DR PEPPER/SEVEN-UP COMPANIES, INC. v. FTC, Civ. A. No. 91-2712 (GHR).
| Decision Date | 20 July 1992 |
| Docket Number | Civ. A. No. 91-2712 (GHR). |
| Parties | DR PEPPER/SEVEN-UP COMPANIES, INC., et al., Plaintiffs, v. FEDERAL TRADE COMMISSION, Defendant. |
| Court | U.S. District Court — District of Columbia |
Philip D. Bartz, Leslie J. Cloutier, Micki M. Chen, Morrison & Foerster, Washington, D.C., for plaintiff Dr. Pepper/Seven-Up Companies, Inc.
Peter E. Greene, Skadden, Arps, Slate, Meagher & Flom, New York City, Gary A. MacDonald, Skadden, Arps, Slate, Meagher
& Flom, Washington, D.C., for plaintiff Harold A. Honickman.
Jeffrey T. Sprung, Asst. U.S. Atty., James M. Spears, Melvin H. Orlans, F.T.C., Washington, D.C., for defendant F.T.C.
W. Foster Wollen, Cathleen Shine, Sherman & Sterling, Washington, D.C., for intervenor Cadbury Beverages, Inc.
Before the Court are the cross-motions for summary judgment of plaintiffs Dr Pepper/Seven-Up Companies, Inc. ("DPSU") and Harold A. Honickman ("Honickman"), and defendant Federal Trade Commission ("FTC" or "the Commission"). At issue is whether the FTC's decision to deny Honickman's application for prior approval to acquire certain assets of the Seven-Up Brooklyn Bottling Company ("Seven-Up Brooklyn")—an application made pursuant to a Consent Order between Honickman and the FTC—is arbitrary and capricious, violates Honickman's due process rights, and violates substantive antitrust law. The disputes before the Court are largely ones of law, not of fact, and summary judgment is appropriate. Having considered the parties' briefs, oral arguments of counsel, and the extensive administrative record, the Court declines to reverse the FTC's decision and will accordingly enter an order granting summary judgment to the Commission and deny plaintiffs' motion.
Honickman owns interests in and controls all voting rights of Canada Dry Bottling Company of New York and Pepsi Cola Bottling Company of New York, Inc., which are bottlers and distributors of soft drinks in New York State. AR 4.1 DPSU is a manufacturer of soft drink concentrate, in particular of "Seven-Up," a leading soft drink brand.
Like other major concentrate manufacturers, DPSU does not distribute Seven-Up directly to consumers, but rather grants exclusive territorial marketing rights to bottlers to do so. Seven-Up Brooklyn was one such franchisee, with rights to bottle and distribute Seven-Up and other soft drinks in a portion of the lucrative New York metropolitan market.2 DPSU and Honickman now desire that Honickman obtain Seven-Up Brooklyn's share of the New York market. The FTC believes that such an acquisition violates Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45.
In August 1987, Honickman acquired3 Seven-Up Brooklyn's soft drink franchises, as well as other assets including production equipment, vending equipment, office equipment and furnishings, and real estate. AR 4. One consequence of this acquisition was that the soft drink market in three metropolitan counties—Kings, Queens and Richmond—became more highly concentrated, as the number of bottlers was reduced effectively from three to two (Honickman and Coca Cola New York). AR 1680. The acquisition prompted an FTC investigation into the transaction's likely effects on competition, from which the Commission concluded that there was reason to believe that the transaction was likely substantially to lessen competition in the production, distribution and sale of soft drinks in the New York metropolitan area in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act. AR 5. The Commission accordingly issued an administrative complaint challenging Honickman's acquisition and seeking divestiture of assets acquired from Seven-Up Brooklyn. AR 0-8.
Before the Commission issued its complaint, however, Honickman sold his interest in the bottling and distribution business of Seven-Up Brooklyn to Lance T. Funston, an investment banker and business associate of Honickman who had invested in the 1987 acquisition. AR 713. Honickman apparently did not sever his ties entirely, however, for he retained control over real estate acquired from Seven-Up Brooklyn, which Funston leased from him. AR 1345. Honickman's partial divestiture occurred in December 1988. AR 713. The financial fortunes of Seven-Up Brooklyn, which had been "financially troubled for many years," deteriorated further after the sale to Funston and in October 1990 the company filed for bankruptcy protection under Chapter 11. AR 714.
