386 U.S. 568 (1967), 342, Federal Trade Commission v. Procter & Gamble Co.

Docket Nº:No. 342
Citation:386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303
Party Name:Federal Trade Commission v. Procter & Gamble Co.
Case Date:April 11, 1967
Court:United States Supreme Court
 
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Page 568

386 U.S. 568 (1967)

87 S.Ct. 1224, 18 L.Ed.2d 303

Federal Trade Commission

v.

Procter & Gamble Co.

No. 342

United States Supreme Court

April 11, 1967

Argued February 13, 1967

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Syllabus

Procter & Gamble (Procter), a large, diversified manufacturer of household products, acquired in 1957 the assets of Clorox Chemical Co., the leading manufacturer of household liquid bleach, and the only one selling on a national basis. Clorox had 48.8% of the national market, with higher percentages in some regional areas. Clorox and one other firm accounted for 65% of liquid bleach sales, and, with four other firms, for almost 80%, with the rest divided among more than 200 small producers. Procter is a dominant factor in the area of soaps, detergents and cleaners, with total sales in 1957 in excess of a billion dollars, and an advertising budget of more than $80,000,000, due to which volume Procter receives substantial discounts from the media. The FTC challenged the acquisition, and, after hearings, found that the substitution of Procter for Clorox would dissuade new entrants in the liquid bleach field, discourage active competition from firms already in the industry due to fear of retaliation from Procter, and diminish potential competition by eliminating Procter, the most likely prospect, as a potential entrant. The FTC, which placed no reliance on post-acquisition evidence, held the acquisition violative of § 7 of the Clayton Act and ordered the divestiture of Clorox. The relevant line of commerce was found to be household liquid bleach, and the relevant geographical market was held to be the Nation and a series of regional markets. The Court of Appeals reversed, stating that the FTC's finding of illegality was based on "treacherous conjecture," mere possibility, and suspicion. The court found nothing unhealthy about the market conditions in the industry, found "it difficult to base a finding of illegality on discounts in advertising," found no evidence to show that Procter ever intended to enter the bleach field, and relied heavily on post-acquisition evidence to the effect that other producers "were selling more bleach for more money than ever before."

Held:

1. Any merger, whether it is horizontal, vertical, conglomerate, or, as in this case, a "product-extension merger," must be tested

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by the standard of § 7 of the Clayton Act, that is, whether it may substantially lessen competition, which requires a prediction of the merger's impact on present and future competition. P. 577.

2. This merger may have anticompetitive effects. Pp. 578-581.

(a) In this oligopolistic industry, the substitution of the powerful acquiring firm for the smaller but dominant firm may substantially reduce the competitive structure of the industry by dissuading the smaller firms from competing aggressively, resulting in a more rigid oligopoly, with Procter the price leader. P. 578.

(b) The acquisition may also tend to raise the barriers to new entrants, who would be reluctant to face the huge Procter, with its large advertising budget. P. 579.

(c) Potential economics cannot be used as a defense to illegality, as Congress struck the balance in favor of protecting competition. P. 580.

(d) The FTC's finding that the acquisition eliminated Procter, the most likely entrant into the liquid bleach field, as a potential competitor was amply supported by the evidence. Pp. 580-581.

358 F.2d 74, reversed and remanded.

DOUGLAS, J., lead opinion

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This is a proceeding initiated by the Federal Trade Commission charging that respondent, Procter & Gamble Co., had acquired the assets of Clorox Chemical Co. in violation of § 7 of the Clayton Act, 38 Stat. 731, as amended by the Celler-Kefauver Act, 64 Stat. 1125,

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15 U.S.C. § 18.1 The charge was that Procter's acquisition of Clorox might substantially lessen competition or tend to create a monopoly in the production and sale of household liquid bleaches.

Following evidentiary hearings, the hearing examiner rendered his decision, in which he concluded that the acquisition was unlawful and ordered divestiture. On appeal, the Commission reversed, holding that the record as then constituted was inadequate, and remanded to the examiner for additional evidentiary hearings. 58 F.T.C. 1203. After the additional hearings, the examiner again held the acquisition unlawful and ordered divestiture. The Commission affirmed the examiner and ordered divestiture. 63 F.T.C. ___. The Court of Appeals for the Sixth Circuit reversed and directed that the Com mission's complaint be dismissed. 358 F.2d 74. We find that the Commission's findings were amply supported by the evidence, and that the Court of Appeals erred.

