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Federal Trade Commission v. Tronox Ltd.

United States District Court, District of Columbia

September 12, 2018

FEDERAL TRADE COMMISSION, Plaintiff,
v.
TRONOX LIMITED et al., Defendants.

          MEMORANDUM OPINION [*]

          TREVOR N. MCFADDEN, U.S.D.J.

         Last year, two of the world's largest titanium dioxide (“TiO2”) producers announced their intent to merge. Tronox Limited agreed to acquire the National Titanium Dioxide Company's TiO2 business, known as “Cristal, ” for $1.67 billion in cash and a 24% equity stake in the combined firm. Believing that the acquisition would likely violate federal antitrust laws, the Federal Trade Commission issued an administrative complaint challenging the deal.

         TiO2 is a pigment used to add whiteness, brightness, and opacity to products like paints, plastics, and paper. It is manufactured by subjecting raw titanium ores to either a chloride or a sulfate production process. Chloride-process TiO2 comprises nearly all the pigment sold in the United States and Canada. The FTC believes that the Tronox-Cristal merger will significantly reduce competition for chloride TiO2 in these two countries, a combined market referred to herein and by the parties as “North America.”

         Following discovery and briefing by the parties, the FTC's Administrative Law Judge (“ALJ”) held a month-long trial to determine the legality of the proposed transaction. The trial recently concluded, and the ALJ will soon issue an initial decision. That ruling is reviewable by the FTC's Commissioners, and a federal appeals court may in turn review the agency's final decision.

         The transaction has now received conditional or final approval from the FTC's counterparts in the European Union, China, Saudi Arabia, and elsewhere. The Commission therefore seeks a preliminary injunction under Section 13(b) of the Federal Trade Commission Act to prevent Tronox and Cristal from consummating the merger until the agency's review process and any later judicial proceedings have concluded.

         The Court finds that the FTC has met its burden under Section 13(b). It has shown a likelihood that the proposed transaction will substantially lessen competition for chloride-process TiO2 in North America, and it has shown that issuing a preliminary injunction is in the public interest. The Court will therefore grant the Commission's motion for preliminary injunctive relief.

         I. BACKGROUND

         A. The Titanium Dioxide Industry

         Titanium dioxide is commercially available in two crystalline structures: anatase and rutile. Anatase is used in textiles, cosmetics, pharmaceuticals, and food, while rutile is typically used in architectural and industrial paints and plastics. PX5000-013.[1] Cristal estimates that roughly 60% of all titanium dioxide produced worldwide is used in paints and coatings, while the rest is used in plastics, paper, and various other applications. Id. at 018. Rutile is thus the predominant form of TiO2; anatase accounts for only 10% of global production. Id. at 013.

         The sulfate production process can create either anatase or rutile TiO2. PX5000-016. It involves dissolving naturally occurring titanium ores (the “feedstock”) into sulfuric acid to separate the titanium from other impurities in the ore. Id. The sulfate process relies on simpler technology than the chloride process, requires less skilled labor, and, because it produces TiO2 in batches, does not require an uninterrupted power supply. Id. Roughly half of all TiO2 made globally is produced using the sulfate process. PX5000-017. China accounts for the largest single-nation share of sulfate-process TiO2, producing 1.67 million metric tons in 2016. Id.

         The chloride production process can only create rutile TiO2, and it involves using chlorine gas to produce titanium tetrachloride, which is then oxidized to produce TiO2. PX5000-015. The chloride process is continuous, so it requires an uninterrupted power supply. PX3011-013. Compared to sulfate, chloride tends to produce a higher grade TiO2 pigment, features lower conversion and labor costs, and results in less waste. Id. The process requires a highly skilled labor force, and its “superior technology” is “closely guarded by Western producers.” PX3011-019. In 2016, 99% of the TiO2 produced in the United States and Canada was made using the chloride process. PX5000-016. By contrast, in Europe, only 39% of all TiO2 manufactured was produced using chloride. Id.

         Customers and suppliers generally agree that there are noticeable differences between chloride- and sulfate-process TiO2. A 2015 Tronox presentation notes, for example, that the chloride pigment is “bluer in tone than sulfate pigment, ” which has a “more yellow tone of white.” PX1322-003. Dr. Paul Malichky, the Director of Raw Material Sourcing at PPG, a major multinational paints and coatings company, explained that while “both would appear white if you physically looked at them, ” in a final product (like a can of white paint) with “two colors, one with a chloride and one with a sulfate, the color would be different.” Hr'g Tr. 100:6-13. See also PX7020-013 (George Young, a senior executive at Sherwin-Williams, another major paint company, stating that “sulfate grade is not as bright a white as a chloride. It doesn't deliver the same physical performance as a chloride.”).

         Chloride TiO2 can also be more durable than its sulfate counterpart. Sulfate has “impurities that come as part of the process; most specifically, iron . . . [which] decreases the durability.” Hr'g Tr. 100:14-19. Chloride-process TiO2 products feature “better durability, scrubability, and various other performance characteristics.” Hr'g Tr. 169:19. And, because of “the [consumer] preference for whiteness and durability, sulfate grades are not widely preferred for applications that have prolonged outdoor exposure.” PX8005-002.

         Titanium dioxide is generally sold to customers in two formulations: “dry” and “slurry.” PX5000-017. Dry TiO2 is sold in a powdered form typically packaged in bags; slurry TiO2 is dry titanium dioxide combined with an aqueous solution. Id. While most TiO2 sold globally is dry, large North American paint companies prefer slurry. PX0001-030.

         B. The Competitive Landscape

         The titanium dioxide market has been described as an “oligopoly, ” as TiO2 is a “commodity-like product with no substitutes, the market is dominated by a handful of firms, and there are substantial barriers to entry.” Valspar Corp. v. E.I. Du Pont De Nemours and Co., 873 F.3d 185, 190 (3d Cir. 2017). Jeffry Quinn, the CEO of Tronox, explained that there are “dozens and dozens of competitors worldwide, but there are really six companies that often are referred to as sort of the global TiO2 producers or the global companies.” Hr'g Tr. 585:9-11. These firms are Chemours, Tronox, Cristal, Kronos, Venator, and Lomon Billions. Id. at 585:13-586:2.

         Of the six, the first five dominate the production of chloride TiO2. PX1532-051. In 2016, roughly 2.77 million metric tons of the pigment was produced globally. Id. Chemours, the world's largest TiO2 firm, accounted for about 37% of 2016 chloride production capacity. PX5000-021. With Chemours, Cristal (21%), Tronox (15%), Kronos (13%), and Venator (7%), together accounted for 93% of total chloride production capacity. Id. Based on this data, the proposed transaction would result in two firms, Chemours and the Tronox-Cristal entity, that control nearly three-quarters of the global chloride TiO2 supply.

         Chinese manufacturers control around 51% of global sulfate production capacity. Id. Sulfate production is more dispersed than chloride. Lomon Billions is China's largest TiO2 firm, and in 2016 it accounted for 13% of global supply. Id. A smattering of other Chinese firms had roughly 38%, while domestically, Venator (12%) and Kronos (4%) are also significant producers of sulfate TiO2. Id.

         The paint and coatings industry is the largest overall consumer of titanium dioxide, and PPG, Sherwin-Williams, RPM, and Masco (Behr) are among the largest paint producers. See PX9020-009; PX5000 at 18, 044-045. Representatives from these firms, other paint and plastics manufacturers, and Chemours, Tronox, Cristal, Kronos, and Venator provided testimonial and documentary evidence about the TiO2 market during the administrative proceedings before the Commission. Additionally, Dr. Malichky (PPG), Mr. Christian (Kronos), Mr. Quinn (Tronox), and the parties' economic experts (Dr. Nicholas Hill for the Commission and Dr. Ramsey Shehadeh for the Defendants) testified about the market and the proposed merger during a three-day evidentiary hearing here.

         C. History of Proceedings in This Case

         On December 5, 2017, the Commissioners of the FTC voted 2-0 to authorize the filing of an administrative complaint to block the Tronox-Cristal transaction, as they found reason to believe that it would violate Section 7 of the Clayton Act, 15 U.S.C. § 18. The Commissioners' vote also authorized the FTC to seek a temporary restraining order (“TRO”) and preliminary injunction against the merger in federal district court.

         After several months of discovery, the ALJ held an administrative trial from May 18 to June 22, 2018. The parties filed post-trial briefs, proposed findings of fact, and proposed conclusions of law with the ALJ last month. They will offer closing statements to him once briefing has concluded. His resulting decision may be reviewed by the Commission and potentially, an appellate court.

         On July 10, 2018, the FTC petitioned this Court for a TRO and a preliminary injunction to halt a potential closing of the deal. The Commission explained that “[a]bsent such provisional relief, Tronox and Cristal . . . will likely be free to consummate the merger as soon as July 16, 2018, the earliest date it appears the European Commission (“EC”) is likely to complete its [antitrust regulatory review] process by approving” remedies to mitigate the deal's anticompetitive effects in Europe. Compl. 2. Approval from the EC was “the only remaining hurdle preventing Defendants from consummating the Acquisition.” Id.

         Three days later, the Court held a hearing on the Commission's TRO motion. Following that hearing, the parties stipulated that Tronox and Cristal would not seek to consummate the proposed transaction until four business days after the Court decided the Commission's request for a preliminary injunction. See Ex. A (Agreement Not to Close Transaction) 2, ECF No. 44-1.

         On August 7, 2018, the Court began a three-day evidentiary hearing on the FTC's motion for injunctive relief. The Commission proposed that the hearing proceed with oral arguments based solely on the closed evidentiary record before the ALJ. See Pl.'s Proposed Hr'g Schedule 2, ECF No. 45. The Defendants objected, ultimately proposing that each side be allowed to present live testimony from two expert witnesses and a fact witness. See Defs.' Proposed Hr'g Schedule 4, ECF No. 47. The Court allowed each side to present live testimony from three witnesses of their choosing, and to present opening and closing arguments.[2] The parties also submitted briefs outlining their positions and the complete administrative record before the ALJ.

         II. LEGAL STANDARDS

         Section 7 of the Clayton Act prohibits 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. If the FTC has reason to believe “that a corporation is violating, or is about to violate, Section 7 of the Clayton Act, [it] may seek a preliminary injunction to prevent a merger pending the Commission's administrative adjudication of the merger's legality.” F.T.C. v. H.J. Heinz Co., 246 F.3d 708, 714 (D.C. Cir. 2001). Section 13(b) of the Federal Trade Commission Act authorizes district courts to grant a preliminary injunction where “such action would be in the public interest-as determined by a weighing of the equities and a consideration of the Commission's likelihood of success on the merits.” Id.; see 15 U.S.C. § 53(b).

         For relief under Section 13(b), the Commission must establish that “there is a reasonable probability that the challenged transaction will substantially impair competition.” F.T.C. v. Staples Inc., 190 F.Supp.3d 100, 114 (D.D.C. 2016). Congress “intended this standard to depart from what it regarded as the then-traditional equity standard, which it characterized as requiring the plaintiff to show: (1) irreparable damage, (2) probability of success on the merits and (3) a balance of equities favoring the plaintiff.” Heinz, 246 F.3d at 714. The FTC is “not held to the high thresholds applicable where private parties seek interim restraining orders, ” and Section 13(b) instead creates a “unique public interest standard . . . rather than the more stringent, traditional equity standard for injunctive relief.” Id. (cleaned up).

         The public interest standard requires courts to “measure the probability that, after an administrative hearing on the merits, the Commission will succeed in proving that the effect of the [proposed transaction] may be substantially to lessen competition” in violation of the Clayton Act. F.T.C. v. Sysco Corp., 113 F.Supp.3d 1, 22 (D.D.C. 2015). The Commission meets this standard if it “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.” Id. at 23 (citing Heinz, 246 F.3d at 714-15).

         To determine the Commission's likelihood of success on the merits, the Court applies the burden-shifting framework established by United States v. Baker Hughes, Inc., 908 F.2d 981, 982-93 (D.C. Cir. 1990). First, the FTC must show that the Tronox-Cristal merger will lead to “undue concentration in the market for a particular product in a particular geographic area.” Id. at 982. The Commission thus bears the initial burden of (1) defining the appropriate product market, (2) defining the appropriate geographic market, and (3) showing that the merger will lead to undue concentration in the relevant product and geographic market. See F.T.C. v. Arch Coal, Inc., 329 F.Supp.2d 109, 117 (D.D.C. 2004). Such a showing establishes a presumption that the merger will substantially lessen competition. Baker Hughes, 908 F.2d at 982.

         The Defendants can rebut this presumption by showing that the Commission's “prima facie case inaccurately predicts the [merger's] probable effect on future competition.” Id. at 991. If the Defendants make this showing, the burden of producing further evidence of anticompetitive effects shifts back to the government. Id. at 983. The “ultimate burden of persuasion . . . remains with the government at all times.” Id. In evaluating either party's evidence, “antitrust theory and speculation cannot trump facts.” Arch Coal, 329 F.Supp.2d at 116.

