United States v. General Dynamics Corporation 8212 402

Decision Date19 March 1974
Docket NumberNo. 72,72
PartiesUNITED STATES, Appellant, v. GENERAL DYNAMICS CORPORATION et al. —402
CourtU.S. Supreme Court
Syllabus

Material Service Corp., a deep-mining coal producer, and its successor, appellee General Dynamics Corp., acquired, through stock purchases, control of appellee United Electric Coal Companies, a strip-mining coal producer. The Government brought suit alleging that this acquisition violated § 7 of the Clayton Act. The District Court found no violation on the ground, inter alia, that the Government's evidence—consisting principally of past production statistics showing that within certain geographic markets the coal industry was concentrated among a small number of large producers, that this concentration was increasing, and that the acquisition here would materially enlarge the acquiring company's market share and thereby contribute to the concentration trend—did not support the Government's contention that the acquisition substantially lessened competition in the production and sale of coal in either or both of two specified geographic markets. This conclusion was primarily based on a determination that United Electric's coal reserves were so low that its potential to compete with other producers in the future was far weaker than the aggreatte was far weaker than the aggregate Government might otherwise have indicated, virtually all of United Electric's proved reserves being either depleted or already committed by long-term contracts with large customers so that its power to affect the price of coal was severely limited and steadily diminishing. Held:

1. While the Government's statistical showing might have been sufficient to support a finding of 'undue concentration' in the absence of other considerations, the District Court was justified in finding that other pertinent factors affecting the coal industry and appellees' business mandated a conclusion that no substantial lessening of competition occurred or was threatened by the acquisition. Ample evidence showed that United Electric does not have sufficient reserves, which are a key factor in measuring a coal producer's market strength, to make it a significant competitive force. Thus, in terms of probable future ability to compete, rather than in terms of past production on which the Government relied, the court was warranted in concluding that the merger did not violate § 7 of the Act. Pp. 494—504.

2. The District Court was justified in considering postacquisition evidence relating to changes in the patterns and structure of the coal industry and in United Electric's reserve situation, since (unlike evidence showing only that no lessening of competition has yet occurred) the demonstration of weak coal resources necessarily implied that United Electric was not merely disinclined but unable to compete effectively for future contracts, such evidence going directly to the question whether future lessening of competition was probable. Pp. 504—506.

3. United Electric's weak reserves position, rather than establishing a 'failing company' defense by showing that the company would have gone out of business but for the merger, went to the heart of the Government's statistical prima facie case and substantiated the District Court's conclusion that United Electric, even if it remained in the market, did not have sufficient reserves to compete effectively for long-term contracts, and therefore appellees' failure to meet the prerequisites of a failing-company defense did not detract from the validity of the District Court's analysis. Pp. 506—508.

4. Under the 'clearly erroneous' standard of Fed.Rule Civ.Proc. 52(a), which governs as fully on direct appeal to this Court as on review by a court of appeals, the District Court's findings and conclusions are supported by the evidence and are not clearly erroneous. P. 508.

5. The District Court found new strip reserves unavailable, and the mere possibility that United Electric could some day acquire expertise to mine deep reserves does not depreciate the validity of the conclusion that United Electric at the time of trial did not have the power to compete effectively for long-term contracts, nor does it give the production statistics relied on by the Government more significance than the District Court ascribed to them. Pp. 508—510.

D.C., 341 F.Supp. 534, affirmed.

Daniel M. Friedman, Washington, D.C., for appellant.

Reuben L. Hedlund, Chicago, Ill., for appellees.

Mr. Justice STEWART delivered the opinion of the Court.

On September 22, 1967, the Government commenced this suit in the United States District Court for the Northern District of Illinois, challenging as violative of § 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U.S.C. § 18, the acquisition of the stock of United Electric Coal Companies by Material Service Corp. and its successor, General Dynamics Corp. After lengthy discovery proceedings, a trial was held from March 30 to April 22, 1970, and on April 13, 1972, the District Court issued an opinion and judgment finding no violation of the Clayton Act. 341 F.Supp. 534. The Government appealed directly to this Court pursuant to the Expediting Act, 15 U.S.C. § 29, and we noted probable jurisdiction. 409 U.S. 1058, 93 S.Ct. 553, 34 L.Ed.2d 510.

