TRW, Inc. v. F.T.C.

• Decision Date: 08 June 1981
• Docket Number: No. 79-7209,79-7209
• Citation: 647 F.2d 942
• Parties: 1981-1 Trade Cases 64,077 TRW, INC., and Horace A. Shepard, Petitioners, v. The FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 942

647 F.2d 942

1981-1 Trade Cases 64,077

TRW, INC., and Horace A. Shepard, Petitioners, v. The FEDERAL TRADE COMMISSION, Respondent.

No. 79-7209.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 9, 1981.

Decided June 8, 1981.

Robert H. Rawson, Jr., Jones, Day, Reavis & Pogue, Cleveland, Ohio, for petitioners.

Charles David Nelson, Washington, D. C., for respondent.

On Petition for Review of an Order of the Federal Trade Commission.

Before TRASK and SNEED, Circuit Judges, and THOMPSON ^*, District Judge.

SNEED, Circuit Judge:

TRW, Inc., and Horace A. Shepard petition for review of a final order of the Federal Trade Commission requiring them to cease and desist from violating section 8 of the Clayton Act, 15 U.S.C. § 19, proscribing interlocking directorates. Our jurisdiction is authorized by section 11(c) of the Clayton Act, 15 U.S.C. § 21(c). We affirm the Commission's finding of a section 8 violation as to both petitioners and reject the various defenses of the petitioners. However, because the Commission erred in assessing the need for prospective relief, we set aside the cease and desist orders.

I. STATEMENT OF THE CASE

Horace Shepard has been associated with TRW since 1951 and served as chief executive officer from 1969 to 1977. He joined TRW's board in 1957 and is eligible to remain on the board until 1984 on the date of his seventy-second birthday. On March 20, 1971, Shepard also was elected to the board of the Addressograph-Multigraph Corp. (A-M). He served on the A-M board until November 6, 1975. During this period Shepard maintained his position as a TRW director.

On June 17, 1976, the Federal Trade Commission voted to issue a complaint against TRW, Shepard, and A-M, charging them with violations of section 8 of the Clayton Act and section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. § 45 (a)(1). ¹ Section 8 provides, in relevant part:

No person at the same time shall be a director in any two or more corporations, any one of which has capital, surplus, and undivided profits aggregating more than $1,000,000, engaged in whole or in part in commerce, if such corporations are or shall have been theretofore, by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the provisions of any of the antitrust laws.

The complaint was referred to an administrative law judge (ALJ), who found that Shepard's simultaneous membership on the boards of TRW and A-M during the period January 1, 1973, to November 6, 1975, violated section 8. Prior to the ALJ's decision, A-M had removed itself from the case by entering into a consent order with the Commission. The ALJ issued a cease and desist order against Shepard, but declined to issue one against TRW, principally on the ground that the company had taken no active role in sanctioning Shepard's assumption of the A-M directorship. ² On appeal the Commission affirmed the issuance of an order against Shepard, but reversed the ALJ and also issued an order against TRW, enjoining it from further violations of section 8 and requiring it to file annual compliance reports. In re TRW, Inc., 93 F.T.C. 325 (1979). Both Shepard and TRW have petitioned this court for review. The central issue, and the one to which we turn initially, is whether the Commission's finding that TRW and A-M were "competitors" for purposes of section 8 is correct.

II.

THE MEANING Of "COMPETITORS"

Section 8 of the Clayton Act proscribes interlocking directorates only between corporations that are "competitors". ³ Petitioners argue that TRW and A-M have never been actual competitors and that the Commission at best found the companies to be potential competitors, a finding the petitioners argue is insufficient to support a

                section 8 violation.  The respondent maintains that "the Commission made no finding concerning potential competition but rather based its decision upon record evidence showing actual competition between TRW and A-M."  We believe that the respondent correctly characterizes the Commission's opinion.  Therefore, we confront two questions: (1) did the Commission apply the correct legal standard for determining actual competition; 4  and (2) if so, is the Commission's finding of actual competition supported by substantial evidence.  5  See 15 U.S.C. § 21(c).  We hold that both questions should be answered affirmatively.  TRW and A-M were actual competitors for purposes of section 8
                

