U.S. v. Archer-Daniels-Midland Co., ARCHER-DANIELS-MIDLAND

• Decision Date: 08 March 1989
• Docket Number: ARCHER-DANIELS-MIDLAND,No. 87-2343,87-2343
• Citation: 866 F.2d 242
• Parties: 1988-2 Trade Cases 68,362 UNITED STATES of America, Appellant, v.COMPANY and Nabisco Brands, Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 242

866 F.2d 242

1988-2 Trade Cases 68,362

UNITED STATES of America, Appellant, v. ARCHER-DANIELS-MIDLAND COMPANY and Nabisco Brands, Inc., Appellees.

No. 87-2343.

United States Court of Appeals Eighth Circuit.

Submitted May 9, 1988.

Decided Dec. 15, 1988.

Rehearing and Rehearing En Banc Denied March 8, 1989.

David Seidman, Washington, D.C., for appellant.

J. Randolph Wilson, Washington, D.C., for appellees.

Before HEANEY and McMILLIAN Circuit Judges, and ROSS, Senior Circuit Judge.

HEANEY, Circuit Judge.

On June 12, 1982, Nabisco Brands, Inc. (Nabisco) leased to Archer-Daniels-Midland Co. (ADM) two corn wet milling plants. On December 14, 1982, the United States commenced an antitrust action in the United States District Court for the Southern District of Iowa, alleging that the lease creates an unreasonable restraint of trade in violation of section 1 of the Sherman Act and may substantially lessen competition in violation of section 7 of the Clayton Act. After substantial discovery, the parties made cross-motions for summary judgment. The trial court granted appellees' motion and ordered the government's complaint dismissed. 695 F.Supp. 1000. The district court held in substance that, based on the tests of reasonable interchangeability, cross-elasticity of demand and price correlation, high fructose corn syrup (HFCS) and sugar are in the same relevant product market. We reverse and remand for further action consistent with this opinion, which concludes that sugar is not in the same relevant product market as HFCS.

I. BACKGROUND

This case involves sweeteners, primarily two different types of commercial sweeteners--sugar and HFCS. Sugar, technically called sucrose, is processed from either sugarcane or beet sugar. HFCS is a sweetener produced from corn.

In the early 1970's, new technology was sufficiently widespread to permit the processing of certain corn syrup products into a sweetener product by the use of enzymes capable of isomerizing the syrup into fructose. This process is used today to produce corn syrup containing 42% fructose (HFCS 42), 55% fructose (HFCS 55), and 90% fructose (HFCS 90). Although HFCS 42 is not as sweet as sugar, it may be used as a substitute for sugar in sweetening various products, such as canned fruits and vegetables. HFCS 55, a popular corn sweetener used by soft drink producers, is between 94% and 95% as sweet as sugar.

Since 1934, sugarcane and beet sugar growers have benefitted from either direct subsidies or sugar price supports enacted by Congress. The present price support program is due to expire in 1990. Because of the price supports, the price of HFCS has been lower than the price of sugar for a number of years.

The government presented evidence that if the lease between ADM and Nabisco was consummated ADM would be able, because of its newly established market position, to raise the price of HFCS to a level just below the price of sugar. ADM and Nabisco argue that--while the government's contention may be true--because sugar and HFCS are in the same relevant product market, ADM's market share of that market is not sufficient to constitute a violation of either the Sherman Act or the Clayton Act.

II. DISTRICT COURT OPINION

The district court held that sugar is in the same relevant product market as HFCS.

To determine product market, the court applied three legal tests: reasonable interchangeability, cross-elasticity of demand and price correlation. The court found that, since it is undisputed that HFCS and sugar are fully interchangeable as to use and to quality, the two products are reasonably interchangeable. The lower court also found that, because HFCS's lower price since its commercial introduction has caused substantial displacement of sugar in the market, there is cross-elasticity of demand between sugar and HFCS. This finding was substantiated by data demonstrating high cross-elasticity of demand between HFCS and sugar in Canada. (Sugar prices are not artificially supported in Canada.) Finally, the court found that the high degree of price correlation between sugar and HFCS also supports the appellees' contention.

Based on these findings, the district court determined that HFCS and sugar are in the same relevant product market.

