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Federal Trade Commission v. Wilh. Wilhelmsen Holding ASA

United States District Court, District of Columbia

October 1, 2018



         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.


         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.


         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 ...

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