Avnet, Inc. v. F. T. C., 73--1399
| Decision Date | 28 February 1975 |
| Docket Number | No. 73--1399,73--1399 |
| Citation | 511 F.2d 70 |
| Parties | 1975-1 Trade Cases 60,184 AVNET, INC., Petitioner, v. FEDERAL TRADE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Howard P. Willens, Washington, D.C., for petitioner.
Gerald Harwood, Acting Asst. Gen. Counsel, F.T.C., Washington, D.C., for respondent.
Before FAIRCHILD, Chief Judge, and PELL and STEVENS, Circuit Judges.
The Commission held that the acquisition by Avnet of two competing manufacturers of parts which are sold to rebuilders of automotive electrical units violated § 7 of the Clayton Act, as amended. 1 Avnet argues that it did not have a fair opportunity to meet the Commission's prima facie case because it did not anticipate the Commission's narrow definition of the relevant product market, and, in any event, that the evidence is insufficient to satisfy the Commission's initial burden on the relevant market issue. We find no unfairness in the way the case was tried and have no difficulty in concluding that the evidence adequately supports the Commission's findings.
As a preface to our discussion of Avnet's principal contentions, we shall briefly summarize the Commission's description of the industry, review the history of the proceedings, and identify the evidence which, according to Avnet, it was unable to present.
Among the automobile parts which may need to be replaced or repaired as a car ages are electrical units, such as generators, alternators, starters and voltage regulators. These 'automotive electrical units,' ('AEU's') are made by original equipment manufacturers ('OEM's') and by rebuilders. OEM's include the major automobile companies and other firms that produce equipment for installation on new vehicles. They sell replacement units to warehouse distributors ('WD's'), who in turn resell individual units, as well as components of such units, to retailers such as repair shops, service stations, garages and car dealers.
The record in this case demonstrates that the prices at which WD's sell new AEU's are significantly higher than the prices at which comparable AEU's can be rebuilt and sold at a profit. A used unit may be dismantled, cleaned and reassembled with such substitute components as may be needed. 2 Such rebuilding may take place in repair shops where one unit at a time is put back in working order for an individual customer ('custom rebuilding'), or in a production-line operation where units are rebuilt in large quantities and then sold to jobbers for distribution to the retail trade ('production-line rebuilding'). There are about 150 or 200 production-line rebuilders in the entire country. 3
The 'rebuilders supply industry' includes the firms which sell new components to rebuilders of AEU's. Counsel for the Commission consistently contended that the industry is composed of only 16 or 17 principal manufacturers with aggregate annual sales of about $20 million. 4 The alleged violation resulted from the combination of IPM, the largest, and Valley Forge, the third largest, of these firms. Before the combination, IPM had sales of over $11 million and Valley Forge's were almost $2 million. Avnet acquired the assets of Valley Forge as of July 31, 1964, and those of IPM as of January 31, 1965. After the second acquisition, Avnet's sales represented about two-thirds of the total in the market as viewed by the Commission.
Both the complaint, which issued on April 1, 1969, and the amended complaint of December 1, 1969, 5 alleged that 16 firms, of which IPM and Valley Forge were the largest and third largest, supplied virtually the total value of equipment and parts furnished to rebuilders.
The evidentiary hearing commenced on February 1, 1971. During the preceding 16 months, the parties conducted pretrial discovery, argued about the adequacy of Avnet's compliance with discovery orders, stipulated about certain facts and issues, and agreed that, in advance of trial, each would provide the other with a list of witnesses and copies of proposed exhibits.
