United States Steel Corporation

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IN THE MATTER OF UNITED STATES STEEL CORPORATION* ORDER, OPINIOKS , ETC. , IN REGARD TO THE ALLEGED VIOLATION OF SEC. 7 OF THE CLAYTON ACT Docket 8655. Complaint, Jan. 1965-Decision, Dec. 2, 1968 Order requiring the Nation s largest steel company to divest itself, within one year, of a Hicksvile, N. , producer of ready.mixed concrete, ac- See joint Initial Decision In the Ma.tter of Natio'rl Portwnd Cement Company, Docket No. 8654 , 71 F. C. 395.

UNITED STATES STEEL CORP. 1271 1270 Complaint quired in April 1964, and not to acquire such a firm for the next 10 years without prior approval of the Commission. COMPLAINT The Federal Trade Commission has reason to believe that United States Steel Corporation through its subsidiary New Providence Corporation bas acquired the stock and assets of Certified Industries Incorporated, a corporation, in violation of Section 7 of the Clayton Act (U. S. C., Title 15, Section 18) as amended, and therefore, pursuant to Section 11 of said Act, it issues this complaint stating its charges in that respect as follows: Definitions 1. For the purpose of this complaint the following definitions shall apply:

a. "Portland cement" includes Types I through V of portland cement as specified by the American Society for Testing Materials. Neither masonry cement nor white cement is included. b. "Ready-mixed concrete" includes all portland cement concrete which is manufactured and delivered to a purchaser in a plastic and unhardened state. Ready-mixed concrete includes central mixed concrete, shrink-mixed concrete and trans-mixed concrete.

c. "The Kew York City metropolitan area" consists of the five boroughs of the City of New York and the New York counties of )iassau, Suffolk and Westchester.

United States Steel Corporation 2. United States Steel Corporation, respondent herein, is a corporation organized and existing under the laws of the State of New Jersey with its general offce located at 71 Broadway, New York, New York.

3. United States Steel Corporation is and for many years has been the largest steel producer in the L'united States and a major integrated producer of raw materials for the production of steel and steel products. Through its Universal Atlas Cement division the company is also one of the four largest portland cement producers in the United States. In 1963, United States Steel had sales of $3 637 173 138, assets of $5 033 528 582, and net income of $203,549 338.

Complaint 74 F.

4. Universal Atlas Cement division of United States Steel Corporation operates ten portland cement plants in the United States with a total annual capacity of approximately 30 900 000 barrels. Universal Atlas also has a portland cement manufacturing plant under construction on Grand Bahama Island which wii be capable of serving major east coast metropolian markets. 5. The New York City metropolian area is one of the principal markets for portland cement manufactured at Universal Atlas plants at Hudson, New York, and Northampton, Pennsylvania. In 1963, the total shipments of portland cement by these two plants amounted to 5 274 486 barrels. About 973 119 barrels or approximately 18 percent of the total portland cement shipped by these plants, was shipped to consumers located in the New York City metropolian area.

6. At a1l times relevant herein, United States Steel Corporation was a corporation engaged in commerce, as j'commerce" is defined in the Clayton Act.

Certified Industries Inc.

7. Prior to May 1, 1964, Certified Industries Inc., was a corporation organized and existing under the laws of the State of Delaware with its principal offce located at 201 Park Avenue, Hicksvice, Long Island, New York.

8. At the time of the acquisition, Certified was, and for many years had been, engaged in the production and sale of readymixed concrete and mineral aggregates (sand and gravel) in the New York City metropolitan area. For the fiscal year ending June 30 , 1963, Certified had sales of $14 325 991 , assets of $11 147,419, and a net loss of $655 850.

9. Certified operated ten ready-mixed concrete plants in the New York City metropolitan area. Certified is one of the four largest producers of ready-mixed concrete, and one of the four largest consumers of portland cement in the New York City metropolitan area. During 1963, Certified consumed 1 054 072 barrels of portland cement and sold approximately 772 241 cubic yards of ready-mixed concrete.

10. At a1l times relevant herein Certified Industries Inc., was a corporation engaged in commerce, as "commerce" is defined in the Clayton Act.

UNITED STATES STEEL CORP. 1273 1270 Complaint Acquisition 11. On or about May 1 , 1964, United States Steel, through its subsidiary New Providence Corporation, acquired all the assets and outstanding capital stock of Certified Industries Inc. , by assumption of liabilties of an undetermined amount and payment in cash of $1 026 000.

The Nature of Trade and Commerce 12. Portland cement is a material which in the presence of water binds aggregates, such as sand and gravel, into concrete. Portland cement is the essential ingredient in the manufacture of ready-mixed concrete. There is no practicable substitute for portland cement in the manufacture of concrete. 13. The portland cement industry in the United States is substantial. In 1963, there were about 51 cement companies in the United States operating approximately 182 plants. Total shipments of portland cement in that year amounted to 349 321,000 barrels having a value of $1 116,555,000. 14. On a national basis, approximately 57 percent of all portland cement is shipped to companies engaged in the production of ready-mixed concrete. In the heavily populated metropolitan areas, the percentage of portland cement consumed by readymixed concrete companies is generally higher. Ready-mixed concrete producers are the only businesses engaged in the sale of concrete as a commodity.

15. Due to such factors as transportation costs and the necessity of supplying competitive delivery service to consumers, the effective market area of portland cement production and distribution facilities is limited. Similar considerations limit the market area for ready-mix companies.

16. Cement producers sell their portland cement to consumers such as ready-mixed concrete companies, manufacturers of concrete products, contractors and building materials dealers. In the past such consumers, in general, have not been integrated or affiliated with portland cement producers. 17. In recent years there has been a trend of mergers and acquisitions by which ready-mixed concrete companies in major metropolian areas in various portions of the United States have become integrated with portland cement companies. As ready-mix Complaint 74 F.

companies have been acquired by producers of cement, competing cement producers have sought to acquire other cement consumers in order to protect their markets against the actual or expected foreclosure caused by these acquisitions, and to prevent additional foreclosure of their markets as a result of future such acquisitions by their competitors. Thus each acquisition by a cement producer of a substantial consumer of portland cement forms an integral part of a chain reaction of acquisitions-contributing both to the share of the market already foreclosed by acquisitions, and to the impetus for further such acquisitions. 18. Three of the five largest ready-mixed concrete producers in the New York City metropolitan area have, since 1960, become integrated, through acquisition, with portland cement companies. Violation of Section 7 19. The effect of the acquisition of Certified by United States Steel Corporation, both in itself and by aggravating the trend towards vertical integration between suppliers and consumers of portland cement, may be substantially to lessen competition or to tend to create a monopoly in the p,-oduction and sale of portland cement and ready-mixed concrete in the New York City metropolitan area, in adjoining markets, or in the United States as a whole, in the following ways, among others: a. Competitors of respondent may have been or may be foreclosed from a substantial share of the market for portland cement.

b. The entry of new sellers of portland cement and ready-mixed concrete may be inhibited or prevented.

c. The ability of non-integrated competitors of respondent effectively to compete in the sale of portland cement may be substantially impaired.

d. As an integrated manufacturer and seller of portland cement, ready-mixed concrete and other construction materials respondent has achieved or may achieve a decisive competitive advantage over its competitors which are engaged only in the manufacture and sale of portland cement, or ready-mixed concrete. e. The production of ready-mixed concrete, now a decentralized locally controlled, small business industry, may become concentrated in the hands of a relatively few producers of portland cement.

Now, therefore, the acquisition of Certified by United States UNITED STATES STEEL CORP. 1275 1270 Opinion Steel Corporation, as above alleged, constitutes a violation of Section 7 of the Clayton Act (U. S. C. , Title 15 , Section 18), ae amended.

OPINION OF THE COMMISSION DECEMBER 2 , 19G5 By DIXON Commissioner:

This matter is before the Commission on the appeal of complaint counsel from an initial decision by Hearing Examiner John Lewis dismissing as unsustained a complaint charging respondent with violation of Section 7 of the Clayton Act, as amended. The Commission issued its complaint against respondent on January 22, 1965. The gravamen of the action is respondent' acquisition, through a subsidiary, of Certified Industries, Inc. , a New York corporation engaged in the production and sale of ready-mixed concrete.

The examiner, upon the culmination of extensive hearings, dismissed the complaint primarily on the basis that the acquired company s "failing condition" at the time of its acquisition immunized the transaction from Section 7 challenge. In the alternative, the examiner held that the merger in question did not have the tendency to substantially lessen competition or to create monopoly in any line of commerce in any section of the country. We disagree, finding that the challenged acquisition was anticompetiive within the test of Section 7 and holding that the acquisition was not exempted because the acquired company was in a failing condition. Accordingly, we reverse thc initial decision and order divestiture, finding such remedy appropriate after consideration of aJl the circumstances.

Respondent, United States Steel Corporation, is tbe country largest manufacturer of steel and a maj or integrated producer of raw materials for the production of steel and steel products. In 1965, it achieved sales of $4 129,352 578. In the same year, respondent' s net income amounted to $236,785 114; and it listed assets of $5 206, 119 000. According to a national periodical which annually ranks American companies with respect to size, respondent, in 1966, was the nation s seventh largest industrial corporation.1 Fortune, July 15, 1966 , p. 232.

_ 1276 FEDERAL TRADE COMMISSION DECISIOXS Opinion 74 F.

Respondent is also one of the four largest manufacturers of portland cement in the United States, producing and distributing this product through an unincorporated business entity, Universal Atlas Cement Division (UAC). Its eleven operating cement plants have an aggregate annual capacity of over 30 milion barrels and enable respondent to serve cement purchasers located in thirty-seven states.

