Consolidated Foods Corporation

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In THE MATTER OF CONSOLIDATED FOODS CORPORATION ORDER, OPINION, ETC., IN REGARD TO THE ALLEGED VIOLATION OF SEC. 7 OF THE CLAYTON ACT Docket 7000. Complaint, Dec, 18, 1957—Decision, Mar. 22, 1963 Order requiring a large integrated Chicago processor and distributor of a broad line of food products, to divest itself of a Los Angeles manufacturer of dried food seasonings—including onions, garlic, chili pepper, and paprika— acquired in April 1951, which had occupied a position of dominance in the onion and garlic dehydrating and processing industry; and to restore it as a going concern as in the order below in detail set forth. Complaint The Federal Trade Commission having reason to believe that the party respondent named in the caption hereof and hereinafter more particularly designated and described has violated and is now violating the provisions of Section 7 of the Clayton Act (15 U.S.C. Title 15, Sec. 18), as amended and approved December 29, 1950, hereby issues its complaint charging as follows:

Paracrapy 1. Respondent Consolidated Foods Corporation is a corporation organized in 1941 and doing business under and by virtue of the laws of the State of Maryland, with its office and principal place of business located at 185 South La Salle Street, Chicago, Illinois. Respondent Consolidated Foods Corporation, hereinafter referred to as Consolidated, is engaged, among other things in the business of processing, distributing, and retailing a broad line of food products. Its food operations are completely integrated in that it handles a wide variety of products from the raw stage in the field to retailing to the ultimate consumer.

During the period from July 1, 1950, to June 30, 1951, Consolidated’s net sales were $174,006,801. Its net sales for the period from July 1, 1955, to June 30, 1956, totaled $268,252,695. As of June 30, 1951, Consolidated’s assets totaled approximately $60,000,000 and by June 30, 1956 its total assets increased to more than $99,000,000. The distribution of food products constitutes a principal part of Consolidated’s operations. In connection with this distribution Consolidated purchases a substantial volume of food products from various suppliers, many of which use, or can use, the type of dried food seasonings produced by Consolidated’s Gentry Division. Prior to and since April 12, 1951, Consolidated has been and is now engaged in the purchasing, processing and distribution of food prod- Complaint 62 F.T.C.

ucts. Consolidated purchases, processes, and distributes such products in commerce, as “commerce” is defined in the Clayton Act and offers to sell, sells, and distributes said products in said commerce in several of the States of the United States to purchasers located in several of the States of the United States. Par. 2. Gentry, Incorporated, prior to April 1951, was a corporation organized in 1946 and doing business under and by virtue of the laws of the State of California, with its principal office and place of business located at 887 North Spring Street, Los Angeles, California. Gentry, Incorporated, hereinafter referred to as Gentry was engaged in the business of manufacturing dried food seasonings including, among others, onions, garlic, chili pepper and paprika. Gentry, prior to April 1951, in the regular course and conduct of its business, sold or offered for sale, and distributed products hereinabove described, in commerce, as “commerce” is defined in the Clayton Act. Par. 8. On or about April 12, 1951, the stockholders of Gentry approved the sale of Gentry to Consolidated. In accordance with this approval Consolidated acquired Gentry by exchanging one share of Consolidated stock for each five shares of Gentry stock. Since its acquisition by Consolidated, Gentry has been operated as a division of Consolidated. Gentry’s net sales for 1950 were $2,629,- 910. For the period from July 1, 1954, to June 30, 1955, net sales for the Gentry Division amounted to $5,061,989. Prior to and at the time of the acquisition Gentry was one of the few firms of consequence and occupied a position of dominance in the onion and garlic dehydrating and processing industry. Subsequent to the acquisition the Gentry Division of Consolidated has maintained and now maintains a position of dominance in said industry. Par. 4. The effect of the aforesaid acquisition by Consolidated of Gentry may be substantially to lessen competition or to tend to create a monopoly in the lines of commerce, as “commerce” is defined in the Clayton Act, in which Gentry was engaged and in which Consolidated’s Gentry Division is now engaged.

More specifically the aforesaid effects include, among others, the actual or potential lessening of competition or a tendency to create a monopoly in that the acquisition of Gentry by Consolidated: 1. May substantially lessen competition in the nation as a whole or in various sections of the country by reason of the utilization of Consolidated’s purchasing power in such a manner as to coerce or attempt to coerce food suppliers to purchase dried food seasonings from its Gentry Division by withdrawing or threatening to withdraw its patronage.

CONSOLIDATED FOODS CORP. 931 929 Initial Decision 2. May substantially lessen competition or tend to create a monopoly in the nation as a whole or in various sections of the country by the increase of the dominant position of Consolidated’s Gentry Division in the dried food seasonings industry resulting from the utilization of Consolidated’s purchasing power in such a manner as to coerce or attempt to coerce food suppliers to purchase dried food seasonings from its Gentry Division by withdrawing or threatening to withdraw its patronage.

Par. 5. The foregoing acquisition, acts and practices of respondent Consolidated, as herein alleged, constitute a violation of Section 7 of the Clayton Act (U.S.C. Title 15, Sec. 18), as amended and approved December 29, 1950.

Mr. Raymond L. Hays, Mr. Theodor P. von Brand, and Mr. Richard B. Smith for the Commission.

Hopkins, Sutter, Owen, Mulroy & Wentz by Mr. Anderson A. Owen, Mr, Daniel Walker, and Mr. Edward W. Rothe, of Chicago, Il., for respondent.

Intrtau Decision By Earu J. Kors, Heartne Examiner DECEMBER 29, 1961 This proceeding is based upon a complaint charging the respondent, Consolidated Foods Corporation, a corporation, with violation of Section 7 of the Clayton Act, as amended and approved December 29, 1950, by reason of its acquisition of Gentry, Incorporated, a corporation. This proceeding is now before the undersigned hearing examiner for final consideration on the complaint, answer thereto, testimony and other evidence and proposed findings of fact and conclusions of law, together with briefs and reply briefs presented by counsel. The hearing examiner has given consideration to the proposed findings of fact and conclusions of law submitted by both parties and briefs in support thereof, and all findings of fact and conclusions of law proposed by the parties respectively, not hereinafter specifically found or concluded, are herewith rejected, and the hearing examiner being now fully advised in the premises makes the following findings of fact, conclusions drawn therefrom, and order:

1. Respondent, Consolidated Foods Corporation (hereinafter referred to as Consolidated), is a Maryland corporation with its office and principal place of business located at 185 South La Salle Street, Chicago, Illinois. It was originally incorporated as Consolidated Initial Decision 62 E.T.C.

Grocers Corporation and changed its name to Consolidated Foods Corporation in February 1954.

2. Respondent was incorporated September 4, 1941, to take over C. D. Kenny, a wholesale grocery house. Subsequent to that time, there has been a series of acquisitions accounting for the rapid and steady growth of Consolidated, until it is now composed of a variety of divisions and subsidiaries engaged in producing and selling food — products at wholesale and retail.

3. As of December 31, 1958, Consolidated had eight divisions and subsidiaries engaged in processing food products as follows: (a) Coastal Foods Division, a processor of canned soups and vegetables at Cambridge, Maryland.

(b) Columbia Foods Division, a processor of vegetables, coffee, pickles, dressings and some fruits at plants in West Chicago, Ilinois; Ellsworth, Michigan; Grundy Center, Iowa; Sugarland, Texas; Cambria, Wisconsin; Baltimore, Maryland; and Los Angeles, California. (Baltimore and Los Angeles packed coffee only and are now closed.) (c) Kitchens of Sara Lee, Inc., which produced bakery goods at Chicago, Ilinois.

(d) Ocoma Foods Company, a processor of frozen foods at six plants located in Nebraska, Iowa, and Arkansas. (e) Orchard Hill Farms, Inc., a processor of frozen foods at Red Hook, New York.

(f) Union Sugar Division which produced beet sugar at Betteravia, California.

(g) U.S. Products Corp. Ltd., a processor of canned fruits and vegetables at San Jose and Santa Clara, California, and Salem, Oregon.

(h) Gentry Division, which produced dehydrated onion, dehydrated garlic and capsicums at Gilroy and Oxnard, California. 4. As of December 31, 1958, Consolidated had 12 units which sold products of Consolidated and other food processors at wholesale as follows:

(a) River Grove Division, which sold grocery products in the Chicago, Illinois, area.

(b) International Division, San Francisco, California, which sold grocery products to customers outside the United States. (c) Lee Foods Division, which sold grocery products to institutional users in the Kansas City, Kansas, area. (d) Morey Mercantile Division, which sold grocery products to independent retailers in the Denver, Colorado, area. CONSOLIDATED FOODS CORP. 933 929 ; Initial Decision (e) Dannemiller Grocery Division, which sold grocery products out of branches in Canton, Cleveland and Akron, Ohio, to retailers and institutional users in the vicinity of each of those cities. (f) E. A. Aaron and Bros., Inc., a wholesale frozen food distributor in Chicago, Illinois, which has since been liquidated. (g) Western Grocer Division, which operated out of headquarters in Marshalltown, Iowa, with branches in Albert Lea, Minnesota; Davenport, Des Moines and Mason City, Iowa; and Manhattan, Kansas, and which sold to retailers and voluntary groups in the immediate area of each branch.

(h) Monarch Foods Division, which operated limited line branches in Minneapolis, Minnesota; Los Angeles and San Francisco, California; Houston, Texas; Jacksonville, Florida; and Somerville, Massachusetts, and which sold private label products of Consolidated almost exclusively to retailers and institutional users. (i) Separate Monarch Foods branches, which operated independently of the Monarch Food Division and which were located at Roanoke, Virginia; Baltimore and Cumberland, Maryland; and Columbus, Ohio. These branches were not limited to Consolidated’s private label products and sold to retailers, institutional users and voluntary groups. 5. As of December 31, 1958, Consolidated had three units which were engaged in the operation of retail stores as follows: (a) Piggly-Wiggly Midwest Co., which operated about 50 retail supermarkets in northern Illinois, southern Wisconsin and eastern Towa.

(b) Klein Supermarkets, Inc., which operated about 25 retail supermarkets in Minneapolis and St. Paul, Minnesota. (c) Lawson Milk Division, which processed dairy and bakery products and sold them at retail with a very small line of other groceries, through small dairy-type stores in Akron, Canton and Cleveland, Ohio. 6. During the period from July 1, 1950, to June 30, 1951, the net sales of Consolidated were $174,006,801. Its net sales for the period from July 1, 1955, to June 30, 1956, totaled $268,252,695. As of June 30, 1951, the assets of Consolidated totaled approximately $60,000,000 and by June 30, 1956, its total assets increased to more than $99,000,- 000.