         In addition to evaluating the Commission's prima facie case and any rebuttal evidence proffered by the Defendants, the Court must also weigh the equities involved. The “public interest in effective enforcement of the antitrust laws is of primary importance, ” and “a showing of likely success on the merits will presumptively warrant an injunction.” Arch Coal, 329 F.Supp.2d at 116. If, on the other hand, the FTC cannot show a likelihood of success on the merits, “equities alone will not justify an injunction.” Id.

         III. ANALYSIS

         A. The FTC has Established a Presumption of Anticompetitive Effects

         The Commission has shown a likelihood that Tronox's acquisition of Cristal's titanium dioxide business will substantially impair market competition. It has demonstrated that the relevant market should be defined as the chloride-process TiO2 sold in North America. The FTC's evidence credibly suggests that the merger will greatly increase concentration in an already concentrated market, and that it will create incentives for the remaining industry participants to engage in strategic withholding of TiO2 supplies to maintain higher prices.

         1. Chloride-Process Titanium Dioxide is the Relevant Product Market

         A market's “outer boundaries” are determined by the “reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962). Within this market, however, “well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes.” Id. The appropriate submarket can be identified “by examining such practical indicia as industry or public recognition of the 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.” Id. “[E]vidence of industry or public recognition of the submarket as a separate economic unit matters because we assume that economic actors usually have accurate perceptions of economic realities.” United States v. H & R Block, Inc., 833 F.Supp.2d 36, 53 (D.D.C. 2011).

         The Defendants contend that the market, properly defined, includes both chloride- and sulfate-process TiO2, but the Commission believes the correct market includes only the former. Both the economic realities of the industry, as described by TiO2 producers and consumers, and the evidence presented by the expert economists show that the FTC has carried its burden.

         a. Producers and Consumers View Chloride TiO2 as a Separate Product, and the Expert Evidence Supports this View

         Manufacturers of titanium dioxide consistently recognize the existence of a chloride TiO2 submarket in North America. In 2014, for example, Tronox's Content Communications Manager emailed then-CEO Tom Casey talking points ahead of a town hall meeting. PX1427. The talking points convey that, unlike sulfate, “[c]hloride process uses higher-quality feedstocks and makes better-quality TiO2” and that “[s]ubstitution in US/Europe not likely.” Id. at 003. A 2015 Tronox presentation notes that the “North American market is ~90% chloride. There is no sulfate production (except a small plant in Canada, Kronos). Limited imports.” PX1322-003. At the evidentiary hearing, Tronox CEO Jeffry Quinn[3] conceded that “the way things have developed here in the U.S. is as a chloride market.” Hr'g Tr. 641:17-19. He added that chloride TiO2 uses a different manufacturing process, is “viewed as more environmentally friendly, and it has - so I think it's a different product.” Hr'g Tr. 648:18-21.

         Mr. Christian, [4] from the Defendants' competitor Kronos, similarly testified that chloride TiO2's “brighter, more reflective white” and its “better durability, scrubability, and various other performance characteristics” when compared to sulfate TiO2 make it a “higher-quality product that [is] preferred, all things being equal, by the customers.” Hr'g Tr. 169:10-20. Kronos's chloride TiO2 products “are more environmentally friendly . . . have a lower cost structure, and . . . command higher prices in the marketplace.” Hr'g Tr. 174:18-21. Consistent with this view, other TiO2 suppliers distinguish between their chloride- and sulfate-process TiO2 products.[5]

         Like suppliers, customers recognize a submarket for chloride-process TiO2, reflecting the product's particular traits and uses. Dr. Malichky[6] testified that chloride and sulfate TiO2 are “not substitutable on a color basis” and that if “you don't want [a paint product] to degrade or fade" the product would "require chloride." Hr'g Tr. 100:12-19. Masco, maker of Behr paints, adds that the "ultra pure white feature" of its paints is "[e]xtrernely important" for the firm's brand, and that "to achieve that [feature], we need to use TiO2 produced based on the chloride process." Adrnin. Trial Tr. 972:16-973:20.[7]

         In fact, customers do not substitute away from chloride TiO2 even when prices are "very high" or when sulfate prices have "been as much as (XXXXX) cheaper than chloride TiO2." See PX8001-002; PX8003-003. (XXXXX) reported that, "[e]xcept for our traffic marking pamt, we have not used sulfate TiO2 in our products in North America even though sulfate grades generally are less expensive than chloride grades." PX8003-003. Switching from chloride to sulfate TiO2 involves "[t]housands of horns" of labor due to the complexities associated with color-matching and product reformulation (i.e., ensuring that paint colors made with chloride TiO2 are not visibly different from the colors as made with sulfate TiO2). Hr'g Tr. 104:14-105:6.

