabody and the continued decline of the United-Freeman position.

It should be noted in this latter regard that the evidence was that United Electric-Freeman combination accounted for less of the Midwest coal production in 1967 than it did in 1959.

In fact, as the Court found below, the combination had experienced more than a 10% decrease in its percentage of such production since 1959.

The Court anticipated that this would continue to drop as United Electric’s mines closed as their reserves played out.

That these predictions have become true is a matter of which we submit this Court could take judicial notice by examining the post-trial publications of the State of Illinois and the United States’ Bureau of Mines.

These show that United Electric-Freeman’s combined coal production for 1972 was almost 4 million tons less than the 14 million ton total in 1967 and that it's share of Midwest production has dropped by more a third.

The final factual finding upon which I wish to focus was the testimony of knowledgeable industry witnesses in this case.

Notwithstanding a diligent Government search before trial for competitors or customers of the combination whose testimony would tend to prove the alleged adverse effect on competition, the Government was unable to find a single member of the class for whose benefit this action was purportedly brought to add any substance to its claims.

The defendants, however, did adduce evidence from a broad cross section of both producers and consumers to the effect that the combination had not had and would not have an adverse effect on competition.

This came from large, medium size and small public utilities, a rural electric cooperative, a federal electric authority, a retail coal dealer and several industrial concerns as well as large and small coal producers and the significant thing here about this testimony of consumers and producers is like is that it came from knowledgeable witnesses who gave concrete reasons for their conclusions as was required by this Court’s admonition in Philadelphia National Bank.

The most dramatic example, I submit of this took place during the Government’s lone attempt to establish that these witnesses were in different to and unsophisticated about the competitive implications of mergers of coal producers.

This occurred during the cross-examination by the Government of Davis, President of Central Illinois Light Company.

This elicited the fact that Mr. Davis had in the past taken the initiative in complaining to the anti-trust division.

When his evaluation led him to conclude that another merger between coal producers did pose a threat to competition, a question was asked of Mr. Davis, “Would you be concern Mr. Davis as President of SELCO with UEC and Freeman merged with Trueex.

As your department undoubtedly knows, Mr. Davis testified, “we made a compliant several years ago about the merger of two coal companies in our area and you have reached the satisfactory settlement, I take it with those two companies.

So, anything that we feel reduces the amount of competition in our area, we are certainly not that bashful about making a complaint.”

If Trueex were emerged with say Peabody in our area, wed make another complaint.

But why would that bother you Mr. Davis, the Government asked, Mr. Davis said, “It’s a reduction of competition in our area.”

The Government’s first response to these determinations --

Chief Justice Warren E. Burger: Did you have the page in the transcript for that?

Mr. Reuben L. Hedlund: I'm sorry Mr. Chief Justice.

Yes, that’s page 1222 to 23 in the --

Justice William J. Brennan: Well, its page 45 of your brief.

Mr. Reuben L. Hedlund: That’s correct.

The Government’s first response to these determinations is that Judge Robinson somehow did not make the proper structural analysis dictated by the cases.

It seems to me that the trouble with that argument is two-fold.

First of all, it does not avoid the hard reality of the specific finding by the trial court that the combination would not have an adverse effect on competition even if the Government’s product in geographic market definitions were accepted in full.

The second trouble is that the trial court did in fact make the structural analysis which the Government claims is missing and did so in conformity with the cases.

Almost one third of the opinion below is devoted to such considerations as the rankings of the defendants in both coal production and coal reserves, the background of the coal industry, the changes in the demand for coal, the emergence of the utilities as the principle market for coal, the changes that had taken place in production techniques, the way in which coal producers competed for their principle market utilities and indeed one section of the opinion is even titled, “Changes in the structure of the coal industry,” are over read, that four point of Judge Robinson’s opinion he declares that coal is the subject of a litigation.

Now, what the Government really complains about, we submit is that the Court refuse to decide the case solely in the numbers the Government had put on their charts.

Now, even if these numbers had been something more than improperly aggregated coal production statistics which they were decidedly not, it seems to us that writing numbers on the blackboard is not enough in the present case where the issue is not whether the Government has made out of prima facie case but whether on the basis of all the evidence after a full trial, a likely adverse on effect on competition has been shown.

Even where the statistical data and evidence is not misleading, this Court has stressed in Brown Shoe that its important should not obscure that only a further examination of the particular market, its structure, history, probable future and provide the appropriate setting for judging the probable anticompetitive effect of the merger.

Square to the point here is the testimony at trail of the Government’s own economist, James Fulsome.

