Fed. Trade Comm'n v. H.J. Heinz Co. & Milnot Holding Corp.

Decision Date27 April 2001
Docket NumberNo. 00-5362,00-5362
Citation246 F.3d 708
Parties(D.C. Cir. 2001) Federal Trade Commission, Appellant v. H.J. Heinz Co. and Milnot Holding Corporation, Appellees
CourtU.S. Court of Appeals — District of Columbia Circuit

[Copyrighted Material Omitted] Appeal from the United States District Court for the District of Columbia (No. 00cv01688)

Debra A. Valentine, General Counsel, Federal Trade Commission, argued the cause for the appellant. John F. Daly, Assistant General Counsel, Richard G. Parker, Director, and David A. Balto and David C. Shonka, Attorneys, Federal Trade Commission, were on brief.

Edward P. Henneberry argued the cause for the appellees. W. Bradford Reynolds, Marc G. Schildkraut, Kenneth W. Starr, and Mark L. Kovner were on brief.

J. Joseph Curran, Jr., Attorney General, and Ellen S. Cooper, Assistant Attorney General, State of Maryland; Bruce M. Botelho, Attorney General, State of Alaska; Janet Napolitano, Attorney General, State of Arizona; Mark Pryor, Attorney General, State of Arkansas; Bill Lockyer, Attorney General, and Peter Siggins, Chief Deputy Attorney General, State of California; Ken Salazar, Attorney General, State of Colorado; Richard Blumenthal, Attorney General and Steven Rutstein, Assistant Attorney General, State of Connecticut; Robert R. Rigsby, Corporation Counsel, Charles L. Reischel, Deputy Corporation Counsel, and Bennett Rushkoff, Senior Counsel, District of Columbia; Robert A. Butterworth, Attorney General, State of Florida; Earl I. Anzai, Attorney General, State of Hawaii; Alan G. Lance, Attorney General, State of Idaho; James E. Ryan, Attorney General, State of Illinois; Karen M. Freeman-Wilson, Attorney General, State of Indiana; Thomas J. Miller, Attorney General, State of Iowa; Carla J. Stovall, Attorney General, State of Kansas; Richard P. Ieyoub, Attorney General, State of Louisiana; Jennifer Granholm, Attorney General, and Thomas L. Casey, Solicitor General, State of Michigan; Julie Ralston Aoki, Assistant Attorney General, State of Minnesota; Mike Moore, Attorney General, State of Mississippi; Frankie Sue Del Papa, Attorney General, State of Nevada; Philip T. McLaughlin, Attorney General, State of New Hampshire; Eliot Spitzer, Attorney General, State of New York; Michael F. Easley, Attorney General, and K.D. Sturgis, Assistant Attorney General, State of North Carolina; Herbert D. Soll, Attorney General, Commonwealth of the Northern Mariana Islands; Betty D. Montgomery, Attorney General, State of Ohio; W.A Drew Edmondson, Attorney General, State of Oklahoma; Angel E. Rotger-Sabat, Attorney General, Commonwealth of Puerto Rico; Mark Barnett, Attorney General, State of South Dakota; John Cornyn, Attorney General, State of Texas; Jan Graham, Attorney General, State of Utah; William H. Sorrell, Attorney General, State of Vermont; Mark L. Earley, Attorney General, Commonwealth of Virginia; Christine O. Gregoire, Attorney General, State of Washington; Darrell V. McGraw, Jr., Attorney General, and Douglas L. Davis, Assistant Attorney General, State of West Virginia; James E. Doyle, Attorney General, and Kevin J. O'Connor, State of Wisconsin; and Gay Woodhouse, Attorney General, State of Wyoming; were on brief for The Thirty-Six Amici Curiae in support of the appellant.

James H. Skiles and Jan Amundson were on brief for Grocery Manufacturers of America, Inc. et al., Amici Curiae in support of the appellees.

C. Boyden Gray, William J. Kolasky, Jeffrey D. Ayer and Robert H. Bork were on brief for Citizens for a Sound Economy Foundation, Amicus Curiae, in support of the appellees.

Before: Henderson, Randolph and Garland, Circuit Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge:

On February 28, 2000 H.J. Heinz Company (Heinz) and Milnot Holding Corporation (Beech-Nut) entered into a merger agreement. The Federal Trade Commission (Commission or FTC) sought a preliminary injunction pursuant to section 13(b) of the Federal Trade Commission Act (FTCA), 15 U.S.C. 53(b), to enjoin the consummation of the merger. The injunction was sought in aid of an FTC administrative proceeding which was subsequently instituted by complaint to challenge the merger as violative of, inter alia, section 7 of the Clayton Act, 15 U.S.C. 18. The district court denied the preliminary injunction and the FTC appealed to this court. For the reasons set forth below, we reverse the district court and remand for entry of a preliminary injunction against Heinz and Beech-Nut.

