Purex Corp. v. Procter & Gamble Corp.

• Decision Date: 11 May 1979
• Docket Number: No. 76-3205,76-3205
• Citation: 596 F.2d 881
• Parties: 1979-1 Trade Cases 62,675 PUREX CORPORATION, Plaintiff-Appellant, v. The PROCTER & GAMBLE COMPANY, and the Clorox Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 881

596 F.2d 881

1979-1 Trade Cases 62,675

PUREX CORPORATION, Plaintiff-Appellant, v. The PROCTER & GAMBLE COMPANY, and the Clorox Company Defendants-Appellees.

No. 76-3205.

United States Court of Appeals Ninth Circuit.

May 11, 1979.

John L. Endicott, Los Angeles, Cal., for plaintiff-appellant.

Robert K. Wrede, Los Angeles, Cal., Daniel M. Gribbon, Washington, D. C., Powell McHenry, Cincinnati, Ohio, for defendants-appellees.

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

Before HUFSTEDLER and KILKENNY, Circuit Judges, and ENRIGHT, ^* District Judge.

HUFSTEDLER, Circuit Judge:

Purex Corporation ("Purex") appeals from a judgment in favor of The Procter & Gamble Company ("Procter") in an action by Purex seeking damages under Section 4 of the Clayton Act (15 U.S.C. § 15) for claimed violations of Section 7 of the Clayton Act (15 U.S.C. § 18) and Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2). We vacate the judgment and remand to the district court for further consideration in the light of Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. (1977) 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d 701; Greyhound Computer Corp. v. International Business Machines Corp. (9th Cir. 1977) 559 F.2d 488, and for making new findings of fact following reconsideration of the controlling legal standards.

This litigation was spawned by the acquisition of Clorox Chemical Company ("Clorox") by Procter on August 1, 1957. At that time, Clorox was the nation's leading producer of liquid bleach and Procter was the nation's leading manufacturer of soaps, detergents, and other high-turnover household products. On September 20, 1957, the Federal Trade Commission ("FTC") challenged Procter's acquisition of Clorox on the grounds that it might substantially lessen competition or tend to create a monopoly in liquid bleach markets in violation of Section 7 of the Clayton Act. The FTC subsequently held that the acquisition violated Section 7, and Procter was ordered to divest itself of Clorox (63 F.T.C. 1465 (1963)). On April 11, 1967, the Supreme Court, reversing a decision of the Sixth Circuit (Procter & Gamble Co. v. FTC (6th Cir. 1966) 358 F.2d 74), affirmed the FTC order (FTC v. Procter & Gamble Co. (1967) 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303). Divestiture was completed on January 2, 1969.

This case was filed on October 23, 1967. Purex, Clorox's closest competitor in the liquid bleach field, sued Procter pursuant to Section 4 of the Clayton Act, authorizing treble damages for anyone injured "by reason of anything forbidden in the antitrust laws." Purex claimed that its liquid bleach business had been damaged by the illegal acquisition and by an alleged conspiracy to restrain trade and to obtain a monopoly in violation of Sections 1 and 2 of the Sherman Act. After a court trial, judgment was for Procter. (Purex Corp. v. Procter & Gamble Co. (C.D.Cal.1976) 419 F.Supp. 931.) ¹

Procter's acquisition of Clorox was a violation of Section 7 of the Clayton Act because it could substantially lessen competition or tend to create a monopoly in the liquid bleach market. The Supreme Court explained why Procter's acquisition of Clorox might substantially lessen competition and tend to create a monopoly. The Court said that the relevant line of commerce was household liquid bleach, a distinctive product with no close substitutes. Because all liquid bleach is chemically identical, advertising and sales promotion are vital to successful marketing of the product. Liquid bleach cannot be shipped economically more than three hundred miles from its place of manufacture because of high shipping costs and low sales prices. Thus, the relevant geographic market for liquid bleach includes a series of regional markets, as well as the national market.

When Procter acquired Clorox, the liquid bleach industry was highly concentrated. Six firms accounted for almost 80 percent of national sales. Clorox, the only firm selling liquid bleach on a nationwide basis, was the dominant firm in the industry with 48.8 percent of all industry sales. Purex, Clorox's closest competitor, distributed liquid bleach in less than half of the national market. Purex accounted for 15.7 percent of industry sales at the time of acquisition. In certain regional markets, Clorox's "position approached monopoly proportions." (386 U.S. at 578, 87 S.Ct. 1224.) Clorox's seven principal competitors did no business in metropolitan New York, New England, or the mid-Atlantic states, where Clorox's market shares were 64 percent, 56 percent, and 72 percent, respectively.

