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Federal Trade Commission v. H.J. Heinz

October 18, 2000

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
H. J. HEINZ, COMPANY, ET AL., DEFENDANTS.



The opinion of the court was delivered by: James Robertson United States District Judge

OPINION

The Federal Trade Commission seeks a preliminary injunction pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin the proposed merger of the baby food divisions of H.J. Heinz Company and Milnot Holding Corporation ("Beech-Nut"). The injunction is sought to preserve the status quo until full-scale administrative proceedings can determine whether the effect of the proposed merger "may be substantially to lessen competition" in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The matter was the subject of a five-day evidentiary hearing and has been fully briefed and argued. This Opinion sets forth the factual findings and conclusions of law that form the basis for an order, issued today, denying the Commission's motion.

I. BACKGROUND

A. Market overview

Four million infants in the United States consume 80 million cases of jarred baby food annually, representing a domestic market of $865 million to $1 billion. See DX 617-0002; DX 38; DX 1-0012; PX 336 at 565; DX 435 at 52. There are only three major manufacturers and distributors of jarred baby food in the United States: Heinz, Beech-Nut, and Gerber Products Company. See PX 782 at 1-2. Gerber is by far the largest domestic manufacturer. It enjoys, and has enjoyed for some 40 years, a dominant market share that has recently grown to between 65 and 70 percent. See PX 781; DX 617, App. B. The Gerber market share is now 65 percent, the Heinz share 17.4 percent, and the Beech-Nut share 15.4 percent. See DX 617, App. B.

Heinz manufactures and distributes a variety of food products worldwide, and, despite its relatively low domestic market share, is the largest producer of baby food in the world. Heinz's domestic baby food products are manufactured at its Pittsburgh, Pennsylvania plant, which was recently updated at a cost of $120 million. The Pittsburgh plant now operates at 40 percent of its production capacity and produces 12 million cases of baby food annually.

Before its purchase by Milnot Holding Corporation from Ralcorp Holdings in September 1998, Beech-Nut had been owned by seven different companies. See DX 435 at 23. *fn1 Beech-Nut's annual sales of baby food are $138.7 million, of which 72 percent is jarred baby food. Beech-Nut manufactures all of its baby food in Canajoharie, New York, see Milnot Admis. ¶13, at a manufacturing plant that was built in 1907 and began manufacturing baby food in 1931. See Tr. 858. The plant is not technologically current. Beech-Nut submitted proof that it would be prohibitively expensive to make further improvements in the Canajoharie plant, see DX 159; DX 641 at 25; that management has realized all the cost-savings that can be achieved in Beech-Nut's production and distribution, see DX 641-0023; and that, although Beech-Nut is currently profitable, its business is stagnant or declining without any realistic prospect of change. The FTC has not disputed this evidence.

Heinz and Beech-Nut both maintain that, despite all their efforts, neither is able to build market share, either against one another or against Gerber. See Tr. 440; 442-43; 859. Gerber, on the other hand, does not aggressively pursue market share, because, given its already dominant position in the market, striving for any further gain in market share "becomes so costly you get no return out of it." See DX 707-0001.

As the dominant firm in the market, Gerber is generally the first company to increase its price. Its prices have increased every year, above levels explainable by the rate of inflation. *fn2 Heinz has tended to follow Gerber's prices, but it markets its baby food as a "value brand," with a shelf price several cents below Gerber's. See PX 273 at 569; PX 415 at 153; DX 288-2109A, 0661A, 3380A. Gerber has expressed no desire to compete in the "value priced" sector of the market and has in fact conceded that market sector to Heinz. See DX 411; DX 412-0719. Beech-Nut strives to maintain price parity with Gerber, see Tr. 863, marketing its product as a premium brand, and has been able to maintain premium pricing without losing sales volume. See PX 3-4544. Gerber sometimes lowers prices against Beech-Nut, but only if and when Beech-Nut manifests sufficient strength in a particular market. See DX 411; DX 412-0719.

Gerber enjoys unparalleled brand recognition, and its brand loyalty is greater than that of any of product sold in the United States, including Coca-Cola and Nike. See DX 728-0001. Consumers generally view Heinz as being of slightly lower quality than Gerber. See PX 15; PX 429 at 341. Beech Nut's products are generally perceived as comparable in quality to Gerber's. See PX 97-0861 to 0862.

