F. T. C. v. Exxon Corp.

• Decision Date: 23 December 1980
• Docket Number: No. 80-2043,80-2043
• Parties: , 1980-81 Trade Cases 63,679 FEDERAL TRADE COMMISSION v. EXXON CORPORATION et al., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1336

636 F.2d 1336

205 U.S.App.D.C. 208, 1980-81 Trade Cases 63,679

FEDERAL TRADE COMMISSION v. EXXON CORPORATION et al., Appellants.

No. 80-2043.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 17, 1980.

Decided Dec. 23, 1980.

William H. Allen, Washington, D. C., with whom Edwin M. Zimmerman and Catherine W. Brown, Washington, D. C., were on brief, for appellant.

Michael A. Schlanger, Atty., F. T. C., Washington, D. C., with whom James H. Sneed, Acting Gen. Counsel, Ernest A. Nagata, David W. Long, Daniel S. Koch, Richard L. Sippel and John R. Metz, Karen L. Chapman, Attys., F. T. C., Washington, D. C., were on brief, for appellee.

Before EDWARDS and GINSBURG, Circuit Judges, and JOYCE HENS GREEN, ^* United States District Judge for the District of Columbia.

Opinion for the court filed by Circuit Judge EDWARDS.

EDWARDS, Circuit Judge:

Exxon Corporation here appeals from an Order entered by District Court Judge John Pratt on June 25, 1980. In that Order, Judge Pratt prohibited both in-house and retained counsel for Exxon from having an attorney-client relationship with a segment of a wholly-owned Exxon subsidiary, known as the Drives Group, during the course of an administrative proceeding that may result in the divestiture of the Drives Group from Exxon. The Order also granted counsel for the Federal Trade Commission (FTC) liberal access to certain documents and personnel of the Drives Group, without requiring the FTC to resort to the established administrative discovery process. Exxon contests both aspects of this Order.

For the reasons stated below, we affirm that portion of the Order that prohibits counsel for Exxon from maintaining an attorney-client relationship with the Drives Group. We reverse, however, that portion of the District Court Order that grants the FTC access to documents and personnel of the Drives Group outside of the administrative discovery process. We remand this case to the District Court with instructions to modify the Order accordingly.

I. BACKGROUND

The issues presented in this appeal are novel. For this reason, we set forth the facts and procedural history of this action with some detail.

In May of 1979, Exxon announced the development of a new technology (called "alternating current synthesis" or "ACS") for controlling the speed of certain alternating current motors. At the same time, Exxon announced plans to acquire Reliance Electric Company, a company that possessed manufacturing and marketing capabilities that Exxon lacked in the general area of controls (sometimes called "drives") for electric motors. After negotiations between officials at Exxon and Reliance, the Reliance Board of Directors announced that it would neither endorse nor oppose a tender offer by Exxon. Exxon made a formal offer to buy any and all outstanding shares of the common stock and the Series A preferred stock of Reliance tendered by July 11, 1979 (later extended to July 13). Tendered shares could be withdrawn after August 20, 1979, unless purchased by Exxon. On July 13, more than 95 percent of the common stock of Reliance and nearly 75 percent of its Series A preferred stock had been tendered.

In compliance with the Hart-Scott-Rodino Act, 15 U.S.C. § 18a (1976), ¹ the Department of Justice and the Federal Trade Commission were notified on May 29, 1979 of the impending acquisition. On July 27, 1979, pursuant to the authority of Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b) (1976), ² the FTC filed a complaint in District Court. ³ The complaint sought a temporary restraining order and a preliminary injunction prohibiting Exxon from buying the tendered Reliance shares, pending resolution of an FTC proceeding in which the legality of the acquisition would be challenged under Section 7 of the Clayton Act, 15 U.S.C. § 18 (1976), and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (1976).

In the corresponding administrative proceeding, the FTC alleged a violation of the antitrust laws based on a "potential competition" theory of antitrust liability. ⁴ The FTC contended that Exxon had been actively preparing to enter the "drives market" on its own, either de novo or by acquiring a smaller "toehold" company. The FTC administrative complaint thus alleged that certain anticompetitive effects would result from the acquisition, as follows:

Exxon's acquisition of Reliance would eliminate Exxon as an actual potential entrant into the United States EVSD (electronic variable speed industrial drives) market, thereby eliminating the likelihood that entry by Exxon would:

(a) decrease concentration in the market;

(b) increase competition in the market; or

(c) increase competition in the development of EVSD technology and products.

