Ansell Inc. v. Schmid Laboratories, Inc.

• Decision Date: 27 February 1991
• Docket Number: Civ. No. 90-3581 (GEB).
• Citation: 757 F. Supp. 467
• Parties: ANSELL INCORPORATED, Plaintiff, v. SCHMID LABORATORIES, INC. and Allercare/NSL, Inc., Defendants.
• Court: U.S. District Court — District of New Jersey

757 F. Supp. 467

ANSELL INCORPORATED, Plaintiff, v. SCHMID LABORATORIES, INC. and Allercare/NSL, Inc., Defendants.

Civ. No. 90-3581 (GEB).

United States District Court, D. New Jersey.

February 27, 1991.

Gardner, Carton & Douglas, Chicago, Ill. by Robert J. Wilczek, Walder, Sondak, Berkeley & Brogan, P.A., Roseland, N.J. by Thomas J. Spies, and Pepper, Hamilton & Scheetz, Washington, D.C. by Hugh Latimer, Bruce R. Stewart, and Richard B. Nash, Jr., for plaintiff Ansell Inc.

Wolff & Samson, Roseland, N.J. by Daniel D. Caldwell, for defendant Allercare/NSL, Inc.

Hannoch Weisman, Roseland, N.J. by Brad R. Roth and Menaker & Herrmann, New York City by Richard G. Menaker, for defendant Schmid Laboratories, Inc.

OPINION

GARRETT E. BROWN, Jr., District Judge.

I. INTRODUCTION

This is an antitrust action brought by Ansell Incorporated pursuant to Section 16 of the Clayton Act, 15 U.S.C. § 26, to challenge the acquisition of Allercare/NSL, Inc. by Schmid Laboratories, Inc., as violative of Section 7 of the Clayton Act, 15 U.S.C. § 18. The amended complaint seeks an order of divestiture and or rescission, and such other relief as may be just and proper. Plaintiff asserts no claim for money damages. This Opinion constitutes my Findings of Fact and Conclusions of Law.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. The Parties

Plaintiff Ansell Incorporated ("Ansell"), a Delaware corporation with its principal place of business in Eatontown, New Jersey, is a wholly-owned subsidiary of Pacific Dunlop Holdings, Inc., a Delaware corporation wholly owned by Pacific Dunlop Limited, a Victoria (Australia) corporation with its principal place of business in Melbourne, Australia. Ansell is engaged in the business of manufacturing and selling latex rubber condoms, among other consumer products, and describes itself as the largest international producer of such latex consumer products as condoms and gloves. Ansell currently produces in excess of 7.5 million gross in condoms annually out of its condom manufacturing facilities in Troy, Alabama and Dothan, Alabama.

Defendant Schmid Laboratories, Inc. ("Schmid"), currently a division of London International U.S. Holdings, Inc. ("LIUS") is in the business of manufacturing and selling latex condoms and other lines of health care consumer products. LIUS is a wholly-owned subsidiary of London International Group, a United Kingdom corporation. Schmid currently produces approximately 800,000 gross in condoms annually out of its condom manufacturing plant in Anderson, South Carolina.

Defendant Allercare/NSL, Inc. ("Allercare/NSL" or "NSL") is a packager and distributor of health and beauty consumer products with its principal place of business in Lincolnwood, Illinois. Allercare/NSL is a wholly-owned subsidiary of Allercare, Inc., a Minnesota Corporation with its principal place of business in Minneapolis, Minnesota. Prior to September 21, 1990, Allercare/NSL was engaged in the business of selling latex condoms.

B. The Schmid-Allercare/NSL Transaction

On August 28, 1990, Allercare/NSL entered into an asset purchase agreement to sell its Protex condom business to Schmid for a purchase price of $4,000,000 subject to adjustments. Schmid purchased all of the assets of NSL relating to NSL's packaging and distribution of latex condoms including inventory and manufacturing equipment together with trademarks, trade names, and customer lists. The Schmid-Allercare/NSL transaction closed on September 21, 1990, with the purchase price from the sale placed in escrow pending the resolution of this action.