I

At the time of the acquisition involved here, Material Service Corp. was a large midwest producer and supplier of building materials, concrete, limestone, and coal. All of its coal production was from deep-shaft mines operated by it or its affiliate, appellee Freeman Coal Mining Corp., and production from these operations amounted to 6.9 million tons of coal in 1959 and 8.4 million tons in 1967. In 1954, Material Service began to acquire the stock of United Electric Coal Companies. United Electric at all relevant times operated only strip or open-pit mines in Illinois and Kentucky; at the time of trial in 1970 a number of its mines had closed and its operations had been reduced to four mines in Illinois and none in Kentucky.1 In 1959, it produced 3.6 million tons of coal, and by 1967, it had increased this output to 5.7 million tons. Material Service's purchase of United Electric stock continued until 1959. At this point Material's holdings amounted to more than 34% of United Electric's outstanding shares and—all parties are now agreed on this point—Material had effective control of United Electric. The president of Freeman was elected chairman of United Electric's executive committee, and other changes in the corporate structure of United Electric were made at the behest of Material Service.

Some months after this takeover, Material Service was itself acquired by the appellee General Dynamics Corp. General Dynamics is a large diversified corporation, much of its revenues coming from sales of aircraft, communications, and marine products to Government agencies. The trial court found that its purchase of Material Service was part of a broad diversification program aimed at expanding General Dynamics into commercial, nondefense business. As a result of the purchase of Material Service, and through it, of Freeman and United Electric, General Dynamics became the Nation's fifth largest commercial coal producer. During the early 1960's General Dynamics increased its equity in United Electric by direct purchases of United Electric stock, and by 1966 it held or controlled 66.15% of United Electric's outstanding shares. In September 1966 the board of directors of General Dynamics authorized a tender offer to holders of the remaining United Electric stock. This offer was successful, and United Electric shortly thereafter became a wholly owned subsidiary of General Dynamics.

The thrust of the Government's complaint was that the acquisition of United Electric by Material Service in 1959 violated § 7 of the Clayton Act2 because the takeover substantially lessened competition in the production and sale of coal in either or both of two geographic markets. It contended that a relevant 'section of the country' within the meaning of § 7 was, alternatively, the State of Illinois or the Eastern Interior Coal Province Sales Area, the latter being one of four major coal distribution areas recognized by the coal industry and comprising Illinois and Indiana, and parts of Kentucky, Tennessee, Iowa, Minnesota, Wisconsin, and Missouri.3 At trial controversy focused on three basic issues: the propriety of coal as a 'line of commerce,' the definition of Illinois or the Eastern Interior Coal Province Sales Area as a relevant 'section of the country,' and the probability of a lessening of competition within these or any other product and geographic markets resulting from the acquisition. The District Court decided against the Government on each of these issues.

As to the relevant product market, the court found that coal faced strong and direct competition from other sources of energy such as oil, natural gas, nuclear energy, and geothermal power which created a cross-elasticity of demand among those various fuels. As a result, it concluded that coal, by itself, was not a permissible product market and that the 'energy market' was the sole 'line of commerce' in which anticompetitive effects could properly be canvassed.

Similarly, the District Court rejected the Government's proposed geographic markets on the ground that they were 'based essentially on past and present production statistics and do not relate to actual coal consumption patterns.' 341 F.Supp., at 556. The court found that a realistic geographic market should be defined in terms of transportation arteries and freight charges that determine the cost of delivered coal to purchasers and thus the competitive position of various coal producers. In particular, it found that freight rate districts, designated by the Interstate Commerce Commission for determining rail transportation rates, of which there were four in the area served by the appellee...

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