Respondent' s acquisition of Certified Industries, Inc., was consummated on April 30, 1964, through means of a U. S. Steel subsidiary, New Providence Corporation. At the time of the merger, Certified ranked as one of the four largest producers of ready-mixed concrete within its marketing region, the New York Metropolitan Area. At the same time and within the same area Certified was the second largest consumer of portland cement among ready-mixed concrete producers.

Certified purchased a portion of its cement requirements from UAC prior to its acquisition. The amount of such purchases increased very significantly in 1963 when U.S. Steel assisted Certified in obtaining a long-term loan, and the trend continued untll 1964 when the company was acquired by U. S. Steel. Set forth below is a table reflecting the amount and proportion of Certified' s cement purchases from UAC between 1961 and 1964: Certified' s Cement Proportion of total Purchases from VAG cement purchases (Bbl.) (percent) 196L-- - 36 675 8.4 1962 - -- - - - -- - - - -- - - _123,731 14. 1963-- 567,470 53. 1964_ - - 701 151 88.4 The acquisition of Certified was, therefore, vertical in naturethe merger of a supplier with one of its customers. Such acquisitions contravene Section 7 of the Clayton Act when their effect may be substantially to Jessen competition within a particular product market in a relevant area of the country. A judgment of this question "is concerned with probabilities not certainties (for the force of 7 is stil in probabilities not in what later transpired for once the two companies are united no one knows what the fate of the acquired company and its competitors would have been but for the merger. Fedeml Trade Commission Consolidated Foods 380 U. S. 592, 598 (1965). The material facts in this matter are mainly without dispute. UNITED STATES STEEL CORP. 1277 1270 Opinion The product markets are conceded to be portland cement and ready-mixed concrete. The geographic market was found by the examiner to be the New York Metropolian Area and this finding has been accepted by both sides on appeal. The principal factual dispute concerns the viability, financially and otherwise, of Certified Industries, Inc. It is from this question that respondent and complaint counsel proceed to their arguments concerning the conclusions that must be drawn from the record. The issues evolving from these arguments may be phrased as follows:

(1) Whether the challenged merger did not and cannot have any anticompetitive effect as the acquired company was in a failing condition" at the time of acquisition; and (2) Whether, in any event, the fact that the acquired firm was a "failing company" within the confines of the "defense" outlined in Inte,.wtional Shoe v. Fedeml Tmde Commission immunized respondent' s acquisition from condemnation under Section 7 (or in other words, the failing company defense is absolute not relative in nature).

The basic issues of this matter, therefore, involve the "failing company" defense and its effect upon a Section 7 proceeding. However, before we reach these issues, we must first decide whether tbe record supports the hearing examiner s factual conclusion that Certified Industries was in fact a "failing company. The following facts concerning Certified' s financial condition as found by the hearing examiner, are fully supported by the record:

For some years prior to its acquisition by U. S. Steel, Certified was a thinly capitalized company, with a relatively heavy debt structure in relation to net worth. This thin financial structure was aggravated by the firm s acquisition in 1961 of other readymixed concrete companies. During 1961 and 1962 Certified attempted to raise additional capital to improve its financial situation, but these efforts were generally unsuccessful. Its net working capital declined from approximately $388,000 in 1961 to $220 500 in 1962.

In the fall of 1961 Certified, in order to receive the cash discount on its cement purchases, negotiated extended credit arrangements, totalling $350 000, with four of its cement suppliers. In 280 s. 291 (1930).

1278 FEDERAL TRADE COMMISSIOK DECISIOKS Opinion 74 F.

addition, it issued H 12-month note for $150 000 to respondent' United Atlas Cement Division to secure its obligation for cement purchases. By October 31 , 1962, Certified owed $1.5 milion to its suppliers. In early December it notified respondent that it would have diffculty in paying the $150 000 note and respondent agreed to extend the term of the note from February 15 to April 30 , 1963. Respondent also recommended at that time that Certified give consideration to trying to arrange some long-term financing. Since Certified had previously been unsuccessful in obtaining additional capital, respondent arranged a meeting between Certified and Bankers Trust Company of N ew York, where respondent was a depositor.

Negotiations between Certified and Bankers Trust Company were carried on between January and March 1963, and were concluded with an agreement dated March 15, 1963, under which the bank loaned Certified $3.3 milion for a period of ten years, at a rate of interest of 7/8 '70 above the bank' s prime commercial loan rate, with the first installment of interest to become due July 1 , 1964. Under the terms of the loan agreement, Certified agreed that it would not permit its net current assets to be less than $600 000 for a period of three years from June 30, 1963, and not less than certain stated sums in excess of that figure for the period therafter. The agreement also set a limit of $1. 6 milion on the amount of Certified' s accounts receivable loans. Despite this new capital, Certified's financial condition continued to deteriorate. In the spring of 1963, its accounts receivable loans increased beyond the $1. 6 million limitation set forth in the loan agreement and its net current assets were $120 000 short of the loan requirement of $600 000. By June 30 of that year, Certified had suffered a loss of $655 850 and had a working capital deficit of approximately $200 000 below that required under the agreement.

Certified continued to suffer from a capital and cash deficiency. It WHS unable to make payment on notes due in October and December 1963 , or to pay to its suppliers amounts due totalling approximately $675 000. It was also in arrears on taxes amounting to $40 000. According" to Certified' s financial statement of December 31, 1963, the firm lost $928,444 during the last six months of that year, or approximately $155 000 a month. It had a deficit of over $70 000 in net working capital or net current assets, compared to net current assets of approximately $375 000 at the end of September. Its financial statement for the seven months ending January 31 , 1964 , revealed that its rate of loss UNITED STATES STEEL CORP. 1279 1270 Opinion had accelerated in the latter months of 1963. By the end of January 1964, it had a deficit in net working capital of $279 000. For the four months ending April 30, 1964 (when it was acquired by respondent), Certified sustained a loss of $871 518 , or a loss rate of $218 000 a month.

Complaint counsel do not seriously dispute the finding that when Certified was actually acquired by respondent there was a reasonable probabilty of its failing within the near future. The following conclusion by the examiner concerning the financial condition of the company at the time of its acquisition has not been challenged:

(Certified) had been losing money, in substantial amounts and at an increasing rate, for a period of about a year and a half, and there was no visible improvement in the trend of its earnings. ':' By January 1964 it had no working capital, since its current liabilities exceeded its current assets by almost $300 000, and it had a deficit in retained earnings of over $1 million. It was unable to meet overdue obligations in excess of $600 000, with some of its creditors threatening to discontinue further credit and to institute legal action. According to the uncontradicted and credited testi.. many of the only expert witness to testify on the subject (Harry F. Tappen, in charge of the loan administration division of the Bankers Trust Company) , by the end of 1963 and early 1964 Certified was in a "failing condition.

* Set forth below is a table reflecting Certified's losses and the monthly rate of loss duringthe period in question.

Cel'tjfed' Losses and Rate of Joss 12 ?nos. end 6 mos- end 7 mos. end -4 mos. end 6/30/63 12/31/63 1/31/6-4 -4/30/6-4 Total Amount 5655 850 $928 400 141 000 8871, 500 Monthly Rate 650 154 730 163 000 271,900 Complaint counsel claim, however, that the proper time to judge the financial prospects of Certified is not the date of the acquisition but approximately 14 months prior thereto, January 1963, when Certified, with the assistance of respondent, obtained the longterm loan commitment from Bankers Trust Company of New York. They contend that at that time Certified was not in fact in such a debilitated financial condition as to warrant invoking the "failing company" doctrine. According to complaint counsel this loan was instrumental in inducing Certified to reject a purchase offer made in December 1962 by Bangor & Aroostock, a diversified firm, and later, in 1963, caused Certified to reject an offer from American Cement Corporation who was unable to obtain financing for Certified on such favorable terms. Consequently, complaint counsel argue, respondent's financial involvement with Certified as of January 1963, preventing the latter from being Opinion 74 F.

acquired by other potential purchasers and thus effectively "tied" Certified to respondent.

Since there was no evidence that in obtaining the Bankers Trust loan Certified was not making a good faith effort to rehabHitate itself, complaint counsel are in effect contending that it would be preferable for a company in need of financial assistance, but not in a failing condition, to be acquired as part of a vertically integrated operation than to secure financing which may enable it to retain its independence. ' In ruling on this argument, the examiner concluded as follows: In the opinion of the examiner, the fact that U.S. Steel had assisted Certified financially in January 1963, does not establish the availability of other purchasers, nor does it establish that U. S. Steel knowingly contributerl to the lack of availability of other purchasers, as complaint counsel suggest at another point (CB, at p. 31). The fact that Certified chose to accept U. S. Steel's financial assistance in January 1963 , rather than the Bangor & Aroostock offer, is no reason to fault either Certified or U. Steel. As far as Certified is concerned, it made a business judgment that it preferred to continue its independent existence, rather than become part of a vertically integrated operation with National Portland Cement Company, controlled by Bangor & Aroostock. Had its optimistic hopes been realized, its independent existence \vould have been preserved. This was certainly preferable, from the point of view of maintaining competition in the market, to its becoming the outright property of another company controllng a cement company. There is not the s1ightcst evidence that U. Steel was aware of the Bangor & Aroostock offer, or that it arranged for the Bankers Trust loan in order to head off Certified's acceptance of that offer.

We agree with this conclusion. Complaint counsel's argument on this point is therefore rejected.