C. Procedural Background

Ansell's complaint was filed on September 13, 1990, along with an application for an Order to Show Cause, Temporary Restraining Order and Preliminary Injunction. Ansell subsequently withdrew its request for the emergent relief, without prejudice, and the Court entered a Scheduling Order providing for an accelerated discovery schedule and trial. The matter was set down for non-jury trial on Ansell's application for a permanent injunction. Thereafter, defendants filed a motion for summary judgment which was denied on November 13, 1990. On that same date, the hearing on plaintiff's application for a permanent injunction began. The hearing continued on November 15, November 19 and December 3, 1990.¹

D. The Condom Industry

A latex condom is a sheath worn over the male sexual organ to prevent conception or venereal infection during sexual activity. The latex condom manufacturing process consists of pouring liquified latex compound into vats into which are dipped glass formers in various shapes. The formers are dipped continuously into the vats while being moved along a manufacturing line. The resulting film of latex on the formers is removed under carefully monitored conditions. When drying is completed, the sheaths are removed from the dipping machine. After finishing and electronic testing, the sheaths are ready for final processing, which may consist of filming and packaging or of treatment with a lubricant, spermicide, or fragrance, followed by filming and packaging. Condom manufacturers (sometimes known as "dippers") sell to retailers and other customers and in bulk to firms that package and market under their own brand names (known as "packagers") as well as to other dippers in the United States and overseas. Plaintiff Ansell is the largest dipper in the United States, currently producing over 7.5 million gross of various styles of latex condoms per year at its two plants in Alabama. Carter-Wallace, Inc. ("Carter-Wallace"), is apparently the next largest dipper in the United States with annual production estimated at approximately 2,000,000 gross. Schmid has annual production of approximately 800,000 gross. There are at least three other dippers operating in the United States; Safetex, Aladan and Killian, with combined annual production of over 1,000,000 gross. Prior to the acquisition, NSL was a packager of condoms. Unlike Ansell, Carter-Wallace and Schmid, it had no manufacturing or "dipping" operations. Instead, NSL purchased condom sheaths in bulk from one or more manufacturers, tested and packaged the condoms, and sold them at wholesale primarily to retail merchandisers and vending machine operators.

Sales of condoms in the United States grew during the 1980's, at first at a stable rate, then with a sudden surge due to the AIDS crisis. From total sales in that year of approximately $50 million to retailers, vending machine operators and institutions, condom sales grew steadily to $81 million in 1988. Since then, growth has leveled off.

The dippers and packagers distribute the condoms through various channels of distribution depending upon the particular characteristics and prices of the products. There are several markets in the United States in which latex condoms are sold. The largest of these U.S. markets is the retail market which consists of sales to retail drug stores, food stores and mass merchandizing outlets.² The sale of condoms in this market consists primarily of products with well-recognized brand names and specialized packaging.³ Sales in the retail market account for about 90% of all latex condom revenues in the United States. Of total estimated 1990 calendar year condom sales of $72,370,000 in this market, retail drug stores account for approximately 70%, food stores approximately 18%, and mass merchandisers approximately 12% of the total. There are two other smaller channels through which condoms are distributed: (1) vending machines, adult stores and mail order catalogues (1990 dollar sales of approximately $3.5 million); and (2) institutional sales, including sales to states, municipalities, clinics and prisons (1990 dollar sales of approximately $5 million).

Ansell also produces, pursuant to receipt of an annual General Services Administration ("GSA") contract awarded on a bid basis, in excess of five million gross of latex condoms. These condoms are distributed free by the United States Agency for International Development ("USAID") outside the United States in third-world countries.

III. THE RELEVANT MARKETS

A. Defining the Relevant Product Market

Product market definition is a significant and much disputed issue in this case. Plaintiff claims that the sale of latex condoms through retail outlets in the United States is the relevant product market or submarket. On the other hand, defendants have a much broader view of the relevant product market, claiming that the proper definition of the market is condoms sold at wholesale within the United States including Ansell's substantial sales to USAID under the GSA contract.

"To define the bounds of the product market it is necessary to determine what products are reasonably interchangeable with the product in question, that is to say, products to which consumers would switch if there were a small but significant non-transitory price increase." United States v. Calmar, 612 F.Supp. 1298, 1301 (D.N.J.1985) (citing Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962); SmithKline Corp. v. Eli Lilly and Co., 575 F.2d 1056 (3d Cir.), cert. denied, 439 U.S. 838, 99 S.Ct. 123, 58 L.Ed.2d 134 (1978)). The relevant product market will necessarily be "composed of products that have reasonable interchangeability for the purpose for which they are produced — price, use and qualities considered." SmithKline Corp., 575 F.2d at 1062-63 (quoting United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 404, 76 S.Ct. 994, 1012, 100 L.Ed. 1264 (1956)). The Supreme Court in Brown Shoe additionally recognized the possibility of considering relevant product submarkets:

The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product markets for

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