United States Steel Corporation v. FTC

• Decision Date: 06 May 1970
• Docket Number: No. 19423.,19423.
• Citation: 426 F.2d 592
• Parties: UNITED STATES STEEL CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

426 F.2d 592 (1970)

UNITED STATES STEEL CORPORATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.

No. 19423.

United States Court of Appeals, Sixth Circuit.

May 6, 1970.

Edgar E. Barton, New York City, (White & Case, New York City, on the brief), for petitioner. Laura Banfield, New York City, of counsel.

Jerold D. Cummins, Federal Trade Commission, Washington, D. C. (John V. Buffington, Gen. Counsel, J. B. Truly, Asst. Gen. Counsel, Frederick H. Mayer, Attys., Federal Trade Commission, Washington, D. C., on the brief), for respondent.

Before PHILLIPS, Chief Judge, CELEBREZZE, Circuit Judge, and O'SULLIVAN, Senior Circuit Judge.

CELEBREZZE, Circuit Judge.

This is a proceeding to review an order of the Federal Trade Commission "Commission" requiring the United States Steel Corporation "U.S. Steel" to divest itself of the assets of Certified Industries "Certified". The Commission ordered divestiture based upon its finding that the acquisition of Certified — the largest non-integrated customer of portland cement among concrete producers in the New York Metropolitan Area — by the U.S. Steel — the largest non-integrated supplier of portland cement in the same metropolitan area — violated Section 7 of the Clayton Act, as amended. 15 U.S.C. § 18 (1964).

I. THE FACTS AND PROCEEDING BELOW

U.S. Steel acquired Certified on April 30, 1964. On January 22, 1965, the Commission issued a complaint alleging that "the effect of the acquisition * * * both in itself and by aggravating the present industry trends towards vertical integration and concentration between suppliers and consumers of portland cement may be substantially to lessen competition * * * in the production and sale of portland cement and ready-mixed concrete in the New York City metropolitan area * * * and in adjoining markets." In its answer, U.S. Steel denied that the acquisition had the requisite anti-competitive effects for a violation of Section 7. U.S. Steel further alleged that the acquisition was immunized from attack under Section 7 by the "failing company" doctrine of International Shoe Co. v. Federal Trade Commission, 280 U.S. 291, 50 S.Ct. 89, 74 L.Ed. 431 (1930).

After hearings were held, the hearing examiner issued a decision dismissing the complaint. The Commission, on appeal, overruled the initial order of the hearing examiner. The Commission found: (1) that the effect of the acquisition may be substantially to lessen competition in a relevant area of competition; and (2) that the failing condition of the company did not immunize its acquisition from the scope of Section 7 prohibitions as there was no overriding interest in preserving Certified from possible bankruptcy. Each of these conclusions is challenged in this action

U.S. Steel, The Acquiring Company.

U.S. Steel was the nation's seventh larg-industrial corporation in 1965, with sales est industrial corporation in 1965, with sales in excess of $4.0 billion. It was the country's largest manufacturer of steel and a major integrated producer of raw materials for the production of iron and steel products and building materials.

Through its Universal Atlas Cement Division "U.A.C.", U.S. Steel is one of the nation's four largest portland cement manufacturers. It operates 11 cement plants, has an annual capacity of over 30 million barrels, and serves 37 states. U.A.C. serves the New York City metropolitan area "NYMA" from plants located at Hudson, New York and North-hampton, Pennsylvania.

Certified, The Acquired Company.

Certified, at the time of the acquisition and for a number of years prior thereto, produced and sold ready-mixed concrete and mineral aggregates. At the close of 1963, four months prior to the acquisition, Certified had nearly $9 million in assets and was generating sales at an annual rate of approximately $12 million. During that same year Certified made substantial purchases of portland cement from sources located outside the State of New York. In that same time period Certified's subsidiary, Northern Light-Weight Aggregates, Inc., made shipments of expanded shale valued at $205,757, to destinations outside of the State of New York.

Starting in 1953 as a small, one-plant, four-truck, ready-mixed concrete company doing business in Suffolk County, Certified rapidly expanded. By 1961, it had acquired the assets of a number of other ready-mixed concrete companies, thereby expanding its sales area throughout Long Island and New York City proper.