But during the litigation, it came to our attention that while the antitrust division was trying to split up the United Electric and Freeman, they were acting affirmatively at the same time to approve a merger of two other Illinois coal producers that would have been structurally indistinguishable from United Electric-Freeman with the resulting combination in either situation constituting the second largest coal producer in Illinois and in the Midwest.

Now, at trial, I submitted to Mr. Fulsome a hypothetical based solely upon the structural numbers of the merger which the Government said it would approve.

I asked him to assume that the two companies were buyable and I asked him whether he would conclude on the basis of those facts that the merger posed a threat to competition.

Mr. Fulsome was not prepared to rest an appraisal on the numbers alone as he quoted, “I would still want more information.

I would still want to look further.”

So in this case, if the Government’s numbers did anything at all and we say they didn’t, in view of among other things, they are improper aggregation.

The fact that production data rather than reserved data was used and the fact that even then, they included non-competing forms of coal, they created at most of presumption that was rebutted and overcome by the facts which defendants placed in evidence.

With Commonwealth Edison testifying that they have put their eggs in the nuclear basket, with the documented loss of coal’s position in other markets, were the undisputed fact that a coal producer competes for long-term contracts not with production’s statistics but with verifiable uncommitted coal reserves and with the Government’s own economist challenging the use of the Eastern Interior Coal Province sale’s area as a market and failing to support the proposition that Illinois was a market, we submit that the trial court was undoubtedly correct in its finding at page 65A.

That the only evidence produced by the Government to support their claim of a substantial lessening of competition was statistics which fail to reflect the very real competition coal faces from other forms of energy and which proofs together coal producers and to economically unrealistic markets while ignoring the key factor in a coal producer’s market strength, coal reserves.

The Government’s remaining and we submit late arriving argument also fails.

If there’d be any significance, and we say there is none, that the fact that Judge Robinson entered no specific findings with respect to United Electric’s prospects of 1959.

It is because Government trial counsel not only failed to request such findings but asked the trial court not to make them.

However, defendants did propose findings on evidence that they had put in the record concerning United Electric’s debilitated condition in 1959, the reasons why that unhappy circumstance had come about and the merger efforts of United before 1959 to try solve the problem.

In the face of the lack of evidence to the contrary, however, all the Government could claim at trial was that those findings were irrelevant.

If I may make a few more specific comments to certain other things that Mr. Friedman touched on as far as the state of the record.

I would suggest a careful look at the Government’s exhibit on mergers since 1959, that’s at -- that’s at page 106, I believe.

A careful analysis of that will show that almost all of the mergers since 1959 have involved the Peabody Coal Company as I've already referred to and that another rather large looking one on the record was in fact an acquisition of an existing company in the Midwest from a company outside the Midwest.

With respect to Mr. Justice Douglas’ observation about a fuel monopoly --

Justice William O. Douglas: That was the question.

Mr. Reuben L. Hedlund: A question sir.

There is a reference or at least an aspect of that in Judge Robinson’s opinion in which he does note that 25% of the production of coal in the Midwest has been produced by oil companies.

General Dynamics of course has no other fuel interest or utility interest for that matter, other than these two coal companies.

As to whether Ayrshire’s attempt to deep mining proves that anybody can go into deep mining, I would respectfully refer the Court to the testimony of Ayrshire’s witness at trial on that subject and it was -- we submit, for square against the Government.

As far as General Dynamics reserve position, a coal reserve position in the Midwest or elsewhere in the country, that has not changed except as a result of small increments of the two coal companies involved since 1959.

Justice Lewis F. Powell: Mr. Hedlund, would you comment on the nature of the competition or however you describe it between these two companies with respect to Commonwealth Edison?

Mr. Reuben L. Hedlund: Yes, Mr. Justice.

The competition for Commonwealth Edison has to be viewed it seems to us in three lights.

The first of which is that Commonwealth Edison is a unique, unique coal purchaser in the Midwest.

It purchases one third of all the production in the State of Illinois, for example.

Unlike any other coal purchaser revealed by either the Government or ourselves, it must buy coal from a variety of producing districts.

We believe that the real competition then for Edison’s coal purchasers is among the producers in a district and not between different districts.

Secondly, in view of Edison's substantial size, their world leading commitment to nuclear energy, the sophistication and care with which that company makes every fuel decision that it -- we do not think that this combination could have any effect on Commonwealth Edison as indeed was confirmed by their witness at trial.

A dimension of these I think, Mr. Justice Powell is that the Government’s request or at haste to point out I should say at trial that Commonwealth Edison does not take unfair advantage of coal producers.

