MEMORANDUM OPINION
The
Federal Trade Commission (“FTC”) has moved for a
preliminary injunction to block a proposed merger between
defendants Wilhelmsen Maritime Services AS
(“WMS”), Wilhelmsen Ship Services
(“WSS”) (collectively “Wilhelmsen”),
and The Resolute Fund II, L.P., Drew Marine Intermediate II
B.V., and Drew Marine Group, Inc. (collectively
“Drew”), two large providers of marine water
treatment chemicals and related services. The FTC objects to
the merger on the grounds that Defendants are each
other's closest and only realistic competition for
supplying these chemicals and services on a global scale, and
the merger threatens to reduce or eliminate tangible consumer
benefits resulting from market competition. Having considered
the evidence presented through live testimony, as well as
extensive pleadings, exhibits, and other submissions, the
court hereby GRANTS the motion for preliminary injunction.
I.
BACKGROUND
This
case is about the likely impact of a proposed merger in the
international maritime industry-an industry on which much of
the global economy, including intercontinental trade,
large-scale transport of raw materials, and the import/export
of foodstuffs and manufactured goods, depends. See
PX90033 at 001; PX90034 at 001 (noting that
"[international shipping transports more than 80 percent
of global trade to peoples and communities all over the
world," and that "[s]hipping is the most efficient
and cost-effective method of international transportation for
most goods"). By at least one estimate, the worldwide
shipping industry includes 50, 000 merchant ships registered
in over 150 nations. PX90033 at 001. The following map,
originally sourced from the National Center for Ecological
Analysis and Synthesis, depicts common global shipping routes
and underscores the breadth and density of maritime industry
activities:
(Image Omitted)
PX10126 at 023. While international merchant ships includes
many types of vessels, all of them- and especially large
ones-require regular maintenance to ensure continuous
performance at operational levels. Companies like Wilhelmsen
and Drew provide an array of products and services designed
to ensure the continued operational performance of all types
of maritime vessels. See PX10126 at 008-009 (noting
that “VPP [vessel performance products] applications
are necessary to maintain financial and operational
efficiency of vessels, ” and that such products
“are required by all commercial shipping vessel
classes, ” which include container ships, bulk ships,
cruise ships, military ships, tankers, cargo ships, and even
offshore oil and gas rigs). Defendants sell maritime
customers several categories of products, including cleaning
chemicals, fuel treatment chemicals, welding gases,
refrigerants, and, critically, water treatment chemicals. Am.
Compl. ¶ 29; Ans. ¶ 29. The products at issue in
this case are consumable water treatment products and related
services, a category that includes products and services for
the chemical treatment of boiler water, cooling water, water
production, waste water, ballast water, and potable water.
DX-1161 at 0019.
Marine
vessels use water resources for a number of applications,
including drinking, showering, cleaning, pools, spas,
and-critically-for boiler and cooling systems. JX-0149 at
003. Depending on the type of ship, a boiler is necessary
either as a constituent part of the main propulsion system or
as part of an auxiliary system on which the propulsion system
relies. PX90030 at 001. In auxiliary systems, the boiler
primarily serves to generate steam to support ship functions
in vessels running on marine diesel engines or diesel
electric propulsion. PX90030 at 001. Examples include
preventing Heavy Fuel Oil (“HFO”)-a highly
viscous substance- from falling below the temperature at
which it is useable, heating HFO to ensure fluidity
immediately before use in the engine, and for use in
purifiers, booster modules, and other applications. PX90030
at 002-005. Cooling water systems reduce excess heat produced
by the working machinery of a vessel's engine. PX90032 at
001. Essentially, cooling water systems circulate water
through the engine to remove heat and reduce the likelihood
of engine failure. Fry Hrg. Tr. at 943: 17-24 (“If you
don't maintain the cooling water side, then you're
relying on the oil side of the house to take up and remove
that heat from the engine. And what happens is, if you
don't cool the cylinders down, the oil starts breaking
down. When the oil starts breaking down, then you get
metal-to-metal contact inside the piston and the rings, and
then you have an engine failure, and usually . . . under
those circumstances you have a crank case explosion as
well.”).