At the time of the acquisition it was one of the four largest ready-mixed concrete producers and the second largest consumer of portland cement among the concrete producers in the New York metropolitan area. It owned several pits for the extraction of sand and gravel, a quarry for the extraction of lightweight aggregates, and 181 trucks, including 117 ready-mix trucks.

The Background of the Acquisition.

In 1961, Certified completed two major acquisitions. These acquisitions placed heavy capital requirements on Certified's already-thin capital structure. In the fall of 1961, Certified negotiated extended credit arrangements with four of its suppliers, in an aggregate amount of $350,000. In January, 1962, Certified was issued a 12-month interest-bearing note for $150,000 by U.A.C. on the purchases of cement which it had made from U.A.C. In December, 1962, Certified notified U.S. Steel that it would have difficulty paying off the U.A.C. note. U.S. Steel recommended to Certified that it consider long-term financing and arranged a meeting between the President of Certified and officials of Bankers Trust Company of New York, in which U.S. Steel was a substantial depositor. Thereafter, Certified borrowed up to four million dollars from Bankers Trust on a loan secured by Certified's assets and guaranteed by a "notes purchase agreement" from U.S. Steel.

This additional influx of funds did not rescue the troubled Certified.¹ Nor was Certified able to reestablish its financial security through a favorable sell-out.² In November, 1963, Certified turned towards U.S. Steel as a merging partner.

After some discussions, U.S. Steel purchased all Certified's assets, assumed all its liabilities, and paid Certified shareholders slightly over $1 million for all its shares. Subsequent to the acquisition, Certified's business has operated as a division of U.S. Steel with Robert A. Ragio, Treasurer of U.A.C. (U.S. Steel's cement-producing subsidiary) as President of the Certified Division.

While Certified had frequently purchased U.A.C.'s cement prior to its January 1962 note, Certified's purchases of U.A.C. cement intensified as the vertical financial arrangements between the two companies increased, as the following figures indicate:

                          Certified's    Certified's
                           Cement           total        Proportion
                          Purchases        Cement         of total
                          from UAC        purchase         cement
                Year       (Bbl.)          (Bbl.)         purchases
                1961         36,675        451,989            8.4%
                1962        123,731        823,352           14.9%
                1963        567,470      1,054,072           53.8%
                1964        701,151        793,479           88.4%
                

Since the acquisition took place in March 1964, it may be inferred that most, if not all, of Certified's purchases from suppliers other than U.A.C. took place prior to the acquisition. In the post-acquisition period Certified has purchased substantially all of its cement requirements from U.A.C.

At no point during the years under discussion was there a formal agreement by Certified to purchase a specified percentage of its cement requirements from U.A.C. There is unrebutted evidence, however, that such proposals were submitted to Certified by U.A.C. and some minimum form of commitment was tacitly understood by the parties. U.S. Steel's purpose in extending its credit, its guarantees, and, ultimately its funds to purchase Certified was revealed in a memorandum from its Executive Vice President to its Board of Directors:

"If Certified ceases operations Universal Atlas Cement would suffer an irreplaceable loss in its present market for its Hudson product and be seriously embarrassed commercially in one of its major markets during the last sixty years."

The Relevant Markets. Section 7 of the Clayton Act does not outlaw every vertical acquisition of stock or assets whose effect "may be substantially to lessen competition," but rather it proscribes only those arrangements which have that requisite effect "in any line of commerce in any section of the country." As the United States Supreme Court observed in Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962) (applying the Clayton Act to a vertical merger),

"The `area of effective competition\' must be determined by reference to a product market (the `line of commerce\') and a geographic market (the `section of the country\')." 370 U.S. at 324, 82 S.Ct. at 1523.

Products Markets. The Commission found that "portland cement"³ and "ready-mixed concrete,"⁴ defined as stipulated by the parties, are appropriate product markets for purposes of this proceeding and are relevant lines of commerce within the meaning of Section 7 of the Clayton Act.

The Geographic Markets. Although relevant geographic markets are not "susceptible to a (precise) `metes and bounds' definition," the appropriate market is characterized as "the area in which the seller operates and to which the purchaser can practically turn for supplies." Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327, 331, 81 S.Ct. 623, 628, 5 L.Ed.2d 580 (1960). Since the primary impact of the instant acquisition falls upon the customer-supplier relationship between Certified — which operates almost exclusively in the NYMA — and its potential suppliers — to whom Certified can practically turn for portland cement, the geographic market can be no broader than the area in which Certified's potential suppliers can turn if they lose...