Exxon's acquisition of Reliance would likely have anticompetitive effects in the United States EVSD market, including but not limited to:

(a) increasing the level of concentration in the market;

(b) elevating barriers to entry into the market; or

(c) eliminating competition in the development of EVSD technology and products.

A. 234. ⁵

A temporary restraining order blocking the acquisition was issued by District Court Judge Harold H. Greene on July 28, 1979. ⁶ During the course of subsequent hearings before District Court Judge John Pratt, four options were presented concerning the possibility of further preliminary injunctive relief. One such option was that the court could impose no further equitable relief; this position was advocated by Exxon on the ground that the FTC had not established the prerequisites for a preliminary injunction. A second option was that the court could enter a preliminary injunction prohibiting the purchase of the tendered Reliance shares by Exxon. A third option was that the court could permit the acquisition to go forward, but subject to a condition that Exxon maintain certain segments of Reliance separate from Exxon. The "hold separate" option was suggested to ensure that, in the event that the FTC succeeded in its administrative action, meaningful divestiture could be imposed. ⁷ Reliance strongly urged the court to accept this third alternative, so that the risk of financial loss resulting from the challenge to the acquisition would be born by Exxon, and not by the shareholders of Reliance. ⁸ A fourth option was that the court could permit the acquisition to go forward, but subject to a requirement that Exxon offer competitors non-exclusive "licenses" for the use of its ACS technology. Exxon expressed some interest in this alternative.

On August 17, 1979, the District Court decided against the issuance of a preliminary injunction blocking the acquisition. ⁹ The court decreed that, "in light of the relief hereinafter granted, the Federal Trade Commission has failed to show that the public interest entitles it to the relief sought under Section 13(b) of the Federal Trade Commission Act." In lieu of a preliminary injunction, and "in the exercise of the inherent equitable powers of the Court," the District Court ordered that Exxon could proceed with the consummation of the acquisition on the condition that Exxon maintain the "drives" and "motors" divisions of Reliance completely separate and independent from Exxon. The August 17 Order was to remain in effect only until the court could more carefully consider the licensing alternative.

Exxon did not immediately move to purchase the tendered Reliance shares. ¹⁰ On September 20, 1979, Reliance filed suit to enjoin Exxon from withdrawing from the tender offer. ¹¹ Reliance based its suit on allegations that, in June 1979, in order to induce Reliance not to oppose Exxon's tender offer, Exxon assured Reliance that it would not withdraw from the transaction in the event that Exxon was required to hold Reliance separate during litigation seeking to prevent the acquisition. Four days later, on September 24, Exxon consummated the tender offer. Exxon is now the sole owner of Reliance.

In the course of further proceedings before the District Court, the court concluded that the licensing remedy advocated by Exxon was not a reasonable alternative to a hold separate order. As a result, on October 26, 1979, the court entered a final order that mirrored in most respects the interim Order of August 17. ¹² The provisions of the October 26 Order are important to this proceeding, and need be described in some detail.

The District Court made the factual finding that the "Electrical Drives and Systems Group" of Reliance (the "Drives Group") could be operated as a separate entity by Exxon during the pendency of the Federal Trade Commission administrative proceeding. ¹³ The court then entered a comprehensive hold separate order insulating the Drives Group from Exxon. To do so, the court relied upon its "authority either under § 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), or its inherent equitable powers to enter an order in such form as it considers necessary to protect the ability of the Federal Trade Commission and the courts to order meaningful relief upon conclusion of proceedings now pending before the Federal Trade Commission to determine the legality of this acquisition." ¹⁴

The October 26, 1979 hold separate order applied to Exxon and its subsidiaries, and to "all directors, officers, employees or agents" of the corporation. A. 786. The Order generally required that "Exxon shall cause the Drives Group to be maintained as a separate entity such that the Drives Group will be capable of being divested pursuant to any subsequent order of the Federal Trade Commission." Id. To effectuate that end, the Order prohibited Exxon from taking any action "which would cause any changes or alterations to be made in the Drives Group's business or operations or organization," except "as may be required in the ordinary course of business." A. 787. Most importantly for purposes of this action, the Order also provided that Exxon and the Drives...