         The Defendants suggest that the market is not so black and white. "Chloride-process TiO2 can be used interchangeably with sulfate-process TiO2 in the vast majority of end-use applications," they argue, and consumers "regularly try to leverage sulfate-process TiO2 prices in negotiations with suppliers about chloride-process TiO2." Defs.' Redacted Opp. to Prelim. Inj. 11, ECF No. 70 (emphasis added). But the relevant question concerns not just the hypothetical possibility of substitution, but whether customers do in fact exhibit a willingness to substitute chloride- and sulfate-process TiO2. See Arch Coal, 329 F.Supp.2d at 119.

         Compare the market perspectives discussed above with those offered by the consumers in Arch Coal. There, the court considered how much utilities companies substitute between two types of coal - 8800 Btu and 8400 Btu. It found that “virtually all the utilities acknowledged that they can and do purchase and consume both 8800 and 8400 Btu coal, and that they actively solicit and consider both in their coal bidding procedures.” Id. at 121. Customers testified that their facilities “were designed to burn, and have burned” both types of coal, that they “purchased both 8400 and 8800 coal in the past five years” and that managers “purchase 8400 to 8800 Btu coal depending on which coal has the best evaluated price.” Id. at 121-22. The court thus concluded that the “evidence of significant interchangeability” between 8800 and 8400 Btu coal, combined with a “reluctance of [the FTC's] own expert to conclude that 8800 Btu coal is a separate relevant market, ” meant that the Commission failed to carry its burden of establishing its proffered product market. Id. at 122-23.

         Here, the Commission has sufficiently shown a relevant product market. The evidence from customers and suppliers suggests a lack of significant interchangeability between chloride and sulfate TiO2. And the report and testimony of the Commission's expert economist, Dr. Hill, bolster this evidence.[8]

         Using producer invoices and data published by the International Trade Commission and the United Nations, Dr. Hill evaluated price trends for chloride and sulfate TiO2. He found that, from 2012 to 2017, “chloride titanium dioxide was on average $532 per ton, or 21 percent, more expensive than sulfate titanium dioxide.” PX5000-046. Yet, despite this price premium for chloride TiO2, “the proportion of sales accounted for by chloride titanium dioxide has held steady [in North America].” Id. The existence of distinct prices and a consistent market share for chloride TiO2 are “not what one would expect if North American customers were willing and able to substitute one type of titanium dioxide for another in response to a change in their relative prices.” Id.

         b. The Defendants' Product Market Counterarguments are Unavailing

         Dr. Shehadeh, the Defendants' expert, attacked Dr. Hill's findings, countering that “[e]conomically significant co-movement between prices for chloride-produced TiO2 and prices for sulfate-produced TiO2 establishes a single market” for the two products. RX0170.0143.[9]Using data from Cristal, Venator, and Kronos, Dr. Shehadeh showed “the correlation between and co-integration of monthly chloride and sulfate TiO2 prices for” the three firms from 2010 to 2017. Id. at 0144-46. This price correlation, according to Dr. Shehadeh, suggests that chloride and sulfate TiO2 are substitutable.

         But the mere fact that the prices of two goods move upward or downward together need not mean that they are substitutes. As Dr. Hill explained during the evidentiary hearing, “If you think about the sale of hamburger buns and hot dog buns, their prices will be highly correlated. Their demands are both seasonal-high in the summer, low in other seasons-and they're made with the same ingredients. So their prices will be highly correlated. But they're not close substitutes for each other.” Hr'g Tr. 407:24-408:4.

         Price correlation between the two types of TiO2 may reflect changes in feedstock prices, or a correlation in the demand for different types of paints (like low-end traffic marking paint, which tends to use sulfate TiO2, and high-end exterior home paint, which uses the chloride pigment). In other words, “rather than high cross-elasticity of demand, correlated price movements might reflect the similar responses of different markets to similar changes, as when all prices move up in response to changes in common ...


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