Chicago Bridge & Iron Co., N.V. v. F.T.C.

• Decision Date: 25 January 2008
• Docket Number: No. 05-60192.,05-60192.
• Citation: 515 F.3d 447
• Parties: CHICAGO BRIDGE & IRON COMPANY, N.V., a foreign corporation, and Chicago Bridge & Iron Company, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

515 F.3d 447

CHICAGO BRIDGE & IRON COMPANY, N.V., a foreign corporation, and Chicago Bridge & Iron Company, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

No. 05-60192.

United States Court of Appeals, Fifth Circuit.

January 25, 2008.

Charles W. Schwartz (argued), Skadden, Arps, Slate, Meagher & Flom, Houston, TX, for Petitioners.

David C. Shonka (argued), John F. Daly, William E. Kovacic, Donald S. Clark, Imad Dean Abyad, FTC, Washington, DC, for Respondent.

Petition for Review of an Order of the Federal Trade Commission.

Before REAVLEY, GARZA and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

Chicago Bridge and Iron Company, a Dutch corporation, and its United States subsidiary, Chicago Bridge and Iron Company, (collectively, "petitioner" or "CB&I"), petition for review of an order of the Federal Trade Commission ("Commission")¹ to divest assets acquired from Pitt-Des Moines, Inc. ("PDM"), a Pennsylvania corporation, used in the business of designing, engineering and building field-erected cryogenic storage tanks. The Commission ruled that CB&I's acquisition of these assets on February 7, 2001 would likely result in a substantial lessening of competition or tend to create a monopoly in the relevant markets in violation of section seven of the Clayton Act, 15 U.S.C. § 18, and section five of the Federal Trade Commission Act, 15 U.S.C. § 45. We DENY the petition for review.

I.

Before the acquisition, both CB&I and PDM designed, engineered, and constructed industrial storage tanks in the United States for liquified natural gas (LNG), liquified petroleum gas (LPG), and liquid atmospheric gases, such as nitrogen, oxygen, and argon (LIN/LOX), as well as thermal vacuum chambers (TVCs) for testing aerospace satellites. The two firms were the dominant suppliers of the products in these four relevant United States markets. Before 2001, they had a virtual duopoly in those markets. Between 1990 and 2001, they were the only builders of LNG tanks in the United States. Between 1975 and the acquisition, they were the only builders of LNG tanks for import terminals, and they built all but 7 of the 95 peak-shaving LNG tanks constructed in the United States. In the LPG tank market, between 1990 and the acquisition, all but two of the 11 projects were awarded to CB&I and PDM. In the LIN/LOX tank market, the only other significant competitor, Graver Tank, left the market in 2001, leaving CB&I as the dominant firm now in that market. In the TVC market, CB&I and PDM were the only firms that had built any large, field-erected TVCs in the United States since 1960.

On February 7, 2001, CB&I acquired all of PDM's assets relating to these four markets for approximately $84 million. Prior to the acquisition, the Commission notified CB&I that it had significant antitrust concerns about the acquisition and was conducting an investigation.² On October, 2001, the Commission issued an administrative complaint charging that CB&I's acquisition of those assets of its principal competitor, PDM, violated Section 7 of the. Clayton Act, 15 U.S.C. § 18 and Section 5 of the Federal Trade Commission (FTC) Act, 15 U.S.C. § 45. An Administrative Law Judge (ALJ) held an evidentiary hearing, issued an Initial Decision, concluding that CB&I had violated both Acts and ordered a divestiture of the assets. After briefing, argument and a de novo review of the record, the Commission issued a final order affirming the ALJ's determination of liability and issuing a modified divestiture order.

In its order, the Commission adopted the ALJ's decision with some modifications. Noting that the relevant product and geographic markets are undisputed, the Commission affirmed the ALJ's determination that the acquisition's effects must be assessed in each of the United States markets for LNG, LPG, and LIN/LOX tanks, and for. TVCs. Op., at 9. Finding that sales of the relevant products had been sporadic, the ALT rejected the traditional method of measuring market concentration with the Herfindahl-Hirschman Index (HHI) on an annualized basis. Id., at 3. Nonetheless, based on the bidding history in each market, the ALJ found that the acquisition resulted in an undue accretion of market power in CB&I that could not be constrained by timely entry of new competitors. Id. The Commission disagreed with the ALJ's complete disregard for the HHI, stating that, because CB&I and PDM had been the only competitors in the relevant markets for the past two decades, it was appropriate to analyze their sales data over an extended time frame. Id., at 18. Using the HHIs accordingly, the Commission concluded that the resulting market concentration established a prima facie case that the acquisition violates Section 7 of the Clayton Act and Section 5 of the FTC Act. Op., at 18-20. Furthermore, the Commission found an independent reason for a prima facie case of presumptive illegality in the qualitative evidence showing that the acquisition left CB&I as the only major player in each of the relevant markets, e.g., the views of customers with first-hand knowledge that CB&I and PDM were the only LNG tank suppliers and that the acquisition substantially harmed competition; CB&I's and PDM's own documents confirmed that they focused almost exclusively on each other in assessing competition and paid little or no attention to other companies. Id., at 19-20.