A. The Standard for Determining Competition

The meaning of "competitors" for purposes of section 8 is a question of first impression in this court. ⁶ No reported decision of which we are aware has directly addressed the question, primarily because competition has been stipulated in the few reported cases. In its opinion the Commission never expressly formulated a "test" for determining whether two corporations are competitors. However, it did emphasize the following factors: (1) the products marketed by TRW and A-M performed the same generic functions (point-of-sale credit authorization and electronic funds transfer), 93 F.T.C. at 380-81; (2) the two companies "vied for the business of the same purchasers," id. at 381; (3) they "attempt(ed) to convince" the same purchasers that their products best suited the purchasers' specific needs, id. at 381-82; and (4) they attempted or offered to modify their existing equipment to meet purchaser needs, id. at 383. The Commission acknowledged, however, that TRW and A-M did not make common sales to the same purchasers. Thus, in the eyes of the Commission, "competitors" are companies that vie for the business of the same prospective purchasers, even if the products they offer, unless modified, are sufficiently dissimilar to preclude a single purchaser from having a choice of a suitable product from each.

The petitioners argue that substantially greater similarity between the competing products is required. "Competitors" make common sales to the same purchaser or class of purchasers; their products generally meet similar needs and principally differ only in price or quality. Accordingly, they argue that the question should be judged by the standards of cross-elasticity of demand and reasonable interchangeability of use commonly employed in defining markets for purposes of the Sherman Act and Section 7 of the Clayton Act. See, e. g., Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962); Twin City SportService, Inc. v. Charles O. Finley & Co., 512 F.2d 1264, 1271 (9th Cir. 1975).

Statutory language should be construed in accordance with its underlying purpose. The purpose of section 8 was "to nip in the bud incipient antitrust violations First, market definition for Sherman Act and Clayton Act, section 7, purposes, for which these tests were designed, is used to establish "the locus of competition, within which the anticompetitive effects" of a merger or practice are to be judged. Brown Shoe Co., supra, 370 U.S. at 324, 82 S.Ct. at 1523. See Kaplan v. Burroughs Corp., 611 F.2d 286, 291-92 (9th Cir. 1979), cert. denied, 447 U.S. 924, 100 S.Ct. 3016, 65 L.Ed.2d 1116 (1980). Section 8, on the other hand, does not require that such a "locus" be established. Only two alleged "competitors" are involved and proof that the interlock has an actual anticompetitive effect is not required. Accord, Protectoseal Co. v. Barancik, 484 F.2d 585, 589 (7th Cir. 1973).

by removing the opportunity or temptation for such violations through interlocking directorates." United States v. Crocker National Corp., 422 F.Supp. 686, 703 (N.D.Cal. 1976), appeal docketed, No. 76-3614 (9th Cir. Dec. 10, 1976). See United States v. Sears, Roebuck & Co., 111 F.Supp. 614, 616 (S.D.N.Y.1953). The Commission is right in asserting that this purpose would not be well served by requiring proof of high cross-elasticity of demand between competing products or low-friction interchangeability of use. Two reasons support this conclusion.

Second, the petitioner's recommended standard is too restrictive. To further the purpose of Section 8 there should be reliance not only on the degree of actual interchangeability of use between the products of alleged competitors, but also on evidence concerning (1) the extent to which the industry and its customers recognize the products as separate or competing; (2) the extent to which production techniques for the products are similar; and (3) the extent to which the products can be said to have distinctive customers. E. g., Equifax, Inc. v. FTC, 618 F.2d 63, 66-67 (9th Cir. 1980); Kaplan, supra, 611 F.2d at 292; Greyhound Computer Corp. v. IBM, 559 F.2d 488, 493 (9th Cir. 1977), cert. denied, 434 U.S. 1040, 98 S.Ct. 782, 54 L.Ed.2d 790 (1978); Twin City SportService, supra, 512 F.2d at 1271. Only by doing so can we be sure our criteria "are not to be used to obscure competition but to 'recognize competition where, in fact, competition exists.' " United States v. Continental Can Co., 378 U.S. 441, 453, 84 S.Ct. 1738, 1745, 12 L.Ed.2d 953 (1964) (quoting Brown Shoe, supra, 370 U.S. at 326, 82 S.Ct. at 1524).

Our approach may render more difficult the process of screening potential directors for compliance with section 8. The alternative, however, entails infidelity to the purposes of the statute. Moreover, while the tests of cross-elasticity of demand and interchangeability of use may yield realistic results in well-established industries, they are much less useful in situations such as this case presents. ⁷ The Commission, we conclude, employed the proper legal standard for determining competition.

B. The Evidence

Turning to whether there is substantial evidence to support the Commission's findings, the products and services of TRW and A-M relevant to this litigation are set forth in the Appendix to this opinion. The Commission found that TRW and A-M were competitors in the...