Marine
water treatment chemicals “are all the chemicals
associated with the maritime operation of
ships”-including boiler chemistry, diesel chemistry,
central cooling water, and evaporators. Fry Hrg. Tr. at 936:
11-12. After measuring the pH, conductivity, temperature, and
oxidation-reduction potential of the water with specialized
testing equipment, ship engineers inject these chemicals into
the boiler and engine cooling systems through specialized
dosing equipment optimized for high-pressure/low-volume or
low-pressure/high-volume applications. Fry Hrg. Tr. at 945:
10-12; JX-0135 at 005; PX90014 at 003-004. Once injected,
water treatment chemicals ensure the performance and
reliability of marine boiler and engine cooling systems by:
(1) removing excess oxygen from the systems, (2) allowing
fine-tuned control of boiler water, cooling water, and
feedwater pH; and (3) preventing the leaching and circulation
of harmful metals. See Fry Hrg. Tr. at 937: 1-21;
see also JX-0135 at 002. In each of these
applications, the chemicals operate to reduce or eliminate
the incidence of scale, corrosion, and oxygen formation
within boiler, feedwater, and engine cooling systems, as well
as the risk of engine overheating with respect to cooling
systems specifically. Fry Hrg. Tr. at 937: 1-6; JX-0135 at
003; Fry Hrg. Tr. at 943: 12-14 (“Q. And why do vessels
use engine cooling water chemicals? A. To control the amount
of corrosion and erosion within the cooling channels of the
engine itself.”).
Although
marine water treatment chemicals “only account for a
small fraction of the cost of managing a ship, ”
PX80014 ¶ 3, failure to treat the water resources in
boiler and engine cooling systems comes with significant
consequences, including breakdown or catastrophic failure.
See, e.g., Thompson Hrg. Tr. at 259: 18-24
(“Q. What happens if a boiler develops corrosion? A.
[I]t could potentially damage the boiler. It may require
significant servicing or even replacement”); JX-0135 at
002 (“Deviating from recommended pH and phosphate
control limits can lead to caustic corrosion and result in
catastrophic failure of the boiler system.”); Fry Hrg.
Tr. at 942: 24- 25-943:4, 17-24 (describing how failure to
treat high pressure boiler water could cause a ruptured pipe
and boiler explosion, and how failure to treat cooling water
could cause engine failure or explosion). System failure
requires costly repairs and unscheduled downtime that
translates to lost business and profits for shipping
companies. JX-0149 at 003 (“Water treatment is as much
about asset protection as it is about maintaining efficiency.
The consequences of not using the right treatments can be
costly, resulting in unscheduled downtime, or in the worst
cases catastrophic, leading to total breakdown of
equipment”); PX90014 at 003; Thompson Hrg. Tr. at
259:21-24 (noting that due to the size of the boilers
involved, replacement would likely require cutting a hole in
the hull and removing the boiler in pieces). Maritime
companies therefore regard a consistent and effective marine
water treatment program as critical to maintaining an
operational fleet of ships. See, e.g., PX80014
¶¶ 3, 5, 7 (describing the importance of water
treatment chemicals to ship operations, the need for
consistency and dependability in chemical products, and the
preference for companies offering total packages of chemical
products and related services); Medina Hrg. Tr. at 167: 8-10
(“[C]onstancy in the chemical makeup of [marine water
treatment chemical] products is crucial to the maintenance of
our equipment.”).
Consistent
with customer demand for reliable water treatment chemical
programs, suppliers of water treatment chemicals focus their
business strategy on providing more than the chemicals
themselves. They supply a “total solution”-a
program that includes chemical products, test kits, technical
expertise and support, and access to a global network with
the ability to quickly and reliably provide product on
demand, wherever a vessel is located, and whatever its
specific needs may be. JX-0231 at 154
(“Manufacturer/supplier should be able to . . .
[s]upply a total solution rather than just the
product”); XXXXX uses the
phrase ‘total solution' here, can you explain what
that phrase means. A. It typically means the service that
would come with the product, or even identifying what would
be the best product for that application. So the total
package would be not just a product but the service
associated with the use, or identifying the right use of the
right product for that application.”); XXXXX (noting that when Drew enrolls a new
customer in its water treatment program it offers
recommendations on how to use specific water treatment
chemicals, how to test water in boiler and cooling systems,
and how to properly dose the chemicals); Medina Hrg. Tr. at
170:7- 171:25 (discussing various services provided by marine
chemical suppliers); see also, e.g.,
Thompson Hrg. Tr. at 279:9-281:22 (describing the specific
products and services covered under contract with marine
chemical supplier). Defendants-whose business is described in
more detail below-provide such programs.
