14 95 Federal Trade Commission v. Consolidated Foods Corporation

• Decision Date: 28 April 1965
• Docket Number: No. 422,422
• Citation: 380 U.S. 592,85 S.Ct. 1220,14 L.Ed.2d 95
• Parties: . 14 L.Ed.2d 95 FEDERAL TRADE COMMISSION, Petitioner, v. CONSOLIDATED FOODS CORPORATION
• Court: U.S. Supreme Court

380 U.S. 592

85 S.Ct. 1220.

14 L.Ed.2d 95

FEDERAL TRADE COMMISSION, Petitioner,

v CONSOLIDATED FOODS CORPORATION.

No. 422.

Argued March 10 and 11, 1965.

Decided April 28, 1965.

Archibald Cox, Sol. Gen., for petitioner.

Daniel Walker, Chicago, Ill., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The question presented involves an important construction and application of § 7 of the Clayton Act,¹ 38 Stat. 731, as amended, 15 U.S.C. § 18. Consolidated Foods Corp.—which owns food processing plants and a network of wholesale and retail food stores—acquired Gentry, Inc., in 1951. Gentry manufactures principally dehydrated onion and garlic. The Federal Trade Commission held that the acquisition violated § 7 because it gave respondent the advantage of a mixed threat and lure of reciprocal buying in its competition for business and 'the power to foreclose competition from a substantial share of the markets for dehydrated onion and garlic.' It concluded, in other words, that the effect of the acquisition 'may be substantially to lessen competition' within the meaning of § 7, and it ordered divestiture and gave other relief. —- F.T.C. —-, —-. The Court of Appeals, relying mainly on 10 years of post-acquisition experience, held that the Commission had failed to show a probability that the acquisition would substantially lessen competition. 329 F.2d 623. The case is here on certiorari. 379 U.S. 912, 85 S.Ct. 259, 13 L.Ed.2d 183.

We hold at the outset that the 'reciprocity' made possible by such an acquisition is one of the congeries of anticompetitive practices at which the antitrust laws are aimed. The practice results in 'an irrelevant and alien factor,' —- F.T.C., p. —-, intruding into the choice among competing products, creating at the least 'a priority on the business at equal prices.' International Salt Co. v. United States, 332 U.S. 392, 396—397, 68 S.Ct. 12, 15, 92 L.Ed. 20; Northern Pac. R. Co. v. United States, 356 U.S. 1, 3, 6, 12, 78 S.Ct. 514, 517, 2 L.Ed.2d 545. Reciprocal trading may ensue not from bludgeoning or coercion but from more subtle arrangements. A threatened withdrawal of orders if products of an affiliate cease being bought, as well as a conditioning of future purchases on the receipt of orders for products of that affiliate is an anti-competitive practice.² Section 7 of the Clayton Act is concerned 'with probabilities, not certainties.' Brown Shoe Co. v. United States, 370 U.S. 294, 323, 82 S.Ct. 1502, 8 L.Ed.2d 510; United States v. Philadelphia Nat. Bank, 374 U.S. 321, 362, 83 S.Ct. 1715, 1740, 10 L.Ed.2d 915. Reciprocity in trading as a result of an acquisition violates § 7, if the probability of a lessening of competition is shown. We turn then to that, the principal, aspect of the present case.

Consolidated is a substantial purchaser of the products of food processors who in turn purchase dehydrated onion and garlic for use in preparing and packaging their food. Gentry, which as noted is principally engaged in the manufacture of dehydrated onion and garlic, had in 1950, immediately prior to its acquisition by Consolidated, about 32% of the total sales of the dehydrated garlic and onion industry and, together with its principal competitor, Basic Vegetable Products, Inc., accounted for almost 90% of the total industry sales. The remaining 10% was divided between two other firms. By 1958 the total industry output of both products had doubled. Gentry's share rising to 35% and the combined share of Gentry and Basic remaining at about 90%.³ After the acquisition Consolidated (though later disclaiming adherence to any policy of reciprocity) did undertake to assist Gentry in selling. An official of Consolidated wrote as follows to its distributing divisions:

'Oftentimes, it is a great advantage to know when you are calling on a prospect, whether or not that prospect is a supplier of someone within your own organization. Everyone believes in reciprocity providing all things are equal.

'Attached is a list of prospects for our Gentry products. We would like to have you indicate on the list whether or not you are purchasing any of your supplies from them. If so, indicate whether your purchases are relatively large, small or insignificant. * * *

'Will you please refer the list to the proper party in your organization. * * * If you have any special suggestions, as to how you could be helpful in properly presenting Gentry to any of those listed, it will be appreciated.'

