U.S. v. Franklin Elec. Co., Inc., 00-C-0334-C.

• Decision Date: 30 August 2000
• Docket Number: No. 00-C-0334-C.,00-C-0334-C.
• Parties: UNITED STATES of America, Plaintiff, v. FRANKLIN ELECTRIC CO., INC., United Dominion Industries, Limited, and United Dominion Industries, Inc., Defendants.
• Court: U.S. District Court — Western District of Wisconsin

130 F.Supp.2d 1025

UNITED STATES of America, Plaintiff, v. FRANKLIN ELECTRIC CO., INC., United Dominion Industries, Limited, and United Dominion Industries, Inc., Defendants.

No. 00-C-0334-C.

United States District Court, W.D. Wisconsin.

August 30, 2000.

Joan Farragher, U.S. Dept. of Justice, Antitrust Div., Washington, DC, Thomas J. Horton, Willie Hudgins, Joan Farragher, Mike Hammaker, Maribeth Petrizzi, Bruce Yamanaga, Aaron Hoag, Paul Moore, Chinita Sinkler, Orrick, Herrington & Sutcliffe LLP, Washington, DC, for U.S.

William D. Sullivan, Howrey, Simon, Arnold & White, Washington, DC, for Franklin Elec. Co., Inc., United Dominion Industries Ltd., United Dominion Industries, Inc.

Daniel H. Squire, Wilmer, Cutler & Pickering, Washington, DC, for Veeder-Root Co.

OPINION AND ORDER

CRABB, District Judge.

This is a civil antitrust action brought by the United States against defendants Franklin Electric Co., Inc., United Dominion Industries, Limited, and United Dominion Industries, Inc., under § 7 of the Clayton Act, 15 U.S.C. § 18, to enjoin a planned joint venture between Franklin Electric and United Dominion Industries, Inc. (For the remainder of this opinion, I will refer to defendant United Dominion Industries, Inc. as United; its parent, United Dominion Industries, Limited, plays no role in the litigation.) The government sought a temporary injunction in early June that I denied for three reasons: 1) defendants had not had adequate time to prepare to defend the motion; 2) the parties agreed they could be ready for trial on the government's motion for a permanent injunction at the end of July; and 3) defendants agreed to take no steps to accomplish the joint venture until the court reached a decision on that motion. The trial proceeded as scheduled and the parties completed their post-trial briefing on August 21.

To put this dispute into context, defendants Franklin Electric and United are the only two companies in the United States that develop, manufacture and sell submersible turbine pumps used for pumping petroleum products out of underground storage tanks at service stations. Franklin Electric does this through its subsidiary, FE Petro, and United, through its subsidiary, The Marley Company. The parties agree that the planned joint venture is a horizontal acquisition in which the new company, Petroleum Submersibles, LLC, will acquire both FE Petro and the submersible turbine pump assets of The Marley Company. They agree as well that the relevant geographic market is the United States and that the relevant product is the development, production and sale of 4" submersible turbine pumps for use in retail gasoline stations.

The government believes that the acquisition will eliminate all realistic competition for the submersible turbine pump product not only because the competitors will decrease from two to one, but also because there are no foreign manufacturers that have competitive products, the field has many barriers to entry and there are no substitute products. Defendants view the picture entirely differently. They see the planned acquisition as changing the identities of the two competitors but not reducing the competition; the net result of the acquisition will be two companies continuing to compete. This is because defendants' merger plan includes entering into a licensing agreement with a company named Environ, which is in the petroleum products business and, in defendants' eyes, ideally positioned to add a submersible turbine pump product to its lines. Under the licensing agreement, Environ will have access to all of defendant United's submersible turbine pump-related intellectual property; in addition, it will have a contractual right to purchase the United Dominion STP product and sell it under its own name for at least two years. Defendants believe that this arrangement will resolve all of the government's concerns about competition: Environ is a strong company known for innovation; the STP product will be an apt fit for its product line; the company will face no barriers to entry because it will be using a known product that has Underwriters Laboratory approval and that it can sell without infringing defendants' patents; and it will be able to offer customers a package deal on pumps, piping and dispensers, with opportunities for package discounts.