7. Prior to April 30, 1951, Gentry, Incorporated, was a California corporation with its office in Los Angeles, California. It was principally engaged in the production and sale of dehydrated onion and garlic. It also produced and sold capsicum spices, such as paprika, chili pepper, chili powder and hot peppers. Gentry was organized 749-537—67——60 Initial Decision 62 F.T.C.

in 1919 and was, successively, a sole proprietorship, a partnership and a corporation and its early business was that of a jobber, of chili and paprika and later dehydrated onion and garlic. In 1940, Gentry built a new plant in Gilroy, California, which it has used since that time for production of dehydrated onion and garlic. In 1946, Gentry built a plant in Oxnard, California, to which it transferred its capsicum operations.

8. On April 80, 1951, Consolidated acquired the assets of Gentry, Incorporated, in exchange for 66,546 shares of the common stock of Consolidated, having a market value of approximately $1,000,000. At the time of said acquisition both Consolidated and Gentry were engaged in interstate commerce. The assets so acquired had a net value at that time of $1,600,000. Gentry distributed Consolidated stock to its shareholders and was dissolved. Its business was thereafter operated as a division of Consolidated.

9. At the time of its acquisition in 1951, Gentry had three domestic competitors engaged in the production and sale of dehydrated onion and garlic:

(a) Basic Vegetable Products, Inc., which has its plant in Vacaville, California, and has been engaged in the processing of dehydrated onion and garlic since 1938 ;

(b) Puccinelli Packing Company, which has plants at Turlock and Livingston, California, and has been engaged in the processing of dehydrated onion and garlic since 1946; and (c) J. R. Simplot Company, Boise, Idaho, which has its processing division in Caldwell, Idaho. Simplot was engaged in the processing of dehydrated onion from 1940 to 1956 when all onion dehydration equipment was removed and the entire plant was converted to the production of frozen french fried and dehydrated potatoes. 10. Gentry, Basic, Puccinelli and Simplot comprised all of the processors of dehydrated onion and garlic in the United States at the time of the acquisition in 1951. Since that date, as noted above, one company has withdrawn from competition in the processing and sale of dehydrated onion and garlic, and a new company, Gilroy Foods, Inc., began production of dehydrated garlic in 1959 and dehydrated onion in 1960. In 1961, Gilroy was acquired by McCormick & Company of Baltimore, Maryland, a processor and distributor of a variety of spices, seasonings, condiments and other products. 11. Sales in pounds of dehydrated onion and dehydrated garlic by Basic, Gentry, Puccinelli and Simplot and their market shares in the domestic market for the period from 1948 through 1958, are as shown in the following tables:

CONSOLIDATED FOODS CORP.

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18. The acquisition of Gentry has not only created a protected market for Consolidated, insofar as suppliers who are already purchasing dehydrated onion and garlic from its Gentry Division are concerned, but in addition has served as an inducement for concerns to buy onion and garlic from the Gentry Division of Consolidated where such concerns were desirous of becoming suppliers of Consolidated. An example of this is the Phillips Packing Company which placed an order for 1,000 pounds of white onion powder with the Gentry Division of Consolidated in the hope that it could in time sell its products to Consolidated.

14. The acquisition of Gentry gave Consolidated the opportunity to use express or implied buisness coercion. to induce suppliers purchasing dehydrated onion and garlic from other sources to purchase some or all of their requirements from the Gentry Division of Consolidated. There is ample evidence in the record that both Gentry and Consolidated have exercised pressure and have attempted to influence, by affirmative action, some of Consolidated’s suppliers to purchase a substantial part if not all of their dehydrated onion and garlic requirements from Gentry. Consolidated was successful in some instances, even though objections had been raised as to the quality of Gentry’s products as compared with the products of its competitors. This indicates the value of the so-called reciprocity policy, when used as a competitive weapon.

15. Prior to the acquisition, Gerber Products Company did not purchase any of its requirements from Gentry as it considered Gentry products as not being satisfactory. Gerber was a substantial supplier of baby food to the various divisions of Consolidated, including its retail outlets. Joseph Farrell of Gentry, for the purpose of obtaining Gerber’s business, on July 14, 1952, wrote Gerber offering to manufacture white onion powder according to Gerber’s specifications and asked for a statement of Gerber’s requirements of this product. In Initial Decision 62 FTC.

order to remind Gerber of the purchases being made by Consolidated from Gerber, Farrell stated in this letter: Be assured of the fact that we want to work very closely with your company. We feel very close to your merchandise, for the obvious reason that it is to be found in all of our various divisions for sale to the buying public. We, in Gentry, realize that Gerber’s Baby Food Products are a wonderful line and we are happy to see them selling exclusively in the divisions of our Consolidated Grocers Corp. (CX 20-C) On the same date, Farrell wrote L. C. Bellisime, vice president of the Gentry Division, concerning the Gerber account informing him that he was taking this matter up with John Sarther, president of the Sprague Warner Division, and S. M. Kennedy, president of Consolidated:

* * * to get us a better “shake of the dice” than we have gotten from this company. After all, as you know, Sprague Warner, as well as many of the other divisions, we believe, use Gerber’s baby food products exclusively, so there should be no reason at all why Gerber Food Products should not use Gentry’s material exclusively and we don’t mean up to 50%, as has been tentatively promised us. We mean 100%. (CX 20-A) Daniel Gerber, president of Gerber Products, testified in this proceeding that some time back, he had had a conversation with Nathan Cummings, chairman of the board of Consolidated, who informed him that Consolidated had acquired Gentry and that they would like to have consideration. Thereafter, Gerber made purchases from Gentry. 16. Gentry had never been able to sell J. J. Gielow & Sons, Inc., a processor of pickles located in Detroit, Michigan. Gentry requested Emil Kohut, of the Consolidated Buying and Purchasing Offices, to assist it in obtaining business from Gielow in view of the substantial sales it was making to Consolidated. Later, L. C. Bellisime, vice president of the Gentry Division, was informed by Bischmann, vice president of Reid Murdoch, a division of Consolidated, that Murdoch had placed an order with Gielow for 200,000 cases of pickles. Bellisime passed this information on to Martin Kraham of Gentry who wrote W. W. Kearney of Gentry on July 18, 1953: You might tell Les Gielow that we have discussed the situation with Mr. Bischmann, president of Reid Murdoch, and Gielow knows that back in April he received an order for 200,000 cases of pickles. Half of that quantity is for Kosher Dill. Let him know, in no uncertain terms, we are not happy at the switch and do not expect the old “Viennese Waltz” with reference to the order he placed with me in good faith. (CX 27) In 1953, Gielow purchase, 1,100 pounds of dehydrated onion and 450 pounds of dehydrated garlic from Gentry and beginning in 1954, Gielow purchased all of its dehydrated onion and garlic from Gentry CONSOLIDATED FOODS CORP. 939 929 Initial Decision replacing Basic as a supplier altogether. The following are the purchases by Gielow for dehydrated onion and garlic from Gentry and Basic for the years 1952 through 1958:

Gentry Basic Year Onion Garlic Onion Garlic 1952__-- 2-2 225 450 13, 380 12, 078 1953__----------- ee 1, 100 450 10, 200 10, 692 1954_.-_.-------------------- 14, 937 12, 261 |_-_------_|_--------- 1955__------- ee 18, 200 19, 160 |----------|---------- 1956._-.-------------- +e 4, 635 2, 870 |_---------|---------- 1957..--------------- eee 11, 490 13, 910 |.....--._-|-.-------- 1958_.-..-------------------- 38, 000 7, 500 |----------]---------- 17. In 1951, Joe Sarther, president of Sprague Warner Division of Consolidated, called Clarence Brickman, vice president and manager of the Tlinois Meat Company, and asked that he give the Gentry Division some business. As a result, Brickman gave Gentry some orders and thereafter purchased more from Gentry and less from Basic, until 1953 when he bought exclusively from Gentry. Basic never regained this business, although the Illinois Meat Company did later purchase dehydrated onion from Simplot and Puccinelli. 18. The Morgan Packing Company is an example of the use of pressure to induce a supplier of Consolidated to purchase Gentry products at a time when it considered Gentry’s products inferior and did not want to purchase them. Morgan purchased its requirements of dehydrated onion and garlic from Basic from the time it began using these products. Its laboratory considered the Gentry products inferior to Basic onion and garlic. Gentry’s salesman, Sherrod, reporting on April 25, 1952, that the buyer from Morgan could do nothing because of the laboratory report, stated : We have brought pressure here through the medium of C. D. Kenny Division Columbus, Ohio branch and these people have been very helpful with us in an effort to assist us in obtaining business from Morgan, You will have in mind Morgan Packing Company does a great business and they freely admit this with C.D. Kenny. (CX 72-B) On November 7, 1952, Joe Farrell of Gentry wrote letters to S. M. Kennedy, president of Consolidated Grocers Corporation, and Emil Kohut of Consolidated Buying and Purchasing Division, describing the difficulties in trying to sell Morgan Packing Company and asked for their assistance.

Initial Decision 62 FTC.

Thereafter, on November 24, 1952, Carl Sherrod, Gentry’s salesman, reported that he had sold a small order to Morgan Packing Company for experimental purposes. He also stated: We have everyone of any consequence connected with Morgan Packing Company literally jumping up and down, especially their sales department in an effort to assist us in selling their production and purchasing department on using our products. This is unquestionably the result of Mr. Kennedy’s assistance, 48 we have been unable to do much of anything with this user in the past. (CX 76 A-C) On December 2, 1952, Sherrod also wrote G. E. Clausen, president of Gentry, with reference to the trial order, stating in part as follows: There is no question in the world but what the trial order which I received this week was obtained as the result of Mr. Kennedy’s efforts in our behalf through Morgan’s broker, Earl Roll of Chicago. (CX 77) On December 11, 1952, George Clausen, president of Gentry, wrote Car] Sherrod, stating in part as follows:

Carl, when I was in Chicago about three weeks, I talked with Mr. Kennedy about this account. He mentioned the large amount of business that Consolidated Grocers is doing with Morgan Packing Company and that the Morgan Packing Company expressed appreciation of their business and would like to reciprocate in buying onion and garlic products from Consolidated Grocers Corporation. (CX 78 A-B) On March 19, 1954, Carl A. Sherrod wrote Martin Kraham of Gentry with reference to Morgan Packing Company, stating: After we received some help from Consolidated Foods office we did begin to sell them some material.

