Borden, Inc. v. F. T. C.
| Decision Date | 12 April 1982 |
| Docket Number | No. 79-3028,79-3028 |
| Citation | 674 F.2d 498 |
| Parties | 1982-1 Trade Cases 64,558 BORDEN, INC., Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
H. Blair White, Sidley & Austin, Charles W. Douglas, Chicago, Ill., Walter W. Kocher, Borden, Inc., Harvey A. Rosenzweig, Edward A. Matto, Columbus, Ohio, for petitioner.
Edward F. Glynn, Jr., Michael N. Sohn, Gen. Counsel, Howard Shapiro, W. Dennis Cross, Jerold D. Cummins, F. T. C., Washington, D. C., for respondent.
Before KENNEDY and JONES, Circuit Judges, and PHILLIPS, Senior Circuit Judge.
This case is before the court on a petition to review an order of the Federal Trade Commission, finding that Borden, Inc., the petitioner, violated § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The decision and order of the Commission are reported at 92 F.T.C. 669-833 (1978). The Commission found that Borden used unfair methods of competition in the sale of a reconstituted lemon juice product known as ReaLemon. The complaint charged unfair methods of competition through promotional pricing of ReaLemon in geographic markets where Borden faced competition from Golden Crown Citrus Corporation, a recent entrant into the reconstituted lemon juice business, with the unlawful intent to maintain ReaLemon's monopoly power.
The principal issues are (1) what is the relevant product market within which Borden's conduct should be assessed, (2) whether Borden possessed monopoly power within the relevant product market, (3) whether Borden's acts and practices in the sale of ReaLemon amounted to the illegal maintenance of its monopoly power, and (4) whether the Commission's remedy was related reasonably to the alleged unlawful practice it sought to curtail. For the reasons stated below, the court concludes that the findings of the Commission are supported by substantial evidence on the record and the prescribed remedy is within the power of the Commission. Accordingly, we affirm the opinion and order.
The ReaLemon business was begun in 1935. The original product was bottled lemon juice. Subsequently the product was changed to reconstituted lemon juice, made from lemon juice concentrate, water and a preservative. Reconstituted lemon juice was marketed successfully as a convenient substitute for fresh-squeezed lemon juice. Sometime in the 1940's the ReaLemon trademark was developed and used for the reconstituted lemon juice product. At that time ReaLemon was the only nationally advertised and distributed processed lemon juice, and its advertising during the 1940's and 1950's was aimed at converting users of fresh lemons to the ReaLemon product.
During the late 1950's and 1960's local business concerns began bottling reconstituted lemon juice in competition with ReaLemon on a regional basis. The emphasis of ReaLemon's advertising and pricing was changed in response to this competition. Sunkist was the only bottler of reconstituted lemon juice to attempt to compete with ReaLemon on a national basis, but in the late 1950's and early 1960's Sunkist retrenched to regional distribution. Since that time ReaLemon has remained the sole nationwide bottler and distributor of reconstituted lemon juice.
Borden purchased the ReaLemon-Puritan Company in 1962 for approximately $12.4 million. Borden has operated its wholly owned subsidiary as ReaLemon Foods. 1 At the time of the complaint, Borden had annual sales of over $2 billion, its 1972 income after taxes was $66 million, and it had assets of approximately $1.3 billion. In 1973 sales of reconstituted lemon juice by Borden's subsidiary totaled about $22 million, generating a net income of $3.5 million.
By comparison, Golden Crown Citrus Corporation was a small company based in Chicago in the late 1960's which produced and sold reconstituted lemon juice in the Chicago area. In 1969 Golden Crown embarked on a plan to expand its sales beyond Chicago to the midwest and later to other markets in the northeast and southeast. Golden Crown's method of expansion was to sell its product to retailers at prices well below those of ReaLemon. It relied almost entirely on its lower prices for its acceptance in other markets. The Commission found that retailers usually have only enough shelf space for two brands of reconstituted lemon juice and they generally limited their sales to ReaLemon and the brand of one lower priced competitor. Consequently, from 1969 through 1971 Golden Crown's expansion into other geographic areas succeeded mainly at the expense of other local competitors Golden Crown displaced on store shelves. In 1971, however, the significant price differential between Golden Crown and ReaLemon began to make inroads on the sales of ReaLemon. Borden's response to this competition from Golden Crown forms the principal basis of the FTC complaint charging Borden with unlawfully maintaining monopoly power in the production, distribution and sale of reconstituted lemon juice in the United States.
