The opinion of the court was delivered by: Robertson, District Judge.
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.
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.
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
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
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 nation-wide
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
nation-wide, 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.
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) >http://www.ftc.gov/opa/2000/07/heinz.htm<. 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.
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,
83 S.Ct. 1715, 10 L.Ed.2d 915 (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, 94 S.Ct. 2856, 41 L.Ed.2d 978 (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 ...