Justice Lewis F. Powell: Does the record show how many suppliers of coal are used by a Commonwealth Edison?

Mr. Reuben L. Hedlund: Yes, Your Honor.

Those are -- in defendant’s exhibit 49, I'm sorry not 49, at defendant’s exhibit 55.

Well, that discloses only the producing districts.

The actual names of the customers, I do not think it is shown, but I could be wrong.

To conclude, we submit that the decision below comports completely with settled principles of merger law and policy and signals no softening out or a retreat from established barriers to anticompetitive mergers.

The findings below, we submit were not clearly erroneous and we respectfully urge that the judgment be affirmed.

If there are no further questions, that would conclude my argument.

Chief Justice Warren E. Burger: Thank you Mr. Hedlund.

I think now Mr. Friedman, you have few minutes left.

Rebuttal of Friedman

Mr. Friedman: Mr. Chief Justice may it please the Court.

Now, the Government doesn’t see this as basically a factual case.

Our opponents have attempted to present this as a case in which the District Court fully considered all the factual issues resolved and against the Government and therefore as they see it that’s the end of it.

We think the basic issue in this case is whether the traditional standards that this Court has applied in passing upon the validity of mergers under Section 7, an analysis of the structure of the industry where the prime emphasis in on increases in concentration in the concentrated market where Congress has made the judgment that increases in concentration or distressing the trend in the American economy that should be halted in their incipiency.

Whether the principles this Court as announced in those cases are somehow not applicable to this industry because of the critical aspect of the reserves in this industry and because of the weak position United Electric was developing in its reserves and we think the whole question of whether United Electric continued as a viable entity in this industry has to depend upon whether they’ve succeeded in establishing this failing company or failing resources defense.

We think you can’t just say because it looked as though United Electric in 1959 would have some troubles surviving, therefore, you jettison all the analysis that this Court has made in the past on this issue and merely say, it's there for a factual question that we let the District Court decide whether in the District Court by the way did make these decisions as of 1959, the time of the merger, it made them as of the time of trial, I would say presently.

Whether we let the District Court say that nevertheless this merger is to be approved because on the basis of the record, it concluded that in 1972, 1972 that United Electric was unlikely at that point to consider as a viable entity and that the divestiture would be inappropriate thing.

A suggestion has been here that, well, are really the coal industry is terribly competitive.

Everyone is competing for business, people are fighting to get business, that’s not the standard for determining the validity of a merger under Section 7.

What Congress was concerned with was changes in the structure of the industry.

Not where the people were vigorously competing.

I dare say there's a -- there are few industries, I think more competitive, more competitive than the retail grocery industry and I have no doubt that the industry, the retail grocery industry in Los Angeles where this Court held a merge of bonds and shopping bag illegal was at least as competitive as the coal industry involved in Illinois.

If anything, it was probably more competitive, but that didn’t change the Court’s decision.

Chief Justice Warren E. Burger: Thank you Mr. Friedman.

Thank you gentlemen.

The case is submitted.

Featured:

United States v. Falstaff Brewing Corp. - Oral Argument

Thu, 02 Apr 2009 06:39:03 +0000

Case:

United States v. Falstaff Brewing Corp.

Media File:

71-873_19721017-argument.mp3

Related Transcript:

71-873_19721017-argument.xml

Featured:

United States v. First Nat. Bancorporation - Oral Argument, Part 2

Thu, 02 Apr 2009 06:34:04 +0000

Case:

United States v. First Nat. Bancorporation

Media File:

71-703_19721017-argument-2.mp3

Related Transcript:

71-703_19721017-argument-2.xml

Featured:

United States v. First Nat. Bancorporation - Oral Argument, Part 1

Thu, 02 Apr 2009 06:35:44 +0000

Case:

United States v. First Nat. Bancorporation

Media File:

71-703_19721016-argument-1.mp3

Related Transcript:

71-703_19721016-argument-1.xml

Featured:

Ford Motor Co. v. United States - Oral Argument

Thu, 23 Aug 2012 18:17:33 +0000

Case:

Ford Motor Co. v. United States

Media File:

70-113_19711118-argument.mp3

Related Transcript:

70-113_19711118-argument

Transcript:

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.

The --

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.

Mr. Friedman.

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.

Secondly --

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.

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?

(Voice Overlap)

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.

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.

Thank you.

Chief Justice Warren E. Burger: Thank you Mr. Friedman.

Mr. Seymour.

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.

Featured: