The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge
American drivers make nearly twenty-five million automobile insurance claims each year and insurers, in turn, spend an estimated $100 billion annually to cover those claims. Most insurers and automotive repair shops use specialized computer software to estimate the cost of repair or the value of replacement in the event of a total loss. These software systems play a critical role in the automotive repair industry. CCC Information Services, Inc. ("CCC") and Mitchell International, Inc. ("Mitchell") are two of the largest companies in these markets. Audatex North America, Inc. ("Audatex"), formerly ADP Claims Services Group, is the one other significant competitor for sales of partial loss estimating and total loss valuation software.*fn2
CCC is a wholly owned subsidiary of CCC Holdings Inc. ("CCC Holdings"), a for-profit corporation, existing and doing business under the laws of Delaware, and headquartered in Chicago, Illinois. CCC Holdings is principally owned by Investcorp, S.A. ("Investcorp"), a private equity firm with more than $15 billion under management, and funded primarily by investors in Saudi Arabia. The majority owner of Mitchell is Aurora Equity Partners III, L.P. ("Aurora"), a private equity firm based in Los Angeles, California, which has approximately $2 billion of assets.
On April 2, 2008, Defendants CCC Holdings and Aurora entered into a Restructuring Agreement ("Restructuring Agreement") which contemplates a $1.4 billion "merger of equals" between CCC and Mitchell to be effected no later than March 31, 2009. PX 786.*fn3 The Federal Trade Commission ("FTC" or "Commission"), through its Bureau of Competition, seeks to preliminarily enjoin the pending transaction, positing that a 3-to-2 merger in the partial loss and total loss software markets would obviously and substantially harm competition. The Court finds the evidence more complicated and uncertain. Nonetheless, because the FTC has "raised 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 FTC in the first instance and ultimately by the Court of Appeals," FTC v. H.J. Heinz Co., 246 F.3d 708, 714-15 (D.C. Cir. 2001) (internal quotations omitted); see also FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035 (D.C. Cir. 2008) (Brown, J.); id. at 1042 (Tatel, J., concurring), the Court will issue the requested injunction.
On November 25, 2008, the FTC found that it had "reason to believe" that the proposed merger would violate the antitrust laws, specifically Section 7 of the Clayton Act, 15 U.S.C. § 18, and issued an administrative complaint challenging the proposed merger. At the same time, the Commission, pursuant to Section 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 53(b), and Section 16 of the Clayton Act, 15 U.S.C. § 26, authorized the Bureau of Competition to file the instant Complaint to petition the Court for a temporary restraining order and a preliminary injunction to preserve the status quo pending an administrative adjudication before the FTC; that trial is scheduled to commence no later than March 31, 2009, and the FTC has committed to rendering a final opinion within 90 days of an initial decision by the Administrative Law Judge. See FTC Press Release (Nov. 25, 2008). The merging parties suggest they will abandon the merger if an injunction issues, in part because financing would be too difficult to maintain during the administrative process. The Court held a total of nine days of evidentiary hearings and legal argument. The parties submitted approximately 15 boxes of documentary evidence, including documents obtained through discovery and deposition and FTC Investigation Hearing ("IH") transcripts, as well as nearly 300 pages of findings of fact and two rounds of highly refined and informative legal briefing.
There are millions of accidents each year on roads across the United States. If the drivers in those accidents are insured, they file an insurance claim. This leads to an assessment of the extent of the damage to the automobile and an estimate of the cost of parts and labor needed to effect repairs, or if too expensive, replace the vehicle.
Costs for repair of damaged vehicles, or partial loss claims, account for well over $30 billion in insurance claims payments annually. See PX 256-003 (CCC).*fn4 Performing partial loss estimations was once a manual process. The appraiser or claims adjuster would rely on information from published sources and perform the calculations either by hand or with a desk calculator. PX 1020 ¶ 27 (Hayes Prelim. Report). Today, all major automobile insurers and the vast majority of the approximately 45,000 repair facilities subscribe to one or more estimating software products ("Estimatics"). PX 514-013, 015 (Mitchell); PX 531-001 (Mitchell); see also PX 6 ¶ 3 (Mello Decl., Anderson Behel Body Shop); PX 10 ¶ 2 (Dorn Decl., Dorn's Body & Paint). These products are much faster than manual calculations, permit analysis of more kinds of information, and are considered more reliable, consistent, and accurate. See, e.g.,PX 14 ¶ 4 (Brandt Decl., Hartford Fire Ins. Co. ("The Hartford")); PX 13 ¶ 3 (Hall Decl., GMAC); PX 20 ¶¶ 3-4 (Rollins Decl., Safeco Ins. Cos. ("Safeco")); PX 28 ¶ 3 (Wilson Decl., The Hanover Ins. Group, Inc. ("Hanover")); PX 27 ¶ 3 (Danford Decl., Ohio Mutual Ins. Group ("Ohio Mutual")); PX 11 ¶ 3 (Brown Decl., Erie Ins. Group ("Erie")); PX 30 ¶ 4 (Starnes Decl., State Farm Mutual Auto. Ins. Co. ("State Farm")). Estimatics products consist of three main components: (1) a spreadsheet that tracks the line items that are a part of a vehicle repair estimate, (2) the database from which parts and labor costs are pulled, and (3) the software that calculates the total cost of repair, taking into consideration overlap times (such as the need to remove a bumper only once to perform two repairs behind or to the bumper). PX 1020 ¶ 12 (Hayes Prelim. Report) (citing Ramamurthy IH Tr. (7/22/08) at 198-200).