He also informed Kraham for some reason Morgan did not want to buy from Gentry and further said:

Another thing which you should have is the fact that the only time that I have ever received a really cordial reception at Morgans was after some assistance from Con Grocers in Chicago and at that time I contacted Mr. Ben Williams, a vice president of this company. At that time I was taken into his office and invited to sit down. He in turn called in Mrs, Eversole and we had a lengthy discussion. The result of that visit with the vice president in the company of Mrs. Eversole was a little onion and garlic. Marty. I believe that will give you a rather complete picture in as far as Morgan Packing Company is concerned and it will greatly appreciated (sic) if you will present the facts to the proper people in Con Grocers and solicit there for their assistance in obtaining more business from Morgan to which certainly our company is entitled. (CX 80 A-B) As a result of this continued pressure, Morgan was finally induced to purchase a substantial portion of its requirements from Gentry. 19. In the matter of the F. H. Snow Canning Co., on March 2, 1953, Joe Farrell wrote Emil Kohut, Consolidated Buying and Purchasing Offices, with reference to the F. H. Snow Canning Co., as follows: CONSOLIDATED FOODS CORP. 941 929 Initial Decision Snow Canning Co., Pine Pt., Maine—With the exception of one order that we received a couple of years ago, we have never done business with this company before or since. They buy two cars of Onion and Garlic products per year from our direct competitor and we see a very dim outlook in the future for us relative to changing this situation. I understand that considerable canned soups are bought from this firm by Consolidated Grocers’ eastern division and here in the middle-west, also. Any help that you can give us will be appreciated. (CX 12 A-B) On the same date, Farrell wrote S. M. Kennedy, president of Consolidated Grocers Corporation, giving substantially the same information and asking his assistance with this supplier. Thereafter, the ¥. H. Snow Canning Co., began purchasing a substantial portion of its requirements from the Gentry Division, as follows: 1954 1955 | 1956 1957 Onion..--..-.----------------|---------- 36, 125 48, 600 69, 900 Garlic__...--.-------..-------|---------- 600 1, 620 600 20. In the matter of the George F. Hormel Company, on August 31, 1953, L. C. Bellisime, vice president of Gentry, wrote Martin Kraham of Consolidated as follows:

I agree with you that in view of the letter that we now stand to gain nothing by waiting, and I think that now would be the time to start moving. It would be my thinking that we bring no pressure direct on Hormel through Gentry. I think that pressure should come from Con Grocers and I suggest that at the very first opportunity you discuss the entire Hormel matter with Kennedy and Gifford, showing them Murphy’s letter and getting an idea how much Con Grocers buys from Hormel, with the thought in mind that pressure be applied from that end of it. (CX 121) While the record does not definitely prove that any pressure that may have been brought against Hormel was effective, this correspondence does prove a policy on the part of Consolidated to use pressure or force suppliers to purchase dehydrated onion and garlic from Gentry. That this was a continuing policy is indicated by statement appearing in letter of March 17, 1955, from Joseph D. Farrell, of Gentry, to Robert H. Perlitz, vice president, Sales and Advertising, Consolidated Foods Corporation, as follows: I want to thank you, Bob, for your letter of March 10th and your comments relative to your meeting with Messrs. R. D. Arnay, Sales Manager for Hormel, Ralph Keller, General Manager Chicago Sales Operation and Ken Forbes. Many thanks for your efforts in our behalf. (CX 50 A-B) 21, The lengths to which respondent would go to pressure a supplier of Consolidated to buy Gentry products is typified by the transactions Initial Decision 62 ET.C.

with the Grocery Store Products Company, a supplier of Consolidated who did not purchase and did not want to purchase dehydrated onion and garlic from Gentry. As early as September 28, 1951, Gentry requested the assistance of Consolidated and Mr. Kennedy, the president of Consolidated, to sell Grocery Store Products Company. After some correspondence, it was decided to have G. K. Wetzell, buyer for Sprague Warner Division, write Jack Ross, president of the Grocery Store Products Company, which he did on January 11, 1952. Although Gentry’s salesman reported a cordial reception, he received no order. This situation continued through 1953 and 1954 and was summed up by Joseph D. Farrell in his letter of March 17, 1955, to Robert H. Perlitz, vice president, Sales and Advertising : You will recall, when I had the pleasure of talking with you in Kansas City, that one of the companies on which I solicited your generous help was the Grocery Store Products Company with headquarters in West Chester, Pa. Quite frankly, Bob, this is a company that gives us no end of annoyance on every call that we make on their buyer. Every so often there is a change in purchasing agents and now they havea Mr. J. F. Gilmour. Despite the fact that we have received a multitude of promises from this company that they would split the business between their present source of supply and Gentry, it seems that their promises have all been in vain. Our latest report from our salesman covering this situation states as follows: The last order went to the Basic Vegetable Company and the buyer stated that even if we had an equal price Basic would have obtained this business because they have been doing business with that account for many years, even though they fully recognize that our merchandise is easily as good or it may even be better.

It is understood that Consolidated Foods buys huge quantities of materials from the Grocery Store Products Company and, therefore, I wonder whether or not it would be at all possible for us to give these people the same sort of treatment when they call on us? We would very much appreciate your cooperation and any comments that you would care to make would be sincerely appreciated by the writer. (CX 50 A-B) Perlitz discussed this matter with Frank Lamarche, vice president of the Grocery Store Products Company, who later wrote Perlitz on April 25, 1955, as follows:

Confirming our conversation of last week, as I stated then I was not familiar with the buying of dehydrated vegetables as my efforts are confined entirely to sales. However, I have had an opportunity to check up with the purchasing department, and the story seems to be that for years Basic have worked very closely with our production department—in fact, made it possible for us to get several of the vegetables which had previously not been available, with the result that as long as Basic is completely competitive and able to give us the quality and service they have been, it is felt that due to the help they have been to the production department, they should continue to get the business. (CX 54-B) CONSOLIDATED FOODS CORP. 943 929 Initial Decision Upon receipt of this information, Joseph Farrell of Gentry wrote Robert Perlitz of Consolidated attempting to refute the contents of the letter of Lamarche and further stated: * * * So, I would frankly say that it would help us immeasurably if it could be told to this company that if they don’t feel that our merchandise is good enough for them, then, frankly speaking, their merchandise is not good enough for us.

This is one company that has absolutely gone out of its way to adulterate the truth with a lot of distortions and as men engaged in sales, such as you and I, we both do not like this type of treatment. If a company does not want to buy from us, they should tell us such, but when they give us a lot of promises from the President on down and then go out of their way, right up until the last moment, to keep us in suspense and finally give this business to our competitor, I think that you will appreciate the situation that we have with the Grocery Store Products Company.

Needless to say, any further cooperation that you can give us relative to this company to remind them of the facts as outlined in this letter will be sincerely appreciated. (CX 56 A-B) .

As requested, on May 17, 1955, Perlitz of Consolidated asked Frank Lamarche, vice president of the Grocery Store Products Company, to call upon him when in Chicago. Thereafter, an order was received from the Grocery Store Products Company for. 10,000 pounds of .white onion chips which was reported to Perlitz by Joseph Farrell in his letter of June 30, 1955:

I take pleasure in letting you know that because of your efforts we were instrumental in being able to sell the Grocery Store Products Company in West Chester, Penna. about 10,000 pounds of our White Onion Chips. All I ean say, Bob, is many, many thanks. We truly appreciate what you have done for us and without your help we might have gone on for the next few years without any business from this company. Since I am unable to shake your hand and thank you in person, would you be good enough to accept the sentiments expressed in this letter until we meet again. (CX 60) 22. In the matter of the P. J. Ritter Company, after intervention of Nathan Cummings, chairman of the board of Consolidated, with William H. Ritter, Jr., president of the P. J. Ritter Company, Gentry was selected as a regular second source of supply for dehydrated onion and garlic, although the Ritter chemists had cbjected to the quality of the Gentry products and expressed the opinion that Basic had consistently maintained a higher quality than Gentry. CONCLUSIONS 1. The lines of commerce involved in this proceeding, as hereinbefore found, are the production and sale of dehydrated onion and the pro- 944. FEDERAL TRADE COMMISSION DECISIONS Initial Decision 62 F.T.C.

duction and sale of dehydrated garlic, and the section of the country involved is the entire United States.

2. The type of acquisition in this proceeding has been designated as a conglomerate merger which implies the absence of premerger competition or supply relationships between the acquired and acquiring concerns. The record does show that there were several divisions of Consolidated Foods Corporation who used dehydrated onion and garlic but the amount supplied by Gentry after the acquisition was not sufficiently substantial to require consideration as a vertical merger. 3. Section 7 of the Clayton Act, as amended, applies to conglomerate as well as horizontal and vertical mergers where the effect may be substantially to lessen competition or tend to create a monopoly. 4, The record is clear that the conglomerate merger in this proceeding has the required effect of substantially lessening competition and tending to create a monopoly.

5. The respondent, Consolidated Foods Corporation, is a financially powerful and aggressive commercial organization which purchases large quantities of canned and processed food products from independent suppliers of food products for resale, both at wholesale and retail through its various divisions. This volume of purchases has permitted Consolidated to place pressure upon these suppliers and unfairly induce them to purchase all or a substantial portion of their requirements of dehydrated onion and garlic from the Gentry Division of Consolidated as opposed to the competitors of the Gentry Division in the dehydrated onion and garlic industry. 6. The acquisition of Gentry by Consolidated created a substantial change in the dehydrated onion and garlic industry and resulted in the replacement of Gentry by a substantially stronger over-all competitive unit in an industry composed of relative equals. It created a gross disparity between the total competitive strength of Consolidated Foods Corporation and the three small competitors, which indicates a serious industry imbalance, the effect of which may be to substantially lessen competition and tend to create a monopoly. 7. The competitive position or share of the market enjoyed by Gentry, under respondent’s control, in the production and sale of dehydrated onion and garlic, has been enhanced to the detriment of actual and potential competition.

