F.T.C. v. Swedish Match

• Decision Date: 14 December 2000
• Docket Number: No. CIV. 00-1501(TFH).,CIV. 00-1501(TFH).
• Citation: 131 F.Supp.2d 151
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. SWEDISH MATCH, et al., Defendant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

131 F.Supp.2d 151

FEDERAL TRADE COMMISSION, Plaintiff, v. SWEDISH MATCH, et al., Defendant.

No. CIV. 00-1501(TFH).

United States District Court, District of Columbia.

December 14, 2000.

Richard Liebeskind, Rhett R. Krulla, Steven L. Wilensky, Bureau of Competition, F.T.C., John D. Graubert, Federal Trade Commission, Office of General Council, Washington, DC, for Plaintiff.

E. Marcellus Williamson, Latham & Watkins, Washington, DC, James V. Kearney, Latham & Watkins, Peter Gruenberger, Weil, Gotshal & Manges, LLP, New York City, for Defendants.

REDACTED MEMORANDUM OPINION

THOMAS F. HOGAN, District Judge.

Pending before the Court is the Federal Trade Commission's ("FTC" or "Commission") motion for preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). The Commission seeks to enjoin the acquisition by Swedish Match North America, Inc. ("Swedish Match") of the loose leaf chewing tobacco business of National Tobacco Company, L.P. ("National"). This injunction is sought to maintain the status quo pending final disposition before the FTC of administrative proceedings to determine whether such acquisition may substantially lessen competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The proposed acquisition has been postponed by agreement of the parties, pending the Court's resolution of this motion. After thorough consideration of the parties' briefs, the exhibits presented by the parties before and during the five-day hearing held in this matter, each witness's credibility, and each party's proposed findings of fact and conclusions of law, and for the reasons set forth below, the Court will grant the plaintiff's motion.¹ This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law.

I. BACKGROUND

The FTC is an administrative agency of the United States organized and existing pursuant to the Federal Trade Commission Act, 15 U.S.C. §§ 41-77. The Commission is responsible, inter alia, for enforcing federal antitrust laws, particularly Section 7 of the Clayton Act, and Sections 5 and 13(b) of the Federal Trade Commission Act.

Swedish Match is a corporation organized and existing under the laws of Delaware, with its principal place of business in Virginia. Swedish Match is a wholly owned subsidiary of Swedish Match AB, a foreign corporation headquartered in Stockholm, Sweden.² Swedish Match manufactures and sells primarily loose leaf and moist snuff tobacco. It produces loose leaf and moist snuff tobacco at its plant in Owensboro, Kentucky. Swedish Match is the largest producer of loose leaf tobacco in the United States. In 1999, its loose leaf sales totaled $127 million, which constituted forty-two percent of all loose leaf sales. Swedish Match's loose leaf brands include Red Man, Red Man Golden Blend, Red Man Select, Southern Pride, J.D.'s Blend, Granger Select, Work Horse, Union Standard, Pay Car, and Red Horse. Red Man, a premium brand, is Swedish Match's leading brand of loose leaf tobacco. In 1999, Red Man had a twenty-two percent share of the loose leaf market. And together, Red Man, Red Man Golden Blend, and Red Man Select accounted for thirty-six percent of all loose leaf sales by revenue. Swedish Match is also the third largest producer of moist snuff tobacco in the United States. In 1999, its moist snuff sales totaled $54 million, which constituted three percent of all moist snuff sales. Its moist snuff brands include Timber Wolf and Renegades. Timber Wolf comes in several cuts, including natural Fine Cut, Wintergreen Long Cut, Wintergreen Cool, Wintergreen Fine Cut, and Long Cut Straight. Timber Wolf, a price-value (or everyday low price ("EDLP")) brand, is Swedish Match's leading moist snuff brand.

National is a limited partnership organized and existing under the laws of Delaware, with its principal place of business in New York. It is a wholly owned subsidiary of North Atlantic Trading Company, Inc., which is headquartered in New York City. National primarily manufactures and sells loose leaf chewing tobacco and is the third largest producer of loose leaf chewing tobacco in the United States. In 1999, its sales totaled $53 million, which constituted an eighteen percent share of the loose leaf market. National produces several brands of loose leaf chewing tobacco including Beech-Nut, Beech-Nut Wintergreen, Havana Blossom, Trophy, and Durango. Beech-Nut, a premium brand, is National's leading loose leaf brand. In 1999, Beech Nut Regular and Beech-Nut Wintergreen comprised thirteen percent of loose leaf sales. National produces its loose leaf chewing tobacco brands at its Louisville, Kentucky plant.