While we believe the examiner was correct in finding that Certified was failing, we do not agree with his holding that, because the company was in a failing condition, its acquisition by U. Steel could not violate Section 7 of the Clayton Act. Respondent argued successfully before the examiner that whatever the consequences upon competition of U. S. Steel's acquisition of Certified, the merger is immune from antitrust challenge under the "failing company" doctrine enunciated by the Supreme Court in International Shoe, supra. In other words, the failing nature of Certified at the time of respondent's acquisition con- 3 Bangor & Aroostock had planned to aC(juire both ational Portland Cen:ent Company, a cement manufacture!', and Certified and to operate the two companil' on an integrated basis. Amel' ican Cement Corporation was, of Could" e, a producer of cement. UNITED STATES STEEL CORP. 1281 1270 Opinion fers an absolute defense to any challenge by the government under the Clayton Act.

On the other hand, complaint counsel have contended that the court' dictum in International Shoe even when viewed in the light of subsequent comment by the court, decisions of lower courts, and the statements of those instrumental in the enactment of the Celler-Kefauver Act, does not confer upon those who would acquire a failing company an absolute defense to remedial enforcement in the public interest under Section 7. Instead, complaint counsel have maintained, the "failing company" defense is relative in nature, requiring a balancing by the deciding tribunal of the adverse interests involved. In essence, they argue that in those cases in which the failing nature of the acquired company served as a defense, either no defense was needed, in that there was no adverse competitive effect flowing from the merger, or that the ultimate question of adverse competitive impact was a close one in which the prospect of economic harm to individuals and to the public that might result from a bankruptcy ,vas decisive.

As set forth in the initial decision, the failing company doctrine was enunciated the first time in a Clayton Act proceeding in Inte,' national Shoe, SUP1'. After holding in that case that there was in fact no substantial competition between the acquired and acquiring corporations and, therefore, no basis for the finding of a substantial lessening of competition, the court addressed itself to the issue of whether "at the time of the acquisition and financial condition of the :vcElwain Company (the acquired company J was such as to necessitate liquidation or sale and, therefore, the prospect for future competition or restraint was entirely eliminated. " Finding that the corporation was " failing circumstances " the court arrived at the following conclusion, which has come to be known as the "failing company doctrine:

In the light of the case thus disclosed of a corporation with resources so depleted and the prospect of rehabilitation so remote that it faced the grave possibility of a business failure with a resulting loss to its stockholders and injury to the communities where its "plants were operated, we hold that the purchase of its capital stock by a competitor (there being no other prospective purchaser) J not with a purpose to lessen competition but to facilitate the accumulated business of the purchaser and with the effect of mitigating seriously injurious consequences otherwise probable is not in contemplation of law prejudicial to the public and does not substantially lessen competition or restrain commerce .within the intent of the Clayton Act. (280 S. at 302-303. , , ::: ::.

Opinion 74 F.

There has been considerable disagreement and uncertainty as to the meaning and scope of the doctrine thus announced by the court. While acknowledging that the decision is not free from ambiguity, the hearing examiner deemed the basic holding of the court to be that the acquisition of a company in a failing condition "does not substantially lessen competition or restrain commerce within the intent of the Clayton Act." Stated somewhat differently, it is the hearing examiner s position that the showing that an acquired company is "failing" provides an absolute defense to a Section 7 proceeding.

The net effect of the examiner s ruling, however, is to read out of the International Shoe decision the court' s lengthy discussion of the circumstances surrounding the challenged acquisition and the various factors specifically mentioned by the court formulating the "failing company" doctrine. The factors regarded by the examiner as surplusage are the injury to stockholders and to the communities which may be affected by the demise of the acquired company, the fact that there were no other purchasers, and the purpose of the acquisition. The examiner reasoned, in this connection, that these factors related only to the question of public interest in allowing the acquisition to stand but that the "absence or presence of prejudice to the public interest" are "Sherman Act criteria which, although recognized at the time of International Shoe to be applicable to a Clayton Act case, have been eliminated by the 1950 amendment to Section 7. " Consequently, according to the examiner, we can now disregard "the public interest test" considered by the Court. The examiner specifically held in this connection: The additional factors referred to by the Court viz that there was " other prospective purchaser, " and that the acquisition was made "not with a purpose to lessen competition, but to facilitate the accumulated business of the purchaser and with the eflect of mitigating seriously injurious consequences Ei. ) to ' stockholders' and to the ' communities J otherwise probable " relate not to the question of competitive impact, but to the question of the public interest in allowing the acquisition to stand, the Court concluding from the latter factors that the acquisition "is not in contemplation of law prejudicial to the public. " The Court apparently assumed that the acquisition of a failing company could not, as a matter of Jaw, injure competition. IIo\vever, it aso had to consider the "absence or presence of prejudice to the public interest" which while Sherman Act criteria, were recognized to be applicable to a Clayton Act case. :, One of the purposes of the amendment to Section 7 was to eliminate the so-called " rule of reason" or "public interest" test, which had crept into the interpretation of that section. Brown Shoe Co. v. United States, supra at 317, n. 30. (Initial Decision, pp. 70, 71) (71 F. C. 395 , 465J. Ul'ITED STATES STEEL CORP. 1283 1270 Opinion Weare in complete disagreement with this reasoning. In the first place, we do not read the opinion in International Shoe drawing a distinction between the "question of competitive impact" and the "question of the public interest in allowing the acquisition to stand. " While the court differentiated between acquisitions which may result in a lessening of competition and those which may result in a lessening of competition "to a substantial degree " it did not hold that the public interest in prohibiting an acquisition turned on factors having nothing to do with the impact of that acquisition on competition. Moreover, there can be no doubt that all factors considered by tbe court, including the determination of whether there was another prospective purchaser and whether the purpose of the acquisition was to lessen competition, are as meaningful today as they were prior to the 1950 amendment. In any case involving the acquisition of a failing company, evidence bearing on the availability of a purchaser other than the acquiring corporation as well as evidence relating to the acquiring firm s purpose in making the acquisition, is clearly relevant. In United States v. Diebold 369 U. S. 654, the court held that it was improper to grant summary judgment to a defendant asserting the "failing company" defense when there was a "genuine issue as to the ultimate facts material" to the ruling in International Shoe Co. v. Federal Trade Commission. And as the hearing examiner himself points out, tbe factual issue in that post-1950 amendment decision was whether the defendant was the only prospective purchaser.

The Supreme Court has also commented at length on the significance of the acquiring corporation s purpose in making- an acquisition under amended Section 7. Contrary to the examiner statement that the purpose of an acquisition does not relate to I The court specifically held: " Section 7 of the Clayton Act, as its terms and the nature of the remedy prescribed pbin y suggest, was intended for the protection of the public against the evils which were supposed to flow f!"m the undue lessening: of competition. In Standard OU Co. Federal Trade Commission 282 Fed. 81 , 87 , the Court of AppeaJs fo,' the Third Circuit npplied the test to the CJliyton Act which had therdofore been held applicable to the Sherman Act, namely, that the standa d of legality was the absence 01' presence of prejudice to the public interest by unduly restricting competition 0" unduly obstructing the due course of trade,...

Me"e acqu lsition by one corporation of the stock of a competitor, even though it results in some lessening- of competition, is 110t forbidden: th" act d"als only with such acquisitions as probably wil result in lessening competition to a substantial degree Standard Fa.hiu-H$ Co. v U!1gnme-fIoHston Co. 258 U. S. :146, 357: that is to ay, to such a degree as will jnjuriOllsJy affect the public. Obviously, such acquisition will not produce the forbidden re:;111t if there 110 pn -('existing sustantiaJ competition to be affected: for the public interest is not concerned in the lessening of competition, which to begin with, is itself without l.ea.l substance. " 280 U. at297 29R.

., Opinion 74 F.

the question of competitive impact and is therefore irrelevant the court observed in B1"01l!n Shoe that in vertical arrangements in which market share foreclosure is neither of monopoly nor de minhnis proportions, a "most important factor" to examine in order to determine whether the arrangement is of the type Congress sought to proscribe "is the very nature and purpose of the arrangement." It stated, in this connection, that "Congress not only indicated that 'the tests of illegality (under 971 are intended to be similar to those that the courts have applied in interpreting tbe same language as used in other sections of the Clayton Act,' but also chose for 9 7 language virtually identical to that of 9 3 of the Clayton Act, 15 u.sc. 9 14, which had been interpreted by this Court to require an examination of the interdependence of the market share foreclosed by, and the economic purpose of, the vertical arrangement." G And the court further observed "Although it is ' unnecessary for the Government to speculate as to what is in the "back of the minds" of those who promote a merger,' * ,', " evidence indicating the purpose of the merging parties, where availablc, is an aid in predicting the probable future conduct of the parties and thus the probablc effects of the merger. " 7 The examiner has also relied on certain statements in the House and Senate Reports on the 1950 amendment to Section 7 and particularly on the following statement from the Senate Report, as support for his argument that Congress intended to exempt from this provision of the statute the acquisition of a failing company" regardless of the effect of that acquisition on competition:

Companies in a fa ling 01' bankntjJt condition The argument has been made that the proposed bil, if passed, \vould have the effect of preventing a company which 1S in a failing or bankrupt condition from sellng Qut.

The committee are in full accord with the proposition that any firm in such a condition should be free to dispose of its stock or assets. The committee, however, do not believe that the proposed bil will prevent sales of this type.

The judicial int€rpretation on this point goes backmany years and is abundantly clear. According to decisions of the Supreme Court, the Clayton Act does not apply in bankruptcy or receivership cases. Moreover, the Court has held, with respect to this specific section, that a company does not have to be actually in a state of bankruptcy to be exempt from its provisions; it is suffcient that it is heading in that direction with the prob- "370 U, S. 294 (1962).

old. at 329.

ld.. n. 48.