8. The acquisition of Gentry, Incorporated, by Consolidated Foods Corporation has the effect of substantially lessening competition and tending to create a monopoly in the relevant lines of commerce in violation of Section 7 of the Clayton Act, as amended. 9, As the injury to competition in this proceeding is primarily based upon ‘the activity of Consolidated Foods Corporation in the dehy- CONSOLIDATED FOODS CORP. 945 929 Initial Decision drated onion and garlic industry, any order of divestiture will effectively remove the opportunity and power of Consolidated to interfere in and lessen competition in this industry. Any order of divestiture which may be issued in this proceeding should not preclude officers, directors and employees of the original Gentry, Incorporated, from purchasing the Gentry Division, if they are not at the time of purchase officers or directors of Consolidated Foods Corporation. ORDER It is ordered, That the respondent, Consolidated Foods Corporation, a corporation, and its officers, directors, agents, representatives and employees, within six (6) months from the date this order becomes final, shall divest itself absolutely, in good faith, of all assets, properties, rights and privileges, tangible or intangible, including but not limited to, all plants, equipment, trade names, trademarks and goodwill acquired by Consolidated Foods Corporation as a result of the acquisition by Consolidated Foods Corporation of the assets of Gentry, Incorporated, together with all plants, machinery, buildings, improvements, equipment and other property of whatever description which have been added to the property of Gentry, Incorporated, so acquired, in such manner as to restore it as a going concern in the production and sale of dehydrated onion and garlic and other products in which said Gentry, Incorporated, was engaged at and immediately prior to the time of said acquisition by respondent Consolidated Foods Corporation.

It is further ordered, That by such divestiture none of the stocks, assets, rights, or privileges, tangible or intangible, acquired or added by respondent, shall be sold or transferred, directly or indirectly, to anyone who is at the time of the divestiture a stockholder, officer, director, employee, or agent of, or otherwise directly or indirectly connected with, or under the control, direction, or influence of respondent or any of respondent’s subsidiary or affiliated corporations. Provided, however, That nothing herein contained shall prohibit the purchase of the assets of the Gentry Division upon divestiture by Consolidated Foods Corporation by any officer, director, or stockholder of the original Gentry, Incorporated, prior to its acquisition by Consolidated Foods Corporation, who is not an officer or director of Consolidated Foods Corporation at the time of such purchase. It is further ordered, That the respondent, Consolidated Foods Corporation, shall, within sixty (60) days from the date upon which this order becomes final, submit its plan of compliance, in writing for approval by the Federal Trade Commission.

Opinion 62 E.T.C.

OPINION OF THE Commission NOVEMBER 15, 1962 By Elman, Commissioner:

This is an appeal from an initial decision of the hearing examiner that the acquisition by respondent, Consolidated Foods Corporation, a large diversified processor and seller of food products, of the assets of Gentry, Incorporated, a company primarily engaged in the production of dehydrated onion and garlic, was proscribed by Section 7 of the Clayton Act (88 Stat. 731, as amended, 15 U.S.C. 18).1_ The examiner determined that the acquisition of Gentry by Consolidated “has the effect of substantially lessening competition and tending to create a monopoly in the relevant lines of commerce in violation of Section 7 of the Clayton Act, as amended.” (Initial Decision, p. 944.) By way of remedy, his proposed order would require Consolidated to divest itself of Gentry within six months from its effective date. I Many of the facts, as found by the hearing examiner, are not in dispute. Respondent, 2 Maryland corporation with its office and principal place of business in Chicago, Illinois, was incorporated in 1941 as a wholesale grocery house. Subsequently, it expanded by merger to encompass a wide variety of food industry enterprises. As of December 31, 1958, respondent operated eight manufacturing divisions or subsidiaries engaged in processing canned soups, pickles, dressing, fruits, bakery goods, frozen foods, beet sugar, dehydrated onion, dehydrated garlic, and capsicum spices in plants located in eleven different States scattered across the continent. In addition, it sold food products at wholesale through twelve units in an equal number of States, and at retail through three units, including the well-known midwestern chains, Piggly-Wiggly Midwest Co., and Klein Supermarkets, Inc.

Respondent has exhibited a capacity for vigorous growth. Its net sales from July 1, 1950, to June 30, 1951, were $174,006,801. For the period July 1, 1955, to June 30, 1956, they had risen to $268,252,695. On June 30, 1951, respondent had assets of approximately $60,000,000. By June 80, 1956, the figure was more than $99,000,000. 1 Section 7 provides in pertinent part:

“No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

CONSOLIDATED FOODS CORP. 947 929 Opinion Respondent’s acquisition of Gentry, Incorporated, took place on April 80, 1951. Both before and since that date Gentry has been a manufacturer of dehydrated onion and garlic and of assorted capsicum spices. By comparison with Consolidated, Gentry is a small concern. At the time of acquisition, it operated two plants and had assets valued at $1,600,000.

This case involves only Gentry’s dehydrated onion and garlic business, which comprises the bulk of its trade. When Gentry was acquired by Consolidated it had only three domestic competitors in the production and sale of dehydrated onion and two in dehydrated garlic. Since that time, one firm has left the onion field but another has entered both, so that four firms constitute the entire industry.2 The domestic processing and sale of both dehydrated onion and dehydrated garlic are dominated by Gentry and one principal competitor, Basic Vegetable Products, Inc. In 1950, immediately prior to the Consolidated-Gentry merger, Basic accounted for 60% and Gentry 28% of dehydrated onion sales. By 1958, these figures were 57% and 35%, respectively. In dehydrated garlic sales, Basic had 86% of the market in 1950 and 50% in 1958, while Gentry’s shares were 51% and 39% for the same years. The industry as a whole is burgeoning due to the development in recent years of new foods, such as dehydrated soups, containing its products. In 1950, total industry sales of dehydrated onion equalled 7,802,159 pounds, of which Basic sold 4,693,860 and Gentry 2,158,880. By 1958, industry sales were 18,147,207 pounds, with Basic accounting for 10,420,944 pounds of this total and Gentry 6,259,171. The industry produced 1,799,518 pounds of dehydrated garlic in 1950; by 1958, the total was 5,127,042 pounds. During the corresponding period Basic’s sales moved from 652,059 pounds to 2,575,041, and Gentry’s from 922,073 pounds to 1,979,834.

II Under Section 7 of the Clayton Act a merger is unlawful if its likely effect would be to lessen competition substantially in the relevant product and geographical markets. It is agreed that Consolidated and Gentry were not competitors prior to this merger and that sales by Gentry to Consolidated were insubstantial. Thus, the acquisition did not involve the kind of competitive effects usually associated with “horizontal” or “vertical” mergers in the ordinary usage of those terms. See Brown Shoe Co. v. United States, 870 U.S. 294. 2 Competition from foreign imports has not been great in the years under consideration. For example, in 1958 imported onion sales equalled less than 4 percent of sales of * domestically produced onion, and imported garlic only a little more than 2 percent of domestic garlic. :

Opinion 62 F.T.C.

The gravamen of this proceeding was that the merger was illegal under Section 7 of the Clayton Act because it created the serious danger that Gentry would acquire a protected market, in which fair competitive opportunities would be denied to other sellers of dehydrated onion and garlic, as a result of the trade practice known as “reciprocity”. Section 7 is designed, of course, to “nip in the bud” such changes in the structure of an industry, produced by corporate acquisitions, as are likely to bring about substantial lessening of competition. It must be emphasized at the outset that in a Section 7 case (as distinguished from a Sherman Act case or a proceeding under Section 5 of the Federal Trade Commission Act), the inquiry does not focus on overt anticompetitive trade practices as such, but rather on changes in market or industry structure that are effected by the challenged merger and that may have anticompetitive consequences. Thus, in this case the inquiry must focus on the likely effect of the Consolidated-Gentry merger on the competitive forces at play in the dehydrated onion and garlic industries.

As generally understood, reciprocity describes the practice whereby firms, overtly or tacitly, make concessions to one another in order to promote their own business interests. Perhaps the most common form of reciprocity is the type involved in this case—reciprocal buying. In this context it involves nothing more than the simple idea that “I will buy from you if you will buy from me”, or the unspoken “If I buy from him, he will buy from me”.

The situation before us here, for example, is relatively straightforward. Asa wholesaler and retailer of food, Consolidated buys the products of many food processors. A substantial number of these processors require dehydrated onion and garlic in packing their foods. Tt can be readily understood that food processors who use dehydrated onion or garlic and are anxious to sell or to continue to sell their products to Consolidated will, to say the least, consider Gentry’s connection with Consolidated in selecting a source of supply of onion and garlic. Indeed, complaint counsel contends, and the hearing examiner found, that Consolidated relied on the influence generated by its buying power to induce these processors to purchase onion and garlic from its Gentry Division. The examiner’s conclusions in this regard were as follows:

The acquisition of Gentry gave Consolidated the opportunity to use express or implied business coercion to induce suppliers purchasing dehydrated onion and garlic from other sources to purchase some or all of their requirements from the Gentry Division of Consolidated. There is ample evidence in the record that both Gentry and Consolidated have exercised pressure and have attempted to CONSOLIDATED FOODS CORP. 949 929 Opinion influence, by affirmative action, some of Consolidated’s suppliers to purchase a substantial part if not all of their dehydrated onion and garlic requirements from Gentry. Consolidated was successful in some instances, even though objections had been raised as to the quality of Gentry’s products as compared with the products of its competitors. This indicates the value of the so-called reciprocity policy, when used as a competitive weapon. (Initial Decision, p. 937.) Tit While contending that the reciprocity aspect of the Consolidated- Gentry merger is less restrictive of competition than a vertical merger, respondent does recognize an analogy between the two types of merger. In a vertical merger the danger to competition lies in the likelihood that the union of previously independent supplier and customer companies will foreclose their share of the market to competitors who previously had an equal opportunity either to buy from the supplier company or to sell to the customer company. So too with reciprocity resulting from a conglomerate or diversification merger. Here competition will be adversely affected if the reasonable likelihood arises that Gentry’s competitors will be to some degree foreclosed by the Gentry-Consolidated merger from having the opportunity of selling to that portion of the market composed of Consolidated’s suppliers. Consequently, the extent of potential foreclosure greatly exceeds that resulting from the slight vertical relationship existing between Gentry and Consolidated.

