F.T.C. v. Warner Communications Inc.

• Decision Date: 13 September 1984
• Docket Number: No. 84-5809,84-5809
• Citation: 742 F.2d 1156
• Parties: , 1984-2 Trade Cases 66,192, 17 Fed. R. Evid. Serv. 1203 FEDERAL TRADE COMMISSION, Plaintiff-Appellant, v. WARNER COMMUNICATIONS INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1156

742 F.2d 1156

39 Fed.R.Serv.2d 1335, 1984-2 Trade Cases 66,192,

17 Fed. R. Evid. Serv. 1203

FEDERAL TRADE COMMISSION, Plaintiff-Appellant, v. WARNER COMMUNICATIONS INC., et al., Defendants-Appellees.

No. 84-5809.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 2, 1984.

Decided Sept. 13, 1984.

David C. Shonka, F.T.C., Washington, D.C., George S. Cary, F.T.C., Los Angeles, Cal., Howard E. Shapiro, Washington, D.C., for plaintiff-appellant.

Alan B. Pick, Los Angeles, Cal., William E. Willis, New York City, Allyn O. Kreps, Jones, Day, Reavis & Pogue, Los Angeles, Cal., Stuart Robinowitz, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before GOODWIN, FARRIS and POOLE, Circuit Judges.

PER CURIAM:

The Federal Trade Commission appeals from the district court order denying the Commission's application for a preliminary injunction to block a proposed joint venture involving Warner Communications Inc. and Polygram Records, Inc. We reverse.

FACTS

Warner Communications Inc. is a diversified communications company that operates three record labels (Warner, Atlantic and Elektra/Asylum) and distributes prerecorded music in the United States and abroad. In 1983, Warner was the second largest distributor of prerecorded music in the United States. Polygram Records, Inc., owned by N.V. Philips and Siemens AG, operates classical and popular record labels and distributes prerecorded music here and abroad. In 1983, Polygram was the sixth largest distributor of prerecorded music in the United States. Warner and Polygram plan to merge part of their record operations and form a joint venture company. Under the terms of the proposed joint venture, Polygram would close its distribution operations in the United States and the joint venture company would distribute Polygram's records.

The Federal Trade Commission brought an action seeking a preliminary injunction under section 13(b) of the Federal Trade Commission Act, 15 U.S.C. Sec. 53(b), to block the proposed merger until the completion of administrative proceedings. The Commission alleged that the proposed joint venture would violate section 7 of the Clayton Act (15 U.S.C. Sec. 18) and section 5 of the Federal Trade Commission Act (15 U.S.C. Sec. 45).

During discovery, the defendants requested that the Commission produce two memoranda prepared by members of the Commission's Bureau of Economics. The memoranda, prepared before the Commission filed the action for preliminary relief, recommended that the Commission not challenge the merger. The district court ordered the Commission to produce the memoranda.

On April 10, 1984, the district court denied the Commission's motion for a preliminary injunction. On April 12, 1984, the Commission filed an Emergency Motion for Injunction Pending Appeal, which we granted.

We now reverse the district court decision because the district court applied an incorrect legal standard and improperly relied on the Bureau of Economics memoranda. Applying the correct legal standard, we hold that preliminary injunctive relief is warranted.

DISCUSSION

Section 13(b) of the Federal Trade Commission Act provides that "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest ... a preliminary injunction may be granted...." 15 U.S.C. Sec. 53(b). Section 13(b) places a lighter burden on the Commission than that imposed on private litigants by the traditional equity standard; the Commission need not show irreparable harm to obtain a preliminary injunction. See Conference Report In determining whether to grant a preliminary injunction under section 13(b), a court must 1) determine the likelihood that the Commission will ultimately succeed on the merits and 2) balance the equities. Federal Trade Commission v. Simeon Management Corp., 532 F.2d 708, 713-14 (9th Cir.1976). The denial of a motion for preliminary injunction will be reversed only if the district court abused its discretion or based its decision on an erroneous legal premise. American Motorcyclist Association v. Watt, 714 F.2d 962, 965 (9th Cir.1983); Simeon Management Corp., 532 F.2d at 711.

No. 624, 93d Cong., 1st Sess. 11, reprinted in 1973 U.S.Code Cong. & Admin.News 2417, 2533; Federal Trade Commission v. Weyerhaeuser Co., 665 F.2d 1072, 1082 (D.C.Cir.1981).

I. THE DISTRICT COURT DECISION

A. Correct Legal Standard Under Section 7

The Commission argues that the district court order denying preliminary injunctive relief should be reversed because the court applied an incorrect legal standard. In its order, the district court said that the recorded music market does not operate in a manner conducive to "collusion," that "collusion" was unlikely at the record label level and that "collusion" regarding prices, critical non-price elements and new releases was impossible. The court mentioned "collusion" in seven of its 18 conclusions of law.