There are presently five companies in the United States that sell Estimatics: CCC, Mitchell, Audatex, Web-Est LLC ("Web-Est"), and Applied Computer Resources, but the three major competitors in the Estimatics market today are CCC, Audatex and Mitchell, which collectively hold the lion's share of the market - approximately 99%*fn5 - thus earning the nickname, the "Big Three." See PX 1020, Exs. 2-3 (Hayes Prelim. Report); see also PX 1028-004 (Web-Est).*fn6 There are two types of Estimatics products: communicating and noncommunicating products. Communicating Estimatics tools are used by insurance companies and repair facilities that are part of a direct repair program ("DRP"), whereas non-communicating estimating tools are used by low-end repair facilities that are not part of a DRP. A DRP is a network of strategic alliances between an insurance company and the repair facilities with which it frequently does business. Communicating products allow insurance companies and DRP repair facilities to instantaneously relay information about the status of partial loss claims through specialized communication links, while non-communicating products do not have this capacity. See PX 1020 ¶ 12 (Hayes Prelim. Report);DX 644, App. 2 ¶ 7 (Ordover Coordinated Interaction Report). CCC, Mitchell and Audatex primarily sell communicating Estimatics products. Web-Est and Applied Computer Resources currently sell only non-communicating products.
CCC's core communicating Estimatics offering is called Pathways, but it also offers a low-end, non-communicating tool called Comp-Est which it markets to the independent repair facility segment. PX 86-008, 056 (CCC).*fn7 To procure the parts and labor data for its Estimatics product, CCC obtained an exclusive license to the Hearst Business Publishing, Inc. "Motor" database in 1998. PX 25 ¶ 22 (Carr Decl., Motor Information Systems ("Motor")). [Text redacted.].
Mitchell's communicating Estimatics product is UltraMate, although it also sells a low-end product called Repairmate. PX 680-004-005 (Aurora). Audatex's Estimatics product is called Audatex Estimating. Unlike CCC, both Audatex and Mitchell have their own proprietary databases, which were developed over many years.
The Estimatics providers generally charge their customers on a per user basis. Currently, the predominant medium for Estimatics software installation is a CD or DVD; monthly software updates must be sent to clients and re-installed on their systems. Web-Est, however, offers a Web-based non-communicating Estimatics product.*fn8 Seidel, Tr. (1/22 p.m.) at 165:18-22, 167:7-8 (Web-Est). It currently licenses Mitchell's database under restrictive conditions which prohibit it from selling to the top fifty insurance companies, from selling communicating Estimatics products to insurance companies or repair facilities, and from integrating with other third-party service providers, such as parts locators, salvage, and other providers. See DX 59 (Mitchell-Web-Est License Agreement); Seidel, Tr. (1/22 p.m.) at 173:24-174:13 (Web-Est). This restrictive license effectively precludes Web-Est from selling to most insurance companies and DRP repair facilities.
Some accidents may prove to be so costly that the insurer will declare the automobile a total loss because the estimated cost of repair approaches or exceeds the vehicle's value. In such situations, the insurance company will calculate the replacement cost of the automobile, as it existed before the accident, based on model, make, upgrades, condition, mileage, etc., and pay the policyholder the vehicle's replacement cost.*fn9 As with estimating repair costs, the total loss valuation process was once done only by hand. Today there are several different methodologies and tools for insurance companies to calculate total loss. One option is the "book" providers - NADA Appraisal Guides ("NADA"), the Kelley Blue Book, the Red Book, and the Black Book (collectively "the Books") - whose reports are based on local or regional values.Brungger IH Tr. at 121-22 (Mitchell); Linder IH Tr. at 43, 46 (Mitchell); Marushka IH Tr. at 18, 29-30 (CCC). These products are available in hard copy and many are available electronically; the electronic versions are updated more frequently than the printed Books. A number of insurance companies perform some or even most of their total loss valuations in-house using a combination of the Books and market research conducted by internal staff in order to obtain a more accurate and localized valuation than the Books can provide alone. Most insurers, however, use total loss software systems ("TLV") which contain comprehensive databases of vehicle sales information that is regularly compiled from numerous sources and hundreds of localities. See PX 680-007-010 (Aurora); PX 86-008 (CCC). The TLV software products provided by CCC, Mitchell and Audatex account for more than 90% of all total loss valuations. PX 513-016 (Mitchell); PX 548-007 (Mitchell). Other providers of total loss services include AutoBid and Vehicle Valuation Services ("VVS"). VVS is a software product that is used mostly for specialty vehicles such as commercial trucks and classic cars, and for a limited number of non-specialty vehicles as an accommodation to existing clients. See PX 401 ¶¶ 3, 5 (Blitstein Decl., VVS).
Until recently, CCC and Audatex were the only providers of TLV. However, Mitchell successfully entered the TLV market in 2005 after two previous failed attempts. CCC's TLV product is called ValueScope Salvage Solutions. PX 256-039, 046 (CCC). Mitchell's TLV product is called WorkCenter Total Loss, and Audatex's product is called Autosource.
In addition to Estimatics and TLV, CCC, Mitchell and Audatex sell a number of other automotive damage products, including workflow management products, business intelligence products, and repair facility or shop management software. DX 82 (CCC); PX 560-031 (Mitchell).*fn10 Mitchell also sells an auto injury estimating, or "medical" product; it is the only of the Big Three companies that offers a medical product. See PX560-031-032 (Mitchell). Insurance companies often purchase a suite of products from one vendor. These "bundles" usually include a core Estimatics product and several add-on products, such as digital imaging, shop management, aftermarket parts data, workflow, and total loss valuation. Conway, Tr. (1/9) at 92:1-18 (Audatex); see also PX 680-007-008, 010 (Mitchell); PX 86-008-009 (CCC); PX 244- 062 (CCC); PX 763 (Mitchell). Contracts for DRP repair facilities also often consist of bundles, including the base Estimatics product and a variety of add-ons. Conway, Tr. (1/9) at 111:9-13 (Audatex); DX 47 (Mitchell); DX 98 (CCC). Independent repair facilities tend to purchase only the core estimating product.
The buyers of Estimatics are insurance companies and auto repair facilities, while only insurance companies buy TLV products. Repair facilities account for about 60% of Estimatics revenues, while insurers account for the other 40%. See PX 1020, Ex. 2 (Hayes Prelim. Report). Insurers negotiate longer term contracts with Estimatics and TLV systems suppliers -- generally two to five years. Sun, Tr. (1/9) at 96:16-20 (Mitchell). In a typical year, approximately 100 insurance company accounts come up for renewal. Brungger IH Tr. at 185-86 (Mitchell). These contracts can cost anywhere from a few thousand dollars per year for a small insurer to several million dollars per year for a large insurer. Conway, Tr. (1/9) at 94:22-95:4 (Audatex); DX 13 ¶ 69 (Hayes Prelim. Report); see, e.g., DX 252-4, 53 (five-year, multi-million dollar contract with CCC). Most of these insurance contracts are obtained through a secret bidding process whereby the insurance company submits a request for proposal ("RFP") to the bidders in which it seeks information on the bidder's proposed prices and product bundle options. RFPs are usually accompanied by a non-disclosure agreement, Sun, Tr. (1/9) at 51-52, 46-47 (Mitchell); Brandt, Tr. (1/8 a.m.) at 23 (The Hartford), and therefore are not supposed to be shared with the bidder's competitors. Repair facility contracts are also intended to be confidential. See, e.g., Cheskis, Tr. (1/23 a.m.) at 16:5-7, 17:21-23 (Gerber Collision & Glass ("Gerber")); Sun, Tr. (1/9) at 53:24-54:10 (Mitchell); Ramamurthy, Tr. (1/22 a.m.) at 108:19-109:25 (CCC); Conway, Tr. (1/12 a.m.) at 39:8-13 (Audatex).
Despite a highly concentrated supplier base and low growth rates in the industry, PX 543-005 (Mitchell); PX 574-002 (Mitchell), these markets are highly competitive today. Brandt, Tr. (1/8 a.m.) at 17:23-18:2, 18:6-7 (The Hartford); Cheskis, Tr. (1/23 a.m.) at 10:12-23 (Gerber); Aquila Dep. at 15 (Audatex); FTC's Pre-Trial Br. at 3; Ordover, Tr. (1/23 a.m.) at 76:20-77:8. Although insurance company and repair facility contracts are confidential, the Estimatics and TLV vendors expend significant resources in order to obtain "competitive intelligence" about each other's pricing, and compete vigorously for customers. Sun, Tr. (1/8 p.m.) at 53-58, 92-93 (Mitchell). The FTC fears that a merger of CCC and Mitchell will destroy the delicate balance that has sustained healthy competition despite the small number of competitors in these markets; hence this lawsuit.
Section 7 of the Clayton Act prohibits mergers or acquisitions "the effect of [which] may be substantially to lessen competition, or to tend to create a monopoly" in "any line of commerce or in any activity affecting commerce in any section of the country." 15 U.S.C. § 18. The Supreme Court has explained that Section 7 "deals in probabilities, not certainties." United States v. Gen. Dynamics Corp., 415 U.S. 486, 505 (1974); see also Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962); United States v. El Paso Natural Gas Co., 376 U.S. 651, 658 (1964). Thus, to establish a violation of Section 7, the FTC need not show that the challenged merger or acquisition will lessen competition, but only that the loss of competition is a "sufficiently probable and imminent" result of the merger or acquisition. United States v. Marine Bancorp., 418 U.S. 602, 623 n.22 (1974) (quoting United States v. Continental Can Co., 378 U.S. 441, 458 (1964)).