To satisfy the requirements of Section 7, it must be shown that the effect of the acquisition may be substantially to lessen competition. Respondent asserts that proof of such substantiality is not only lacking here but that the contrary has been affirmatively demonstrated. Respondent's evidence on this point consists principally of (a) a statistical presentation indicating that Gentry has not come to dominate the industry in the years since the merger, and (b) the testimony of a number of witnesses who stated that they began buying Gentry products only for valid business reasons, ¢.g., because Gentry had improved its manufacturing process, or because the buyer decided that he preferred having at least two sources of supply. These contentions, coupled with the requirements of Section 7, appear to necessitate resolution of three separate questions if the examiner's finding of violation is to be upheld. First, is business reciprocity, as it is presented here, anticompetitive in its effect? Second, if the answer to this question is in the affirmative, did Consolidated’s acquisition of Gentry transform sufficiently the market structure of this industry to create an environment conducive to anticompetitive reciprocity? Third, if both answers are yes, is the threat 74A9-537—67——61 950 _ FEDERAL TRADE COMMISSION DECISIONS Opinion 62 F.T.C.

to competition sufficiently substantial to bring the merger within the prohibitions of Section 7? IV The anticompetitive effect of business reciprocity is made clear by three cases in which the Commission held that overt and coercive implementation of reciprocity is an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act (88 Stat. 719, as amended, 15 U.S.C. § 45). In the first of these, augh E quipment Co., 15 F.T.C. 232, high officials of the large meat packing concern, Armour & Co., acquired stock in the Waugh Equipment Co., a minor manufacturer of draft gears, and commenced to use Armour’s vast power as a major rail shipper to induce railroad companies to buy draft gears from Waugh. Although Waugh’s gear was practically unknown in 1924, when the reciprocity campaign commenced, the company was enabled to vault from obscurity to industry leadership in only six years. Its share of the market for draft gears for new freight equipment rose from less than 1% in 1924 to approximately 85% in 1930.

In finding a violation of Section 5, the Commission pointed out that other draft-gear manufacturers made their sales presentations to the mechanical, operating, and purchasing departments of the railroads, rather than to their traffic departments, and that the factors ordinarily considered by the railroads were price, quality, and salesmanship. The Commission further found that the efforts of the Armour officials on Waugh’s behalf resulted, in many instances, in railroads purchasing Waugh gears contrary to the recommendations of their mechanical officials and in disregard of the bids of competitors. Those competitors had no appreciable traffic to offer the railroads and were therefore unable to meet Waugh’s competition.

3The answer to a fourth question, whether the market affected is substantial (see, €.9., United States v. E. I. dupont de Nemours & Co., 853 U.S. 586, 595), is not open to doubt. The geographic market is the entire United States. The product markets encompass all dehydrated onion and garlic, of whatever price, quality, or characteristics, produced in this country. And the dollar volume of business is significant, as the following table, taken from figures compiled by respondent, indicates. Dehydrated onion | Dehydrated garlic Basic, 1950..------------.---2------ eee eee $2, 320, 067 $438, 679 Gentry, 1950.__. 1, 139, 033 621, 403 Industry, 1950_ 3, 905, 830 1, 200, 197 Basic, 1958. _.__ 5, 918, 521 1, 947, 723 Gentry, 1958..__.--.------- 2-2 eee eee nee ene 3. 547, 338 1, 536, 508 Industry, 1958__-..--.---------2- + esses eee 10, 145; 608 3; 831, 099 CONSOLIDATED FOODS CORP. 951 929 Opinion The Commission concluded that Waugh and the Armour officials had “taken advantage of a competitive weapon, oppressive and coercive in nature”, which tended unduly to suppress competition by preventing customers “from exercising their free will and judgment in determining which device is the most efficient and will best serve their needs at the lowest net cost over a period of time”. (15 F.T.C., at 246, 247). The respondents had “thus injected an element in the competitive field” which was “unfair and abnormal” and tended “to reduce the efficiency and economy in the production and sales methods of competing manufacturers and [give] to the concern that control[led] the largest volume of freight traffic an unfair advantage that [would] more than offset the higher efficiency in the production and sales methods of competing concerns which control[led] no such raffic * * * .? ([d., at 247) Mechanical Manufacturing Co., 16 F.T.C. 67, was a similar case. There important employees of the large packer, Swift & Co., along with the Swift Estate and members of the Swift family, controlled Mechanical Manufacturing Co., a maker of such railroad equipment as draft gears, bumping posts, and coupler centering devices. As in the Waugh case, railroads were persuaded to buy Mechanical’s products by promises of future Swift & Co. freight traffic and threats of withdrawal of existing traffic. When necessary, Swift shipments actually were diverted from railroads that failed to comply and to railroads that did buy from Mechanical. Again the Commission found that the Federal Trade Commission Act had been violated. In California Packing Corp., 25 F.T.C. 879, as in the case before us, the practitioner of reciprocity, California Packing Corporation, was a large diversified processor and distributor of many different kinds of food products. One of its subsidiaries was Encinal Terminals, a corporation operating wharves, sheds, warehouses, and switch tracks on San Francisco Bay for the purpose of handling rail and steamship freight at the waterfront. By promising, or threatening, to shift their purchases of raw and manufactured materials, California. Packing and its officers and subsidiaries placed pressure on their suppliers to divert their freight shipments from other terminal companies athe problem of reciprocity in rail-traffic routing is also considered in In the Matter of Reciprocity in Purchasing and Routing, 188 I.C.C. 417. The Interstate Commerce Commission found the practice “burdensome” to the public transportation system in that “it succeeds only in making the handling of existing traffic more expensive.” (188 I.C.C., at 488, 484.) The Commission also noted the unfair and anticompetitive aspect of the other manutacturer of railway materials or supplies who has little traffic to offer as an inducement is at a serious disadvantage although its product may be superior and its prices comparable. The smaller carriers with limited purchasing power are likewise at a disadvantage in securing traffic although their services are prompt and efficient, and their rates on a parity with those of their larger competitors.” (188 I.C.C., at 433.) Opinion 62 F.T.C.

to Encinal. Similarly, steamship companies were coerced into diverting freight tonnage to Encinal Terminals, even when the move was uneconomical for them, by the employment of California Packing’s power as an important shipper. Even California Packing’s competitors were exploited by the device of soliciting their customers and suppliers to induce them to divert shipments through Encinal Terminals.

The Commission found that the “principal consideration” for California Packing’s purchases from its suppliers became “the volume of tonnage routed by said industrial concerns through the said Encinal Terminals * * * instead of the usual and normal competitive considerations such as quality, service, and price * * *.” (25 F.T.C., at 398- 399) The practices disclosed were held unfair methods of competition.

These decisions represent specific applications of the general principle that abuse of large buying power to restrict competitive market opportunities is illegal. As the Supreme Court has held: Large-scale buying is not, of course, unlawful per se. It may yield price or other lawful advantages to the buyer. It may not, however, be used to monopolize or to attempt to monopolize interstate trade or commerce. Nor * * * may it be used to stifle competition by denying competitors less favorably situated access to the market. (United States v. Griffith, 384 U.S. 100, 108, emphasis added.) This is precisely the vice of reciprocity as manifested in the cases mentioned above. It transforms substantial buying power into a weapon for “denying competitors less favorably situated access to the market”. It distorts the focus of the trader by interposing between him and the traditional competitive factors of price, quality, and service an irrelevant and alien factor which is destructive of fair and free competition on the basis of merit. The efficient producer may thereby suffer loss because of a circumstance extrinsic to the worth of his product. In this situation, it is the relative size and conglomeration of business rivals, rather than econemic efficiency, that, may determine firm growth and success, and, ultimately, the allocation of resources. Obviously, this practice strikes at one of the basic premises ofa free enterprise economy. And itis clear that these anticompetitive effects are likely to occur, given a corporate structure similar to that of respondent in this proceeding, without the crudities involved in the three cited cases or indeed without any action whatsoever on the part of the parent corporation. It is certainly obvious, to use an example based on the facts of this case, that a food processor who uses dehydrated onion or garlic and who seeks to curry Consolidated’s business will tend to prefer Gentry as his source of supply, and the advantages accruing to him from so favoring Gentry would not have to be pointed out by Consolidated.

CONSOLIDATED FOODS CORP. 953 929 Opinion In many respects, reciprocal buying bears a close resemblance to the unlawful business practice of entering into tying arrangements, i.é., agreements by one party to sell one product only on condition that the buyer also purchase a different product. The latter product is said to be “tied” to the former.

Where such conditions are successfully exacted competition on the merits with respect to the tied product is inevitably curbed. Indeed “tying agreements serve hardly any purpose beyond the suppression of competition.” Standard Oil Co. of California v. United States, 337 U.S. 298, 305, 306. They deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price but because of his power or leverage in another market. At the same time buyers are forced to forego their free choice between competing products. * * * Northern Pacific Railway Co. v. United States, 356 U.S. 1, 6. Similarly, reciprocal buying may also enable one seller to succeed over another not on the basis of “a better product or a lower price, but because of his power or leverage in another market”, vzz, the market in which the seller is an influential buyer of other products. <A frequent condition, express or implied, of his purchase of goods from his supplier is that the supplier also buy from him. The prospective customer “ties” the sale of his product to his purchases from his supplier and “competition on the merits with respect to the tied product is inevitably curbed.”

It is for these reasons that the Commission held in the Waugh Equi pment, Mechanical Manufacturing, and California Packing cases that coercive exercise and reliance on business reciprocity is an unfair method of competition within the meaning of Section 5 of the Federal Trade Commission Act. And, in view of respondent’s coercion, were this a proceeding under Section 5 an order to cease and desist would be entirely justified. However, this proceeding was brought not under Section 5 but under Section 7 of the Clayton Act, and the order issued by the hearing examiner calls not for termination of anticompetitive conduct but for divestiture of the acquired firm. We must therefore proceed to consider, in the context of Section 7, whether the merger here has brought about a change in the structure of the industry whose effect—in relation to reciprocity—may be substantially to lessen competition.

v It is elementary that the effect of a merger, rather than its technical label, determines its validity. An acquisition of one corporation by another need not be of an orthodox horizontal.or vertical nature for Section 7 to apply. The legislative history of amended Section 7 makes it clear “that the bill applies to all types of mergers and Opinion 62 F.T.C.

acquisitions, vertical and conglomerate as well as horizontal, which have the specified effects of substantially lessening competition * * * or tending to create a monopoly.” (H.R. Rep. No. 1191, 81st Cong., ist Sess., p. 11). As the Supreme Court has recently stated, “by the deletion of the ‘acquiring-acquired’ language in the original text, [Congress] hoped to make plain that § 7 applied not only to mergers between actual competitors, but also to vertical and conglomerate mergers whose effect may tend to lessen competition in any line of commerce in any section of the country.” Brown Shoe Co. v. United States, 370 U.S., 294, 317.