Food processors who sold to Consolidated stated they would give their onion and garlic business to Gentry for reciprocity reasons if it could meet the price and quality of its competitors' products. Typical is a letter from Armour and Co.:

'I can assure you that it is the desire of our people to reciprocate and cooperate with you in any way we can in line with good business practices, and I am sure that if our quality obstacles can be overcome, your quotations will receive favorable consideration. We value our relationship with you very highly and are disappointed that we have been unable lately to reciprocate for your fine cooperation on Armour Pantry Shelf Meats.'

Some suppliers responded and gave reciprocal orders. Some who first gave generous orders later reduced them or abandoned the practice. It is impossible to recreate the precise anatomy of the market arrangements following the acquisition, though respondent offers a factual brief seeking to prove that 'reciprocity' either failed or was not a major factor in the post-acquisition history.

The Commission found, however, that 'merely as a result of its connection with Consolidated, and without any action on the latter's part, Gentry would have an unfair advantage over competitors enabling it to make sales that otherwise might not have been made.'

And the Commission concluded:

'With two firms accounting for better than 85% of both product lines for eleven successive years, maximum concentration short of monopoly has already been achieved. If it is desirable to prevent a trend toward oligopoly it is a fortiori desirable to remove, so far as possible, obstacles to the creation of genuinely competitive conditions in an oligopolistic industry. Respondent's reciprocal buying power, obtained through acquisition of Gentry, is just such an anticompetitive obstacle.

'This conclusion is buttressed by the peculiar nature of the dehydrated onion and garlic industry. In the first place, the record shows that Gentry's leading competitor, Basic Vegetable Products, Inc., has been the innovator and leader in the field. Gentry has recently made technical strides narrowing, although probably not closing, the gap between them. There is also evidence that the third firm, Puccinelli Packing Co., is not only much smaller—commanding only about 10% of each product market—but is considered by many buyers to offer an inferior product and inferior service.' —- F.T.C., p. —-.

The Court of Appeals, on the other hand, gave post-acquisition evidence almost conclusive weight. It pointed out that, while Gentry's share of the dehydrated onion market increased by some 7%, its share of the dehydrated garlic market decreased 12%. 329 F.2d, p. 626. It also relied on apparently unsuccessful attempts at reciprocal buying. Ibid. The Court of Appeals concluded that 'Probability can best be gauged by what the past has taught.' Id., p. 627.

The Court of Appeals was not in error in considering the post-acquisition evidence in this case. See United States v. E. I. Du Pont De Nemours & Co., 353 U.S. 586, 597, 77 S.Ct. 872, 879, 1 L.Ed.2d 1057, et seq., 602 et seq. But we think it gave too much weight to it. Cf. United States v. Continental Can Co., 378 U.S. 441, 463, 84 S.Ct. 1738, 1750, 12 L.Ed.2d 953. No group acquiring a company with reciprocal buying opportunities is entitled to a 'free trial' period. To give it such would be to distort the scheme of § 7. The 'mere possibility' of the prohibited restraint is not enough. (United States v. E. I. Du Pont De Nemours & Co., supra, 353 U.S. p. 598, 77 S.Ct. p. 880.) Probability of the proscribed evil is required, as we have noted. If the post-acquisition evidence were given conclusive weight or allowed to override all probabilities, then acquisitions would go forward willy-nilly, the parties biding their time until reciprocity was allowed fully to bloom. It is, of course, true that post-acquisition conduct may amount to a violation of § 7 even though there is no evidence to establish probability in limine. See United States v. E. I. Du Pont De Nemours & Co., supra, 353 U.S. pp. 597—598, 77 S.Ct. pp. 879—880. But the force of § 7 is still in probabilities, not in what later transpired. That must necessarily be the case, for once the two companies are united no one knows what the fate of the acquired company and its competitors would have been but for the merger.

Moreover, the post-acquisition evidence here tends to confirm, rather than cast doubt upon, the probable anti-competitive effect which the Commission found the merger would have. The Commission found that Basic's product was superior to Gentry's—as Gentry's president freely and repeatedly admitted. Yet Gentry, in a rapidly expanding market, was able to increase its share of onion sales by 7% and to hold its losses in garlic to a 12% decrease. Thus the Commission was surely on safe ground in reaching the following conclusion:

'If reciprocal buying creates for Gentry a protected market, which others cannot penetrate despite superiority of price, quality, or service, competition is lessened whether or not Gentry can expand its market share. It is for this reason that we reject respondent's argument that the decline in its share of the garlic market proves the ineffectiveness of reciprocity. We do not know that its share would not have fallen still farther, had it not been for the influence of reciprocal buying. This loss of sales fails to refute the likelihood that...