As indicated by the Commission in its painstaking and illuminating report, it does not particularly aid analysis to talk of this merger in conventional terms, namely, horizontal or vertical or conglomerate. This merger may most appropriately be described as a "product-extension merger," as the Commission stated. The facts are not disputed, and a summary will demonstrate the correctness of the Commission's decision.

At the time of the merger, in 1957, Clorox was the leading manufacturer in the heavily concentrated household

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liquid bleach industry. It is agreed that household liquid bleach is the relevant line of commerce. The product is used in the home as a germicide and disinfectant, and, more importantly, as a whitening agent in washing clothes and fabrics. It is a distinctive product with no close substitutes. Liquid bleach is a low-price, high-turnover consumer product sold mainly through grocery stores and supermarkets. The relevant geographical market is the Nation and a series of regional markets. Because of high shipping costs and low sales price, it is not feasible to ship the product more than 300 miles from its point of manufacture. Most manufacturers are limited to competition within a single region, since they have but one plant. Clorox is the only firm selling nationally; it has 13 plants distributed throughout the Nation. Purex, Clorox's closest competitor in size, does not distribute its bleach in the northeast or mid-Atlantic States; in 1957, Purex's bleach was available in less than 50% of the national market.

At the time of the acquisition, Clorox was the leading manufacturer of household [87 S.Ct. 1227] liquid bleach, with 48.8% of the national sales -- annual sales of slightly less than $40,000,000. Its market share had been steadily increasing for the five years prior to the merger. Its nearest rival was Purex, which manufactures a number of products other than household liquid bleaches, including abrasive cleaners, toilet soap, and detergents. Purex accounted for 15.7% of the household liquid bleach market. The industry is highly concentrated; in 1957, Clorox and Purex accounted for almost 65% of the Nation's household liquid bleach sales, and, together with four other firms, for almost 80%. The remaining 20% was divided among over 200 small producers. Clorox had total assets of $12,000,000; only eight producers had assets in excess of $1,000,000, and very few had assets of more than $75,000.

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In light of the territorial limitations on distribution, national figures do not give an accurate picture of Clorox's dominance in the various regions. Thus, Clorox's seven principal competitors did no business in New England, the mid-Atlantic States, or metropolitan New York. Clorox's share of the sales in those areas was 56%, 72%, and 64%, respectively. Even in regions where its principal competitors were active, Clorox maintained a dominant position. Except in metropolitan Chicago and the west-central States, Clorox accounted for at least 39%, and often a much higher percentage, of liquid bleach sales.

Since all liquid bleach is chemically identical, advertising and sales promotion are vital. In 1957, Clorox spent almost $3,700,000 on advertising, imprinting the value of its bleach in the mind of the consumer. In addition, it spent $1,700,000 for other promotional activities. The Commission found that these heavy expenditures went far to explain why Clorox maintained so high a market share despite the fact that its brand, though chemically indistinguishable from rival brands, retailed for a price equal to or, in many instances, higher than its competitors.

Procter is a large, diversified manufacturer of low-price, high-turnover household products sold through grocery, drug, and department stores. Prior to its acquisition of Clorox, it did not produce household liquid bleach. Its 1957 sales were in excess of $1,100,000,000, from which it realized profits of more than $67,000,000; its assets were over $500,000,000. Procter has been marked by rapid growth and diversification. It has successfully developed and introduced a number of new products. Its primary activity is in the general area of soaps, detergents. and cleansers; in 1957, of total domestic sales, more than one-half (over $500,000,000) were in this field. Procter was the dominant factor in this area.

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It accounted for 54.4% of all packaged detergent sales. The industry is heavily concentrated -- Procter and its nearest competitors, Colgate-Palmolive and Lever Brothers, account for 80% of the market.

In the marketing of soaps, detergents, and cleansers, as in the marketing of household liquid bleach, advertising and sales promotion are vital. In 1957, Procter was the Nation's largest advertiser, spending more than $80,000,000 on advertising and an additional $47,000,000 on sales promotion. Due to its tremendous volume, Procter receives...

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