When the FTC has "reason to believe" that the consummation of a merger will violate the antitrust laws, it may seek a preliminary injunction to prevent the merger until the agency has had an opportunity to adjudicate the merger's legality in an administrative proceeding. 15 U.S.C. § 53(b). Section 13(b) of the FTC Act "provides for the grant of a preliminary injunction where such action would be in the public interest." Heinz at 714; see 15 U.S.C. § 53(b). In enacting Section 13(b), Congress "'demonstrated its concern that injunctive relief be broadly available to the FTC.'" Heinz, 246 F.3d at 714 (quoting FTC v. Exxon Corp., 636 F.2d 1336, 1343 (D.C. Cir. 1980)); H.R. Rep. No., 93-624, at 31(1973), reprinted in 1973 U.S.C.C.A.N. 2417,2533; see also Whole Foods, 548 F.3d at 1042 (Brown, J.) ("the FTC -- an expert agency acting on the public's behalf -- should be able to obtain injunctive relief more readily than private parties."). Thus, the FTC "is not required to prove, nor is the court required to find, that the proposed merger would in fact violate Section 7 of the Clayton Act" in order for a preliminary injunction to be issued. FTC v. Staples, Inc., 970 F. Supp. 1066, 1070 (D.D.C. 1997) (citations omitted). Rather, the FTC "need only show that there is a 'reasonable probability' that the acquisition may substantially lessen competition." Id. at 1072.
Section 13(b) authorizes a court to issue a preliminary injunction "[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 Court must balance these considerations on a sliding scale. Heinz, 246 F.3d at 714; FTC v. Elders Grain, Inc., 868 F.2d 901, 903 (7th Cir. 1989); see also Whole Foods, 548 F.3d at 1035 (Brown, J.). Thus, "[a] greater likelihood of the FTC's success will militate for a preliminary injunction unless particularly strong equities favor the merging parties." Whole Foods, 548 F.3d at 1035 (Brown, J.).
The equities will often weigh in favor of the FTC because "'the public interest in effective enforcement of the antitrust laws' was Congress's specific 'public equity consideration' in enacting" Section 13(b). Id. (quoting Heinz, 246 F.3d at 726). If the FTC meets its burden of showing that it is likely to succeed on the merits, it "creates a presumption in favor of preliminary injunctive relief," id., which the merging parties may rebut by showing that, contrary to traditional antitrust theory, the public equities weigh in favor of the merger. See Whole Foods, 548 F.3d at 103 (Brown, J.); see also FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 160 (D.D.C. 2004); cf. Heinz, 246 F.3d at 727 n.25 (noting that private equities are afforded little weight in Section 13(b) cases). If the merging parties are able to make such a showing, the FTC is required to show a greater likelihood of success on the merits. Whole Foods, 548 F.3d at 1035 (Brown, J.) (citing FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1087 (D.C. Cir. 1981)).
A. Likelihood of Success on the Merits
The burden of showing likelihood of success on the merits is met if the Commission has "raised 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 FTC in the first instance and ultimately by the Court of Appeals." Heinz, 246 F.3d at 714-15 (internal citations omitted); see also Whole Foods, 548 F.3d at 1035 (Brown, J); id. at 1042 (Tatel, J., concurring). At the same time, the Court may not "simply rubber-stamp an injunction whenever the FTC provides some threshold evidence; it must 'exercise independent judgment' about the questions § 53 commits to it." Whole Foods, 548 F.3d at 1035 (Brown, J.) (citing Weyerhaeuser, 665 F.2d at 1082).*fn11
In United States v. Baker Hughes Inc., 908 F.2d 981, 982-83 (D.C. Cir. 1990), the D.C. Circuit adopted an analytical approach to Section 7 cases which has been followed in subsequent Section 13(b) cases. See, e.g., Heinz, 246 F.3d at 715; Arch Coal, 329 F. Supp. 2d at 116. First, to meet its initial burden, the government must show that the proposed merger would lead to "undue concentration in the market for a particular product in a particular geographic area." Baker Hughes, 908 F.2d at 982. Such a showing creates a "'presumption' that the merger will substantially lessen competition." Id. Upon such a showing, the burden shifts to the defendants to rebut the presumption with evidence that "'shows that the market-share statistics [give] an inaccurate account of the [merger's] probable effects on competition' in the relevant market." Heinz, 246 F.3d at 715 (quoting United States v. Citizens & S. Nat'l Bank, 422 U.S. 86, 120 (1975)) (alterations in original). If the defendants succeed in rebutting the presumption that the merger will lessen competition, "'the burden of producing additional evidence of anticompetitive effects shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times.'" Heinz, 246 F.3d at 715 (quoting Baker Hughes, 908 F.2d at 983).
