Federal Trade Commission v. Procter Gamble Company

• Decision Date: 11 April 1967
• Docket Number: No. 342,342
• Citation: 87 S.Ct. 1224,386 U.S. 568,18 L.Ed.2d 303
• Parties: FEDERAL TRADE COMMISSION, Petitioner, v. The PROCTER & GAMBLE COMPANY
• Court: U.S. Supreme Court

386 U.S. 568

87 S.Ct. 1224

18 L.Ed.2d 303

FEDERAL TRADE COMMISSION, Petitioner,

v The PROCTER & GAMBLE COMPANY.

No. 342.

Argued Feb. 13, 1967.

Decided April 11, 1967.

Sol. Gen. Thurgood Marshall, for petitioner.

Frederick W. R. Pride and Kenneth C. Royall, New York City, for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

This is a proceeding initiated by the Federal Trade Commission charging that respondent, Procter & Gamble Co., had acquired the assets of Clorox Chemical Co. in violation of § 7 of the Clayton Act, 38 Stat. 731, as amended by the Celler-Kefauver Act, 64 Stat. 1125 15 U.S.C. § 18.¹ The charge was that Procter's acquisition of Clorox might substantially lessen competition or tend to create a monopoly in the production and sale of household liquid bleaches.

Following evidentiary hearings, the hearing examiner rendered his decision in which he concluded that the acquisition was unlawful and ordered divestiture. On appeal, the Commission reversed, holding that the record as then constituted was inadequate, and remanded to the examiner for additional evidentiary hearings. 58 F.T.C. 1203. After the additional hearings, the examiner again held the acquisition unlawful and ordered divestiture. The Commission affirmed the examiner and ordered divestiture. 63 F.T.C. —-. The Court of Appeals for the Sixth Circuit reversed and directed that the Commission's complaint be dismissed. 358 F.2d 74. We find that the Commission's findings were amply supported by the evidence, and that the Court of Appeals erred.

As indicated by the Commission in its painstaking and illuminating report, it does not particularly aid analysis to talk of this merger in conventional terms, namely, horizontal or vertical or conglomerate. This merger may most appropriately be described as a 'product-extension merger,' as the Commission stated. The facts are not disputed, and a summary will demonstrate the correctness of the Commission's decision.

At the time of the merger, in 1957, Clorox was the leading manufacturer in the heavily concentrated house- hold liquid bleach industry. It is agreed that household liquid bleach is the relevant line of commerce. The product is used in the home as a germicide and disinfectant, and, more importantly, as a whitening agent in washing clothes and fabrics. It is a distinctive product with no close substitutes. Liquid bleach is a low-price, high-turnover consumer product sold mainly through grocery stores and supermarkets. The relevant geographical market is the Nation and a series of regional markets. Because of high shipping costs and low sales price, it is not feasible to ship the product more than 300 miles from its point of manufacture. Most manufacturers are limited to competition within a single region since they have but one plant. Clorox is the only firm selling nationally; it has 13 plants distributed throughout the Nation. Purex, Clorox's closest competitor in size, does not distribute its bleach in the northeast or mid-Atlantic States; in 1957, Purex's bleach was available in less than 50% of the national market.

At the time of the acquisition, Clorox was the leading manufacturer of household liquid bleach, with 48.8% of the national sales—annual sales of slightly less than $40,000,000. Its market share had been steadily increasing for the five years prior to the merger. Its nearest rival was Purex, which manufactures a number of products other than household liquid bleaches, including abrasive cleaners, toilet soap, and detergents. Purex accounted for 15.7% of the household liquid bleach market. The industry is highly concentrated; in 1957, Clorox and Purex accounted for almost 65% of the Nation's household liquid bleach sales, and, together with four other firms, for almost 80%. The remaining 20% was divided among over 200 small producers. Clorox had total assets of $12,000,000; only eight producers and assets in excess of $1,000,000 and very few had assets of more than $75,000.

In light of the territorial limitations on distribution, national figures do not give an accurate picture of Clorox's dominance in the various regions. Thus, Clorox's seven principal competitors did no business in New England, the mid-Atlantic States, or metropolitan New York. Clorox's share of the sales in those areas was 56%, 72% and 64% respectively. Even in regions where its principal competitors were active, Clorox maintained a dominate position. Except in metropolitan Chicago and the westcentral States Clorox accounted for at least 39%, and often a much higher percentage, of liquid bleach sales.

