U.S. v. Siemens Corp.

• Decision Date: 16 April 1980
• Docket Number: No. 1104,D,1104
• Parties: 1980-2 Trade Cases 63,287 UNITED STATES of America, Plaintiff-Appellant, v. SIEMENS CORPORATION and G. D. Searle & Co., Defendants-Appellees. ocket 80-6055.
• Court: U.S. Court of Appeals — Second Circuit

Page 499

621 F.2d 499

1980-2 Trade Cases 63,287

UNITED STATES of America, Plaintiff-Appellant, v. SIEMENS CORPORATION and G. D. Searle & Co., Defendants-Appellees.

No. 1104, Docket 80-6055.

United States Court of Appeals, Second Circuit.

Argued April 1, 1980.

Decided April 16, 1980.

Bruce E. Fein, Dept. of Justice, Washington, D. C. (Sanford M. Litvack, Asst. Atty. Gen., Robert V. Allen, John J. Powers, III, Roger B. Andewelt, Kenneth M. Frankel, Nicholas W. Clark, Linda S. Chapman, Kent Brown, Attys., Dept. of Justice, Washington, D. C., of counsel), for plaintiff-appellant.

Guy Miller Struve, New York City (Davis, Polk & Wardwell, New York City, Sidley & Austin, Chicago, Ill., of counsel), for defendant-appellee G. D. Searle & Co.

Werner L. Polak, New York City (Shearman & Sterling, New York City, of counsel), for defendant-appellee Siemens Corporation.

Before LUMBARD, MANSFIELD and KEARSE, Circuit Judges.

MANSFIELD, Circuit Judge:

The United States of America appeals from an order of the District Court for the Southern District of New York, entered on March 20, 1980, by Judge Vincent L. Broderick, denying its motion for a preliminary injunction restraining Siemens Corporation (Siemens), a wholly owned subsidiary of Siemens A. G., a West German corporation, from acquiring certain assets of the Searle Diagnostics Division (SD) of defendant G. D. Searle & Co. (Searle), a Delaware corporation with its principal offices in Illinois. The complaint against Searle, which was filed by the government on March 12, 1980, pursuant to § 15 of the Clayton Act, 15 U.S.C. § 25, ¹ claims that the acquisition would violate § 7 of the Clayton Act, 15 U.S.C. § 18, ² in that it would tend substantially to lessen competition in the sale of nuclear medical diagnostic imaging equipment in the United States. Consummation of the proposed acquisition has been stayed pending this appeal. We affirm the denial of preliminary injunctive relief and vacate the stay.

Medical diagnostic imaging equipment is used, principally by hospitals, to provide images of internal body organs, tissues and structures for diagnostic purposes. There are four main types of such equipment: (1) ultrasound, which uses ultra-high sound waves (like Sonar) to form a cross-section of the patient's body, (2) X-ray, (3) computed tomography (CT) or computed axial tomography (CAT), which uses a computer to process X-rays diffracted from various directions through the patient's body to derive cross-sections of the body, and (4) nuclear, which consists of a gamma camera used to detect radiation emitted by radioactive isotopes introduced into the patient's body and a cathode ray with computer software to process and display the information conveyed by the radiation. Each of these four types of equipment is sufficiently differentiated to constitute a separate product market. In this case we are concerned with the nuclear medical equipment market. The United States is a separate geographic market for the sale of such equipment.

Nuclear medical equipment is highly sophisticated and quite expensive, often costing between $100,000 and $200,000, with hospitals the principal purchasers. Sales in the United States totalled approximately $100 million in 1979, or about 60% of the worldwide total. Production and sale of 1975 1976 1977 1978 1979

nuclear medical equipment in the United States is concentrated principally among four firms (Searle Diagnostics, Ohio Nuclear (now Technicare, Inc.), Picker Co. and General Electric Co.), with the distribution of total sales as follows:

---- ---- ---- ---- ----

1. General Electric ....... 3% 7% 8% 15% 17%

2. Ohio Nuclear (now

Technicare, Inc.) ... 22% 21% 20% 24% 20%

3. Picker ................ 17% 18% 17% 16% 18%

4. Searle Diagnostics .... 50% 43% 42% 30% 22%

5. All Others ³ ....... 8% 11% 13% 15% 23%

These figures, plus the testimony of witnesses, indicate that the nuclear medical equipment market, while concentrated, has been competitive, with General Electric increasing its share from 3% to 17% in five years. Although the market grew substantially since the 1960's, when nuclear equipment was in its infancy, growth in demand has slackened, due in part to increased governmental regulation of hospital costs, leaving a prognostication that sales of nuclear equipment in the years ahead will only gradually increase. With the levelling of market volume there has been increased price competition, with the result that Ohio Nuclear (now Technicare, Inc.) has earned only 5% to 10% on its investment since 1975 and Raytheon, one of the "Others," lost money from 1976 to 1978.