On July 2, 1974, the FTC issued a complaint charging Borden with violations of § 5 of the Federal Trade Commission Act. Administrative Law Judge (ALJ) Daniel Hanscom conducted extensive hearings, received several thousand pages of exhibits and heard testimony from numerous economists and experts on behalf of Borden and the FTC. 2 On August 19, 1976, ALJ Hanscom issued a comprehensive initial decision finding that Borden had violated § 5. 3 The ALJ found that for purposes of analyzing Borden's conduct, the relevant product market was processed lemon juice. 4 Because of different product characteristics, and economic and commercial realities, the ALJ rejected Borden's contention that the relevant market included fresh lemons, finding instead that processed lemon juice was, at the least, a proper submarket. 5 Based upon Borden's share of the relevant market, the industry concentration ratios, ReaLemon's dominant brand name, its ability to command a premium price because of strong consumer preferences, ReaLemon's rate of return on its assets, Borden's substantial resource advantages, and ReaLemon's power to control prices and entry into the market, the ALJ further found that Borden possessed monopoly power within the processed lemon juice market. 6 He found Borden had maintained this monopoly power unlawfully through extensive promotions and price reductions in selected geographic markets where it faced competition from Golden Crown. He further found that the 32 ounce size ReaLemon 7 was sold to large grocery chains in Philadelphia and Buffalo at "unreasonably low prices." Because of the premium price the ReaLemon brand name commanded, ReaLemon's promotions and unreasonably low prices forced competitors either to sell their product at prices below their costs or lose their share of the market to Borden. The ALJ determined that these practices violated § 5, and ordered Borden to grant compulsory trademark licensing of the ReaLemon name and label design for ten years. The ALJ further ordered that Borden cease and desist from granting price reductions resulting in different net prices among ReaLemon customers competing in the same geographic area, selling ReaLemon below costs or at unreasonably low prices with the effect of hindering competition, and granting promotional allowances with the effect of hindering or eliminating competition.
Borden appealed the initial decision of the ALJ to the Commission. The opinion and order 8 of the Commission were filed November 7, 1978. The Commission adopted the factual findings of the ALJ, made further findings and modified the remedy. With respect to the relevant product market, the Commission disagreed with Borden's assertion that a submarket analysis was improper in a case involving the unlawful maintenance of monopoly power. Applying the criteria of Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), the Commission held that processed lemon juice constituted a valid submarket within which to analyze Borden's business practices and that fresh lemons were properly excluded. 9 The Commission also adopted the finding of the ALJ that Borden possessed monopoly power within the product market.
In finding that Borden unlawfully maintained its power through the predatory pricing of ReaLemon, the Commission found that neither Borden nor Golden Crown was appreciably more efficient than the other and that ReaLemon's sales in Buffalo and Philadelphia at "unreasonably low prices," without cost justification, were below its average total costs. 10 In order to overcome ReaLemon's significant premium price advantage, competitors such as Golden Crown had to price well below ReaLemon, and below their own average variable costs, to survive in the market. The Commission found that Borden had practiced predatory pricing with the intent to exclude an equally efficient competitor, Golden Crown.
The Commission modified the remedies proposed by the ALJ, by eliminating the requirement that Borden license the ReaLemon trade name. A majority of the Commission felt that the prohibition against unreasonably low prices was a sufficient means of dissipating Borden's illegally used monopoly power without resorting to the more drastic step of compulsory trademark licensing. In addition, the Commission narrowed the scope of the order of the ALJ by prohibiting price reductions resulting in different net prices among ReaLemon customers only in geographic areas where the price differences were not cost justified and in effect restrained or eliminated competition.
It is to be emphasized that the present action is to review an order and opinion of the Commission-it is not a suit under the Sherman or Clayton Acts.
The Federal Trade Commission Act, authorizing the Commission to issue cease and desist orders, is "not a revenue-raising or a penal measure," United...
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