Since all liquid bleach is chemically identical, advertising and sales promotion are vital. In 1957 Clorox spent almost $3,700,000 on advertising, imprinting the value of its bleach in the mind of the consumer. In addition, it spent $1,700,000 for other promotional activities. The Commission found that these heavy expenditures went far to explain why Clorox maintained so high a market share despite the fact that its brand, though chemically indistinguishable from rival brands, retailed for a price equal to or, in many instances, higher than its competitors.

Procter is a large, diversified manufacturer of low-price, high-turnover household products sold through grocery, drug, and department stores. Prior to its acquisition of Clorox, it did not produce household liquid bleach. Its 1957 sales were in excess of $1,100,000,000 from which it realized profits of more than $67,000,000; its assets were over $500,000,000. Procter has been marked by rapid growth and diversification. It has successfully developed and introduced a number of new products. Its primary activity is in the general area of soaps, detergents, and cleansers; in 1957, of total domestic sales, more than one-half (over $500,000,000) were in this field. Procter was the dominant factor in this area. It accounted for 54.4% of all packaged detergent sales. The industry is heavily concentrated—Procter and its nearest competitors, Colgate-Palmolive and Lever Brothers, account for 80% of the market.

In the marketing of soaps, detergents, and cleansers, as in the marketing of household liquid bleach, advertising and sales promotion are vital. In 1957, Procter was the Nation's largest advertiser, spending more than $80,000,000 on advertising and an additional $47,000,000 on sales promotion. Due to its tremendous volume, Procter receives substantial discounts from the media. As a multiproduct producer Procter enjoys substantial advantages in advertising and sales promotion. Thus, it can and does feature several products in its promotions, reducing the printing, mailing, and other costs for each product. It also purchases network programs on behalf of several products, enabling it to give each product network exposure at a fraction of the cost per product that a firm with only one product to advertise would incur.

Prior to the acquisition, Procter was in the course of diversifying into product lines related to its basic detergentsoap-cleanser business. Liquid bleach was a distinct possibility since packaged detergents—Procter's primary product line—and liquid bleach are used complementarily in washing clothes and fabrics, and in general household cleaning. As noted by the Commission:

'Packaged detergents—Procter's most important product category—and household liquid bleach are used complementarily, not only in the washing of clothes and fabrics, but also in general household cleaning, since liquid bleach is a germicide and disinfectant as well as a whitener. From the consumer's viewpoint, then, packaged detergents and liquid bleach are closely related products. But the area of relatedness between products of Procter and of Clorox is wider. Household cleansing agents in general, like household liquid bleach, are low-cost, high-turnover household consumer goods marketed chiefly through grocery stores and pre-sold to the consumer by the manufacturer through mass advertising and sales promotions. Since products of both parties to the merger are sold to the same customers, at the same stores, and by the same merchandising methods, the possibility arises of significant integration at both the marketing and distribution levels.' 63 F.T.C. —-, —-.

The decision to acquire Clorox was the result of a study conducted by Procter's promotion department designed to determine the advisability of entering the liquid bleach industry. The initial report noted the ascendancy of liquid bleach in the large and expanding household bleach market, and recommended that Procter purchase Clorox rather than enter independently. Since a large investment would be needed to obtain a satisfactory market share, acquisition of the industry's leading firm was attractive. 'Taking over the Clorox business * * * could be a way of achieving a dominant position in the liquid bleach market quickly, which would pay out reasonably well.' 63 F.T.C., at —-. The initial report predicted that Procter's 'sales, distribution and manufacturing setup' could increase Clorox's share of the markets in areas where it was low. The final report confirmed the conclusions of the initial report and emphasized that Procter would make more effective use of Clorox's advertising budget and that the merger would facilitate advertising economies. A few months later, Procter acquired the assets of Clorox in the name of a wholly owned subsidiary, the Clorox Company, in exchange for Procter stock.

The Commission found that the acquisition might substantially lessen competition. The findings and reasoning of the Commission need be only briefly summarized. The Commission found that the substitution of Procter with its huge assets and advertising advantages for the already dominant Clorox would dissuade new entrants and discourage active competition from the firms already in the industry due to fear of retaliation by Procter. The Commission thought it relevant that retailers might be induced...