The adverse effect which reciprocal buying may have upon competition has already been demonstrated. The way in which a conglomerate merger may enhance the likelihood that reciprocity may be practiced to stifle competition is equally clear.

A single-line corporation is far less likely to both buy from and sell to another corporation than one that is diversified—.e., if it deals in a variety of product or service lines. A glance at the cases discussed in Part IV, supra, makes this apparent. The officials of Armour & Co. and Swift & Co. could not exercise reciprocal buying power over the railroads so long as their companies produced only meat products, which the railroads did not consume. But once they established relationships with firms that produced railroad equipment, they could employ Armour and Swift power as shippers of meat products to force the railroads to buy the equipment from the sources in which they were interested. It was precisely the lack of diversification that prevented other equipment manufacturers from meeting the reciprocity competition generated by Armour and Swift. Similarly, California Packing Corp’s. use of reciprocity depended upon linking the purchase of supplies and transportation for its food products to the operation of a wholly unrelated terminal business. In sum: The large diversified firm has better opportunities for using reciprocal buying than the single-line producer * * *, A firm that makes many products can more readily find a supplier that is also a potential buyer of what it makes. And, if it is a large purchaser, it may readily persuade its supplier to buy from it. If a mere suggestion is not adequate, a threat to withhold patronage may do the trick * * *, Diversification not only increases the number of opportunities for reciprocal buying; it increases their magnitude. A single-line producer, even though a near-monopolist, may buy so little of some material that reciprocal buying has little influence on suppliers as potential customers. But by diversifying— making other products requiring the same input—a firm may so enlarge its buying as to give it the power to increase its sales * * *. * * * The large diversified firm producing for sale to other industries bas an advantage in the strategy of reciprocal dealing. (Stocking and Mueller, Business Reciprocity and the Size of Firms, The Journal of Business of the University of Chicago, Vol. XXX, pp. 73,76-77 (1957) CONSOLIDATED FOODS CORP. 955 929 Opinion Hence, to the extent that a diversification, or conglomerate, merger produces an industry structure that facilitates and furthers reciprocal buying, it is likely to lead to the most serious of anticompetitive consequences, vz2, to confer upon large, diversified corporations a crushing weapon against small, single-line competitors. The potential practical consequences are dramatically illustrated in the Waugh case, discussed earlier. The danger of such consequences, we must find, also exists here as a practical reality.

Consolidated’s acquisition of Gentry presented it with an opportunity, previously unavailable, to reap a profit from sales in one product area, dehydrated onion and garlic, on the sheer strength of its buying power in other markets, and not on the basis of “a better product or a lower price”. Furthermore, Consolidated did, again admittedly, overtly exert this power on occasion with success. The evidence shows that other established onion and garlic producers, basic Vegetable Products, Inc., and Puccinelli Packing Co., lack Consolidated’s size and diversification, and are thus ill-equipped to respond in kind. It is in the context of just such an industry structure that a reciprocal buying policy has the greatest chance of success and therefore poses the most serious threat to competition.

Since Consolidated acquired the power to extort or simply attract reciprocal purchases from suppliers when it acquired Gentry, the causal relationship between the merger and the injury to competition implicit in reciprocal buying is patent. While respondent has admitted the overt exercise of the power inherent in its corporate structure, expressly conditioning purchases from processors on their purchases from Gentry, it seems clear that merely as a result of its connection with Consolidated, and without any action on the latter’s part, Gentry would have an unfair advantage over competitors enabling it to make sales that otherwise might not have been made. Section 7 is the appropriate statute for dealing with the problem of eliminating anticompetitive effects directly attributable to a merger in their incipiency. Respondent’s argument that the Commission should rely on Section 5 of the Federal Trade Commission Act as an exclusive remedy in this case is without merit. Congress did not consider it sufficient to provide post hoc procedures to enjoin anticompetitive behavior. Rather, Section 7 was designed to abort such changes in industry structure that would have anticompetitive effects, a concept that is not in any sense confined to unfair methods of competition within the meaning of Section 5 of the Federal Trade Commission Act. Though neither the absence of competition between two arms of the single corporation nor intra-corporate sales might be unfair methods of competition, in a Section 7 proceeding the inquiry Opinion 62 F.T.C.

frequently focuses on the anticompetitive effect of anticipated business practices that would be immune from legal attack had the structure of the merged corporation been developed by growth rather than acquisition. Therefore, in this case, it might be agreed that a cease and desist order would eliminate such overt reliance on reciprocity by Consolidated as might be proved, but it would do nothing to eliminate the anticompetitive effect. inherent in the corporate structure created by the merger.

VI Is the anticompetitive potential of the Consolidated-Gentry merger sufficiently, substantial to render the merger unlawful?*® In considering this question, we are aware that Congress did not intend Section 7 to apply only to the “mere possibility” that competition may be substantially lessened. Conversely, “A requirement of certainty and actuality of injury to competition is incompatible with any effort to supplement the Sherman Act by reaching incipient restraints.” (S. Rep. No. 1775, 81st Cong., 2d Sess., p. 6) Congress used the words “may be substantially to lessen competition” (emphasis supplied), to indicate that its concern was with probabilities, not certainties. Statutes existed for dealing with clear-cut menaces to competition; no statute was sought for dealing with ephemeral possibilities. Mergers with a probable anticompetitive effect were to be proscribed by this Act. (Brown Shoe Co. v. United States, supra, at p. 328) What then are the “probabilities” here? Once again, the Brown Shoe opinion is illuminating. In discussing the vertical aspects of the merger between Brown Shoe Co. and G. R. Kinney Co., the Court described a spectrunr of types of restraints on competition that. may result, in varying degrees, in foreclosing a share of a market to competitors. It distinguished in particular between exclusive-dealing contracts and tying agreements. The former, it said, “are frequently negotiated at the behest of the customer who has chosen the particular supplier and his product upon the basis of competitive merit”, and under certain circumstances “may escape censure * * *.” (870 U.S., at p. 380) Tying agreements, on the other hand, “can rarely be harmonized with the strictures of the antitrust laws * * *.° (Zbid.) The Court explained :

The usual tying contract forces the customer to take a product or brand he does not necessarily want in order to secure one which he does desire. Because such an arrangement is inherently anticompetitive, we have held that its use 5It is agreed that dehydrated onion and dehydrated garlic constitute the lines of ecommerce involved in this proceeding and that the relevant market area is the whole United States.

CONSOLIDATED FOODS CORP. 957 929 Opinion by an established company is likely “substantially to lessen competition” although only a relatively small amount of commerce is affected * * *, (Ibid.) As stated earlier, tying agreements and reciprocal buying are closely analogous in anticompetitive effect. In the latter, the customer is forced “to take a product or brand he does not necessarily want” in order to make a sale. That the similarity between a merger and a tying agreement is an appropriate consideration under Section 7 is also apparent from Brown Shoe, since the resemblance between one aspect of Brown’s relationship to Kinney and a tying clause was mentioned by the Court as a consideration supporting a finding of violation. (/d., at p. 887.) By acquiring Gentry, Consolidated has provided itself with a basis on which to “tie” sales to its supplier to purchases from them.

Certainly the area of competition threatened by the Consolidated- Gentry merger greatly exceeds the “relatively small amount of commerce” the Court has considered necessary to invalidate a tying agreement. This is revealed by examining Gentry’s sales to suppliers of Consolidated. In 1958, to cite the most recent year for which figures are available, Gentry held 35% of the market for dehydrated onion and 39% for dehydrated garlic. Its sales of each, in pounds, were §,259,171 and 1,979,834, respectively. Respondent has undertaken to tabulate (Respondent’s Proposed Findings of Fact and Conclusions of Law, pp. 99-101) Gentry’s sales to major customers—defined as customers that purchased 10,000 pounds of onion and garlic from Gentry in any year from 1946 to 1958—that were also suppliers of Consolidated. For 1958, these sales came to 4,617,145 pounds of onion and 1,263,690 pounds of garlic. Translated into market shares, firms that both supplied Consolidated and bought in volume from Gentry purchased more than 25% of the onion produced by the industry and not quite 25% of the garlic.

Hence, in both the onion and garlic product lines approximately one-fourth of the available market stands to be influenced by the possibility that Consolidated will withdraw patronage unless Gentry is in turn patronized. But this is only the most conservative calculation of the potential scope of reciprocity at Consolidated’s command. Certainly many other prospective purchasers from Gentry could be influenced by the expectation or promise of reciprocal purchases of their products by Consolidated. The latent force of Consolidated’s buying power therefore undoubtedly exceeds one-fourth of both markets by a substantial margin. The area of prospective market foreclosure is thus not merely significant, but exceptionally large. Because, again, Section 7 requires us to deal in “probabilities”, - potential foreclosure of a major share of the market weighs strongly against the lawfulness of a merger—especially a merger that threatens Opinion 62 F.T.C.

consequences like those of a tying agreement. But there are other factors, mentioned in Brown Shoe as appropriate for consideration, which point in the same direction.

First, the Court indicated that past behavior of the merging firms may be significant in showing potential market foreclosure. (370 U.S., at p. 8382) Here, past behavior reveals actual use of reciprocity by Consolidated in pushing Gentry’s products. Respondent argues, however, that the record discloses that reciprocal buying was employed only sporadically and with limited success. We think this contention misconceives both the point of Section 7 and the significance of the reciprocity evidence of record. That respondent has not chosen to systematize and vigorously enforce its reciprocal buying policy is of far less significance than that it obtained the power to do so by merger, and that by actually using its power on occasion to disadvantage competitors unfairly, respondent demonstrated that its possession of such power posed a real and substantial, and not merely abstract or theoretical, threat to competition.

