F.T.C. v. PPG Industries, Inc., s. 86-5206

• Decision Date: 22 August 1986
• Docket Number: 86-5269,Nos. 86-5206,s. 86-5206
• Citation: 798 F.2d 1500
• Parties: , 55 USLW 2141, 1986-2 Trade Cases 67,235 FEDERAL TRADE COMMISSION, Appellant, v. PPG INDUSTRIES, INC., et al., FEDERAL TRADE COMMISSION v. PPG INDUSTRIES, INC., et al., Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1500

798 F.2d 1500

255 U.S.App.D.C. 69, 55 USLW 2141, 1986-2

Trade Cases 67,235

FEDERAL TRADE COMMISSION, Appellant, v. PPG INDUSTRIES, INC., et al., FEDERAL TRADE COMMISSION v. PPG INDUSTRIES, INC., et al., Appellants.

Nos. 86-5206, 86-5269.

United States Court of Appeals,

District of Columbia Circuit.

Argued June 9, 1986.

Decided Aug. 22, 1986.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 86-00022).

Steven A. Newborn, Atty., F.T.C., with whom Marcy J.K. Tiffany, Acting Gen. Counsel, Ernest J. Isenstadt, Asst. Gen. Counsel and Jerold D. Cummins, Deputy Asst. Gen. Counsel, F.T.C., were on the brief for F.T.C., appellant in No. 86-5206 and cross-appellee in No. 86-5269, Washington, D.C.

John V. Lacci, Atty., F.T.C., Washington, D.C., also entered an appearance for F.T.C.

Bertram Kantor, New York City, of the Bar of the Supreme Court of the State of N.Y., Second Dept. Appellate Div., pro hac vice by special leave of Court and Carla A. Hills, Washington, D.C., with whom Michael H. Byowitz, New York City, Irwin Goldbloom and Peter L. Winik, Washington, D.C., were on the brief for PPG Industries, et al., appellees in No. 86-5206 and cross-appellants in No. 86-5269.

Before WALD, Chief Judge, BORK and STARR, Circuit Judges.

Opinion for the Court filed by Circuit Judge BORK.

BORK, Circuit Judge:

This is an appeal by the Federal Trade Commission of the district court's order denying its request for a preliminary injunction barring the acquisition of Swedlow, Inc. by PPG Industries, Inc. The court instead entered a hold separate order pending completion of the Commission's final decision on the legality of the acquisition. See FTC v. PPG Industries, Inc., 628 F.Supp. 881 (D.D.C.1986). ¹ The Commission maintains that this court's decision in FTC v. Weyerhaeuser Co., 665 F.2d 1072 (D.C.Cir.1981), compels entry of a preliminary injunction rather than a hold separate order when, as in the present case, the district court finds that the Commission has demonstrated a substantial likelihood of success on the merits. In their cross-appeal, PPG Industries, Inc. and Swedlow, Inc. also seek reversal of the district court's hold separate order but on the ground that the Commission, having demonstrated no likelihood of success on the merits, was entitled to no preliminary relief.

The underlying administrative proceeding is brought by the Commission to establish that the proposed acquisition would violate section 7 of the Clayton Act, 15 U.S.C. Sec. 18 (1982), which bars a merger if its effect "may be substantially to lessen competition, or to tend to create a monopoly." ² The Commission sought a preliminary injunction in the district court pursuant to section 13(b) of the Federal Trade Commission Act, 15 U.S.C. Sec. 53(b) (1982), which permits the issuance of such an injunction upon the court's determination, after "weighing the equities and considering the Commission's likelihood of ultimate success," that such relief "would be in the public interest."

After an evidentiary hearing and briefing, the district court concluded that "[a]ssuming the traditional rules of antitrust analysis will continue to apply, the FTC and the Court of Appeals may almost surely be expected to find that the change in market structure following a PPG-Swedlow merger will be sufficiently inimical to competition to forbid the acquisition altogether." 628 F.Supp. at 885 (footnote omitted). Nevertheless, the court did not issue a preliminary injunction but, because it found equities favoring the acquisition, entered a "hold separate order" which allowed the acquisition to proceed but required that the companies be operated separately so that divestiture of Swedlow could be implemented if the Commission won its case.

We think the district court's conclusions regarding the merits of the Commission's challenge are supported by the record but that it gave too much weight to the equities urged by PPG and Swedlow. This conclusion requires us to reverse the district court's entry of a hold separate order and to remand the case with instructions to enter a preliminary injunction barring consummation of the merger pending completion of the proceedings before the Commission.

I.

