Ash Grove Cement Co. v. F. T. C.
| Citation | 577 F.2d 1368 |
| Decision Date | 23 May 1978 |
| Docket Number | No. 75-3143,75-3143 |
| Parties | 1978-1 Trade Cases 62,087 ASH GROVE CEMENT COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
David J. McKean (argued), Washington, D. C., for petitioner.
Jerold D. Cummins (argued), Washington, D. C., for respondent.
On Petition to Review an Order of the Federal Trade Commission.
Before CARTER and HUG, Circuit Judges, and HAUK, * District Judge.
This is a petition by Ash Grove Cement Company to review an order of divestiture and a cease and desist order issued by the Federal Trade Commission (FTC or Commission). The Commission issued the orders after adjudicating that Ash Grove had violated § 7 of the Clayton Act by its acquisition of two ready-mix concrete companies. Ash Grove raises three contentions: (1) all of the material issues in the adjudicative proceedings were prejudged against Ash Grove in unlawful non-adjudicative agency proceedings; (2) the evidence does not support the Commission's finding that Ash Grove's acquisitions caused a lessening of competition; and (3) it was error for the Commission to order divestiture in the facts of this case. We AFFIRM.
Ash Grove is a major supplier and manufacturer of portland cement (hereafter "portland") which is the major and most expensive ingredient of ready-mix cement (hereafter "ready-mix"). Between 1961 and 1966 Ash Grove sold an average of about 400,000 barrels of portland annually in the Kansas City Metropolitan Area (KCMA). This amounted to between 13% and 18% of the total annual sales of portland in the KCMA. Most portland was sold to manufacturers of ready-mix.
On June 1, 1964, Ash Grove purchased 50% of the stock of Fordyce Concrete, a ready-mix manufacturer engaged in business in the KCMA since 1961. About two and one-half years later, on November 8, 1966, Ash Grove purchased the outstanding 50% of Fordyce stock, thereby obtaining 100% ownership. At that time Fordyce was the third largest ready-mix company in the KCMA, producing 14% of the local output. It was the largest independent ready-mix manufacturer; the two larger firms already had been acquired by other portland manufacturers.
In the early 1960's Ash Grove also acquired one third of the stock of Lee's Summit, another ready-mix manufacturer in the KCMA. On January 6, 1966, Ash Grove purchased the remaining two-thirds of the Lee's Summit stock. At that time Lee's was the seventh largest KCMA ready-mixer, with 4.3% of the total local output. In effect Ash Grove, through these two acquisitions, had acquired customer firms which, combined, represented nearly one-fifth of the KCMA ready-mix industry. The assets of Lee's were subsequently transferred to Fordyce through liquidation and the two companies were operated as one under the name "Fordyce-Summit".
At about the same time that Ash Grove was in the process of acquiring Fordyce and Lee's, the Federal Trade Commission conducted an investigation of the problem of vertical integration in the cement industry. In April, 1964, the FTC announced that due to the "growing importance and urgency" of the industry-wide trend toward integration of the cement industry, it would institute a trade regulation rule proceeding to organize and appraise "the general economic facts involving (the cement) industry and market structure . . ." Permanente Cement Co., 65 F.T.C. 410, 494 (1964). On December 1, 1964, the Commission issued a minute order directing its Bureau of Economics to conduct the inquiry,
" . . . to obtain information concerning such matters as the structure of the cement-producing and principal cement-consuming markets, the nature of the relevant product and geographic markets, the causes and business reasons underlying such acquisition and the probable effects of such acquisitions on competitive conditions of the market and industries involved which may be of assistance to the Commission in discharging its responsibilities to enforce the laws, in particular Section 7 of the Clayton Act, applicable to such acquisitions." See FTC Economic Report on Mergers and Vertical Integration in the Cement Industry at v (1966). (Emphasis added.)
After nearly two years of study the Bureau of Economics on April 4, 1966, transmitted to the Commissioners the staff report entitled Economic Report on Mergers and Vertical Integration in the Cement Industry (hereafter "Economic Report"). The Economic Report analyzed twenty-two target metropolitan areas, including the KCMA, to determine the extent and anticompetitive effects of vertical integration in the cement industry. No trade regulation rule was ever issued.