I. Background

Four million infants in the United States consume 80 million cases of jarred baby food annually, representing a domestic market of $865 million to $1 billion.1 FTC v. H.J. Heinz, Co., 116 F. Supp. 2d 190, 192 (D.D.C. 2000). The baby food market is dominated by three firms, Gerber Products Company (Gerber), Heinz and Beech-Nut. Gerber, the industry leader, enjoys a 65 per cent market share while Heinz and Beech-Nut come in second and third, with a 17.4 per cent and a 15.4 per cent share respectively. Id. The district court found that Gerber enjoys unparalleled brand recognition with a brand loyalty greater than any other product sold in the United States. Id. at 193. Gerber's products are found in over 90 per cent of all American supermarkets.2

By contrast, Heinz is sold in approximately 40 per cent of all supermarkets. Its sales are nationwide but concentrated in northern New England, the Southeast and Deep South and the Midwest. Id. at 194. Despite its second-place domestic market share, Heinz is the largest producer of baby food in the world with $1 billion in sales worldwide. Its domestic baby food products with annual net sales of $103 million are manufactured at its Pittsburgh, Pennsylvania plant, which was updated in 1991 at a cost of $120 million. Id. at 192-93. The plant operates at 40 per cent of its production capacity and produces 12 million cases of baby food annually. Its baby food line includes about 130 SKUs (stock keeping units), that is, product varieties (e.g., strained carrots, apple sauce, etc.). Heinz lacks Gerber's brand recognition; it markets itself as a "value brand" with a shelf price several cents below Gerber's. Id. at 193.

Beech-Nut has a market share (15.4%) comparable to that of Heinz (17.4%), with $138.7 million in annual sales of baby food, of which 72 per cent is jarred baby food. Its jarred baby food line consists of 128 SKUs. Beech-Nut manufactures all of its baby food in Canajoharie, New York at a manufacturing plant that was built in 1907 and began manufacturing baby food in 1931. Beech-Nut maintains price parity with Gerber, selling at about one penny less. It markets its product as a premium brand. Id. Consumers generally view its product as comparable in quality to Gerber's. Id. Beech-Nut is carried in approximately 45 per cent of all grocery stores. Although its sales are nationwide, they are concentrated in New York, New Jersey, California and Florida.3 Id. at 194.

At the wholesale level Heinz and Beech-Nut both make lump-sum payments called "fixed trade spending" (also known as "slotting fees" or "pay-to-stay" arrangements) to grocery stores to obtain shelf placement. Id. at 197. Gerber, with its strong name recognition and brand loyalty, does not make such pay-to-stay payments. The other type of wholesale trade spending is "variable trade spending," which typically consists of manufacturers' discounts and allowances to supermarkets to create retail price differentials that entice the consumer to purchase their product instead of a competitor's. Id.

Under the terms of their merger agreement, Heinz would acquire 100 per cent of Beech-Nut's voting securities for $185 million. Accordingly, they filed a Premerger Notification and Report Form with the FTC and the United States Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, 15 U.S.C. 18a.4 On July 7, 2000 the FTC authorized this action for a preliminary injunction under section 13(b) of the FTCA and, on July 14, 2000, it filed a complaint and motion for preliminary injunction. The district court conducted a five-day hearing in late August and early September and heard final arguments on September 21, 2000. The record before the district court consisted of 1,267 exhibits, including 150 demonstrative exhibits, 32 depositions and 41 affidavits. In addition, eleven witnesses testified. On October 18, 2000 the district court denied preliminary injunctive relief. The court concluded that it was "more probable than not that consummation of the Heinz/Beech-Nut merger will actually increase competition in jarred baby food in the United States." H.J. Heinz, 116 F. Supp. 2d at 200. The FTC appealed and sought injunctive relief pending appeal, which this court granted on November 8, 2000. On November 22, 2000 the FTC filed an administrative complaint against Heinz and Beech-Nut, charging that the proposed merger violates section 5 of the FTCA and, if consummated, would violate section 7 of the Clayton Act. In the Matter of H. J. Heinz, Docket No. 9295 (filed Nov. 22, 2000).

II. Analysis

A. Standard of Review We review a district court order denying preliminary injunctive relief for abuse of discretion, National Wildlife Fed'n v. Burford, 835 F.2d 305, 319 (D.C. Cir. 1987), and will set aside the court's factual findings only if they are "clearly erroneous." Fed. R. Civ. P. 52(a); United States v. Marine Bancorporation, Inc., 418 U.S. 602, 615 n.13 (1974). If our review of the district court order "reveals that it rests on an erroneous premise as to the pertinent law, however, we must examine the decision in light of the legal principles we believe proper and sound." Ambach v. Bell, 686 F.2d 974, 979 (D.C. Cir. 1982). We apply de novo review to the district court's conclusions of law. See FTC v. National Tea Co., 603 F.2d 694, 696-98 (8th Cir. 1979) (reviewing de novo proper standard...

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