PPG Industries is a publicly-held manufacturer of glass products, automotive and industrial coatings, and chemicals. It is the world's largest producer of glass aircraft transparencies--windows, windshields, and canopies used in civilian and military fixed-wing aircraft and helicopters. It is also a substantial supplier of acrylic and composite (mixed glass/acrylic) transparencies. Swedlow is a closely-held corporation and the world's largest manufacturer of acrylic aircraft transparencies. Swedlow does not produce glass transparencies. While PPG and Swedlow produce transparencies from different materials, the district court found the corporations to be "frequent competitors for contracts to supply transparencies to major U.S. airframe manufacturers." FTC v. PPG Industries, Inc., 628 F.Supp. 881, 883 (D.D.C.1986). The district court thus characterized the proposed merger as "ostensibly horizontal in effect." Id.

In assessing the Commission's likelihood of success on the Clayton Act challenge, the district court found the relevant product market to be

aircraft transparencies requiring, for want of a better term, "high technology" to produce, without regard to the materials of which they are fabricated. The recent history of the industry indicates that, on most aircraft, advanced glass and/or acrylic (or composite) transparencies are now--or will soon become--functionally interchangeable in the sense that each can substantially meet the design specifications established by the airframe manufacturers. Glass and acrylic undoubtedly still do have advantages and disadvantages vis-a-vis one another, but producers of glass transparencies and manufacturers of acrylic transparencies consistently bid against one another for contracts to fill the same apertures, and the trend in their respective technological evolutions is clearly in the direction of an eventual coalescence.

628 F.Supp. at 884 (footnotes omitted). The relevant geographic market was found to be the United States market for such aircraft transparencies. Id. Because it had no accurate figures for the emerging high technology market, the court used the closest relevant market, that for all transparencies, and noted that this market is already highly concentrated with the top four firms accounting for over 80% of all sales in 1984, a statistic which yields a 1943 on the Herfindahl-Hirschmann Index ("HHI"). Id. ³ The merger of PPG, the largest manufacturer with a 30% market share, and Swedlow, the second largest manufacturer with a 23% market share, would create an entity with a combined market share two-and-one-half times larger than that of the nearest competitor and raise the HHI to 3295.

Market power or the lack of it is often measured by the HHI. The FTC and the Department of Justice, as well as most economists, consider the measure superior to such cruder measures as the four- or eight-firm concentration ratios which merely sum up the market shares of the largest four or eight firms. The HHI, by contrast, is calculated by squaring the individual market shares of all firms in the market and adding up the squares. This method, unlike the four-and eight-firm concentration ratios, shows higher market power as the disparity in size between firms increases and as the number of firms outside the first four or eight decreases. The Department of Justice Merger Guidelines define as "unconcentrated" a market with an HHI below 1000, as "moderately concentrated" a market with an HHI between 1000 and 1800, and as "highly concentrated" a market with an HHI over 1800. ⁴ The pre-acquisition HHI calculated by the district court shows that the relevant market, as the court defined it, is already "highly concentrated" and the effect of the acquisition would be a dramatic increase in concentration. Both measures bring the PPG-Swedlow merger well within the range where, absent really extraordinary circumstances, the Department and the Commission will proceed against an acquisition under section 7 of the Clayton Act on the theory that the increased concentration raises a likelihood of "interdependent anticompetitive conduct." See, e.g., United States v. General Dynamics Corp., 415 U.S. 486, 497, 94 S.Ct. 1186, 1193-94, 39 L.Ed.2d 530 (1974); United States v. Phillipsburg National Bank & Trust Co., 399 U.S. 350, 365-67, 90 S.Ct. 2035, 2044-45, 26 L.Ed.2d 658 (1970); United States v. Philadelphia National Bank, 374 U.S. 321, 362-66, 83 S.Ct. 1715, 1740-43, 10 L.Ed.2d 915 (1963). This conclusion rests upon the theory that, where rivals are few, firms will be able to coordinate their behavior, either by overt collusion or implicit understanding, in order to restrict output and achieve profits above competitive levels. The district court also found high market-entry barriers that would prolong high market concentration. There is no doubt that the pre- and post-acquisition HHI's and market shares found in this case entitle the Commission to some preliminary relief. The dispute concerns two issues. The first is whether the district court defined the relevant market correctly. If not, the HHI's computed are meaningless and do not reflect market reality. The second issue, if the HHI's are accurate, is whether the Commission was entitled to a preliminary injunction rather than a hold separate order.

The district court, having found a virtual certainty that the acquisition will eventually be held unlawful, and hence that some interim relief was in order, next analyzed whether entry of a hold separate order in lieu of a preliminary injunction would be appropriate. Relying on this court's decision in FTC v. Weyerhaeuser Co., 665 F.2d 1072 (D.C.Cir.1981), the district court concluded that a stringent...