The Supreme Court has cautioned, however, that while "statistics reflecting the shares of the market controlled by the industry leaders and the parties to the merger are... the primary index of market power[,]... only a further examination of the particular market - its structure, history and probable future - can provide the appropriate setting for judging the probable anticompetitive effect of [a] merger." Brown Shoe, 370 U.S. at 322 n.38. In order to adequately address these factors, "the merging parties are entitled to oppose a [Section 13(b)] preliminary injunction with their own evidence, and that evidence may force the FTC to respond with a more substantial showing" of the merger's probable anticompetitive effects. Whole Foods, 548 F.3d at 1035 (Brown, J.). In the end, "antitrust theory and speculation cannot trump facts, and even Section 13(b) cases must be resolved on the basis of the record evidence relating to the market and its probable future." Arch Coal, 329 F. Supp. 2d at 116-17; see also Brown Shoe, 370 U.S. at 322 n.38. Thus, an analysis of the likely competitive effects of a merger requires determinations of (1) the relevant product market, (2) the relevant geographic market, and (3) the transaction's probable effect on competition in those markets. See Marine Bancorp., 418 U.S. at 618-23; Gen. Dynamics, 415 U.S. at 510-11; see also Arch Coal, 329 F. Supp. 2d at 117.
A prima facie Section 7 case "rests on defining a market and showing undue concentration in that market." Whole Foods, 548 F.3d at 1036 (Brown, J.) (citing Baker Hughes, 908 F.2d at 982-83). Courts generally begin their analysis of a Section 7 case by defining the relevant market. See, e.g., Marine Bancorp., 418 U.S. at 618-23; FTC v. Swedish Match, 131 F. Supp. 2d 151, 156 (D.D.C. 2000). But see Whole Foods, 548 F.3d at 1036 (Brown, J.) (noting that "this analytical structure does not exhaust the possible ways to prove a § 7 violation" (citing El Paso Natural Gas Co., 376 U.S. at 660)). A relevant market has two components: (1) the relevant product market and (2) the relevant geographic market. The "relevant product market" identifies the product and services with which the defendants' products compete. The "relevant geographic market" identifies the geographic area in which the defendants compete in marketing their products or services. The FTC bears the burden of proof and persuasion in defining the relevant market. Arch Coal, 329 F. Supp. 2d at 119.
Once the relevant market is defined, the court can determine market concentration. The standard measure for market concentration is the Herfindahl-Hirschmann Index ("HHI"). See Heinz, 246 F.3d at 716. Under the Federal Trade Commission and U.S. Department of Justice Horizontal Merger Guidelines, a market with a post-merger HHI above 1800 is considered "highly concentrated," and mergers that increase the HHI in such a market by more than 100 points "are presumed... likely to create or enhance market power or facilitate its exercise." Fed. Trade Comm'n & U.S. Dep't of Justice Horizontal Merger Guidelines (1992), as revised (1997) ("Merger Guidelines") § 1.51. Although the Merger Guidelines are not binding on the Court, they provide a "useful illustration of the application of the HHI." FTC v. PPG Indus., Inc., 798 F.2d 1500, 1503 n.4 (D.C. Cir. 1986). Moreover, the D.C. Circuit explained in Heinz that a merger to duopoly which increased the premerger HHI of 4,775 by 510 points "create[d], by a wide margin, a presumption that the merger w[ould] lessen competition" in the relevant market. Heinz, 246 F.3d at 716.
a. Relevant Product Markets
In determining relevant product markets, courts have traditionally considered two factors: " the reasonable interchangeability of use and  the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe, 370 U.S. at 325. In other words, the question is "whether two products can be used for the same purpose, and if so, whether and to what extent purchasers are willing to substitute one for the other." Staples, 970 F. Supp. at 1074 (internal quotations omitted). Relevant markets will generally include producers who, given product similarity, have the ability to take significant business from each other. Arch Coal, 329 F. Supp. 2d at 119.
If consumers can substitute the use of one product for another, those products will be deemed "functionally interchangeable." Id.; see also Staples, 970 F. Supp. at 1074 (finding that office supplies sold by an "office superstore" like Staples are functionally interchangeable with office supplies sold at "mass merchandisers" like Wal-Mart). Courts generally will include functionally interchangeable products in the same product market unless factors other than use indicate that they are not actually part of the same market. See, e.g., United States v. Archer-Daniels-Midland Co., 866 F.2d 242, 246 (8th Cir. 1988) (even though beet sugars and high-fructose corn sugars were functionally interchangeable, they did not belong to the same product market because government price support for beet sugars meant that prices for corn sugars could be raised substantially without feeling the competitive impact of beet sugar prices). Cross-elasticity of demand refers to the "'responsiveness of the sales of one product to price changes of the other.'" Staples, 970 F. Supp. at 1074 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 400 (1956)). However, courts should "exclude any... product to which, within reasonable variations in price, only a limited number of buyers will turn." Times-Picayune Publ'g Co. v. United States, 345 U.S. 594, 612 (1953).*fn12
Courts have relied on several "practical indicia" as aids in identifying the relevant product market, including: industry or public recognition of a submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Brown Shoe, 370 U.S. at 325; see also Arch Coal, 329 F. Supp. 2d at 120. These indicia can be applied to augment the analyses of interchangeablity and cross-elasticity of demand.