UNITED STATES STEEL CORP. 1285 1270 Opinion ability that bankruptcy will ensue. On this specific point the Supreme Court, in the case of Intenwtional Shoe Co. v. Federal Trade Commission (280 S. 281) said: (quoting the pertinent portion of the International Shoe opinions.

It is expected that, in the administration of the act, full consideration wi1 be given to all matters bearing on the maintenance of competition including the circumstances giving rise to the acquisition. Referring to this portion of the Senate Report, the initial decision states:

It is clear that what the Senate Committee ,vas saying was that in determining whether competition would be affected, it assumed that those administering the Act would consider "the circumstances giving rise to the acquisition" which, under the lntenwtional Shoe decision cited by the Report, meant that it assumed consideration would be t;ven to whether the acquired company was in failng condition, If it was, then, in the language of the Report, "the Clayton Act does not apply." (Initial Decision pp. 72, 73. ) (71 F. c. 395, 467J.

We do not agree that the above quoted language from the Senate Report or any other statement contained in tbe legislative history of the amendment clearly indicates that Congress intended to exclude from the statute s coverage the acquisition of a company in failing condition,u While there are statements in the Senate and House Reports, as wen as comments made during debate, which indicate the prevailing view to be that the acquisition of a failing company probably would not result in substantial injury to competition and thus would not be prohibited by the amendment, none of these statements indicate that such an acquisition should be exempted regardless of the effect it may have on competition. To the contrary, statements by proponents of the amendment indicate quite clearly that the statute would be applicable to such mergers. 1O Moreover, no attempt S Sen. Rep. No. 1775 , sist Cong-. , 2d Seos. (1950), o The stat€ment in the Report that it is expected that "full consideration wil be given to all matters bearing upon the maintenance of competition, including the circumstances giving rise to the acquisition " may certainly be interpreted to mean that the fact that the company is failing is a factor to be considered in determining whether the effect of the acquisition wil he anti competitive. The examine!., however, has ruled that inquiry should first be made as to whether the acquired corporation is in failing condition, and, if it is, no further consideration should be given to otller matters bearing on the maintenance of competition. In See, for example, the following responses by Representative Patman to inquiries concerning tne legality of tne sale of a small failing blJsiness to a large national concern: Senator Donnell. If you will take some case in which you and the chairman of this Colt mittee and I were to invest a1l of our money, you gentlemen put up $199, 500 and me $500 , whirh would be about the right proportions, suppose we had done that and after we had been in business for 2 or 3 years we were firmly convinced tnat the business was doomed, although at that time it had not actllally gone down, and we wanted to sell our assets out to Borne very large corporation, and it was the only one that was interested in buyin it. Do you think that . ...

Opinion 74 F.

was made to add a proviso to the bil specifically exempting the acquisition of a failing company, nor did Congress attempt to articulate in failing company doctrine differing in any material respect from the International Shoe doctrine. Consequently, we are of the opinion that although Congress obviously intended to preserve the failing company doctrine of International Shoe it did not intend to go beyond that doctrine. The precise issue before us, therefore, is what is the "failing company" doctrine of International Shoe. The cases decided subsequent to that decision have not amplified this defense to any significant degree. "It is abundantly clear that none of the cases have adequately undertaken a thorough examination of the conceptual elements contained in the ' failing company' defense, or of the appropriate criteria to be used in testing a particular factual situation. Since the facts in these decisions were either extremely favorable or unfavorable to the interposition of the defense, there was no need to explore critically the gray area in 12 Another commenta-determining the scope of its application." tor has stated more bluntly: "The conclusion seems inescapable that the failing company doctrine has no logical basis as it is usually stated" and that" . . . the interpretation and application of any doctrine becomes diffcult indeed in the absence of rational basis for it. It is impossible to determine whether any particular factor fits into the doctrine s purpose if that purpose is not known," l:

The question that has not yet been resolved is why should an acquisition which would otherwise be unlawful under Section 7 be permitted solely because the acquired company was in a failing condition. In certain of the cases in which the defense has been allowed the determination that the acquisition did not violate it would be just to us to say that We just have to sit there and Jet our business be ruined by gradual diminution in our assets over the next few years Hepl' e5e!Jtatlve Patman. I am not conceding it would happen just the way you Sli, but I repeat, if it is against the public interest for us to sell out that way. I would say that we bould not be allowed to sell against the public. That publi interest should come first, and 1 think we wO\11d gO into bll ines with that knowledge all of the time. That is, the pubJjc inteJ'estbeserved first.

Senator Donnell. So that you would fee! that there would be no injustice done to us. Representative Patman. Possibly financial injustice, hut in the long run the p\1blic interest will be served that way. " (Hearings on H.n. 2734 bdore a Subcomm . of the Senate Comm. on the ,Tudieiary, 81st Cong., 1st and 2nd Sess. 135 (1950). 11 As stated by the court in Brown Shoe The importance which Congress attached to economic purpose i further demonstrated by the Senate and HO"1se Reports on II,R. 27a4, which evince an intention to IJleserve the ' failing company ' doctrine of InternatJ oral Shoe 370 U. S. at 331.

u Comment, 61 Mich. L. Hev. 566 , 576 (1963) '" Low The Failing Comp(111Y Doct.rine: All lllwJivc I;economic Dejense Under Section of the Clayton Act 35 Fordham 1. Eev. 425 , 430 (19(;7). .

UNITED STATES STEEL CORP. 1287 1270 Opinion Section 7 was based on the assumption that the acquisition of a company in failing condition could not cause competitive injury. In United States v. Maryland Va. Milk P,' od"lcers Assn. , 167 F. Supp. 799 (D. C. 1958), the court ruled that Section 7 had not been violated "because the acquisition of a failing corporation that is on the verge of going out of business cannot result in lessening competition or in creating a monopoly. " In United States v. Diebold, Inc., supm the district court having found that the acquired corporation was failing, held that the merger did not threaten or actually cause a lessening of competition within the meaning of Section 7. . . . " As indicated below, however, we do not agree that the assumption of no competitive injury is a valid one. Injury to competition may in fact occur even though the acquired company is in a failing condition. Weare of the opinion, however, that the failing company doctrine does provide a true exception to Section 7 , an exception which may .immunize an acquisition having the prescribed effect on competition. But we agree with counsel supporting the complaint that this defense is not created automaticaJ1y by the mere showing that the acquired company was in a failing condition. It seems reasonably clear from the opinion in International Shoe that in enunciating the so-caJ1ed "failing company" doctrine the court was concerned principally with the protection of "stockholders " of the failing corporation and the "communities " in which its plants were located. Since the acquisition in that matter had this salutary effect and since it was not made for the purpose of injuring competition, the court apparently was wiling to condone it even though it may have had an adverse competitive effect. While the court reached this conclusion in the factual situation with which it was confronted, it did not suggest that in aJ1 future cases involving the acquisition of a failing corporation protection of the interests of private individuals should necessarily be paramount to the preservation of competition. We believe the court did no more than balance the probable injury to competition against injury to stockholders and other third persons and in the circumstances of that case, decided that the prevention of the latter was of greater importance.!! We agree with counsel supporting the complaint, therefore, that to be consistent with International Shoe and with the legislative intent expressed in the ;. See Erie S(!.nd Grave! Co. C" :1". 2d 279 , 280-281 (31"d Gir. 1\11), where tJw COllrt pointed out that " The lnienlftionol Sltoe opinion itself describes the situation before the Court " IInd that "It was in uch circumstances that II merger was viewed as likely to he Jess harmful in its possible adverse effect on competition than obviously advantageous in Sllving creditors, owners "-nd emp)oyees of file failng b;Jsincss from seriol1;; impending loss . .

Opinion 74 F.

amendment of Section 7, in any case involving the acquisition of a failing company we must determine whether the acquisition may result in a substantial lessening of competition and, if so, the acquisition must be declared illegal in the absence of probable harm to innocent individuals so serious and substantial that the public interest requires that the acquisition nevertheless be permitted.

The examiner viewed the question of Certified' s failing condition as the threshold issue in this case. After reviewing the Supreme Court' s holding in International Shoe he observed: "Although the decision is not free from ambiguity, the examiner considers the basic holding of the Court to be that the acquisition of a company in failing condition ' does not substantially lessen competition or restrain commerce within the intent of the Clayton Act.' " Thus, he apparently accepted the proposition, now urged upon us by respondent, that the challenged merger must be conclusively presumed as neutral with regard to competitive effect because of Certificd' s condition at the time of acquisition. We reject this proposition. The fact that a firm was "failing" at the time of acquisition does not necessarily create a presumption conclusive or otherwise, that its purchase was without potential or actual detrimental competitive effect within one or more markets.

In reviewing the opinions of the lower courts and other agencies, and legal articles published since the Supreme Court' s statement in Intel national Shoe we have noted a reliance on an unexplained proposition that the acquisition of a failing company could not possibly substantially injure competition. " Such holdings have led one commentator to observe: " (TJ he defense is no stronger than the validity of that presumed lack of impact, and in the author s view, the presumption is seldom, if ever, valid. Yet, customarily, whenever a reason for the doctrine is demanded this invalid basis is presented as truth * * *. It is difficult to refute an argument whose advocates advance no logical reason in sup- " 1(;port of it.

Clearly there may be situations in which the borizontal acquisi- See United States v. Maryland Va. Milk Produce1's AIIs 167 F. Supp. 799 (D. 1958), aff' 36Z U. S. 458 (1960); United-Capital Mer!;e!", C. , Dkt. No. 11699 (1961). Aviation Law Rep. 1960-64 Cas. 'i 21 , 132; Von KaJinowski Section ald CompetitJj,'c Efieds 48 Va. L. Rev. 827 , 841 (1962).

