General Foods Corporation v. FTC

• Decision Date: 09 November 1967
• Docket Number: No. 15910.,15910.
• Citation: 386 F.2d 936
• Parties: GENERAL FOODS CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Third Circuit

386 F.2d 936 (1967)

GENERAL FOODS CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 15910.

United States Court of Appeals Third Circuit.

Argued June 6, 1967.

Decided November 9, 1967.

Gerhard A. Gesell, Covington & Burling, Washington, D. C. (Roberts B. Owen, Gerald P. Norton, Covington & Burling, Washington, D. C., Kendall M. Cole, White Plains, N. Y., on the brief), for petitioner.

Thomas F. Howder, Federal Trade Commission, Washington, D. C. (James

McI. Henderson, Gen. Counsel, J. B. Truly, Asst. Gen. Counsel, Frederick H. Mayer, Washington, D. C., on the brief), for respondent.

Before STALEY, Chief Judge, HASTIE, Circuit Judge, and SHERIDAN, District Judge.

OPINION OF THE COURT

STALEY, Chief Judge.

Appellant, General Foods Corporation (hereinafter "G.F."), seeks to have reviewed and set aside a final order of the Federal Trade Commission. The Commission's order required G.F. to divest itself of all S.O.S. assets acquired in violation of § 7 of the Clayton Act, 64 Stat. 1125 (1950), 15 U.S.C. § 18 (1964), amending 38 Stat. 731 (1914).¹ The precise determination was that G.F.'s acquisition of S.O.S. "will in fact substantially lessen competition in the steel wool pad market."

Both before and after the acquisition, which occurred on December 31, 1957, the major source of revenue for S.O.S. came from the sale of its household steel wool pads. These pads are produced by a shaving process in which a specifically manufactured steel wool wire is drawn through a machine containing a series of cutting knives. As the wire is drawn against the knives, strands of steel wool with triangular cross sections are shaved off and collected in ribbons. Thereafter, these ribbons are formed into balls or pads, the majority of which are impregnated with soap, dried, and packaged for sale.

Steel wool pads make a particularly effective abrasive. The three exposed cutting edges or cross sections perform in much the same manner as a knife abrasing by cutting or shaving the surface to which the steel wool is applied. With the addition of soap to the pad to facilitate its abrasive action, steel wool makes a highly effective scouring and cleansing agent.

The steel wool cutting machines are comparatively large, complicated machines, not generally available on the open market, but are custom made to the manufacturer's specifications. A German manufactured machine is available but is not as efficient as its American counterpart. The machines can be used for no other function than the production of steel wool. Wool manufactured from materials other than steel are impractical because of the high cost of the raw materials.

G.F. is one of the largest producers and distributors of packaged food in the United States.² All its products are low-priced high-turnover household consumer commodities sold to customers through the same grocery and supermarket outlets as are S.O.S. steel wool soap pads. Between 1955 and 1964, its net sales rose from $825 million to $1.3 billion, and its net assets from $279 million to $436 million, an increase of 57.6% and 56.2% respectively.

Because the self-service outlet is the primary source of distribution for its products, G.F. endeavors to create a desire for a particular product in the mind of the shopper, thereby enabling her to make a distinction among the different brands of a similar commodity. It is "an unrelenting effort to presell the housewife."³

Mass advertising and market promotions are essential factors in the effort to achieve this goal. In 1957 G.F.'s advertising and sales promotions aggregated $69 million, and in 1958 $87 million. By 1961, G.F. ranked third among all national advertisers, with most of its advertising expenditures going into television advertising.

Prior to the acquisition, the steel wool industry had been an almost perfectly balanced duopoly.⁴ But in terms of regional, as distinguished from national sales, S.O.S. managed to achieve a monopoly position in many areas.⁵ G.F., however, was not satisfied with the market position of the company it acquired. Soon after the acquisition, appellant concluded that the entire marketing and advertising approach of S.O.S. needed rejuvenation. This task was entrusted to an advertising agency then handling other G.F. products. The new agency succeeded in enhancing the S.O.S. image by skillfully emphasizing different aspects of the product than had previously been featured and by persuading G.F.'s management that they should place an almost total reliance on television advertising.⁶

A survey of sales' statistics for the household steel wool industry reveals the dramatic change that G.F. was able to effect. During the period from 1955 to 1957 total sales in the industry rose from $24.2 million to $28.6 million, a market expansion of over 18%. The sales of S.O.S., however, increased by only 14.5% from $12.7 million in 1955 to $14.6 million in 1957. S.O.S. thus failed to keep pace with the expanding market, its share falling from 52.8% in 1955 to 51% in 1957. Contrasted with this decline is the rise of Brillo's market share during the same period, going from 45.7% in 1955 to 47.6% in 1957. Brillo's sales increased by 23.4%, a rate markedly more rapid than that for the industry as a whole.

The downward trend in the market position of S.O.S. continued for a period of time after the acquisition due to G.F.'s preoccupation with the integration of S.O.S. into its own organization. Brillo, during this same period, continued to grow faster than the market; its sales increased, for example, from $14.4 million in 1958 to $14.9 million in 1959, a gain of 3.8% as compared to a total market expansion of 2.8%.

Beginning in 1960, with the post-acquisition period coming to a close, the advantages derived from G.F.'s great competitive strength began to make themselves evident, and the fortunes of S.O.S. took an upward turn. Sales began to accelerate sharply and at a much faster pace than those for the total industry.⁷ Between 1959 and 1962, the sales of S.O.S. rose from $15.2 million to $19.2 million, a gain of 26.5%. Total industry sales, however, increased by only 11.5%, from $30.7 million to $34.2 million. Sales of S.O.S., therefore, expanded at more than twice the rate of the household steel wool market, and the market share of S.O.S. grew from 49.4% in 1959 to 56% in 1962.

In the face of this remarkable comeback by S.O.S., Brillo's position deteriorated rapidly. Even though industry household steel wool sales increased by 11.5%, Brillo's sales actually decreased from $14.9 million in 1959 to $14.3 million in 1962, a decline of 4.2% in an expanding market.⁸ Confronted with steadily falling sales, a dangerously declining market share, and mounting advertising and promotional expenses, Brillo, in December 1963, ceased operations as an independent company and merged with Purex Corporation, Ltd.⁹

I

Section 7 of the Clayton Act prohibits any merger which may substantially lessen competition or tend toward monopoly "in any line of commerce." Prohibition of a merger depends, not upon the form it assumes, but upon the realities of the market in which the merged companies operate. Federal Trade Commission v. Procter & Gamble Co. (hereinafter "Clorox") 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967); Reynolds Metals Co. v. Federal Trade Commission, 114 U.S.App.D.C. 2, 309 F.2d 223 (1962). The fact that different products may in some sense be competitive with each other is not sufficient to place them in the same market if by themselves they constitute distinct product lines. United States v. Aluminum Co. of America (Alcoa-Rome Cable), 377 U.S. 271, 84 S.Ct. 1283, 12 L.Ed.2d 314 (1964). Nor does the availability of substitute products compel the conclusion that they belong in the same relevant market. United States v. E. I. DuPont De Nemours & Co., 353 U.S. 586, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957), Reynolds Metals Co. v. Federal Trade Commission, supra.

In Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962), the Supreme Court addressed itself to the task of clarifying some of the uncertainty surrounding the concept of relevant market. There, the Court said:

"The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for anti-trust purposes. United States v. E.I. DuPont De Nemours & Co., 353 U.S. 586, 593-595, 77 S.Ct. 872, 877, 1 L.Ed.2d 1057. The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product\'s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialized vendors." (Emphasis supplied.)

In the present case, the Commission followed, as far as possible, the guidelines laid down in Brown Shoe. It found that the appropriate line of commerce or relevant product market within which to test the impact of the G.F.-S.O.S. merger was household steel wool. Appellant challenges this finding, accusing the Commission of "untenable gerrymandering" because of its failure to include in the relevant market numerous nonsteel wool household aids that G.F. introduced into the record. Appellant further argues that even if the market definition was technically tenable, the Commission nevertheless erred in assessing the impact of the merger by treating nonsteel wool scouring devices as though they did not exist.

At the outset, it is important to note that G.F. does not quarrel with the legal principles that guided the Commission. Rather, appellant contends that the Commission not only did not find sufficient facts to satisfy the Brown Shoe criteria,...