Defendants do not dispute the FTC's contention that Estimatics is so far superior to the paper-based systems that their customers would not return to the old methods even if Estimatics prices increased substantially. See, e.g., PX 6 ¶ 2 (Mello Decl.); PX 7 ¶ 4 (Kostakis Decl., Angelo's Auto Body); PX 20 ¶ 4 (Rollins Decl.); PX 27 ¶ 3 (Danford Decl.); PX 11 ¶ 3 (Brown Decl.).Thus, Defendants concede that the core Estimatics software product is a relevant product market. See Ordover, Tr. (1/23) at 204:20-25.*fn13
Although the Defendants do not dispute the FTC's market definition for Estimatics, they disagree with its definition of the total loss valuation market. The FTC defines the relevant total loss valuation market to include only TLV sold in the United States by CCC, Mitchell and Audatex. PX 1020 ¶ 48 (Hayes Prelim. Report); see also Hayes, Tr. (1/12 a.m.) at 84:12-22. The Defendants argue that the FTC has not met its initial burden of showing a properly defined product market because it fails to include other sources of total loss valuations that insurance companies currently use or to account for the fact that some insurance companies perform their total loss valuations in-house rather than using TLV products.
Defendants have demonstrated that insurers of auto physical damage currently use a variety of solutions to perform total loss valuations. In addition to the total loss software sold by CCC, Mitchell and Audatex, some insurance companies use the Books to perform some or most of their total loss valuations in-house. Brandt, Tr. (1/8 a.m.) at 47:5-9 (The Hartford); Dibble, Tr. (1/23 a.m.) at 38:23-39:18 (Infinity Ins. Co.). In fact, some of the largest auto insurers in the country rely on the Books for most of their total loss needs. SeeDX 49 (Mitchell);DX 50 (Mitchell). For instance, CCC's CEO, Githesh Ramamurthy, testified that, of the 700,000 total loss claims that [text redacted] processes each year, it calculates roughly 500,000 in-house using NADA. Ramamurthy, Tr. (1/22 a.m.) at 97:4-8 (CCC); see also Brandt, Tr. (1/8 a.m.) at 47:5-10 (The Hartford) (Progressive Insurance Company ("Progressive") uses NADA to calculate roughly 75% of its total loss claims).*fn14 Those insurance companies that perform some of their valuations internally may consult other data sources as well, such as Autotrader, or conduct their own research by contacting salvage yards and auto dealerships. See, e.g., Dibble, Tr. (1/23 a.m.) at 39:8-13 (Infinity Ins. Co.). Defendants point to these shifts between products as evidence of a single market between Estimatics and the Books. See IIB Phillip Areeda et al., Antitrust Law ¶ 562a, at 371 (3d ed. 2007) ("[A]ctual shifts between two products in response to - or even without - changes in their relative prices indicate a single market.").
This evidence is factually unchallenged by the FTC but the agency contends that it does not have the force Defendants would imply, given that over 90% of all total loss claims are calculated using TLV sold by one of the three major competitors. PX 513-016 (Mitchell); PX 548-007 (Mitchell).*fn15 According to the FTC, there is sufficient evidence in the record to conclude that the TLV products sold by CCC, Mitchell and Audatex represent a separate product market from other total loss valuation methods.
Dr. John Hayes, an economics expert testifying for the FTC, conducted a critical loss analysis to determine whether a hypothetical monopolist could profitably impose a SSNIP in the TLV market, an approach described in the Merger Guidelines. PX 1020 ¶¶ 26, 42-48 (Hayes Prelim. Report).*fn16 Through his analysis, Dr. Hayes concluded that TLV software constitutes a relevant product market. Id. ¶ 48. Dr. Hayes was aware that some insurance companies use the Books to conduct valuations, but he admitted that he did not know how pervasively internal valuations are used or how insurance companies produce internal valuations. Hayes, Tr. (1/21 p.m.) at 156:24-157:18. Thus, when calculating total loss market shares, Dr. Hayes did not include valuations that were performed internally. Id. at 149:22-150:8.
Although Defendants' expert, Dr. Janusz Ordover, did not reach a conclusion as to whether the Books are or are not part of the same market as TLV, Ordover, Tr. (1/23 p.m.) at 205:18-22, a critical failure to support Defendants' challenge to the FTC's market definition for TLV, the Defendants discredit Dr. Hayes's conclusions, arguing that his critical loss analysis is flawed because he incorrectly assumed that insurance companies lack the economies of scale to perform total loss valuations in-house. Hayes, Tr. (1/21 p.m.) at 150:14:151:4, 153:2-154:20, 157:2-158:17. The evidence is clear that CCC lost a large insurance company as a customer when that company decided to do most of its total loss calculations in-house using NADA. DX 86. "[C]courts have generally recognized that when a customer can replace the services of [an external product] with an internally-created [ ] system, this 'captive output' (i.e. the self-production of all or part of the relevant product) should be included in the same market." United States v. Sungard Data Sys., Inc., 172 F. Supp. 2d 172, at 193, 186 (D.D.C. 2001) (quoting FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 48 (D.D.C. 1998)) (alterations in original) (internal quotations omitted); accord Merger Guidelines § 1.31 (vertically integrated firms are included in the market "to the extent that such inclusion accurately reflects their competitive significance in the relevant market prior to the merger").