Defendant
Drew Marine Group, Inc. is a subsidiary of defendant Drew
Marine Intermediate II B.V., which is owned by defendant The
Resolute Fund II, L.P., a private equity fund managed by The
Jordan Company. Am. Compl. ¶ 24. Drew was originally
established in 1928, and has grown over the ensuing years
into a company with a global infrastructure. Am. Compl.
¶ 24; DX-1161 at 0006, 0010. As Drew Marine
representatives put it at a management presentation on
February 15, 2017, “Drew Marine's strength is in
delivering technical support in specialty chemicals.”
DX-1161 at 0019. Accordingly, roughly __ % of Drew's
revenue is traceable to “Water Treatment Solutions,
” a category that includes an array of products and
services related to the chemical treatment of boiler water,
cooling water, water production, waste water, ballast water,
and potable water. DX-1161 at 0019. Drew maintains a
“sales, service and logistics network that spans 47
countries, with stocking locations in nearly 100 distribution
facilities that in turn supply [an estimated] 1000 ports and
customers worldwide.” PX10126 at 017.
Defendant
Wilhelmsen Maritime Services AS is a wholly owned subsidiary
of defendant Wilh. Wilhelmsen Holding ASA, a publicly traded
corporation headquartered in Norway. Am. Compl. ¶ 23.
Wilhelmsen Ship Services (WSS) is a division of WMS that
focuses on supplying marine customers with a number of
products and services, including water treatment chemicals
and associated equipment for boiler water, cooling water,
water production, and pool water. PX61000 ¶¶ 51,
53; PX90046; PX90047; PX90050; PX90063. Wilhelmsen-the parent
company-was founded as a shipping business in 1861. PX61000
¶ 51. WSS was founded in 1968. Since then, WSS has
developed into “the largest maritime services network
in the world, ” capable of delivering “in 125
countries . . . [and] supporting [its] non-stop operations in
2, 200 port locations across the globe.” PX20172 at
006. Marine chemicals account for __ % of WSS's total
revenues. PX20137 at 0010.
Pursuant
to a Share Purchase Agreement dated April 27, 2017, WMS
proposed to acquire 100% of Drew's voting securities for
approximately $400 million. Am. Compl. ¶ 25. The FTC
then conducted a ten-month investigation, after which it
“found reason to believe that the proposed Acquisition
violates Section 7 of the Clayton Act and Section 5 of the
FTC Act.” Mem. Supp. Prelim. Inj. 12
(“Mot.”). The FTC initiated an administrative
action alleging a violation of the above statutes, and the
merits trial in that action is scheduled to begin on July 24,
2018. Mot. at 2. The FTC also filed the instant motion for a
preliminary injunction under Section 13(b) of the FTC Act, to
preserve the status quo pre-merger during the pendency of the
administrative proceeding. Mot. at 12-13.
An
evidentiary hearing on the motion for preliminary injunction
began on May 29, 2018 and concluded on June 19, 2018. The
court heard testimony from fifteen fact witnesses-either live
or via video deposition-and three expert witnesses. Plaintiff
and Defendants each submitted proposed findings of fact and
conclusions of law on June 25, 2018, along with a combined 4,
186 exhibits.
II.
LEGAL STANDARDS
A.
Section 7 of the Clayton Act
Section 7 of the Clayton Act prevents mergers or acquisitions
where “the effect . . . 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. As the Supreme Court has noted, Section 7 concerns
“probabilities, not certainties, ” Brown Shoe
Co. v. United States, 370 U.S. 294, 323 (1962), and thus
the FTC need not demonstrate certainty that a proposed merger
will produce anticompetitive effects-only that a
“substantial lessening of competition will be
‘sufficiently probable and imminent' to warrant
relief.” FTC v. Arch Coal, Inc., 329 F.Supp.2d
109, 115 (D.D.C. 2004) (citing United States v. Marine
Bancorporation, 418 U.S. 602, 618 (1974)).
B.