From the outset Avnet disputed the Commission's position that the market was composed of 16 principal firms. 6 It attempted, in three different ways, to develop evidence that the 16 firms have so many competitors that their sales do not comprise a relevant market or submarket. First, Avnet requested the Hearing Examiner to issue subpoenas to the 14 competitors of IPM and Valley Forge calling for disclosure of their customer lists, and thereafter to subpoena all those customers to learn their sources of supply. The Hearing Examiner quite properly rejected this request 7 and directed Avnet, at least as an initial matter, to make its own inquiries of the customers of IPM and Valley Forge. Second, according to Avnet's counsel, Avnet did attempt to develop evidence by a study of its own records and by interviewing its customers; presumably the results of those efforts were later incorporated in Avnet's presentation of evidence at the trial. Third, well after the trial was under way, through conversations with its sales personnel and through an independent market research study, Avnet sought to prove that the volume of business handled by custom rebuilders was so enormous that, by inference, there must be such a significant total volume of sales by rebuilder suppliers that the statistics relating to the 16 firms identified by the Commission should be disregarded as essentially meaningless. The Hearing Examiner excluded the market study for procedural reasons. 8
On the basis of the voluminous evidence in the record, the Hearing Examiner concluded that the acquisition violated § 7 of the Clayton Act and recommended an order requiring Avnet to divest IPM. He found that the relevant market included the sale of new components by rebuilder suppliers to rebuilders and that the contours of the market were fairly delineated by the sales of the 16 principal suppliers to 150 to 200 production-line rebuilders. In so finding, he resolved the 'sharp disagreement between the parties over the meaning of the term 'rebuilder' as used in paragraph 1(b) of the complaint.' 9 His market analysis and conclusion summarizing competitive impact of the acquisition were corroborated in large part by an opinion expressed by a Valley Forge executive in memoranda outlining the advantages to Avnet of the acquisition of IPM.
In a carefully prepared opinion by Chairman Kirkpatrick, the Commission approved the findings and order proposed by the Hearing Examiner. Commissioner Dennison dissented on the ground that complaint counsel had not met their burden of demonstrating the size and dimensions of the relevant line of commerce.
The record contains a great deal of testimony by rebuilder suppliers and by production-line rebuilders. It is clear that the production-line rebuilders could not survive without an adequate source of supply of new parts. Because the prices charged by OEM's and WD's are so high, the production-line rebuilders must obtain such parts from rebuilder suppliers. The testimony indicates that they relied primarily on IPM, Valley Forge and two other suppliers for these parts.
Unlike production-line rebuilders, who operate at a manufacturing level and sell largely to jobbers, custom rebuilders operate at the retail level dealing directly with consumers. At that level, particularly since their charges cover their labor and specialized expertise, they can afford to purchase OEM parts from WD's. They may, of course, also purchase new, used, or rebuilt components from other sources, including rebuilder suppliers. We know that some of the rebuilder suppliers sell either nothing, or at most very little, to custom rebuilders, 10 and we also know that IPM makes some sales to custom rebuilders. 11 But the record does not tell us what portion of the rebuilder suppliers' total sales, or even what portion of IPM's or Valley Forge's total sales, were to custom rebuilders rather than production-line rebuilders.
Avnet contends that such information is of critical importance in appraising the Commission's definition of the relevant market, and that it was prevented from developing such evidence as well as any other evidence identifying the dimension of the business of supplying custom rebuilders throughout the country, by the Commission's failure to give it adequate notice that the Hearing Examiner, and ultimately the Commission, would decide that the term 'rebuilders' includes only production-line operators and excludes custom rebuilders. As we understand Avnet's principal argument, which is phrased in terms of a 'denial of administrative due process,' if its counsel had understood the theory of complaint counsel's case they would have proved (a) that for the purposs of this case, any distinction between production-line rebuilders and custom rebuilders is invalid, 12 and (b) that the inclusion of sales to custom rebuilders would so enlarge the relevant market as to undermine completely the Commission's prima facie case. Specifically, Avnet contends that it would not have waited so long (1) to develop evidence from its own sales personnel describing the 3,300 customers of IPM who are not production-line rebuilders, and (2) to obtain a market study delineating the volume done by custom rebuilders. 13
We find Avnet's 'administrative due process' argument unpersuasive. It relies largely on the fact that both the amended complaint and a trade practice rule 14 promulgated by the Commission contain a functional definition of the term 'rebuilder' which can be read to include custom rebuilding as well as production-line rebuilding, and on the further fact that the amended complaint described the demand side of the market as 'highly fragmented,' and referred to IPM's sales 'to over 5,000 independent distributors and rebuilders.'
Avnet had no reason to rely on the trade practice rule as significant in this proceeding. The...
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