Nearly all supermarkets stock only two brands of baby food, not three. See DX 617 at ¶23. Gerber is invariably one of the two. *fn3 The food products industry measures the extent of a particular product's presence in stores across the country by referring to a product's ACV (All Commodity Volume), which is stated as the percentage of stores that carry a certain product or product line. See Tr. 989, DX 1512. Gerber's ACV for jarred baby food approaches 100 percent, which means that Gerber is sold in virtually every food store in the United States. See DX 23-3630; Tr. at 989. Heinz has an ACV of approximately 40 percent, see DX 1-0069, and Beech-Nut, approximately 45 percent. See DX 444-2226. Heinz's sales are nationwide but are concentrated in northern New England, the Southeast and Deep South, and the Midwest. See Tr. 947, DX 15-0017. Beech-Nut's sales, also nationwide, are concentrated in the Atlantic region (New York and New Jersey), California, and Florida.

In general, witnesses described the baby food market as "boring," and "declining." See Tr. 441, 891-92; DX 38. During the last five years, grocery store sales have fallen more than 15 percent, despite the fact that the birth rate has remained stable. See DX 2-0016; DX 1-0012; DX 14-0008. This decline is partially attributable to a shift from jarred baby food to table food. See 1-0012. Beech-Nut's sales have either been flat or declining since the early 1990s, and it expects this trend to continue. See DX 1098; DX 463.

B. Procedural history

On February 28, 2000, Heinz and Beech-Nut entered into a merger agreement. See DX 1314 at 16. Under the terms of the merger, Heinz would acquire 100 percent of Beech-Nut's voting securities for $185 million. On February 29, 2000, defendants filed a Premerger Notification and Report Form with the FTC and the Department of Justice, pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, 15 U.S.C. § 18a. See DX 200-0001. On April 28, 2000, the FTC issued a Second Request for Information, which defendants complied with on June 8 and 9, 2000. See DX 460-0001; DX 299-0001. On July 7, 2000, the Commission (by a 3-2 vote) authorized this action for a preliminary injunction under Section 13(b) of the FTCA, 15 U.S.C. § 53(b). See FTC Press Release, FTC to Challenge Merger of Beech-Nut Nutrition Corp. and H.J. Heinz Co. (visited Oct. 5, 2000) . The FTC filed its complaint and motion for preliminary injunction on July 14, 2000. I conducted a five-day evidentiary hearing in late August and early September, and I heard final arguments on September 21, 2000.

II. ANALYSIS

A. Legal standard

Section 7 of the Clayton Act, 15 U.S.C. § 18, prohibits a merger between two companies "where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition . . . may be substantially to lessen competition, or to tend to create a monopoly." The Clayton Act authorizes the Commission to seek an injunction to prevent the consummation of any merger pending a full administrative hearing on its legality. See 15 U.S.C. § 53(b). The legality of a merger under Section 7 is a determination the Commission must make, and the Commission is not required in this preliminary injunction proceeding to demonstrate that the proposed merger would actually violate Section 7. See FTC v. Staples, Inc., 970 F. Supp. 1066, 1070 (D.D.C. 1997).

Instead, the Commission is entitled to injunctive relief "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest." 15 U.S.C. § 53(b).

"The Commission satisfies its burden to show likelihood of success if it 'raises questions going to the merits so serious, substantial, difficult, and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the Commission in the first instance and ultimately by the Court of Appeals.' " Staples, 970 F. Supp. at 1071 (quoting FTC v. University Health, Inc., 938 F.2d 1206, 1218 (11th Cir. 1991)). The FTC must establish that there is a "reasonable probability" that the challenged transaction will substantially impair competition. Id. (citing cases).

The Commission can satisfy its initial burden of establishing a prima facie case for enjoining the merger by demonstrating that the merger will result in a firm that controls an undue percentage share of the relevant market and increases the concentration of firms in the market. See United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 363 (1963). Once the FTC has made that prima facie showing, the burden shifts to defendants to rebut the presumption of unlawfulness that arises. See United States v. Marine Bancorporation, Inc., 418 U.S. 602, 613 (1974); FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 54 (D.D.C. 1998). The defendant's burden is one of production: a "clear" showing that the merger is unlikely to lessen competition is unnecessary. See Baker Hughes, 908 F.2d at 991-92. The ultimate burden of persuasion rests with the Commission throughout.

B. Relevant market

The first step in evaluating a merger is to define the relevant market. See Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962). The relevant product market is "determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe, 370 U.S. at 325. See also Staples, Inc., 970 F. Supp. at 1074.

In this case, the parties agree that the relevant product market is jarred baby food. Jarred baby food can be replaced by homemade baby food and breast milk, but the Supreme Court's "interchangeability" test refers to products. See United ...


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