Section 13(b) Standard for Preliminary Injunction
Section 13(b) of the Federal Trade Commission Act empowers
the Federal Trade Commission to seek preliminary injunctive
relief in order to prevent a merger until it can adjudicate
the merger's legality in an administrative proceeding,
provided the agency has “reason to believe” that
the merger will violate the antitrust laws. 15 U.S.C. §
53(b); see also FTC v. CCC Holdings Inc., 605
F.Supp.2d 26, 35 (D.D.C. 2009); FTC v. H.J. Heinz
Co., 246 F.3d 708, 714 (D.C. Cir. 2001). Section 13(b)
provides that an injunction may issue “[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). As the D.C. Circuit noted in Heinz, the
omission of any irreparable harm element evinces
Congress's intention “to depart from what it
regarded as the . . . traditional equity standard” that
applies to traditional requests for preliminary relief.
Heinz, 246 F.3d at 714; see also FTC v. Exxon
Corp., 636 F.2d 1336, 1343 (1980) (“In enacting
[15 U.S.C. § 53(b)], Congress . . . demonstrated its
concern that injunctive relief be broadly available to the
FTC by incorporating a unique ‘public interest'
standard . . . rather than the more stringent, traditional
‘equity' standard for injunctive relief.”).
Under
Section 13(b), the district court balances the FTC's
likelihood of success against the equities on a sliding
scale. FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028,
1035 (D.C. Cir. 2008) (Brown, J.) (citing H.J. Heinz
Co., 246 F.3d at 727). Since Congress's particular
“public equity consideration in enacting Section 13(b)
was ‘the public interest in effective enforcement of
the antitrust laws, '” a showing of “private
equities” alone will not suffice to overcome a showing
of likelihood of success, and the equities often favor the
FTC. Id. Moreover, “[t]he FTC is not required
to establish that the proposed merger would in fact
violate section 7 of the Clayton Act” in a Section
13(b) proceeding. FTC v. Sysco Corp., 113 F.Supp.3d
1, 22 (D.D.C. 2015) (quoting Heinz, 246 F.3d at
714). Instead, “to demonstrate the likelihood of
success on the merits, ‘the government need only show
that there is a reasonable probability that the challenged
transaction will substantially impair competition.”
Id. (quoting FTC v. Staples, 970 F.Supp.
1066, 1072 (D.D.C. 1997)). Thus, the trial court's role
in a Section 13(b) proceeding is to “measure the
probability that, after an administrative hearing on the
merits, the Commission will succeed in proving that the
effect of the [proposed] merger ‘may be substantially
to lessen competition, or to tend to create a monopoly in
violation of section 7 of the Clayton Act.'”
Id. (quoting Heinz, 246 F.3d at 714). The
FTC satisfies this standard where it “rais[es]
questions going to the merits so serious, substantial,
difficult[, ] and doubtful as to make them fair ground for
thorough investigation.” Whole Foods, 548 F.3d
at 1035 (Brown, J.) (quoting Heinz, 246 F.3d at
714-15); see also Sysco, 113 F.Supp.3d at 22.
Nevertheless, a preliminary injunction in this context
remains “an extraordinarily drastic remedy, ”
Exxon, 636 F.2d at 1343 (quoting Medical Society
v. Toia, 560 F.2d 535, 538 (2d Cir. 1977)), especially
since “as a result of the short life-span of most
tender offers, the issuance of a preliminary injunction
blocking an acquisition or merger may prevent the transaction
from ever being consummated.” Id.
C.
Baker Hughes Burden-Shifting Framework
Courts
in this Circuit apply the burden-shifting framework set out
in United States v. Baker Hughes Inc., 908 F.2d 981,
991 (D.C. Cir. 1990), to assess whether a proposed merger
violates Section 7 of the Clayton Act. Under that framework,
the FTC bears the initial burden to prove that a proposed
merger would result in “undue concentration in the
market for a particular product in a particular geographic
area.” Id. at 982; see also Heinz,
246 F.3d at 715 (quoting United States v. Phila.
Nat'l Bank, 374 U.S. 321, 363 (1963)); United
States v. Anthem, Inc., 236 F.Supp.3d 171, 192 (D.D.C.
2017). Such a showing entitles the FTC to a presumption that
the merger will substantially lessen competition. Baker
Hughes, 908 F.2d at 982 (citing United States v.
Citizens & Southern Nat'l Bank, 422 U.S. 86, 120
-22 (1975)); Arch Coal, 329 F.Supp.2d at 115-17,
appeal dismissed, No. 04-5291, 2004 WL 2066879 (D.C.