JO Low The Failing Company Doctrine: An Illusive Economic Defense Under Section The Cl(1yton Act 35 Ford. L . Rev. 425 528 (1967). , UNITED STATES STEEL CORP. 1289 1270 Opinion tion of a debilitated firm could not have the requisite anticompetitive consequences. On the other hand, it is also clear to us that the horizontal acquisition of a "failing company" can be at times, capable of substantial anticompetitive impact. Consider a situation where a firm, possessed of valuable "know-how" patents, is failing because of a severe dificiency in capital. Because of contractual commitments or because of its debt structure, its sale as an operating concern is realistically feasible only through contract with an industry giant. Or consider a situation where a dominant firm purchased the assets of a dying firm thereby increasing capacity to satisfy orders which it would have been otherwise unable to accept; the acquisition thus foreclosing competing firms from handling the surplus of business that would have resulted absent the acquisition. " Still again, the acquisition of a failing company by a substantial market factor could remove productive facilities from a market and therefore forestall new entry through the fear of swelling total productive capability at a time when the statistics of supply and demand argued against such an increase.

With respect to vertical acquisitions, the situations in which the acquisition of a failing company by an industry giant may have an adverse competitive impact are readily visualized after a review of the possible anti competitive consequences of a vertical coalition. The possible anticompetitive effects of a vertical acquisition are varied. "The primary vice of a vertical * * * is that foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a clog- upon competition * which 'deprive(sJ * * * rivals of a fair opportunity to compete.'" 19 A substantial share of custom in a market may be obtained by a supplier through contractual exclusivity, not through competition based on offerings of price quality or service. Competitors of the acquiring supplier may be competitively disadvantaged through permanent foreclosure of custom once open to competitive bidding. Competitors of the acquired firm may be competitively weakened by the realiy of competition with an integrated firm whose market position is already secured by contract and whose size and previous market activity in other fields portends a form of competition which would not necessarily flow from market entry achieved through internal expansion.

17 Comment, 61 Mich. L. Rev. 566, 577 (1963). lSId. at 578.

Rrown Shoe Co. United States 370 U. S. 294 , ;123-24 (1962). Opinion 74 F.

In stil other ways, a vertical merger may contribute to the erosibn of competition. The control of a substantial share of a market, through market entry achieved by acquisition, may retard or prevent any future increase in the number of sellers within the market, depending upon the strength of the acquiring firm and the conditon of competition at the time of acquisition. Again, a vertical merger consummated during a trend toward concentration in the relevant market may have the effect of aggravating market diminution and/or contributing to realignment of product competition from a situation where many small firms compete in many geographic markets to one in which the same large firms confront One another in each of these markets throughout the country.

In sum, under Section 7 we are concerned with vertical acquisitions that result .in substantial foreclosure of trade in one or more markets; which abruptly inject powerful corporations into markets populated by small, localized sellers; which disadvantage smaller sellers within a market and substantially impair their ability to compete; which raise barriers to entry to one or more markets or which contribute to a trend toward vertical concentration of markets. Given a situation wherein a company is a substantial customer for the product of a heavily concentrated market, and enjoys a substantial portion of a concentrated market of small, localized sellers which is in the throes of a movement toward vertical integration, its acquisition by a leading supplier who possesses oligopoly power in a number of diverse fields wi1 predictably have adverse competitive impact upon at least one relevant market no matter what the financial condition of the company at tbe time of its acquisition. The fact is that once the merger has been consummated one or two markets wil no longer be the same. Market forces wil be disrupted. Market share wil be foreclosed not through competition but through contract. Barriers to market entry wil be considerably heightened. The trend toward vertical concentration through contract wil be accelerated.

In their briefs and arguments, complaint counsel all but conceded the failng nature of Certified at the time of its acquisition. They have primarily focused on the failing company defense, asserting that the defense is a relative and not an absolute one. Drawing our attention to the legislative history of amended Section 7 bearing upon the International Shoe decision, they argue that the Commission, in its administration of the Clayton Act and evaluation of a "failing company" defense, must give full UNITED STATES STEEL CORP. 1291 1270 Opinion consideration to all matters bearing upon the maintenance of competition. To this end, they urge that we first analyze the acquisition s impact upon competition within the relevant markets of cement and ready-mixed concrete in the NYMA before approaching the application of the defense urged by respondent United States Steel.

The examiner, after holding that the failing company defense was absolute in nature, ruled upon complaint counsel' s request for findings concerning the possible effects of the merger in the event "that the Commission may disagree with the examiner conclusions as to the scope of the protection afforded by the failing company defense * * * " 20 Thus, the examiner put the cart before the horse. Unlike the court in International Shoe he relegated the basic standard of the statute to an afterthought. Thc examiner held that the merger did not ossess the requisite tendency to lessen competition substantially within either relevant product market. In our opinion, however, his evaluation of this, the primary issue in a Section 7 proceeding, was distorted by his premature decision concerning the scope of the failing company defense. Accordingly, we reject in toto his conclusions concerning the impact of the acquisition on competition and consider the question de novo.

Essentially, the complaint charges that respondent' s acquisition of Certified Industries mayor has resulted in the anti competitive propensities of vertical acquisitions outlined above. Specifically, it is charged that as a result of the merger: (1) Respondent's competitors may have been foreclosed from a substantial share of the market for portland cement; (2) Market entry of new sellers of portland cement and readymixed concrete may be inbibited or prevented; (3) The abilty of non-integrated cement producers may be substantially impaired;

(4) Respondent may have achieved a decisive competitive advantage over its competitors;

(5) The trend toward vertical concentration in the production and sale of cement and concrete has been aggravated; and (6) A decentralized, locally controlled small business industry -ready-mixed concrete-may become concentrated in the hands of a relatively few producers of cement. F01' eclosure i", the Sale of Cement The national market for portland cement is highly concentrated. Initial Decision, p. 85 (71 F. C. 395 , 478l. 1292 FEDERAL TRADE COM IISSION DECISIONS Opinion 74 F.

It encompasses fifty-one sellers, with the four and twenty largest accounting for 32 and 78 percent of total shipments respectively in 1958.

One of the most important, if not the most important geographical submarket for portland cement, is the New York Metropolitan Area (I\YMA). In 1964 , this market could be described as being oligopolistic in nature. Then, the four largest sellers controlled 53.41'0 of sales while the eight largest accounted for 70. 81'0.

Two years prior to the 1964 acquisition of Certified, respondent United States Steel was one of the four largest sellers of cement in the nation. At this point in time, however, it was only the sixth largest supplier of cement within the ;'YMA. Immediately subsequent to its assistance in obtaining financing for Certified respondent' s sales of cement within the NY:\1A increased rapidly. The increase was almost wholly accounted for by patronage from Certified. Principally as a result of its acquisition of Certified, United States Steel became the second largest supplier of cement to the NY:IA market.

At the time of the challenged acquisition, there were over fifty ready-mixed concrete companies serving the I\Y:IA. Four of these companies, however, accounted for 731'0 of the readymix market' s purchases of cement. Certified was one of the four. In 1963, it was the second largest purchaser of portland cement operating within the relevant geographical market. Its sales of ready-mixed concrete had more than tripled in the period from 1960 to 1963. Its consumption of cement immediately prior to the acquisition placed it among the ten largest consumers of cement in the entire Nortbeastern area of the country. :\ioreover, the record shows that there were only 5 to 10 consumers of cement within this broad area that consummated annual purchases, as did Certified, of over 750 000 barrels.

In B,' own Shoe, supm the Supreme Court held that a vertical acquisition foreclosing less than one-half of one percent of the relevant market violated Section 7 of the Clayton Act. Of course the court did not consider increased market share as alone decisive, but, as in all Section 7 proceedings, viewed it in the light of other applicable factors such as (J) the significance of the resultant foreclosure whether the foreclosure was one of the largest that could be achieved through merger; and (2) the presence or absence of market movement toward concentration. We find that the market foreclosure resulting from U. S. Steel' acquisition of Certified was extremely significant. Within the . .

UNITED STATES STEEL CORP. 1293 1270 Opinion NYMA, only one company, Colonial Sand and Gravel, purchased more cement than Certified. The former is a vertically integrated operation, having integrated backward into cement production through internal expansion. Accordingly, the forec:osure resulting from Certified's acquisition by United States Steel was the largest market foreclosure within the relevant market as could be achieved by any single acquisition. :\loreover, the acquisition occurred in the context of a strong trend toward concentration through merger in the sale of cement and ready-mixed concrete. We address ourselves to this point below. The examiner recognized that as a result of the merger "access to Certified's volume of cement purchases wil be substantially closed to other cement companies. " However, he concluded his consideration of this market change by observing that "given Certified' s financial condition, such volume would have been foreclosed in any event upon Certified' s demise. " The latter statement is correct as far as it goes. It does not go far enough, however for the purposes of the Celler-Kefauver Act. The statute draws a line between market foreclosure achieved through competition and that accomplished by acquisition.