Section 7 reads “may be”, not “has”. The evidence may show that respondent has not thus far severely impaired competition in the industry by reciprocity but it does not show that respondent may not do so when it chooses or that it will not so choose in the future. In other words, respondent’s proof on this point reveals, at best, only past internal irresolution in implementing reciprocity rather than solid and effective external limitations on the power to exercise it. Any suggestion that such power cannot effectively be exploited fails to account for clear-cut historical instances when it has been. Consider, for example, the dramatic effect of reciprocity in Waugh Equipment Co., discussed earlier, where the acquired firm was enabled to leap from insignificance to control of 85% of the market and industry leadership in only six years.* Respondent has given us no reason to believe that industry conditions preclude its achieving similar results. Indeed, as we pointed out in Part V, supra, the industry structure seems tailor-made to the exploitation of reciprocal buying power. Second, the Supreme Court attached importance in Brown Shoe to the trend of concentration in the industry. (/d., at p. 37) Here, no such trend appears, but the industry is already so highly concentrated that there is hardly room in which a “trend” could develop.’ With two firms accounting for better than 85% of both product lines for 11 successive years, maximum concentration short of monopoly ®¥For other instances in which reciprocal buying by large diversified firms may seriously hamper small single-line competitors, see Stocking and Mueller. “Business Reciprocity and the Size of Firms,” XXX The Journal of Business of the University of Chicago 73 (1957). TOne “trend”, however, is highly possible. Other diversified food firms may follow Consolidated’s lead and seek to acquire the remaining industry members for reciprocity purposes. This development would stifle fair competition on an industry-wide basis. CONSOLIDATED FOODS CORP. 959 929 Opinion has already been achieved. If it is desirable to prevent a trend toward oligopoly ° it is @ fortiori desirable to remove, so far as possible, obstacles to the creation of genuinely competitive conditions in an oligopolistic industry. Respondent’s reciprocal buying power, obtained through acquisition of Gentry, is just such an anticompetitive obstacle.

This conclusion is buttressed by the peculiar nature of the dehydrated onion and garlic industry. In the first place, the record shows that Gentry’s leading competitor, Basic Vegetable Products, Inc., has been the innovator and leader in the field. Gentry has recently made technical strides narrowing, although probably not closing, the gap between them. There is also evidence that the third firm, Puccinelli Packing Co., is not only much smaller—commanding only about 10% of each product market—but is considered by many buyers to offer an inferior product and inferior service. Coupled with this industry structure is the fact, well-documented by respondent, that many buyers have determined that their source of supply may best be protected by a policy of buying from two suppliers. When the inducement of reciprocal buying is added as a third ingredient, the probable result becomes clear. Buyers are likely to lean toward Basic on the ground of quality, but, in seeking a second, protective supply channel, to -purchase from Gentry in the belief that this will further their sales to Consolidated. Not only does Gentry thus obtain sales that might otherwise go to Basic or Puccinelli, but the two-firm oligopoly structure of the industry is strengthened and solidified and new entry by others is discouraged.° Third, and closely related to the problem of oligopoly, is the matter of maintaining competitive vigor in the industry. Respondent seems to think that it cannot be found to have violated Section 7 since it has not driven competitors from the field or sharply curtailed their sales. But we have already indicated that our inquiry must focus on probable effect, and that one such probable effect of respondent’s acquisition of Gentry is the discouragement of new competition. This could occur even if Gentry does not drive competitors from the field or attain unilateral industry dominance. If reciprocal buying creates for Gentry a protected market, which others cannot penetrate despite superiority of price, quality, or service, competition is lessened ® See Brown Shoe Co. v. United States, 370 U.S., at pp. 332-3838. ® Neither the departure from the industry of J. R. Simplot Co., nor the entry of Gilroy Foods, Ine. (later purchased by McCormick & Co.). appears particularly significant here. Simplot seems to have switched to another field for reasons extrinsic to the competitive picture in the onion and garlic industry. Gilroy’s entry is too recent to permit assessment of its probable role, especially in view of its acquisition by McCormick, a large user of both onion and garlic.

Opinion 62 F.T.C.

whether or not Gentry can expand its market share.° And if, as we find to be true here, the share of the market that may be insulated from the effective interplay of fair competitive forces is substantial, and the likelihood of such foreclosure is considerable, the merger cannot stand.

The Supreme Court has said that “remaining vigor cannot immunize a merger if the trend in that industry is toward oligopoly.” (Brown Shoe Co. v. United States, supra, at p. 833.) Nor can it “immunize a merger” if pre-existing oligopoly is thereby significantly reinforced or more firmly entrenched. “Vigor” of competition is diminished, rather than increased, by a merger that adds an anticompetitive element to an already overwhelmingly concentrated industry. Of course, a merger escapes the proscription of Section 7 if its likely effect is to promote, rather than hinder, competition. This might be true, for example, if the acquired corporation were a “failing company” being purchased by a newcomer to the industry, or if two small companies must combine in order to compete effectively with larger corporations dominating the industry. (See Brown Shoe Co. v. United States, 370 U.S., at pp. 819, 331.) But no such procompetitive effects can be discerned in the merger here. Indeed, it is difficult to see how the quasi-tying-agreement effect of reciprocal buying fostered by the union of Consolidated and Gentry can be anything but anticompetitive.4 In Brown Shoe, the Court concluded that the Brown-Kinney merger was likely substantially to lessen competition : because the trend toward vertical integration in the shoe industry, when combined with Brown’s avowed policy of forcing its own shoes upon its retail subsidiaries, may foreclose competition from a substantial share of the markets for men’s, women’s, and children’s shoes, without producing any countervailing competitive, economic, or social advantages. So here, we must conclude that the acquisition of Gentry by Consolidated has conferred upon the latter the power to foreclose competition from a substantial share of the markets for dehydrated onion It is for this reason that we reject respondent’s argument that the decline in its share of the garlic market proves the ineffectiveness of reciprocity. We do not know that its share would not have fallen still farther, had it not been for the influence of reciprocal buying. This loss of sales fails to refute the likelihood that Consolidated’s reciprocity power, which it has shown a willingness to exploit to the full, will not immunize a substantial segment of the garlic market from normal quality, price, and service competition. 1 Respondent has suggested that reciprocity business gained by its acquisition of Gentry is offset by business Gentry has lost due to competitors of Consolidated not wishing to patronize one of its divisions. But this hardly establishes that the “vigor of competition” has been preserved. Instead it shows that the merger has lent additional rigidity to the market by establishing a class of customers immune to Gentry's sales efforts. The free play of competitive forces is thus further curbed. CONSOLIDATED FOODS CORP. . 961 929 Opinion and garlic, thereby jeopardizing the competitive opportunities of its small, relatively undiversified competitors and tending to lend further rigidity to an already heavily concentrated industry and to discourage the entry of new competitors, all “without producing any countervailing competitive, economic, or social advantages.” ” Vil The final question concerns the appropriate relief to be ordered. The hearing examiner directed respondent to divest itself within six months of all assets obtained through acquisition of Gentry, together with subsequent additions thereto, in such a manner as to restore Gentry as a going concern in the production and sale of dehydrated onion, garlic, and other products. The examiner’s order would prohibit distribution of the stock or assets of Gentry to any officer, director, stockholder, employee, or agent of Consolidated. Respondent objects (a) that there is no reason to prevent a “spin-off” of Gentry to existing shareholders of Consolidated, and (b) that the six-month time limit imposes an unreasonable burden. Significantly, respondent does not argue that divestiture, in whatever form, is not here, as it normally is, the proper remedy. That proposition we take to be conclusively established by United States v. F. I. dupont de Nemours & Co., 866 U.S. 316, which held that divestiture, “that most drastic, but most effective, of antitrust remedies,” is “peculiarly appropriate in cases of stock acquisitions which violate § 7.” 366 U.S., at 326, 328. In this case, divestiture is indeed peculiarly appropriate. As we have pointed out, a cease and desist order would prevent further overt effort by respondent to obtain business for Gentry through reciprocity, but it could not remove the attraction, implicit in the Consolidated- Gentry relationship, which is now well-known in the industry, for suppliers or prospective suppliers of Consolidated to purchase from Gentry solely or principally in the hope of maintaining or enhancing their sales position with Consolidated.

However, we find substance in both of respondent’s contentions concerning the details of the order of divestiture which should be issued. Respondent points out that its stock is publicly held by LY OCf., Reynolds Metals Co. v. Federal Trade Commission, 309 F. 2d 223 [7 8S. & D. 527] (D.C. Cir., Sept. 27, 1962):

“Arrow’s assimilation into Reynolds’ enormous capital structure and resources gave Arrow an immediate advantage over its competitors who were contending for a share of the market for florist foil. The power of the ‘deep pocket’ or ‘rich parent’ for one of the florist foil suppliers in a competitive group where previously no company was very large and all were relatively small opened the possibility and power to sell at prices approximating cost or below and thus to undercut and ravage the less affluent competition.” Opinion 62 F.T.C.

thousands of investors. Their simultaneous ownership of Gentry and Consolidated shares is not likely to have an adverse effect on competition. An order prohibiting transfer of stock in a new, independent, reconstituted Gentry corporation to officers, directors, executive employees, and major shareholders (e.g., owners of more than 2% of the stock) of Consolidated might therefore suffice. Further, a six-month deadline for divestiture of Gentry’s entire business may be unnecessarily abrupt. However, on these and other aspects of the proposed order we are without adequate information at this time to determine what would be the most appropriate and effective provisions to be included.

_ In addition, we are of the opinion that the hearing examiner’s order is, in one important respect, inadequate and incomplete. Since respondent has admittedly engaged in a practice which we have found to be an unfair method of competition, protection of the public interest requires that it be specifically ordered to desist from any future resumption of that practice. Cases such as Waugh Equipment Co. and Mechanical Manufacturing Co., Part IV, supra, show that anticompetitive reciprocity relationships between firms may be established not only through a clear-cut, parent-subsidiary connection but also through ownership or control of one company by important officials of another. For this reason, no relief will be adequate unless it prohibits Consolidated and Gentry from having common officers, directors, and executive employees and precludes stock ownership in each firm by officers, directors, and executive employees of the other. Preparation of a sound and equitable order embodying these provisions requires that the matter be explored more fully by the Commission and the parties than has yet been done here. The controversy up to now has centered on the issue of violation. Now that it has been determined that Section 7 has been violated, we believe it would be useful and desirable to follow a procedure here analogous to that provided in Rule 4.22(c). Within twenty days after service of this decision, counsel supporting the complaint shall file with the Commission a proposed form of order appropriate to our decision, together with a supporting memorandum. Counsel for respondent may, within twenty days thereafter, file an alternative form of order, together with a supporting memorandum; and counsel supporting the complaint may, within ten days thereafter, file a statement in reply thereto. The Commission will, upon consideration of the materials submitted, enter its final order.