Cir. Sept. 15, 2004). Defendants are then entitled to rebut
the presumption by presenting evidence that
“‘show[s] 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 Citizens &
Southern Nat'l Bank, 422 U.S. at 120). Where
defendants successfully rebut the presumption of illegality,
“the burden of producing additional evidence of
anticompetitive effect shifts to the government, and merges
with the ultimate burden of persuasion, which remains with
the government at all times.” Baker Hughes,
908 F.2d at 983; see also Heinz, 246 F.3d at 715.
III.
DISCUSSION
A.
Likelihood of Success on the Merits
1.
Prima Facie Case
Given
that “the ultimate determination of the legality of a
merger involves an assessment of the new firm's market
power . . . and the prima facie case concerns market
concentration, ” Anthem, 236 F.Supp.3d at 193
(D.D.C. 2017), it is appropriate to begin a merger analysis
by defining the “relevant product and geographic
boundaries of the market[] in question.” FTC v.
Cardinal Health, Inc., 12 F.Supp.2d 34, 45 (D.D.C.
1998); see also Id. (“[d]efining the relevant
market is critical in an antitrust case because the legality
of the proposed mergers in question almost always depends
upon the market power of the parties involved.”);
Marine Bancorporation, 418 U.S. at 618 (describing
market definition as a “necessary predicate” to
evaluating the legality of a merger under Section 7). The
“relevant market has two components: (1) the relevant
product market and (2) the relevant geographic market.”
CCC Holdings Inc., 605 F.Supp.2d at 37; see also
Arch Coal, 329 F.Supp.2d at 117. In this case, there is
no dispute regarding the relevant geographic market-the
parties agree it is global. Nevo Hrg. Tr. at 564:18-565:8;
Israel Hrg. Tr. at 1456:21-23. Thus, the court now turns to
determining the bounds of the relevant product market.
a.
Relevant Product Market
1.
LEGAL STANDARD
The
Supreme Court has long maintained that “[t]he outer
boundaries of a product market are determined by the
reasonable interchangeability of use or the cross-elasticity
of demand between the product itself and the substitutes for
it.” Brown Shoe Co., 370 U.S. at 325.
Accordingly, the touchstone is demand
substitution-“[m]arket definition focuses . . . on
customers' ability and willingness to substitute away
from one product to another in response to a price increase
or a corresponding non-price change such as reduction in
product quality or service.” 2010 Merger Guidelines
§ 4. The key question is “whether there are other
products offered to consumers which are similar in character
or use to the product or products in question, as well as how
far buyers will go to substitute one commodity for
another.” Staples, 970 F.Supp. at 1074 (citing
United States v. E.I. du Pont de Nemours and Co.,
351 U.S. 377, 393 (1956)); see also United States v. H
& R Block, 833 F.Supp.2d 36, 51 (D.D.C. 2011). Where
“one product is a reasonable substitute for the other,
it is to be included in the same relevant product market even
though the products themselves are not the same.”
Cardinal Health, 12 F.Supp.2d at 46.
Whether
a product is a reasonable substitute for another depends on
two factors: (a) the extent to which “buyers view
similar products as substitutes” and thus “can
substitute the use of one for the other” (i.e.,
functional interchangeability), Sysco 113 F.Supp.3d
at 25; Arch Coal, 329 F.Supp.2d at 119; and (b) the
extent to which variations in the price of one product-an
increase, for example-affects demand for another (i.e.,
cross-elasticity of demand). See, e.g., Cardinal
Health, 12 F.Supp.2d at 46 (“a product is
construed to be a ‘reasonable substitute' for
another when the demand for it increases in response to an
increase in the price for the other.”). Thus, the
boundaries of the relevant market lie where the reasonable
alternatives for substitution-based on use or price-end.
“The relevant market consists of all the products that
the Defendants' customers view as substitutes to those
supplied by the Defendants” id., “even
though the products themselves are not entirely the
same.” Sysco, 113 F.Supp.3d at 25.
Broad
markets sometimes include relevant submarkets that themselves
may “constitute product markets for antitrust
purposes.” Whole Foods, 548 F.3d at 1037-38
(Brown, J.) (quoting Brown Shoe, 370 U.S. at 325). A
firm need not “be included in the relevant product
market for antitrust purposes” just because “it
may be termed a competitor in the overall marketplace.”