The Supreme Court accepted the FTC's characterization of the acquisition of Clorox by Procter as a "product-extension merger" because the acquiring firm had not been a participant in the liquid bleach industry. Although Procter did not produce liquid bleach, it was the nation's leading producer of soaps, detergents, and other high-turnover household products when it acquired Clorox. Procter was the nation's largest advertiser and the most likely potential entrant into the liquid bleach industry.

Procter's acquisition was fraught with anti-competitive effects, the Supreme Court said, because:

"(1) the substitution of the powerful acquiring firm for the smaller, but already dominant, firm may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing; (2) the acquisition eliminates the potential competition of the acquiring firm."

(386 U.S. at 578, 87 S.Ct. at 1230.)

The Court thought it was reasonable to assume that the smaller producers of liquid bleach "would become more cautious in competing due to their fear of retaliation by Procter." (386 U.S. at 578, 87 S.Ct. at 1230.) Procter's enormous financial resources, its access to substantial advertising discounts, and its sophisticated marketing skill, could give Clorox competitive advantages and an enhanced capacity "to meet the short-term threat of a new entrant" in any of the markets it dominated. (386 U.S. at 579, 87 S.Ct. at 1230. Moreover, the Court believed that the elimination of the threat of entry by Procter might enable Clorox to exercise greater market power throughout the liquid bleach industry. (386 U.S. at 580-81, 87 S.Ct. 1224.) The fact that the merger "might result in economies" was no defense, the Court explained, because Congress had "struck the balance in favor of protecting competition." (386 U.S. at 580, 87 S.Ct. at 1231.)

I

Purex sought to prove that Procter's acquisition of Clorox actually produced the kind of anti-competitive consequences that the Supreme Court feared. Purex charged that the acquisition had reduced competition in the industry because Clorox acquired access to the vast marketing resources of Proctor, "including advertising discounts, preferred media positions, market research, packaging capability, and experienced personnel." Purex claimed that Procter and Clorox engaged in below-cost pricing, when Purex tested the feasibility of eastern expansion by attempting to market liquid bleach in Erie, Pennsylvania. Purex also alleged that Procter and Clorox implemented a comprehensive plan to direct marketing expenditures to weaken Purex in its areas of strength. In addition, Purex claimed that Procter and Clorox used a number of allegedly unfair commercial practices, including false advertising, bleach boarding, and participating in a cooperative marketing program with washing machine companies.

As we read the district court's opinion, the district court found that almost all of the specific instances of claimed anti-competitive conduct that Purex alleged had actually occurred. (The district court did not make separate findings of fact and conclusions of law.) The district court nevertheless concluded that "Clorox under Procter was not anticompetitive," because "Clorox did nothing after the merger that it could not readily have done before the merger," and "the acts complained of amounted to no more than the vigorous competition that one would expect among rivals in the marketplace." (419 F.Supp. at 934, 937.) ²

The district court did not find that the merger had no effect on Clorox's competitive position in the market. To the contrary, the district court found that Clorox obtained valuable managerial resources, technical services, and advertising discounts through Procter. It also found that the merger increased Clorox's efficiency, and therefore, its profits. Although it engaged in below-cost pricing after the acquisition, that conduct was merely "localized and temporary."

The pivot of the district court's determination that no forbidden anti-competitive results occurred was its finding that Clorox could have engaged in the same conduct with antitrust impunity before the merger took place. That assumption rests on a misreading of the Supreme Court's opinion in the Procter & Gamble case. In the Section 7-world, Davids can engage in many kinds of conduct in the marketplace that are forbidden to Goliaths.

Clorox's position was significantly different before and after the acquisition. After the merger, even relatively innocuous competitive acts could become actionable if the impact of those acts reduced competition in the industry by raising entry barriers and by dissuading smaller firms from aggressive competition. The below-cost pricing, for example, could serve as a basis for damages even if it were both localized and temporary, if that conduct were related to an enhanced capacity "to meet the short-term threat of a new entrant" in any of the markets dominated after the merger. (386 U.S. at 579, 87 S.Ct. at 1230.)

A failure fully to appreciate the standards against which post-illegal merger conduct must be judged is surely understandable because, at the time the district court decided this case, it did not have the benefit of Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., supra, or Greyhound...