Notwithstanding this gap in Dr. Hayes's analysis, the real-world evidence shows that Books and TLV are not part of the same product market. See Arch Coal, 329 F. Supp. 2d at 116 ("[A]nti-trust theory and speculation cannot trump facts."). The Book vendors do not consider themselves to be in competition with CCC, Mitchell, and Audatex. PX 17 ¶¶ 7-13 (Stanton Decl., NADA); PX 19 ¶ 5 (Fournier Decl., Automobile Red Book); PX 29 ¶ 8 (Cross Decl., Nat'l Auto Research). In fact, CCC and Mitchell offer access to NADA as an add-on to their TLV products. PX 241-023 (CCC); PX 643-011 (Mitchell). Most insurance companies do not view the Books as an adequate substitute for TLV products. See PX 664-005 (Mitchell); Brown Dep. at 90-90 (Erie); see also Hall, Tr. (1/8 a.m.) at 79:15-17, 81:2-4 (GMAC); Danford Dep. at 58 (Ohio Mutual only uses Books for commercial and recreational vehicles that are not in the TLV databases); PX 11 ¶ 7 (Brown Decl.). In fact, the majority of insurers who were contacted by the FTC stated that they would not switch from TLV products to the Books even if facing a price increase of 10% or more. See, e.g.,Adamson Dep. at 31-32, 40-41 (EMC Ins. Co.); PX 20 ¶ 14 (Rollins Decl.) ("In the event of a 10% price increase in total loss valuation products, Safeco would not be likely to switch to using NADA, Kell[e]y, or other 'book' products for total loss estimates. The book products are only guides, which do not provide a local market evaluation of comparable vehicles."). Similarly, almost none of the Defendants' internal documents refer to the Books when describing the competitive landscape.*fn17 To the extent that the Books are mentioned, they are referred to as "ancillary databases." PX 643-011 (Mitchell document containing a competitive analysis between CCC, Mitchell and Audatex, and referring to NADA and other Books as "ancillary databases").*fn18
The market participants view TLV as separate from the Books for good reason. The evidence reveals that the Books simply are not as accurate, detailed, or up-to-date as TLV. CCC, Mitchell and Audatex use a consistent methodology across all vehicles that includes recent sales of comparable vehicles. PX 1964-009-010 (CCC); PX 1958-034-036 (Mitchell). Their methodology accounts for, among other factors, year, make, model, body style, engine, mileage, upgrades, condition, and includes numerous databases. PX 1964-006, 010 (CCC's TLV product "equates to a vehicle database of approximately 64,00 [sic] unique vehicles, which is substantially more than Red Book and Kelley Blue Book"). CCC's TLV database is "compiled by surveying over 4,400 car dealerships in more than 350 markets twice each month and through 1,800 publications." PX 99-020 (CCC). Mitchell's database contains over [text redacted] million electronic records including the Power Information Network (PIN) data received from JD Power and Associates. PX 643-011 (Mitchell); PX 541-024 (Mitchell). The valuation methodologies used by the Books include subjective data and do not account for all of the vehicle's options, mileage, or condition as precisely as TLV programs. Hall, Tr. (1/8 a.m.) at 79:18-80:8, 80:19-81:8 (GMAC); PX 1964-006, 010 (CCC). For instance, NADA uses wholesale and retail data sets and manipulates that information using analytical modeling and judgment by its editorial staff to estimate vehicle value. PX 17 ¶ 3 (Stanton Decl.); PX 260-001 (CCC); PX1964-016 (CCC Valuescope Methodology & Settlement Tips). Thus, TLV has substantially different valuation methodologies than the Books. See Brown Shoe, 370 U.S. at 325 (peculiar characteristics of the product indicate separate product markets).
In addition, TLV provides valuations in local markets, while the Books provide only regional data that are rarely localized. See PX 20 ¶ 14 (Rollins Decl.); PX 11 ¶ 7 (Brown Decl.); PX 28 ¶ 11 (Wilson Decl.) (stating that "pricing information in guidebooks... does... not contain the same level of specificity as local market comparables."); PX 1964-010 (CCC) ("Where NADA will have one region covering seven states, CCC will segment each state into an average of eight local markets."); PX 17 ¶ 9 (Stanton Decl.); PX 256-048 (CCC). Furthermore, TLV systems' calculations are said to comply with applicable state regulations of each state, PX 81-038 (CCC Response to [text redacted] RFP); PX 116-039 (CCC Response to [text redacted] RFP); PX117-044, 051 (CCC Response to [text redacted] RFP), whereas the Books do not.
Nor does CCC, Mitchell, or Audatex price TLV against the Books. TLV costs approximately $[text redacted] per estimate, PX 548-007, whereas the Books charge about 5-35 cents per use. Stanton Dep. at 101-03 (NADA); PX 19 ¶ 2 (Fournier Decl.). Of course, "products competing against one another in a differentiated product market may have widely different prices." United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1121 (N.D. Cal. 2004).*fn19
If part of the same product market, the Books and the Defendants' TLV products are undoubtedly differentiated products. The variance in price therefore may not be surprising.*fn20
However, there is no evidence to suggest that the price of TLV is sensitive in any way to changes in pricing by Book vendors, or vice-versa. Cf. PX643-008 (Mitchell) (setting pricing strategy by reference to CCC and Audatex only). In addition, there is scant evidence of any direct competition between TLV and the Books.