Other producers in the loose leaf and moist snuff markets, while not directly involved in this litigation, include Conwood Corporation ("Conwood"), Swisher International, Inc. ("Swisher"), Fred Stoker & Sons, Inc. ("Fred Stoker"), and U.S. Tobacco ("UST"). Conwood produces Levi Garrett, the second largest selling loose leaf brand. Swisher produces Lancaster and Chattanooga Chew, which are respectively the eighth and ninth leading brands of loose leaf tobacco. Fred Stoker's loose leaf brands account for approximately one percent of all loose leaf. UST is the leading producer of premium moist snuff brands, including the largest selling brand, Skoal. UST accounts for more than seventy-five percent of moist snuff sales and approximately forty percent of total smokeless tobacco sales.

In 1997, Swedish Match and National unsuccessfully attempted to solidify a joint operation agreement, under which Swedish Match would manufacture National's brands in its Owensboro facility.³ In 1999, however, Swedish Match and National came to the table again, this time discussing an asset purchase arrangement rather than a joint operation agreement. On February 10, 2000, they entered into an asset purchase agreement under which Swedish Match would acquire the loose leaf tobacco brands and certain related assets of National for approximately $165 million. According to the defendants, the purpose of this asset purchase agreement is to utilize better Swedish Match's significant and increasing excess capacity. National seeks to alleviate the difficulties created by its own excess capacity and inability to compete with U.S. Tobacco — the leading moist snuff producer — in an environment of declining moist snuff prices.

Pursuant to the Hart-Scott-Rodino Improvements Act of 1976, 15 U.S.C. § 18a, Swedish Match and National filed Premerger Notification and Report forms with the FTC on February 18, 2000. By a vote of 5-0 on June 22, 2000, the FTC authorized its staff to seek a temporary restraining order or preliminary injunction to prevent this merger under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). The defendants subsequently agreed that they would not effectuate the asset purchase agreement during the pendency of the preliminary injunction proceedings, obviating the need for a temporary restraining order. The FTC filed this suit on June 23, 2000, seeking a preliminary injunction against the merger pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), pending the completion of an administrative proceeding pursuant to Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and Sections 7 and 11 of the Clayton Act, 15 U.S.C. §§ 12, 21.

The Court held a five-day evidentiary hearing beginning on September 5, 2000, and closing arguments were heard on September 27, 2000. At the hearing, the FTC called several witnesses, including six industry witnesses and two economic experts, Dr. John Simpson and Dr. Orley Ashenfelter. The defendants offered testimony from several witnesses, also including two economic experts, Dr. Lawrence Wu and Dr. Kenneth Train. In addition to these witnesses, the plaintiff and the defendants have submitted several hundred exhibits.

II. DISCUSSION

Section 7 of the Clayton Act, 15 U.S.C. § 18, prohibits a corporation from acquiring "the whole or any part of the assets of another [corporation] engaged also in commerce or in any activity affecting commerce, 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." The FTC is authorized by Section 13(b) of the Federal Trade Commission Act to seek a preliminary injunction to block an acquisition pending a full administrative proceeding before the Commission when the Commission has reason to believe that a corporation is violating, or is about to violate, Section 7 of the Clayton Act. 15 U.S.C. § 53(b).

Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), authorizes the Court to grant injunctive relief to the Commission if it finds "[u]pon a proper showing that, weighing the equities and considering the FTC's likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond." In other words, to obtain a preliminary injunction under Section 13(b), the FTC must demonstrate: (1) a likelihood of success on the merits in its case under Section 7 of the Clayton Act; and (2) the equities weigh in favor of granting an injunction. See FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1080-83 (D.C.Cir.1981); FTC v. Cardinal Health, Inc., 12 F.Supp.2d 34, 44 (D.D.C.1998); FTC v. Staples, Inc., 970 F.Supp. 1066, 1070 (D.D.C.1997); see also FTC v. Freeman Hospital, 69 F.3d 260, 267 (8th Cir. 1995); FTC v. University Health, Inc., 938 F.2d 1206, 1217-18 (11th Cir.1991); FTC v. Warner Communications, Inc., 742 F.2d 1156, 1160 (9th Cir.1984).

A. Likelihood of Success on the Merits

To meet the first requirement — to show a likelihood of success on the merits the Commission...