It is clear that the examiner believed that Certified's customers would all turn to Colonial Sand and Gravel, the largest supplier of cement and ready-mixed concrete within the NYMA. The record wil not support this supposition. Undoubtedly Colonial would have bid for the business, but as the testimony shows it would have experienced the competition of other ready-mix concerns. Moreover, Colonial, because of plant location and sales policy, was not a strong competitor within Nassau and Suffolk counties the principal sales areas of Certified at the time of the merger. Impact Upon Competition;', the Sale of ReiLdy- Mixed Concrete In 1962, Certified was the fourth largest consumer of cement and seller of ready-mixed concrete within the NYMA. By 1963, largely as a result of acquisitions and aggressive pricing, it ranked second in both categories. Although its consumption of cement dropped in 1964, Certified, at the time of the merger was still second in cement purchases and concrete sales to the vertically integrated market leader, Colonial Sand and Gravel. At that time, it consumed 8;70 of the cement sold to ready-mix firms, some 6;70 more than the third ranking firm, and more than three times the purchases of the market' s sixth largest seller. The merger of United States Steel and Certified effeetuated the entry into the NYMA ready-mixed concrete market of a 1294 FEDERAL TRADE COMMISSIOK DECISIONS Opinion 74 F.

very large conglomerate company. Five years prior to the merger the market had been characterized exclusively by small companies whose sales efforts were principally, if not exclusively, devoted to sales of concrete. In the ensuing years prior to the acquisition three instances of vertical integration occurred. One company, Colonial Sand and Gravel, had integrated backward into cement production and had retained its position as the market leader, a position to which Certified was the runner-up. Another company, M. F. Hickey, the fifth largest ready-mix seller was acquired by a supplier, the American Cement Corporation. Finally, less than a year prior to the U. S. Steel-Certified merger, the market' s fourth largest seller was acquired by the :"ational Portland Cement Company.

The Hickey-American Cement Corporation merger was cancelled by a Commission consent order." Hence, at the time of respondent' s merger with Certified there were only two vertically integrated companies operating within the market. The leading seller of these two firms, Colonial, possessed assets of $47 539,462. United States Steel, upon its entry into the market, possessed assets of $1 673 914 946 or thirty-five times more than the market' s leading seller and over a thousand times more than tbe market' s leading non-integrated seller. The entry of United Sttes Steel into the NYMA ready-mix market placed all market members at a competitive disadvantage particularly the non-integrated firms within the market. With reference to the latter sector, respondent enjoys significant cost advantages. Cement manufacturers are subjected to certain fixed costs in operation of their productive facilities regardless of whether such facilities are running at full or partial capacity. A producer that owns a ready-mix outlet or enjoys a guaranteed outlet for its product can increase utilization of his production facilities and reduce unit costs. At the same time, it incurs no additional expense in the way of sales effort and other administrative costs. Moreover, as the examiner has also found, it may combine or integrate delivery and storage facilities with those of its ready-mix outlets.

With respect to a1l members operating within the NYlVA market, respondent also enj oys the advantages that fiow to a com- : This merger involving- Ryan Ready 1Iixcd Concrete was challpnged by H Commj, ion mmplaint issu",d on ,Janllary 22 , 1965, ConnllTent with his decision herein, the examiner, on May 20 1906, dismiscied the cumplaint against National Portland. On March 2B , 1967 f71 F C. , J. the Commission vacated the initiai de ision and djsmi scd th.. !'omplain: on the ground that the pro,-'cding was rendered moot by National p",. tland' s subsequent divestiturc of Ryan Amcri (m Cement COTj! Docket C-681 , Commission Order of Ja.nuary 20 , 1%4 (64 316).

, : UNITED STATES STEEL CORP. 1295 1270 Opinion pany that is a massive supplier of a number of products to all aspects of the building and construction trades. The testimony shows that "contacts" or acquaintances with architects, builders, contractors and political figures are very important in the sale of ready-mixed concrete. Certified's management, which was retained by respondent after the merger, have excellent contacts. United States Steel, with its heavy involvement in the building and construction industries knows" as one competitor put it "more people than Certified.

Finally, there are the advantages flowing from the fact that United States Steel is a large conglomerate corporation, one of the nation s largest corporations, and the possessor of great strength in markets other than that involved directly in the instant matter.

A conglomerate corporation, as Professor Corwin Edwards has pointed out, has strength and access to competitive strategy that hurdles the discipline of any particular market.'" The conglomerate corporation "operates in a series of different markets, in each of which it encounters different competitors and different conditions of demand and supply and thus may be able to charge different prices and make different profits. " 2.1 Here, for instance, as one competitor explained, United States Steel, unlike other market entities, can offer at least two essential products to the building and construction trade, steel and concrete. Its position in onc field can dictate its range in the other. The overall size and financial strength of respondent creates an advantage in respect to pricing and the extension of credit. Respondent, with a pocket immensely deeper than that of its competitors within the market, can outlast and out-extend any price warfare and credit offerings.

Again, there is the advantage stemming from the well-circulated and well-documented reputation of respondent for strength in other markets. If we may adjust our expression in Pmct",' and Gamble Company:

Even if such strength has not been proved to reach the level at which monopoly profits or other fruits of great market power are forthcoming" it is relevant to the psychological response of the members of the $ (ready-mixed Concrete markets to (United States SteelJ as a competitor. To the extent that (United States SteelJ is thought by them to be not only a large and affuent firm, but also a powerful firm, in terms of market 3 Testimony of Corwin D, Edwal' (lTinD8 0'11 Econumic GOHcentratum Bejore the Subcomm . an Antitrust and Monopoly of the Senate Committee on the Judiciary, ggth Gong' , 1st S"ss. , pt. 1 at 36 (1964-65-) I d, at 38 , , .

Opinion 74 F.

power enjoyed in related markets and possibly transferable into the (concrete) market, its prowess a,s a competitor gains an added and even sinister dimension in the eyes of its (ready-mix) rivals a factor of considerable importance to the impact of the merger on competition in the . . . industry.

The examiner dismissed complaint counsel's arguments that the entry through acquisition of United States Steel into the KYMA ready-mix market poses a threat to the viabilty of at least the small firms operating within that market. Considering the fact of the disadvantage faced by small ready-mix companies in competing with one of the nation s largest corporations, the examiner concluded: "It is suffcient to observe that this frequently occurs when a large, multi-product, conglomerate company enters a market." As he saw it, the arguments of complaint counsel were speculative" and their acceptance required a holding that size is per se ilegal.

Again, the examiner s observations are correct to a degree. Again, however, they either do not go far enough or else demonstrate a misunderstanding of the basic purpose of Section 7 and the duties of one who is to make the initial evaluation of aSection 7 complaint. It is true, of course, that the competitive disadvantages faced by the small entities within the market as a result of the Certified/United States Steel merger frequently do occur, although perhaps not to the same degree, when any large conglomerate enters a market such as that under review\v. However, this observation ignores the distinction made by Congress between market entry through internal expansion and that achieved through acquisition. Here we have advantage added to advantage-size added to size-market power added to market power-advantage, size and power unburdened by the tasks, costs and uncertainty of market entry achieved through internal expansion. It is true, of course, that the size per 8e of an acquiring firm has no conclusive bearing upon the adjudication of a Section 7 proceeding. Effciencies and resulting benefits to competition can come from size. Neither this Commission, nor any antitrust arbiter has as its mission the shielding of competitors from the rigors of competition. \Ve are, however, concerned with protecting competition. The Clayton Act has a prophylactic purpose. Its function is to prevent monopolization in its incipiency. 2G To this end, the Commission is under the duty to scrutinize acquisitions for their The Procter Grl11!ble Co. Dock t G901. 63 :F. C. 1465 , 1579 Brown Shop. Co. 'mphj. at :-17.

, , . UNITED STATES STEEL CORP. 1297 1270 Opinion capacity or potentiality to lessen competition. ' In such an evaluation, we are bound to seriously consider the "factor" of the acquiring company s size for frequently, as the courts have observed and economic theory holds, the capacity or potentiality of a merger to lessen competition within the relevant market stems from the size and the strength of the acquiring firm in other markets.

As the examiner observed, consideration of complaint counsel's arguments concerning the adverse impact of the challenged acquisition requires a speculative judgment. The analysis of any Section 7 matter requires speculation, if one understands speculation to mean an informed projection of future events from a basis of market realities. This "speculation " is not of the crystal ball variety but instead one based upon facts and experience. For instance, complaint counsel argue that respondent has the capability to adversely affect price competition within the relevant ready-mix market. After briefly considering the argument that respondent could afford to incur short-term losses by "dumping" excess capacity product to the disadvantage of independent sellers who could not afford such losses, the examiner concluded ( w J while this is possible there is nothing in the record of the pricing practices of United States Steel's UAC (1.universal Atlas Cements Division to suggest that this is likely to occur. We are not prepared to adopt even this limited view. Xevertheless we are convinced that upon scrutiny of the record as a whole and evaluation of all factors bearing upon competition within the market, a finding that respondent has the capacity or potential to adversely affect price competition is warranted. Immediately prior to the challenged acquisition, competition within the KYMA ready-mix market was characterized by aggressive price competition. Because of a decline in demand, no one was "holding the line. " Jobs were being bid away from initially successful applicants through after-the-contract solicitation. In the opinion of certain industry members, below-cost selling was utilized at times. To these firms, it was a question of staying power. On the latter point, the record reveals that a number of sellers were required to retrench and to seek out further effciencies in order to remain viable. 2' Re)lnolds Metals Co. v. 309 F. 2d 22:-;, 2:30 (D. C. Cjr. 19(2) eE C. Procter Gn7able C01n)Hmy, 386 e. . 57:-\ (H)67); C. v. COil. olida,ted Foods 592 (1\)(;5); H.eynolds Metol Co. , supra at 229; GeiwTol Foods COTpoTahon Docket 8600 , 60 C. :JHO; Edwards Conglomerate Eigne" as " SUHTrc of P01U"'" ,II Business Clmcentration and PTice Policy (National BUI'ea'1 of E,,()n. Research cd 19. S); Blail' The ConglorneHlte Merger in Econo7nics and La\(' 46 Geo. L.J. 672 (1958) , Opinion 74 F.