In sum, the practical indicia - particularly industry recognition of a separate market; TLV's peculiar characteristics including especially accurate, up-to-date valuations, speed, reliance and defensibility, and ability to interface with estimating products; and sensitivity to price changes only against other TLV products - support the conclusion that TLV software products represent a relevant product market.
Despite this analysis, the fact remains that some of the largest insurance companies in the country perform a significant percentage of their total loss valuations in-house using the Books and that some others use the Books or other valuation methods for a small percentage of their total loss claims, rather that TLV. What this demonstrates, at best, is that some of the largest insurance companies in the country have the resources and scale to perform most of their total loss valuations in-house profitably in lieu of using TLV, and that a few middle tier insurance companies use the Books to supplement TLV software, but not that the Books constitute a viable substitute for TLV for the vast majority of insurers.*fn21 When TLV software is used to calculate 90% of the total loss claims made in this country, and the majority of the remaining 10% includes the largest insurers that do most of their calculations in-house, it is clear that the computer-based TLV products provided by these three suppliers constitute a relevant product market. The Books are, in the main, a complementary product and not a competitive product.
In any event, the FTC is not "required to settle on a market definition at this preliminary stage," Whole Foods, 548 F.3d at 1036 (Brown, J.), and inclusion of the Books in the market would have an insignificant effect on the market shares because over 90% of total loss claims are calculated using TLV. PX 513-016 (Mitchell) (chart showing that CCC, Audatex and Mitchell were used to evaluate a combined 90% of all total loss claims made in 2007, while NADA and "other" products were used for approximately 10% of valuations); PX 548-007 (Mitchell) (table showing that book valuations are used for approximately 10% of all total loss claims while TLV software is used for 90% of claims). Even including the Books and other valuation methods, the combined CCC/Mitchell would still have over a 50% share of the broader total loss valuation product market. See PX 513-016 (Mitchell). The corresponding HHIs likewise would still establish a strong prima facie case for the FTC. Cf. Arch Coal, 329 F. Supp. 2d at 158 (concluding that the HHI increase of 49 to 2,103 was "far from compelling," and thus the prima facie case was "fairly weak.").*fn22
Unlike some other Section 7 cases, the geographic market is not contested here. The relevant geographic market for both products in this case is the United States. Audatex competes in many foreign countries; CCC and Mitchell currently compete only in the United States. More significantly, although software products can be designed, manufactured and sold almost anywhere, the databases for Estimatics and TLV sold in the United States must contain data that apply to vehicles driven in the U.S., wherever manufactured. Hayes, Tr. (1/12 p.m.) at 131:2-10. Similar auto physical damage products sold outside the United States that rely on a database of foreign vehicles cannot provide partial loss and total loss valuations for most vehicles driven in this country. PX 1020 ¶ 50 (Hayes Prelim. Report).
Market share and concentration statistics can establish a presumption of harm and shift the burden of proof to Defendants to demonstrate that the presumption does not accurately reflect a merger's likely effects on competition in the relevant market(s). Baker Hughes, 731 F. Supp. at 11-12.
1. Concentration in the Estimatics Market
There are five competitors in the Estimatics market: CCC, Audatex, Mitchell, Web-Est, which sells the software product WebEst, and Applied Computer Resources, which sells the software product Crash-writeR. Of these, CCC, Mitchell and Audatex dominate the market. Ramamurthy IH Tr. at 157-158 (CCC); PX 1028-004, 017 (Web-Est); Ramamurthy, Tr. (1/22 a.m.) at 40:20-41:7, 74:1-10 (CCC). Defendants' expert, Dr. Ordover, agreed that CCC, Mitchell, and Audatex are the only three competitors for insurance customers in the Estimatics segment and that neither Web-Est nor Applied Computer Resources provides any services to insurers. Ordover, Tr. (1/23 p.m.) at 205:1-7. The Big Three are currently the only competitors for DRP repair facilities as well. PX 4 ¶ 5 (Daly Decl.);PX 27 ¶¶ 4, 7 (Danford Decl.); PX 11 ¶ 4 (Brown Decl.); PX 25 ¶ 15 (Carr Decl.); PX 20 ¶ 5 (Rollins Decl.);Kostakis Dep. at 18 (Angelo's Auto Body Shop). At this point in time, Web-Est and Applied Computer Resources offer only non-communicating Estimatics products to low-end repair facilities that are not part of a DRP. Web-Est and Applied Computer Resources together have a tiny fraction of the Estimatics market - approximately 1% combined*fn23 - and they currently do not compete to any meaningful extent with CCC, Mitchell and Audatex. Removing Web-Est and Applied Computer Resources from the market share data would have "almost no bearing" on the Estimatics market concentration ...