Beatrice Foods Co. v. F.T.C.

• Decision Date: 18 August 1976
• Docket Number: No. 75-1771,75-1771
• Citation: 540 F.2d 303
• Parties: 1976-2 Trade Cases 61,036 BEATRICE FOODS COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 303

540 F.2d 303

1976-2 Trade Cases 61,036

BEATRICE FOODS COMPANY, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 75-1771.

United States Court of Appeals, Seventh Circuit.

Argued April 13, 1976.

Decided Aug. 18, 1976.

Edward L. Foote, Chicago, Ill., for petitioner.

Gerald Harwood, D. Barry Morris, Attys., Federal Trade Commission, Washington, D. C., for respondent.

Before CASTLE, Senior Circuit Judge, and SWYGERT and CUMMINGS, Circuit Judges.

CASTLE, Senior Circuit Judge.

Beatrice Foods Company of Chicago, Illinois, asks this court to review the July 1, 1975, opinion and order of the Federal Trade Commission finding Beatrice's acquisition of the assets of Essex Graham Company to be violative of section 7 of the Clayton Act, 15 U.S.C. § 18, ¹ and directing divestiture.

I.

Beatrice is a multinational and multiproduct company with traditional emphasis in foods and food-related services. Its recent history, however, is marked by wide diversification into many non-food fields. In this regard, Beatrice acquired the stock and assets of Tip Top Brush Company and its various affiliated companies in July of 1969 and one year later acquired the Essex Graham Company. Tip Top is a leading manufacturer of paint brushes and rollers; Essex manufactures paint rollers.

In October of 1971, the Federal Trade Commission issued an administrative complaint against Beatrice alleging that its acquisitions of Tip Top and Essex violated section 7 of the Clayton Act since their effect may be substantially to lessen competition or to tend to create a monopoly in the manufacture and sale of "manually-powered paint applicators" ² in the United States. Beatrice denied the alleged illegality of the acquisitions and a hearing was subsequently held before an administrative law judge.

The administrative law judge determined that paint brushes (including varnish brushes) and paint rollers (together with accessory products) each separately and both together constituted relevant lines of commerce for section 7 purposes. He further found the relevant geographic market to encompass the entire United States.

As to Beatrice's acquisition of Tip Top, the administrative law judge concluded that an insufficient showing had been made by the Commission's counsel that Beatrice was a likely potential entrant into the brush and roller market and that even if it were, elimination of it as a future entrant would not substantially lessen competition. The law judge also declined to find that the acquisition entrenched Tip Top in the market in a manner that would hinder competition by providing Tip Top with access to Beatrice's "deep pocket" for capital expansion loans. However, with regard to Beatrice's acquisition of Essex Graham, the administrative law judge found that the acquisition substantially lessened actual competition in both the combined brush-and-roller market and the roller submarket and that Essex was eliminated as the most likely entrant into the paint brush market. As viewed by the law judge, the "manually powered paint applicator" industry and the roller submarket were both experiencing trends of rising concentration. The acquisition of Essex by Beatrice would result in the combination of the third ranking firm in the combined brush and roller market (Tip Top) with the thirteenth ranking firm (Essex); and the fifth ranking firm in the roller submarket (Tip Top) with the eighth ranking from (Essex). Such an acquisition, the law judge held, would accelerate the already present trend of rising concentration in both markets. ³

The acquisition of Essex having been found to violate section 7, Beatrice was ordered to divest itself of Essex and further ordered to cease and desist from acquiring any interest in any concern "engaged in the manufacture or sale of manually powered paint applicators" or "engaged in the manufacture or sale of raw materials" to such types of companies.

Both parties cross-appealed the administrative law judge's decision; Beatrice contesting the finding that the Essex acquisition was unlawful and the counsel for the Commission attacking the finding that the Tip Top acquisition was lawful. The Commission upheld the initial decision of the administrative law judge ⁴ and adopted his order. Beatrice thereupon sought review of the Commission's decision in this court.

II.

On review, Beatrice advances several arguments for reversal of Commission's decision and order regarding the Essex acquisition. We shall address each.

A.