The record also reveals that the most aggressive competitor in the way of price prior to the acquisition was Certified Industries. It obtained the bitterly contested business. It principally contributed to the competitive situation in Suffolk and Nassau counties that led the market leader, Colonial, to avoid these areas because of "the pricing situation. " But while Certified secured the business it did so from an undercapitalized position. It lacked the deep pocket of United States Steel. While acknowledging the possibility of decisive pricing power by respondent, the examiner apparently relied solely upon respondent' s pricing practices in the sale of cement to reject complaint counsel's arguments. The record reveals that unlike concrete, prices for cement were relatively stable. All sellers sold at the same price. Whatever divergence there was came through discounts ostensibly granted to meet competition. Therefore, the examiner concluded (i) f one were to hazard a guess" the probable effect of the acquisition "would be that Certified' s pricing policy will likely become more conservative. Of course, it wil be in the interest of respondent to adopt a conservative pricing policy for Certified. The point is, however that t:united States Steel has the capacity to bring about such a policy and still maintain Certified' s market share. It can sell low until others tire or perish. It can then engage in parallel pricing or price leadership, breaking ranks only to discipline price mavericks. In sum, as any strongly capitalized company \with a significant sbare of a concentrated market, its interest should price stability. It possesses the potential for imposing such stabiliy upon the relevant market. It offers the capacity for adversely affecting price competition within a marl,et characterized by aggressive price competition. Certified, under the conditions obtaining in the market at the time of the acquisition presents a probable vehicle for such action. Ba",'iers to Market Enh' Prior to Certified's acquisition, the barriers to entry into supplying cement to the J\YMA market were formidable. While the technological requirements were minimal, the financial requisites were immense and concentration or market foreclosure was high. With respect to the former, the sole new entry into the Northeastern market for cement during recent years had to invest some sixty-four milion dollars to achieve initial access. With respect to the matter of available customers, prior to the challenged merger about 70. 870 of the market had been captured by eight UNITED STATES STEEL CORP. 1299 1270 Opinion sellers.

Capital requirements for the sale of ready-mixed concrete were also relatively high. According to industry members, an expenditure of from 3 to 5 million dollars was required. Additionally, a prospective new entrant would have to face the fact that 50. 1 % of the market was enjoyed by a vertically integrated company and 4 sellers accounted for 73. 6 % of the total sales of readymixed concrete within the NYMA.

After the U. S. Steel/Certified coalition, the ante for entry into the sale of CEment was raised. Immediately after the merger 46.3 % of the entire cement market in the KYMA and 66.3 % of the cement sales to ready-mixed concrete producers were foreclosed by 3 vertically integrated sellers. In regard to the sale of ready-mixed concrete, the prospective entrant through internal expansion or initial entry, had to not only risk a considerable cash outlay to compete for a greatly restricted portion of the market, but also had to assume the risk of competing against the nation s seventh largest corporation in a market where price competition was fierce and the ability to withstand losses could be decisive.

Trends Toward Concentration and VeTticallntegTation Through ll1 merger As emphasized above, Section 7 is meant to deal with monopoly in its incipiency. According-ly, in assessing an acquisition s effect on the future course of competition, consideration must be given to the stage of development of market power within the relevant industry or industries and market or markets at the time of the merger, and to the likelihood that the merger wil give impetus to further concentration of such power. In other words and for example, did the merger occur in the context of a trend toward concentration in a relevant market? Did it occur in the context of a trend toward vertical integration through acquisition? Is there a basis for viewing the acquisition as offering a potential for stimulating the continuance of a movement toward concentration of market power? By j 964, the year of respondent' s acquisition of Certified, there was an evident nationwide movement on the part of cement companies toward vertical integration into ready-mixed concrete production through merger. The history of the two industries shows See Brown Shoe, supra at 1527: United Stains v. Aluminum Co. of America. a77 U. S. 27 279-80 (1964): United SI.atf!S Philadcl7Jhia '\/01. 0,,"/ H""I. 3,4 U. S :J21 , 36S (19C3): ted States v. Von s Grocery Company, 384 U. S. 276 , 277 (1966). , :

Opinion 74 F.

only four instances of such integration prior to 1959. During the period from 1959 to 1965 , however, some 30 acquisitions of ready, mix producers were consummated by cement companies. The record also reveals that there was a definite trend toward vertical integration by acquisition in the NYMA market for ready-mixed concrete. Prior to 1960, there had been no marked instances of vertical integration achieved through merger. In the four years leading up to the U. S. Steel-Certified merger, the fourth and fifth largest ready-mix sellers had been acquired by cement producers. Less than a year after the challenged acquisition, the seventh largest concrete producer was acquired by the Marquette Cement Manufacturing Company.

At the time of the challenged merger, the cement industry was experiencing a strong movement toward concentration. The number of producers had been reduced from 62 in 1958 to 51 in 1963. The reduction in industry membership may largely be attributed to the foreclosure of markets by acquisitions of purchasers, for as the examiner has found, vertical integration affords a cement company a captive market which is not subject to challenge by competing cement. companies , On the basis of the record before us, wc are of the opinion that L'united States Steel's acquisition of Certified has the potential for stimulating further concentration of market po\ver in the sale of cement and ready-mixed concrete witbin the NYMA. Several of the witnesses representing the ready-mix market testified that, as a result of the recent moves toward vertical integration within their marketing area, they had either approached cement suppliers about selling-out or had, themselves, been approached by suppliers on the same question. According to the examiner, several cement companies although "opposed to vertical integration "' indicated that they might have to acquire a ready-mix company in order to protect their market. As one cement supplier explained, given the present condition of the market, it might have to "capture" an outlet for its product. Still another supplier, Marquette, following on the heels of respondent' s acquisition of Certified captured the seventh largest ready-mix concern within the market. Furthermore, Alpha Portland Cement closed its terminal at Port Washington, Long Island in 1964 and for all intents and purposes withdrew from the "YMA market. According to the examiner (tJ his terminal was closed because the decline in Alpha s volume in the NYMA , resulting from the loss of one of its largest customers in the area, Certified no loni:er justified the expense of maintaining a terminal." UNITED STATES STEEL CORP. 130J 1270 Opinion Respondent' s argument that there can be no adverse impact flowing from its acquisition of Certified because of the latter failing condition, clashes with respondent's purpose for making the acquisition and with another argument raised by its counsel. There can be no doubt as to why L:united States Steel purchased the second largest ready-mix concern in the NYMA. Jt made the acquisition in order to protect for itself a sizable portion of an important market.

While Certified, during the period from 1962 to 1963, was experiencing losses, it continued to gain customers. As far as this record sho\vs it experienced no diffculty in maintaining the goodwill of its customers or in making timely delivery of satisfactory product. Through aggressive pricing, it built its market share from 670 of the total consumption of cement in the NYMA in 1962 to 8. 2 % in 1968. Its problem, however, was a very basic onc in a market characterized by vigorous price \variare. It was under-capitalized. It lacked a deep pocket. When United States Steel told Banker s Trust that it would guarantee the early J 963 loan to Certified, it, understandably, was not acting as an eleemosynary institution. It expected loyal patronage in return for its services. Within the competitive turmoil of the NYlVA markets for cement and ready-mixed concrete price was relatively stable in the former and credit extensions constituted the major competitive weapon. Thus, immediately after the loan was extended to Certified, U.S. Steel suggested a further agreement to the borrower. According to this proposal Certified would agree to purchase a minimum of sixty-five percent of its cement requirements from U.S. Steel. Certified' s officials balked at executing the agreement. Finally, it remained unexecuted. evertheless, Certified' s purchases from respondent' Universal Atlas Cement Division experienced a very noticeable reversal. Certified increased its purchases from respondent from 14. 9 percent of its requirement in 1962 to 53. 8 percent in' 1963. In 1964 , Certified was buying 88.40/0 of its cement from respondent.

At the time of acquisition, Certified's share of the market for ready-mixed concrete in the NYMA had slipped. It stil, however was the second largest purchaser of cement within the market accounting for 6.8;". It still enjoyed the goodwil of its customers and the contacts of its executives. It occupied such a position in the relevant market that the executive vice president in charge , 1302 FEDERAL TRADE COMMISSIOK DECISIONS Opinion 74 F.

of production for United States Steel' s Universal Atlas Cement Division, in urging Certified's acquisition, explained, in part, to respondent' s board of directors:

If Certified ceases operations, Universal Cement "\vauld suffer an irreplaceable loss in its present market fol its Hudson lPlantJ product and be seriously embarrassed commercially in one of its major markets during the last sixty years.