III. THE GOVERNMENT'S ARGUMENT

The government argues generally that product market must be defined in a manner that permits evaluation of market power. From this premise, the government asserts that the district court erred in its use of the legal tests defining relevant product market.

The government contends that, under either the Merger Guidelines, U.S. Department of Justice, Merger Guidelines p 2.0, reprinted in 2 Trade Reg.Rep. p 4490, or the reasonable interchangeability test, the evidence that HFCS purchasers will not switch back to sugar as long as HFCS remains cheaper is sufficient to establish that sugar and HFCS are not in the same product market. It asserts that the district court erred in ignoring how this price differential affects competition between HFCS and sugar. Because the two products are functionally equivalent as to use and quality, price differential must, according to the government, play a heightened role.

Secondly, the government argues that the district court erred in relying on simple cross-elasticity of demand rather than high cross-elasticity of demand because only high cross-elasticity demonstrates effective competition. In addition, the government asserts that the court based its finding of cross-elasticity on irrelevant evidence.

The government's final argument is that there is still a question of fact as to whether there is a high degree of price correlation.

IV. NABISCO'S AND ADM'S ARGUMENT

ADM and Nabisco ask us to summarily affirm the district court because that court relied on the correct legal tests and undisputed evidence. The theme of their argument is that one must establish the relevant product market first, before one can measure market power.

They specifically argue that the functional interchangeability as to use and quality between sugar and HFCS is sufficient to meet the reasonable interchangeability test. ADM and Nabisco also argue that cross-elasticity of demand is relevant even if the amount of cross-elasticity is not high. In particular, the appellees argue that the movement of sugar consumers to HFCS is not, contrary to the government's argument, irreversible. Finally, the government's own evidence demonstrates an extremely high degree of price correlation.

The appellees reject several of the government's arguments. To reject the government's price differential theory, they assert that a plethora of authority states that even a substantial price difference is insufficient as a matter of law to place two products into separate markets. To reject the government's reliance on the Merger Guidelines, ADM and Nabisco argue that the barometer of a five percent increase, suggested in the Guidelines, permits the exclusion of any product that is selling at a price differential of greater than five percent. To reject the assumption that the movement of buyers to HFCS from sugar is irreversible, the appellees point to the testimony of several buyers stating that their companies have threatened to buy sugar in lieu of HFCS unless HFCS producers lowered their price.

V. DISCUSSION

This case is before us on summary judgment. Because of that, our discussion is limited to the question of whether sugar belongs in the same relevant product market as HFCS. Summary judgment in an antitrust case is mandated, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The suggestion that a different, heightened standard applies in complex antitrust cases is incorrect. City of Mt. Pleasant, Iowa v. Assoc. Elec. Co-op., 838 F.2d 268, 274 (8th Cir.1988). Our focus is therefore to determine whether summary judgment was properly granted for Rule 56(c) of the Federal Rules of Civil Procedure under the standard set forth in Celotex Corp. v. Catrett.

Antitrust legislation does not exist in a vacuum. Its goal is full and free competition in the marketplace. The various legislative acts were inspired both by public opposition to trusts and holding companies in the late nineteenth century and by a historical hostility to monopolies stemming from colonial time. Their premise is that the unrestrained interaction of competitive forces will yield the best allocation of resources. The primary method of assuring a free competitive economy in the United States is by legislation prohibiting unfair methods of competition, such as the acquisition of monopoly power and acquisitions that may substantially lessen competition. In essence, these two prohibitions regulate private business behavior because of the fear of unjustified power in the hands of a small minority.

The lawfulness of an acquisition turns on the purchaser's potential for creating, enhancing, or facilitating the exercise of market power--the ability of one or more firms to raise prices above competitive levels for a significant period of time. See United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 391, 393, 76 S.Ct. 994, 1005, 1006, 100 L.Ed. 1264 (1956) (Cellophane).

The boundaries of the product market of a particular product can be determined by the reasonable interchangeability or cross-elasticity of demand between itself and possible substitutes for it. Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962). Reasonable interchangeability and cross-elasticity of demand are not used to obscure competition but to recognize competition, or the lack of competition, to the extent such exists. United States v....