The FTC issued its administrative complaint on November 2, 1989. AR 0-9. Honickman elected to pursue settlement negotiations with the Commission rather than litigate. AR 713. In January 1991, Honickman and the FTC entered into an "Agreement Containing Consent Order" ("the Settlement Agreement") to settle the complaint. AR 1442-1462.4 Pursuant to its Rules of Practice, the Commission published the Settlement Agreement in the Federal Register and opened a sixty-day public comment period. See 16 C.F.R. § 3.25(f) (1992); 56 Fed.Reg. 19,859-865 (proposed April 30, 1991). The FTC thereafter issued the Settlement Agreement on July 25, 1991. See 56 Fed.Reg. 38,446 (Aug. 13, 1991).
AR 12.5 While the Consent Order itself is silent as to procedures and burdens of proof in evaluating applications made pursuant to Paragraph II, the Settlement Agreement, of which the Consent Order is a part, contains express waivers on the part of Honickman of "any further procedural steps," the requirement that the FTC's decision contain findings of fact and conclusions of law, all rights to seek judicial review or challenge the validity of the Consent Order and any claim under the Equal Access to Justice Act. AR 1442-1442A. The Settlement Agreement expressly provides, moreover, that "the complaint may be used in construing the terms of the order, and no agreement, understanding, representation, or interpretation not contained in the order or in the agreement may be used to vary or to contradict the terms of the order." AR 1442A.
Having entered into the Settlement Agreement with the Commission, and pursuant to Section 2.41(f) of the Commission's Rules of Practice, 16 C.F.R. § 2.41(f), Honickman submitted an application for prior approval to the FTC, dated February 12, 1991, to acquire certain assets of Seven-Up Brooklyn. AR 48-57. Honickman's proposal involved, first, the acquisition by DPSU of licenses, distribution rights and vending equipment from Seven-Up Brooklyn, followed immediately by Honickman's purchase of these assets from DPSU. AR 49. Honickman argued that his acquisition of these assets would be procompetitive because it would enable him to achieve economies of scale in the marketing and distribution of Seven-Up brands necessary to compete effectively in the metropolitan New York market. AR 52-53. In the alternative, Honickman argued that the acquisition met the requirements of the "failing firm defense." AR 53-56.
While the FTC reviewed the Settlement Agreement and Honickman's application, proceedings involving Seven-Up Brooklyn continued before the bankruptcy court. On January 28, 1991, Seven-Up Brooklyn filed an application for an order setting a hearing date to consider sale of the company's assets, which included a draft agreement according to which Seven-Up Brooklyn's assets would be sold to a division of DPSU, which would in turn sell them to Honickman. AR 58-77.
The bankruptcy judge held a hearing on Seven-Up Brooklyn's application on February 27, 1991. AR 261. At this hearing, there were two bidders for the company's assets: DPSU/Honickman and Kraus Industries. The Kraus proposal would have kept Seven-Up Brooklyn operating as a bottler of soft drinks in New York, but did not at first provide sufficient funds to satisfy the company's obligations to its junior secured lender and the franchisors, all of whom refused to consent to a reduction in their amounts. AR 333, 340-341, 559. The DPSU/Honickman proposal did not envision the continued operation of Seven-Up Brooklyn as a distinct entity and was conditioned on FTC approval. AR 270, 559. This proposal, however, did provide more cash up front and had the support of the debtor, the two secured creditors, the unsecured creditors committee, DPSU and some other franchisors. AR 559.
Nevertheless, the bankruptcy judge rejected both proposals and terminated Seven-Up Brooklyn's authority to use the cash collateral advanced by its secured lenders. Id. The judge gave as reasons for rejecting the DPSU/Honickman proposal her concerns that DPSU and Honickman had taken positions that either dissuaded other prospective bidders or shut off competitive bidding for the assets of Seven-Up Brooklyn and that the FTC might not approve a transaction that it had previously believed to be anticompetitive. AR 418-421, 559. DPSU made it clear to the court that it would require any other buyer than Honickman to pay DPSU $1.4 million to cover Seven-Up Brooklyn's debt to DPSU for Seven-Up concentrate and to compensate DPSU for the Seven-Up Brooklyn's failure to promote the brand during the bankruptcy period. AR 293, 324-325, 329, 415-416. It was also apparent to the bankruptcy judge that any other bidder than Honickman would face a potential lawsuit from DPSU. AR 325.
Notwithstanding these concerns, however, the...
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Dr Pepper/Seven-Up Companies, Inc. v. F.T.C.
...to acquire Brooklyn Bottling Company. The District Court granted summary judgment in favor of the FTC, see Dr Pepper/Seven-Up Cos. v. FTC, 798 F.Supp. 762 (D.D.C.1992), and DPSU now seeks Upon consideration of the record before us, we reject DPSU's claim that the "prior-approval" procedures......