H & R Block, 833 F.Supp.2d at 51 (quoting
Staples, 970 F.Supp. at 1075); see also
Sysco, 113 F.Supp.3d at 26 (“[F]or example, fruit
can be bought from both a grocery store and a fruit stand,
but no one would reasonably assert that buying all of
one's groceries from a fruit stand is a reasonable
substitute for buying from a grocery store”). Moreover,
“the ‘product' that comprises the market need
not be a discrete good for sale, ” Sysco, 113
F.Supp.3d at 26, but can be a “cluster of products . .
. and services, ” Phila. Nat'l Bank, 374
U.S. at 356, as long as the combination of “a number of
different products or services” into “a single
market . . . reflects commercial realities.” United
States v. Grinnell Corp., 384 U.S. 563, 572 (1966);
Sysco, 113 F.Supp.3d at 26 (“[W]hat is
relevant for consideration here is not any particular food
item sold or delivered by Defendants, but the full panoply of
products and services offered by them that customers
recognize as ‘broadline distribution.'”).
Such a “cluster market” can even “allow
items that are not substitutes for each other to be clustered
together in one antitrust market for analytical
convenience.” FTC v. Staples, Inc.
(Staples II), 190 F.Supp.3d 100, 117 (D.D.C. 2016)
(finding a cluster market of consumable office supplies
justified because “market shares and competitive
conditions are likely to be similar for the distribution of
pens to large customers and the distribution of binder clips
to large customers.”); see also ProMedica Health
Sys., Inc. v. FTC, 749 F.3d 559, 565-68 (6th Cir. 2014)
(describing the appropriateness of clustering multiple types
of hospital services for the purposes of analytical
convenience where competitive conditions were similar).
Lastly,
antitrust markets can be based on targeted customers. Section
4.1.4 of the Merger Guidelines-described by the court in
Sysco as providing “[t]he clearest
articulation of [a targeted customer] approach to product
market definition”-states that “[i]f a
hypothetical monopolist could profitably target a subset of
customers for price increases, the Agencies may identify
relevant markets defined around those targeted customers, to
whom a hypothetical monopolist would profitably and
separately impose at least a [small but significant and
non-transitory increase in price].” Merger Guidelines
§ 4.1.4; Sysco, 113 F.Supp.3d at 27. In other
words, a targeted customer market may exist when “[a]
price increase for targeted customers may be profitable even
if a price increase for all customers would not be profitable
because too many other customers would substitute
away.” Merger Guidelines § 3. Thus,
“[d]efining a market around a targeted consumer . . .
requires finding that sellers could ‘profitably target
a subset of customers for price increases, '” which
in turn demands that there be “differentiated pricing
and limited arbitrage.” Staples II, 190
F.Supp.3d at 117-18.
Courts
employ two main analytical approaches in order to determine
whether the boundaries of a relevant product market are
“drawn narrowly to exclude any other product to which,
within reasonable variations in price, only a limited number
of buyers will turn.” United States v.
Aetna, Inc., 240 F.Supp.3d 1, 20 (D.D.C. 2017) (quoting
Times-Picayune Publ'g Co. v. United States, 345
U.S. 594, 612 n.31 (1953)). These include the hypothetical
monopolist test, the application of which is frequently the
subject of “testimony from experts in the field of
economics, ” and the “practical indicia”
described by the Supreme Court in Brown Shoe.
Sysco, 113 F.Supp. 3d at 27.
Hypothetical
Monopolist Test
In
determining the bounds of a relevant market, courts often opt
“to ask hypothetically whether it would be profitable
to have a monopoly over a given set of substitutable products
. . . . If so, those products may constitute a relevant
market.” H & R Block, 833 F.Supp.2d at
51-52; see also 5C Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law (hereinafter, “Areeda &
Hovenkamp”), ¶ 530a, at 237 (4th ed. 2014)
(“[A] market can be seen as the array of producers of
substitute products that could control price if united in a
hypothetical cartel or as a hypothetical monopoly.”).
This hypothetical inquiry is referred to by courts and in the
merger guidelines as the hypothetical monopolist test.