Commissioner Anderson dissented to the decision in this matter and Commissioner Higginbotham did not participate. CONSOLIDATED FOODS CORP. 963 929 Findings Friypines or Fact; Conciusions; anp Orprer ProvipING FOR THE SUBMISSION OF Proposats ror FrInat Orper NOVEMBER 15, 1962 FINDINGS OF FACT The Commission adopts findings “1” through “12” of the hearing examiner’s initial decision as its own. The Commission’s other findings of fact are set forth in the accompanying opinion. CONCLUSIONS 1. The Commission has jurisdiction of the subject matter of this proceeding and of the respondent.

2. Section 7 of the Clayton Act, as amended, prohibits any merger— horizontal, vertical, conglomerate, or otherwise—where the effect may be substantially to lessen competition or to tend to create a monopoly. 8. The effect of the acquisition of Gentry, Incorporated, by Consolidated Foods Corporation may be substantially to lessen competition in the domestic production and sale of dehydrated onion and garlic in violation of Section 7 of the Clayton Act, as amended. ORDER PROVIDING FOR THE SUBMISSION OF PROPOSALS FOR FINAL ORDER This case having been heard by the Commission upon respondent’s appeal from the initial decision, and the Commission having determined that an appropriate divestiture and cease and desist order should be issued to conform with its decision as set forth in the accompanying opinion :

It is ordered, That counsel supporting the complaint shall, within twenty (20) days after service of this order, file with the Commission a proposed form of order appropriate to the decision, together with a supporting memorandum; that counsel for respondent may, within twenty (20) days after service of said proposed order and memorandum, file an alternative form of order, together with a supporting memorandum; and that counsel supporting the complaint may, within ten (10) days after service of said alternative order and memorandum, file a statement in reply thereto. The Commission will thereafter enter its final order.

Commissioner Anderson dissenting and Commissioner Higginbotham not participating.

Opinion 62 E.T.C.

Memoranpum ACCOMPANYING FINAL ORDER MARCH 22, 1963 By the Commission:

On November 15, 1962, the Commission determined that respondent had violated Section 7 of the Clayton Act, as amended (15 U.S.C. § 18 (1958) ), by acquiring the assets of Gentry, Incorporated. Adopting a procedure analogous to that described in Section 4.22(c) of the Commission’s Rules of Practice, on the same date we entered an order providing for the submission by counsel on both sides of proposals concerning the form and substance of the final order to be entered. There are no substantial differences in the proposed orders submitted by the parties. Both would allow respondent the alternatives of an outright sale of the business and assets of its Gentry Division or a “spin-off”, whereby a new Gentry corporation would be formed and the stock in the new corporation distributed to existing shareholders of Consolidated. Because, for the reasons stated in our opinion, either plan of divestiture would result in reestablishing Gentry as a viable competitive entity, the Commission has determined to accept this alternative form of order of divestiture, and thus afford respondent a degree of flexibility in formulating a plan to divest itself of the illegally acquired assets.

The differences in the orders submitted by complaint counsel and counsel for the respondent are confined to the details of divestiture. The Commission has decided to adopt the form of order submitted by counsel for the respondent with certain medifications discussed below. The order submitted by complaint counsel would allow respondent one year after the effective date of the order in which to complete divestiture. Counsel for respondent argue that this period should be extended to two years in order to allow respondent sufficient time for deciding which method of divestiture is most appropriate, in light of Consolidated’s financial position at the time the order becomes effective, the trend of Gentry’s sales and profits, and the relevant tax considerations. It is pointed out that Consolidated may wish to assess the possibility of an outright sale by approaching and negotiating with possible purchasers before resorting to a spin-off. Additionally, respondent notes that considerable time will be required to implement whichever plan is adopted.

On the basis of the facts now before the Commission, it is not clear that respondent will not be able to complete the necessary actions within one year. Accordingly, our order will require divestiture withm one year after the date upon which it becomes effective. If divestiture CONSOLIDATED FOODS CORP. 965 929 Opinion should not be accomplished within that time, the Commission will then take such further action as may be necessary to effectuate the objectives of the order.

Respondent also contends that it cannot reasonably comply with a provision requiring submission within sixty days after the order becomes final of a plan for carrying out the provisions of this order. While it is certainly true that respondent cannot be expected to have completed plans for divestiture within that period, it is essential that respondent keep the Commission informed of its progress towards compliance at periodic intervals. The order will therefore require respondent to file such a progress report within sixty days after its effective date and periodically, every ninety days thereafter, until divestiture is finally effected.

It is agreed that, whether Gentry is sold or spun-off, certain limitations must be placed on the persons acquiring control of a divested Gentry so that separation will be real in fact as well as in form. It is agreed that no officer, director, employee or agent of respondent should be among the purchasers of Gentry in the event of a sale and that no officer, director or executive employee of respondent should be among the officers cr shareholders of a new Gentry corporation in the event of a spin-off. There is some disagreement concerning the limitations that should be placed on respondent’s shareholders. In the case of an outright sale, complaint counsel would absolutely prohibit sale to any shareholder, no matter how small his holding. Respondent recommends that sale be permitted to a shareholder owning not more than two percent of its stock. The Commission does not believe that the absolute prohibition recommended by complaint counsel is necessary to insure complete separation and independence of Gentry from respondent. However, since an owner of two percent of respondent’s stock would have an investment in the company of several million dollars and would undoubtedly be one of its largest and most influential stockholders, we are not inclined to accept respondent’s alternative. Rather, we will prohibit sale of the Gentry Division in whole or in part to a holder of more than one percent of respondent’s stock. In addition, we have added a provision prohibiting sale to any purchaser who is not approved in advance by the Commission. We have done so to insure that the purpose of the order of divestiture is not defeated by sale to a purchaser whose relationship io Gentry may also tend to lessen competition in the dehydrated onion and garlic industries.

In the event of a spin-off, complaint counse! would prohibit any of respondent's shareholders to serve as an officer, director or executive employee in the new Gentry corporation, but would allow stockhold- 749-537—67——62 Final Order 62 F.T.C.

ing in that corporation by persons owning no more than two percent of respondent’s stock. Responaent recommends that the two-percent limit apply to both situations. Again, the Commission does not believe an absolute prohibition is necessary. We have, consequently, accepted respondent’s proposal of allowing small holders of its stock to assume office in a new Gentry corporation as well as hold stock in that corporation but we have, for the reasons stated above, applied the exemption only to persons holding no more than one percent of respondent’s stock.

The parties disagree as to whether a purchaser of the Gentry Division must be free of any of the proscribed relationships to respondent at the time of the sale or whether the order should merely require that any such relationship be severed within six months after the divestiture. The Commission has concluded that in the event of a sale of respondent’s Gentry Division it is in the public interest for the separation of Gentry from Consolidated to be complete at the time of divestiture, rather than to permit joint management for any period thereafter. We have left undisturbed, however, the proposed provision which, in the event of a spin-off, allows holders of more than the allowable limit (one percent) of respondent’s stock six months in which to reduce their holdings below that level or disassociate themselves from the new Gentry corporation. In all other respects respondent’s proposed order is accepted and, with the modifications indicated in this opinion, will be adopted as the final order of the Commission.

Commissioner Higginbotham did not participate in the decision of this matter.

Finau ORDER MARCH 22, 1963 Pursuant to the Commission’s order issued November 15, 1962, complaint counsel having filed a proposed form of order appropriate to carry out the Commission’s decision, together with a supporting memorandum, and respondent having filed an alternative proposed form of order, together with supporting memorandum, and complaint counsel having filed a statement in reply thereto; and the Commission having determined that respondent’s proposed form of order should be adopted with certain modifications described in the accompanying memorandum of the Commission :

I It is ordered, That the respondent, Consolidated Foods Corporation, a corporation, and its officers, directors, agents, representatives CONSOLIDATED FOODS CORP. © 967 929 Final Order and employees, within one (1) year from the date this order becomes final, shall divest itself absolutely, in good faith, of all assets, properties, rights and privileges, tangible and intangible, including but not limited to, all plants, equipment, trade names, trademarks and good will acquired by Consolidated Foods Corporation as a result of the acquisition by Consolidated Foods Corporation of the assets of Gentry, Incorporated, together with all plants, machinery, buildings, improvements, equipment and other property of whatever description which have been added to the property of Gentry, Incorporated, so acquired, in such manner as to restore it as a going concern in the production and sale of dehydrated onion and garlic and other products in which said Gentry, Incorporated, was engaged at and immediately prior to the time of said acquisition by respondent Consolidated Foods Corporation.

II It is further ordered, That by such divestiture none of the stocks, assets, rights or privileges, tangible or intangible, acquired or added by respondent, shall be sold or transferred, directly or indirectly, to anyone who is at the time of the divestiture an officer, director, employee, or agent of, or under the control or direction of respondent or any of respondent’s subsidiary or affiliated corporations, or owns or controls more than one (1) percent of the outstanding shares of common stock of Consolidated Foods Corporation, nor to anyone who is not approved as a purchaser in advance by the Federal Trade Commission.

a Lt is further ordered, That if the respondent divests the assets, properties, rights and privileges, described in paragraph I of this order, to anew Gentry corporation, the stock of which is wholly owned by Consolidated Foods Corporation, and if respondent then distributes all of the stock in said wholly owned new Gentry corporation to the stockholders of Consolidated Foods Corporation, in proportion to their holdings of Consolidated Foods Corporation stock, then paragraph II of this order shall be inapplicable, and the following paragraphs IV and V shall take force and effect in its stead. IV No person who is an officer, director, or executive employee of Consolidated Foods Corporation, or who owns or controls, directly or indirectly, more than one (1) percent of the stock of Consolidated Foods Corporation, shall be an officer, director or executive employee of the Complaint 62 B.T.C, new Gentry corporation, or shall own or control, directly or indirectly, any stock of the new Gentry corporation.

v Any person who must sell or dispose of a stock interest in Consolidated Foods Corporation or the new Gentry corporation in order to comply with paragraph IV of this order may do so within six (6) months after the date on which distribution of the stock of the new Gentry corporation is made to stockholders of Consolidated Foods Corporation.

vi As used in this order, the word “person” shall include all members b) cf his immediate family.

VII Itis further ordered, That respondent, Consolidated Foods Corporation, shall periodically, within sixty (60) days from the date this order becomes final and every ninety (90) days thereafter until divestiture is fully effected, submit to the Commission a written and detailed report of its plans and progress in carrying out the provisions of this order. Commissioner Higginbotham not participating by reason of the fact that this matter was argued before the Commission prior to the time when he was sworn into office.