The Economic Report was the subject of public hearings in June 1966. On January 3, 1967, the FTC, based on the report and the public hearings, 1 issued its Enforcement Policy with Respect to Vertical Mergers in the Cement Industry (hereafter "Enforcement Policy"). The Enforcement Policy concluded that vertical mergers in the cement industry, particularly those involving ready-mix companies, "can have substantial adverse effects on competition in the particular market areas where they occur." Id. at 2. Guidelines were promulgated to indicate which mergers the FTC would be likely to challenge. However, it was expressly stated that any enforcement proceedings would be judged on the basis of the facts presented in the individual adjudicative proceedings instituted.
On July 8, 1969, the FTC issued a complaint charging Ash Grove with violation of § 7 of the Clayton Act, as amended, 15 U.S.C. § 18, by its acquisitions of Fordyce and Lee's Summit. 2 Ash Grove admitted the acquisitions took place, but denied their illegality. Furthermore, Ash Grove claimed that its right to due process of law had been and would be further infringed because the major issues in the complaint allegedly had been prejudged by the FTC. A series of attempts by Ash Grove to have the complaint dismissed and to limit the proceedings were all unsuccessful. After extensive hearings 3 the administrative law judge found in his Initial Decision filed September 23, 1974, that the challenged acquisitions were in violation of § 7 of the Clayton Act. 4 A proposed order requiring divestiture was included with the decision.
On appeal the Commissioners entertained extensive briefing and oral argument, but ultimately issued an Opinion and Order on July 24, 1975, affirming the Initial Decision of the administrative law judge with modifications. 5
The Commission's Order decreed that Ash Grove divest itself of all stock, assets and properties acquired as a result of the acquisitions of the stock of Fordyce and Lee's. Ash Grove filed a petition for reconsideration requesting that the remedy of divestiture be withdrawn. The petition was summarily denied and this petition for review followed.
Ash Grove contends its constitutional right to due process of law was violated because the FTC's investigation of the cement industry and subsequent promulgation of the Economic Report and the Enforcement Policy (1) were without statutory authority, and (2) caused the Commission to prejudge all the material issues involved in the adjudicative proceeding instituted against Ash Grove.
The heart of Ash Grove's contention that the FTC acted without statutory authority is that the Commission was engaged in rulemaking when it investigated the cement industry and promulgated the Enforcement Policy. Allegedly the Enforcement Policy is a "per se rule of illegality". According to the argument, § 11(b) of the Clayton Act, which contains the statutory authority for the FTC to enforce § 7 of the Clayton Act, restricts the agency to enforcement solely by adjudicative procedures. Thus, Ash Grove maintains, the FTC was not statutorily authorized either to investigate the cement industry through a trade regulation rule proceeding or to issue a rule based thereon.
Ash Grove is mistaken both as to its allegation that the Enforcement Policy constitutes a "rule" and as to its contention that the FTC cannot conduct investigations in the form of trade regulation rule proceedings. First, neither the Economic Report nor the Enforcement Policy were issued as trade regulation rules. Trade regulation rules, once found applicable to a particular adjudicative issue, are binding on the parties involved. See 16 C.F.R. § 1.12(c). See also Gifford-Hill & Company, Inc. v. F.T.C., 389 F.Supp. 167, 175 (D.D.C.1974), aff'd, 173 U.S.App.D.C. 135, 523 F.2d 730 (1975). Here the investigation was conducted in the form of a trade regulation rule proceeding, ostensibly with the intention of establishing a rule if feasible. 6 However, no rule was promulgated. The FTC Division of Industry Analysis of the Bureau of Economics conducted the investigation and issued a staff report to the Commission. The Commission then held public hearings on the Economic Report to afford the public an opportunity to comment. Referring specifically to the Economic Report the Commission assured that it constituted nothing more than a staff document which the Commission "has not approved, disapproved, or passed upon". 7 31 Fed.Reg. 6285 (1966).
After the hearing on the Economic Report was held, at which Ash Grove submitted comment, the Commission issued its Enforcement Policy. This document also was not issued as a rule, but as an industry guide. Although the Commission specified in the Enforcement Policy generally which mergers and acquisitions it intends to challenge, specific care was taken to explain that the document was not binding on any party:
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