As attractive as defendants make out the licensing arrangement to be, I conclude that defendants have failed to show that there will be no change in the competitive picture if the joint venture is consummated and that plaintiff has shown the reasonable probability of substantial impairment of competition if defendants Franklin Electric and United are permitted to go forward with the venture, whether or not the venture includes the accompanying licensing and supply agreements with the potential competitor, Environ. The presumption the government starts with, which is that a merger of the only two competitors in the market is a violation of § 7, remains unrebutted. Therefore, I will grant the government's request for a permanent injunction prohibiting the acquisition.

From the evidence adduced at trial, I find the following facts.

FACTS

A. The Parties

Defendant Franklin Electric Co., Inc., is an Indiana corporation headquartered in Bluffton, Iowa. It is the world's largest manufacturer of submersible electric motors and a leading producer of engineered specialty electric motor products and electronic drives and controls. Defendant United Dominion Industries, Inc. is a wholly owned subsidiary of defendant United Dominion Industries, Limited, with its corporate headquarters in Charlotte, North Carolina. It produces flow control products, pumps, agricultural machinery, test instruments and construction products. Defendant Franklin sells submersible turbine pumps through its FE Petro subsidiary; defendant United sells its pumps through its Marley subsidiary. Marley and FE Petro are the only firms developing, manufacturing and selling submersible turbine pumps in the United States at the present time. (It may not be accurate to call FE Petro a "manufacturer" of pumps; in fact, it purchases component parts and does only the assembling in its own facility in McFarland, Wisconsin.) Marley markets its product under the Red Jacket label; FE Petro sells as FE Petro.

In early 1997, the two companies sued each other, alleging infringement or invalidity of FE Petro's patent on the variable length STP. The companies settled the litigation by a grant of cross-licenses under which each could continue its existing practice of variable length technology and Marley would sell its STP motor business to Franklin Electric and take back a long term motor supply agreement. In addition, Franklin Electric promised to help Marley sell its water pump business if it ever decided to do so and guaranteed Marley a price of [REDACTED] for the sale.

Defendant United entered the submersible turbine pump business in 1993 when it acquired The Marley Company, which had been incorporated in 1878 as Red Jacket Manufacturing Co., a manufacturer of water pumps. In 1956, Phillips Petroleum and Gulf Oil signed Red Jacket up to design and develop a submersible turbine pump for use in gas stations in the United States. At the present time, Marley designs, manufactures and sells submersible turbine pumps, mechanical and electronic leak detection devices and submersible and surface pump water systems.

FE Petro was incorporated as a subsidiary of defendant Franklin Electric in July 1988 by Charles Franklin (who is apparently no relation to anyone at Franklin Electric). Charles Franklin had been working for Marley and took early retirement. Bored in retirement, he started FE Petro after acquiring tooling and parts from Gilbarco, a company that had manufactured submersible turbine pumps but had abandoned the business, and obtaining a commitment from defendant Franklin Electric to supply STP motors. Franklin designed a manifold and pump and began production, outsourcing the manufacture of the major components. The company sold its first four units in December 1989. Within three years it had made a $1 million sale to a major oil company.

In November 1992, FE Petro acquired the STP assets of Tokheim Corporation. At the time of the acquisition, Tokheim's market share was 10% to 12% of the STP market.

B. The Product

An STP has three components: a motor, a pumping unit and a discharge head. The pump is inserted into an underground storage tank through an opening just large enough for the motor and the 4" diameter pumping unit. The motor sits a few inches off the bottom of the tank; the distribution head sits on top of the tank. It contains the manifold and connects to the underground network of pipes running to the dispensers. In addition it contains the electrical supply that provides power to the pumping mechanism. STPs come in a variety of motor horsepowers and are often equipped with variable speed and variable length features. The variable speed drive allows the pump to maintain a constant flow no matter how many dispensers are operating at any particular time. The telescoping shaft allows the STP to be adjusted to fit a variety of underground storage tanks and service station configurations. Both Marley and FE Petro produce 4 inch and 6 inch STPs; both produce STPs in 1/3, ¾, 1.5, 2, 3 and 5 horsepower sizes.

Submersible turbine pumps are considered a significant improvement over the suction pumps they have replaced primarily because the suction pumps are located inside each dispenser and submersibles are located within the underground storage tank. A gas station might have 6 banks of dispensers drawing from two or three storage tanks. (Stations that blend their medium grade gas at the dispenser from a combination of regular and premium need only two tanks.) With submersible pumps, a gas station would need only two or three pumps, rather than the 18 suction pumps that would be...