See Sysco, 113 F.Supp.3d at 27; Merger Guidelines
§ 4.1.1. The test essentially asks whether a
“hypothetical profit-maximizing firm, not subject to
price regulation, that was the only present and future seller
of those products . . . likely would impose at least a small
but significant and non-transitory increase in price
(“SSNIP”) on at least one product in the market,
including at least one product sold by one of the merging
firms.” Merger Guidelines § 4.1.1. A SSNIP is
usually defined as five percent or more. Id.
The
Brown Shoe Practical Indicia
Courts
also determine the boundaries of a relevant product market by
examining “such practical indicia as industry or public
recognition of the [relevant market] 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.” Whole Foods, 548 F.3d at 1037-38
(Brown, J.) (quoting Brown Shoe, 370 U.S. at 325).
The Brown Shoe “‘practical indicia'
of market boundaries may be viewed as evidentiary proxies for
proof of substitutability and cross-elasticities of supply
and demand.” H & R Block, 883 F.Supp.2d at
51 (quoting Rothery Storage & Van Co. v. Atlas Van
Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986)).
2.
ANALYSIS
The FTC
defines the relevant product market here as “the supply
of marine water treatment (“MWT”) products and
services to Global Fleet customers, ” where MWT
products and services include “[t]he supply of BWT
chemicals, CWT chemicals, and associated products and
services.” Plaintiff's Proposed Findings of Fact
and Conclusions of Law (“PFF”) ¶¶ 7,
17, ECF No. 81-2. This definition depends on at least three
premises: (1) that there are no functional substitutes for
the supply of boiler water treatment (“BWT”)
products and services or cooling water treatment
(“CWT”) products and services, (2) that it is
appropriate to cluster BWT products and services and CWT
products and services into one antitrust market for
analytical convenience (while excluding other water treatment
products), and (3) that it is appropriate to define the
relevant market around “Global Fleets” as a
distinct set of targeted customers. See PFF
¶¶ 17-44.
As an
initial matter, the court finds that there are no reasonable
substitutes for BWT or CWT products and services. These
products and services have unique purposes-preserving the
functionality of boilers and engines-and no party has pointed
to any chemical or group of chemicals, or associated
services, that could replace the critical functions that such
products perform. In other words, it is possible to regard
BWT products and services and CWT products and services as
two separate product markets (e.g., the market for
BWT and the market for CWT), insofar as none of the products
grouped in either category have any reasonable substitutes
that can perform the same functions.[1] Thus, the disputed threshold
issues are (1) whether the markets for BWT and CWT can be
clustered together in the manner proposed by the FTC, and (2)
whether that cluster market can be further defined around the
FTC's preferred set of targeted customers.
i.
BWT and CWT as a Cluster Market
Defendants,
supported by their expert, Dr. Mark A. Israel, advance two
primary arguments against the FTC's proposed cluster
market: that the market is overinclusive and underinclusive.
Mem. Supp. Opp'n to Mot. at 23, ECF No. 50-2. They argue
that the market is overinclusive insofar as it combines two
categories of product-BWT and CWT-that are not reasonably
interchangeable, meaning that combining them does not
accurately reflect commercial realities and conflicts with
the notion that product market definition depends on
substitutability. ECF No. 50-2 at 24; DX-0060 ¶¶
66-67. Defendants also argue that the proposed market is
underinclusive because it is inappropriate for the FTC to
consider BWT and CWT in the same market without also
including the other water treatment and marine products
typically sold alongside BWT and CWT, frequently in the same
contract. ECF No. 50-2 at 25; DX-0060 ¶¶ 68-70.
While Defendants acknowledge that these other products are
not reasonable substitutes for BWT or CWT, they assert that
neither are BWT and CWT reasonable substitutes for one
another, such that with respect to products typically sold
together, the FTC cannot include one product category that is
not a reasonable substitute and then exclude others on that
same ground. In other words, “the FTC cannot both lump
BWTC and CWTC because they are part of the same sales and
purchase process, but then also exclude all other products
that are also part of that process.” ECF No. 50-2 at
25- 26.