"Collusion" is "[a] secret combination, conspiracy, or concert of action between two or more persons for fraudulent or deceitful purpose." Black's Law Dictionary 240 (5th Ed.1979). It implies the existence of fraud, the employment of fraudulent means, or the employment of lawful means to accomplish an unlawful purpose. Id.

It appears that the district court was applying section 1 of the Sherman Act when it required a showing of collusion. Section 1 prohibits every unreasonable "contract, combination ... or conspiracy, in restraint of trade or commerce." 15 U.S.C. Sec. 1. It is unlawful, for example, for businesses that compete in the same market to collude by entering into agreements which divide up the market. See Aydin Corp. v. Loral Corp., 718 F.2d 897, 899-900 (9th Cir.1983); Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1354 (9th Cir.1982).

Section 7 of the Clayton Act requires far less than a showing of collusion. Section 7 prohibits mergers whose effect "may be substantially to lessen competition, or to tend to create a monopoly." 15 U.S.C. Sec. 18 (emphasis added). It was intended to arrest the anticipated anticompetitive effects of acquisitions and other intercorporate transactions in their incipiency. See United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 589, 597, 77 S.Ct. 872, 875, 879, 1 L.Ed.2d 1057 (1957); Ash Grove Cement Co. v. Federal Trade Commission, 577 F.2d 1368, 1378 (9th Cir.), cert. denied, 439 U.S. 982, 99 S.Ct. 571, 58 L.Ed.2d 653 (1978); United States v. Coca-Cola Bottling Co., 575 F.2d 222, 231 (9th Cir.), cert. denied, 439 U.S. 959, 99 S.Ct. 362, 58 L.Ed.2d 351 (1978). The "core question [in a Section 7 case] is whether a merger may substantially lessen competition...." Federal Trade Commission v. Procter & Gamble Co., 386 U.S. 568, 577, 87 S.Ct. 1224, 1229, 18 L.Ed.2d 303 (1967). It is well established that a section 7 violation is proven upon a showing of reasonable probability of anticompetitive effect. See, e.g., Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 274 (7th Cir.1981), cert. denied, 455 U.S. 921, 102 S.Ct. 1277, 71 L.Ed.2d 461 (1982).

Since Section 7 requires only a showing of reasonable probability of anticompetitive effect and the district court required a showing of collusion, we conclude that the court applied an incorrect legal standard.

B. Bureau of Economics Memoranda

The Commission argues that the district court erred also in ordering production A document must meet two requirements for the deliberative process privilege to apply. First, the document must be predecisional--it must have been generated before the adoption of an agency's policy or decision. Coastal States, 617 F.2d at 866. The Bureau of Economics memoranda satisfy this requirement. The authors investigated the proposed joint venture and drafted the memoranda before the Commission made the decision to challenge the venture. See White v. IRS, 707 F.2d 897, 902 (6th Cir.1983). Second, the document must be deliberative in nature, containing opinions, recommendations, or advice about agency policies. Coastal States, 617 F.2d at 866. Purely factual material that does not reflect deliberative processes is not protected. Mink, 410 U.S. at 87-89, 93 S.Ct. at 836-837. The Bureau of Economics memoranda contain analyses of the record industry and the merger's potential effects on competition, and recommendations on whether the Commission should challenge the venture. Analyses and recommendations play a critical role in the Commission's decision whether or not to challenge a merger. The memoranda go to the heart of the deliberative and policy-making processes. Moreover, the factual material in the memoranda is so interwoven with the deliberative material that it is not severable. See Binion v. Department of Justice, 695 F.2d 1189, 1193 (9th Cir.1983). The deliberative process privilege applies to the two memoranda.

                of and in relying on the two memoranda prepared by members of the Bureau of Economics.  The Commission contends that the memoranda were protected from disclosure under the government's "deliberative process privilege."    This privilege permits the government to withhold documents that reflect advisory opinions, recommendations and deliberations comprising part of a process by which government decisions and policies are formulated.   NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 150, 95 S.Ct. 1504, 1516, 44 L.Ed.2d 29 (1975).  It was developed to promote frank and independent discussion among those responsible for making governmental decisions, Environmental Protection Agency v. Mink, 410 U.S. 73, 87, 93 S.Ct. 827, 836, 35 L.Ed.2d 119 (1973), and also to protect against premature disclosure of proposed agency policies or decisions.   Coastal States Gas Corp. v. Department of Energy, 617 F.2d 854, 866 (D.C.Cir.1980).  The ultimate purpose of the privilege is to

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