The Commission also found that evidence of high entry barriers necessarily strengthened the anti-competitive effects of the acquisition. Id., at 29. In addition to customer testimony and behavior in past LNG project awards, the Commission cited reasons that entry into the relevant markets is exceedingly difficult and cannot be achieved in a timely fashion: the nickelsteel composition in LNG tanks requires a specialized construction skill set; LNG tanks require sophisticated engineering, trained supervisors, knowledge of local labor markets, as well as specialized procedures and proprietary techniques.³ Id., at 30. Additionally, the FERC regulatory and approval process is complicated and potentially time consuming; customers expect significant experience in builders of LNG tanks that takes a number of years to gain. Op., at 53-56. Thus, the Commission concluded that CB&I's long-standing dominance in the relevant U.S. markets gives it a virtually insurmountable advantage over newly entering competitors. Accordingly, the Commission decided that the entry and expansion in the relevant markets are not likely to replace the competition lost through the acquisition or to sufficiently constrain CB&I in a timely manner. E.g., id., at 82.

CB&I did not contend that the acquisition would lead to enhanced efficiencies benefitting competition. Rather, it argued that the evidence of high market concentration and entry barriers was rebutted by evidence of recent actual and potential entry into three of the four markets. On examining the record evidence, however, the Commission affirmed the ALJ's finding that the purported new entry is insufficient to constrain CB&I post-acquisition. Id., at 82. Three joint-ventures identified by CB&I as new entrants lacked sufficient experience to compete effectively with CB&I. None had built an LNG tank in the United States. At the time of trial, none had won a LNG tank bid post-acquisition while CB&I had won six sole-source contracts during that period. Customers with upcoming LNG projects were not aware of the alleged new entrants. The Commission concluded that although the new entrants had taken a step toward competing, in the United' States by partnering with United States construction firms, they cannot likely restore the competition lost as a result of CB&I's acquisition of PDM's relevant assets in the foreseeable future. Id., at 58.

The Commission ruled that CB&I's acquisition of these assets would likely result in a substantial lessening of competition in the relevant markets in violation of section seven of the Clayton Act, 15 U.S.C. 18, and section five of the Federal Trade Commission Act, 15 U.S.C. § 45. Id., at 105. The Commission expanded the divestiture remedy, ordering CB&I to divide its cryogenic business into two separate entities (New CB&I and New PDM) equally capable of competing in the four markets.⁴

CB&I contends that the Commission: (1) applied incorrect legal standards in shifting burdens of proof and persuasion; (2) applied incorrect legal standards related to the petitioner's "actual and potential entry" defense; (3) found, without substantial evidentiary support, that CB&I failed to rebut the Government's prima facie case; and (4) abused its discretion in its remedial order.

II.

This court reviews the Commission's factual determinations under the substantial evidence standard. 15 U.S.C. § 21(c); Jim Walter Corp. v. FTC, 625 F.2d 676, 683 (5th Cir.1980). "Substantial evidence is evidence that provides a substantial basis of fact from which the fact in issue can be reasonably inferred." Diamond Drilling Co. v. Marshall, 577 F.2d 1003, 1006 (5th Cir.1978). We review de novo all legal questions pertaining to Commission orders. FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454, 106 S.Ct. 2009, 90 L.Ed.2d 445 (1986).

Section 7 of the Clayton Act prohibits acquisitions, including mergers "where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."⁵ 15 U.S.C. § 18; see United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 355, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963) ("The statutory test is whether the effect of the merger may be substantially to lessen competition in any line of commerce in any section of the country.") (internal quotations omitted); see also Brown Shoe Co. v. United States, 370 U.S. 294. 323, n. 39, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962) ("The use of these words ("may be") means that the bill, if enacted, would not apply to the...