The FTC
responds first that Defendants' argument regarding
overinclusiveness-based on the absence of interchangeability
between BWT and CWT-fundamentally misapprehends the nature of
a cluster market. According to the FTC, a cluster market does
not aim to group together substitutable products, but rather
groups non-substitutable products that face similar
competitive conditions. Reply to Opp'n. to Mot. 5, ECF
No. 56-2. The FTC argues that since both BWT and CWT products
function to maintain operational equipment on marine vessels,
both involve the same customers with the same need for global
consistency, and both are distinguishable from products like
cleaning chemicals, which do not require the same level of
consistency. ECF No. 56-2 at 5-6. Moreover, the FTC argues
that Defendants face the same set of competitors for both
products, and therefore BWT and CWT face similar competitive
conditions and can be appropriately clustered. ECF No. 56-2
at 5-6. As for Defendants' underinclusiveness argument,
the FTC notes that clustering BWT and CWT with other marine
products is inappropriate because those products do not share
similar competitive conditions, despite the fact that
customers negotiate for them at the same time as they
negotiate for BWT and CWT. ECF No. 56-2 at 9-10.
The
court concludes that the FTC's use of the cluster market
approach is appropriate in this case.[2] Although BWT and CWT
products are distinct products intended for distinct uses,
they are also indisputably similar. Both are specially
blended chemicals that are injected into water systems using
special equipment, in order to prevent corrosion and erosion
in critical systems. Thompson Hrg. Tr. at 259:18-24; Fry Hrg.
Tr. at 943:13-14. While both products make up a “small
fraction of the cost of managing a ship, ” PX80014
¶ 3, the cost of system failure in the absence of these
products is high. JX-0135 at 002. The fact that these
products are low cost, highly critical, and heavily dependent
on precise chemistry means that maritime companies strongly
prefer consistency in their use, so as to avoid the risk of
adverse chemical reaction and the resulting temporary or
catastrophic system failure. Moreover, BWT and CWT products
are frequently sold together as part of an overall management
program that includes a number of additional product-related
services. Deckman Hrg. Tr. at 475: 4-14. These similar
characteristics matter because they factor into
customers' decisions regarding the quantity of products
they purchase, the timing of those purchases, as well as
where they make their purchases. In other words, similar
product characteristics-including function and risk-produce
similar needs and constraints for shipping companies, which
in turn affects supplier strategies and, accordingly,
promotes similar competitive conditions across these product
categories.[3]
It
follows from this point that products that do not share key
characteristics do not produce similar needs or constraints
for shipping companies, meaning that they give rise to
different competitive conditions. The court finds that the
FTC has carried its burden to demonstrate those XXXXX differences. While BWT and CWT chemicals
are both "water treatment chemicals"-a category
that includes "chemicals for the treatment of evaporator
water, ballast water, potable water, and pool/spa water or
their related equipment," DFF ¶ 85 -the evidence is
clear that (1) sales of BWT and CWT are the driving force
behind sales in the "water treatment chemicals"
category.[4] and (2) other chemicals in that category,
such as pool and spa chemicals, are easier to obtain from
multiple suppliers. PX80006 ¶¶ 10. 27; Thompson
Hrg. Tr. at 326:24-327:10. They also do not pose the same
risks to a ship's critical systems, because they have no
function related to those systems.
The
same is true for the larger grouping of marine products.
While Defendants correctly note that agreements for the sale
of marine products to global fleets often include products in
addition to BWT and CWT-such as tank cleaning chemicals,
gases, or refrigerants, see Sarro Hrg. Tr. at 113
(noting that Teekay purchase agreements often include many
different marine products, and that Teekay also purchases
many products from WSS in addition to BWT and CWT); DX-1297
at 0013-0015 (listing products covered by purchase
agreement)-the differences between these products and BWT/CWT
are material. For example, tank cleaning products are less
technically complex, do not pose the same operational risks,
and are ordered on a short term, cleaning-by-cleaning basis,
which makes it easier for shippers to switch suppliers.
See Franzo Hrg. Tr. at 348:22-350:1-22 (describing
the differences between tank cleaning and water treatment
business and the difference in competitive conditions based
on the characteristics of each product); JX-0254 ¶ 7
(“Different categories of chemicals require different
levels of sophistication in chemistry. Water treatment
chemicals are generally more sophisticated and harder to
develop than other categories of marine chemicals.”).
Accordingly, tank cleaning presents a more lucrative business
opportunity for smaller suppliers than does water treatment,
where ships “really [do not] want to upset the apple
cart by changing their products.” Franzo Hrg. Tr. at
349:7-11; JX-0254 ¶ 3 (noting that tank cleaning is
roughly 60% XXXXX of business, and
that water treatment business is ...