Beatrice advances a two-pronged attack on the relevant product market definitions determined by the administrative law judge and adopted by the Commission. First, Beatrice contends that the law judge and the Commission erred in defining the relevant product markets to encompass only brushes and rollers and to exclude aerosols and other more sophisticated power spray equipment. Second, Beatrice insists that the law judge and the Commission erred in failing to divide the brush and roller market into separate "professional" and "do-it-yourself" submarkets. We disagree with both contentions.

1.

Beatrice maintains that the evidence presented to the law judge cannot support his exclusion of aerosols and spray equipment from the relevant product market. The market as determined by the law judge, consisting of only brushes and rollers, argues Beatrice, is the result of the law judge and the Commission limiting their analysis to the scope of the market as viewed from the perspective of sellers only and not that of buyers also, as "the law commands."

We, of course, recognize that "any test 'which ignores the buyers and focuses on what the sellers do, or theoretically can do, is not meaningful' " in determining a relevant product market. L. G. Balfour Company v. FTC, 442 F.2d 1, 11 (7th Cir. 1971), quoting United States v. Bethlehem Steel Corp., 168 F.Supp. 576, 592 (S.D.N.Y.1958); see also Cass Student Advertising, Inc. v. National Educational Advertising Service, Inc., 516 F.2d 1092, 1095 (7th Cir. 1975), cert. denied, 423 U.S. 986, 96 S.Ct. 394, 46 L.Ed.2d 303 (1975). But we cannot agree with Beatrice that the law judge and the Commission did so ignore the "rivalry for the custom of buyers," United States v. Bethlehem Steel Corp., supra, 168 F.Supp. at 592, in determining the relevant product market in the instant case.

The administrative law judge found that most of the large manufacturers of brushes also manufacture rollers and most of the large roller manufacturers also manufacture brushes. He also found that brushes and rollers are distributed by the same firms to the same buyers and that both are generally shipped, stocked, merchandized, and promoted together. Aerosols and spray equipment, ⁵ on the other hand, were found to be manufactured and sold by firms other than those which manufacture and sell brushes or rollers. The law judge found that aerosols and sprays are manufactured utilizing technology, machinery, and raw materials substantially different from those employed in the production of brushes or rollers.

While such findings are certainly useful in determining the relevant market from the sellers' perspective, the law judge entered other findings which formed the basis for determining the relevant market from the buyers' point of view. The law judge found that paint brushes and rollers are "INTERCHANGEABLE IN USE TO A VERY GREAT Degree." as to aerosols, however, he found that they are used for "specialized painting applications for which the use of a paint brush or roller would be impractical." Aerosols, he found, are not used for "larger flat surfaces as their cost for such applications would far exceed the cost of applying paint by paint brush or roller." Sprayers, he found, are used to apply paint on "small specialty jobs such as iron work and irregular surfaced items, and by painting contractors for large, outdoor jobs." Thus, it cannot be said that in determining the relevant product market in the instant case the law judge ignored the "custom of buyers."

Beatrice does not dispute any of these findings. Rather, it maintains that the market as defined is incomplete or "gerrymandered." Beatrice thus argues that these findings cannot support the market as defined by the law judge and the Commission. Beatrice contends that the evidence demonstrates that rollers are interchangeable with brushes for some but not all tasks. For instance, while brushes and rollers may be interchangeable for certain jobs such as painting large, flat surfaces, Beatrice points out that they are not interchangeable for other tasks such as painting intricate objects which require applying paint to non-flat, "hard-to-reach" places. With regard to these latter types of jobs, Beatrice maintains that aerosols and sprayers, and not rollers, are interchangeable with brushes. Beatrice's ultimate conclusion, therefore, is that since rollers, aerosols, and sprayers are interchangeable with brushes for certain tasks but not for others, all three must be included in any product market with brushes rather than just rollers. We disagree.

The mere fact that several products are limited substitutes for one another and thus form a broad product market is not dispositive of whether they form a relevant product market for antitrust purposes. In Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), the Supreme Court stated that while "(t)he 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," nevertheless within such a broad market "well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes." Id. at 325, 82 S.Ct. at 1523. Thus, the question is not whether brushes, rollers, aerosols, and sprayers constitute a market, but whether the Commission could properly find that brushes and rollers alone constitute a line...