Another casualty has been SD, the pioneer firm in the market. Its market share has dropped dramatically over the last five years. It lost approximately $15 million dollars in 1978 and, after imposing various economies, $2 million in 1979. According to testimony of senior Searle management officials, Searle determined in early 1979 that it could not justify investing the research and development funds required to keep SD technologically competitive, in light of the anticipated negative return on its investment in SD, and concluded that SD must be sold. After receiving inquiries from two other companies, Searle agreed to sell its SD business to Siemens on December 10, 1979.

Siemens manufactures and sells X-ray equipment and computer tomography equipment throughout the world, with its 1979 United States sales of these products totalling $87.2 million and.$2.3 million, respectively. It makes and sells ultrasonic equipment outside of the United States, with 1979 sales of $26 million. Until June 1979 it also sold nuclear medical equipment outside the United States as a distributor for Ohio Nuclear Corp. (now Technicare, Inc.) and its sales of such equipment were $17.7 million. Siemens has on several occasions considered the possibility of entering the nuclear medical equipment market de novo or by a so-called "toe-hold" acquisition. ⁴ In 1969 it attempted to develop and sell its own gamma camera, but abandoned that effort because of technical difficulties and customer complaints. In 1972 it again considered entering the nuclear medical equipment field but, despite recommendations by some Siemens sales personnel in favor of such a move, it concluded that it On December 19 and 20, 1979, Searle and Siemens filed premerger notification reports pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a, thereby commencing the 30-day waiting period specified by 15 U.S.C. § 18a(b)(1). On January 30, 1980, the Antitrust Division of the Justice Department requested further information from Siemens and Searle pursuant to 15 U.S.C. § 18a(e)(2) and the requested information was furnished on February 20, 1980. The 20-day supplemental waiting period provided by 15 U.S.C. § 18a(e)(2) began to run on February 20, 1980. On the last day of the supplemental waiting period, March 11, 1980, the Antitrust Division notified counsel for Searle and Siemens that it intended to commence the present action and to seek a temporary restraining order and preliminary injunction the next day, on the ground the proposed merger eliminated a potential competitor, Siemens, from the nuclear medical equipment field.

was too late to become a new entrant and that it would not be able to recover the investment required to make such an entry. In 1979 it briefly considered purchasing ADAC, a manufacturer of computers used in nuclear medical equipment, but that proved equally unsuccessful when ADAC declined a proposal that it develop a gamma camera.

On March 13 and 14 Judge Broderick held an evidentiary hearing at which the Government relied principally upon the testimony of three officers of manufacturers of nuclear medical equipment, two from Technicare, Inc., and one from Raytheon Corporation, plus various documents, including four memoranda by Siemens employees. The defendants, in turn, called the Senior Vice-President and Chief Financial Officer of Searle, as well as the Executive Vice-President of Siemens, who is also a member of its Board of Management and head of its Medical Group.

The evidence revealed that a manufacturer improves its chances to be competitive in the United States market for medical diagnostic imaging equipment if it can offer a full line of products, including nuclear equipment. Siemens has a strong technology base for manufacture of non-nuclear medical imaging equipment and an excellent reputation. In 1978 and 1979 some of its subordinate, non-managerial employees (e. g., Gerd Baer, John A. Diener, James J. Kelly) recommended expansion into the nuclear equipment, preferably by acquisition of Searle, ADAC, or some other suitable company. Dr. Frederick Kuhrt, Siemens' Executive Vice-President, testified that in view of Siemens' unsuccessful attempt to produce a gamma camera and its probable inability to recover its investment given the present market conditions of slow growth and uncertain profits, he and his decision-making colleagues, after reviewing the question several times, had decided against a de novo entry. Siemens was in his view "too late." To develop commercial nuclear sales via a new entry would in his opinion take "at least five years." On the other hand, he believed that by combining the technology and sales organizations of Siemens and SD, Siemens could turn a profit on the sale of nuclear medical equipment even though it planned to distribute the equipment through a separate sales and service organization rather than through its existing one.

One Government witness, Joseph B. Richey of Technicare, viewed Siemens as a potential entrant into the nuclear market and Herman Vahjen of Raytheon believed Siemens had the internal capability to create a nuclear product of its own. However, Vahjen conceded that his company had never been influenced in its competitive market decision-making by Siemens' potential entry and Richey stated that any...