The record clearly spells out the rise in market power achieved by U.S. Steel as a result of first, its loan arrangements with Certified, and, finally, its acquisition of Certified' s assets. As found by the examiner, respondent, in 1962, had declined from a 1960 market share of 6;70 to a 2;70 share in 1962-making it the sixth largest supplier in the market. In the year of the loan, respondent became the fourth largest supplier within the relevant market, accounting for 7. Ii of market volume. As found by the examiner (iJ n 1964 , the year in which U. S. Steel acquired Certified. l:AC' s share increased to 11.41'0, and it became the second largest supplier of cement in the area, Contrary to their argument about the total absence of adverse competitive effect flowing from the acquisition of a failing company, respondent has continually stressed in this proceeding that if U,S. Steel had not acquired Certified the latter s business would have been gained by the market leader, Colonial Sand and Gravel, the ready-mix company which had vertically integrated through internal expansion. But even assuming the validity of this contention, we find ourselves not favorably impressed with , but, instead, concerned with its inherent admission. It has as its major premise the belief that when threatened by loss of customers through competition one is free to foreclose a substantial portion of a market through acquisition. Again, we are required to point out that which should be beyond cavil. The end result of competition is a degree of market foreclosure. The market-foreclosing competition encouraged by the Celler-Kefauver Act, however, is that generated by fair offerings of price, quality and service. The Act does not sanction the fencing-off through contract of a competitor s threatened market. Instead, it proscribes such action, whether defensive or aggressive, when its effect may be to lessen substantially, competition within a relevant market. In any event, \\'e cannot, on the basis of this record, find that had Certified gone out of business its volume would have ipso facto accrued to Colonial. The latter market leader, as ecomomic theory and empirical experience would suggest, and this UNITED STATES STEEL CORP. 1303 1270 Opinion record confirms, is not enamored with the concept of price competition. Yet, Certified' s principal areas of success were within the counties of Nassau and Suffolk on Long Island-areas of fierce price competition. As the record indicates, these areas were explosive in nature in regard to home development and school building, major sources for concrete purchases and cement consumption. Within this very large area, Colonial operates only four ready-mix plants; and, as the record also shows, a readymix plant has an effective supply radius of only fifteen miles. Within the highly concentrated NYMA markets for cement and ready-mixed concrete, Colonial has refrained from aggressive solicitation in Nassau and Suffolk counties because of the "pricing situation" in these areas.

The sum of it is, as respondent's counsel conceded in argument before the examiner, United States Steel greatly increased its share of the relevant market for cement largely as a result of the acquisition. As the record reveals, it has achieved the largest possible vertical foreclosure in the relevant market through acquisition. And, through acquisition, it has projected itself into a market long characterized by small, local sellers at a time when size and the ability to withstand losses could have an extremely powerful impact, both psychologically and directly, upon the competitive strategies and actual competitive responses of existing market members. Despite the failing condition of Certified, the market for ready-mixed concrete within the KYMA has been drastically changed by the challenged acquisition. Into that rarity of heavily concentrated markets, one engrossed with price competition, has entered a company certainly possessed of the resources to withstand and discipline such competition and to eventually, as the examiner predicted, engage in a "more conservative" pricing policy, or, in other \words, stabilize and rigidify product pricing. Barriers to market entry, already high prior to the acquisition, have been raised to prohibitive dimensions. Small ready-mix concerns, the predominant make-up of the relevant concrete market prior to the challenged merger, and the exclusive complement of the market prior to its present trend toward concentration, are no longer competing with an aggressive, but rapidly weakening, nonintegrated number two seller but instead face the feasible opportunities for market maneuvers available to an integrated company which is also the nation seventh largest industrial corporation. The ability of any member of the ready-mix market in the New York Metropolitan Area to engage in predatory pricing practices-to foster price stabiliza- Opinion 74 F.

tion in the long-run-has not been checked but rather enhanced. The trend toward market concentration, and the trend toward vertical integration through acquisition, have not been reduced or halted. They have been, on the basis of this record, decidedly stimulated.

We are not, therefore, dealing here, as the court in Intel"wtional Shoe with a situation in which a large company acquired a non-competitor whose market relevance over immediate prior years has diminished to a de minimis point. We are not dealing with a respondent who has acquired productive facilities for the mere purpose of increasing product capacity but instead, we review a merger that forecloses an appreciable segment of a market already highly concentrated. Again contrary to International Shoe, we are dealing with an acquisition in which the purchasing corporation has acted with the purpose of fencingoff competition.

Moreover, we would be remiss in the implementation of our Congressionally delegated duty to consider all challenged mergers in the light of all factors bearing upon competition, if we did not consider the economic settng of the nation at the time of the merger. Vnlike the time-span in which the International Shoe matter 'vas considered, today s economy is not in a depressed or stagnant condition. It is dynamic in nature-although if the relevant markets surveyed by this record may serve as examples in danger of stagnating through the continued concentration of market power achieved through mergers.

Finally, there is nothing in the record to suggest that the acquisition prevented or mitigated such serious economic harm to creditors, stockholders, or employees of Certified that it should be permitted regardless of the anti-competitive consequences found above. There is no evidence indicating possible harm to either creditors or employees of Certified or to the economic well being of the community in which Certified was located. Furthermore, the evidence shows that 70 % of Certified's stock was owned by only five shareholders. 0 While there can be no doubt that these individuals fared better financially by having their company purchased by respondent, this fact is of little significance when weighed against the possible adverse competitive effects of the merger.

The appeal of counsel supporting the complaint is granted and our order providing for appropriate modification of the initial decision is issuing here\with.

30RX 58(e).

;

CXITED STATES STEEL CORP. 1305 1270 Dissenting Opinion Commissioner Elman dissented and filed an opinion. Commissioner 1aci ntyre did not participate. Commissioner Nicholson did not participate for the reason oral argument was heard prior to his appointment to the Commission. DISSENTING OPIKION DECEMBER 2 , 1968 BY ELMAN Commissioner:

In this case, the Commission is required to interpret and apply the "failing company" defense announced in the Supreme Court' International Shoe 1 decision and carried forward into the amended merger law when Congress passed the CeJler-Kefauver amendments to Section 7 of the Clayton Act in 1950. Under International Shoe proof that a company acquired in a merger or other transaction subject to Section 7 was in "failing circumstances" constitutes a defense to the charge that the transaction was iJlega1. In my opinion, the defense is clearly applicable to the facts of this case as found by the hearing examiner and adopted or modified by the Commission. The Commission s conclusion that the merger violates Section 7, even though the acquired company was failing and no other purchaser was available, distorts and, lo a large extent, nuJlifies the failing company defense.

There is no dispute concerning the basic facts in this case which are adequately set out in the Commission s opinion and need not be repeated at length here, For tbe most part, the Commission s findings of fact are essentially the same as those made by the examiner.

At the time of the acquisition, respondent United States Steel Corporation was one of the four largest manufacturers of portland cement in the l;united States ' and one of the principal suppliers serving the New York :l1metropolitan area.3 The at- 'jnt"nwt.ional Shoe Co F"dcTOI Trade Comm;, 'O!l. 2S0 U. S. 291 (19:jO). The doctrine fourth its g''nesis in eadier d"cisi"TJ uncl"l' the Sherman Art. See U"itrd States LIm:ted States Steel COT)). 25: 'U.S. 417 , 446-4, (1920j; A1Jencan PTess Ass v, fJn,ted Stotcs 245 Fed. 91 , 9, (7th Ci1', 1917) : see gPlwnd:y, Comm€nt. FedcT"/ AntifTHst Law -Met.!jerk-An Updating of au. F"fI'ih'ng Com. pany " DuctTin,; in U;c Amended Section Settill G. 61 Mich. L, Rev . 566 , 567- (1963); Wiley, The "Failing ComprPiY " .4 Hcnl Deje'lSc in lJonzontol MerfJm' Cases, 11 R. Hev. 4 , 497-99 (:961) ' As is weJI known . l' P01l ent i also the largest tppi JJ!oducer in the United States, ::lajol"ity Gpinion a: 127,1; initial decision 9 l'i1 F. C. :-\9,,407 , 408; "Majority opinion at 1292; initiai decision 33 (71 F. , at 4;-0 481 United States Ste",l opel' atpd i s cpment bllSiTJE"S thl' ough its Universa: Atlas Cemer. t Division p, 1306 FEDERAL TRADE COMMISSIOK DECISIONS Dissenting Opinion 74 F.

quired company, Certified Industries, Inc" was one of the four largest producers of ready-mixed concrete in the New York Metropolitan area and the second largest consumer of portland cement among ready-mixed concrete producers, purchasing over one milion barrels in 1963 and almost 800 000 barrels in 1964. Prior to the acquisition, Certified purchased cement from a number of suppliers, including Universal Atlas. However, in 1963, when respondent assisted Certified in obtaining long-term financing and guaranteed certain of Certified's obligations, the percentage of Certified' s cement requirements supplied by respondent more than tripled, from 14.9 percent to almost 54 percent. In 1964 , the year of the merger, that figure increased to over 88 percent.

The other facts relevant to a ima facie showing that this vertical merger violated Section 7 are set out in the majority opinion. It is unnecessary, in the circumstances here presented, to deal at length with the question whether, in the absence of a failing company defense, United States Steel's acquisition of Certified would violate Section 7. For present purposes, it can be assumed that a 7J?' ima facie showing has been made that the merger would probably violate Section 7 were Certified not a failing company at the time of the acquisition, There is no question, however, that Certified 'luas a failing company. The Commission adopts the examiner s findings on this question and rejects complaint counsel's arguments to the contrary. Certainly, there is no merit in the suggestion that Certified should have rejected respondent' s financial assistance in January 1963 and should instead have accepted a merger offer made by one of respondent' s competitors. There is nothing in the record to indicate that this transaction was merely a ploy, the first step in a preconceived merger plan, or that Certified' s management did not reasonably believe that the loan agreement wou,ld help put the company back on its feet, preserving its status as an independent competitor:' As the Commission finds, on this record it must be concluded that Certified was a failing company and j Major' ity opinion at 1276: initia 'J"cision 11- 12 (71 F. C., at 40 4111 5 It ha b"",n 8ugr;ested that before a company can be cO'1sidered failing it must have made l:1511CCessful attempts to borrow money in an ICffort to saYc itscJf by me"HlJl'e ShOTt of merger. See Hale & Base, F'H/')' IIJ Firms and the MerQtr Prol' isions of the Antitrust La 52 Ky. 1,. J. . filJl; Wiley, $1I1)ra r:ot,. 1 , 4: n. lJ. L. Rev . at 506- 7: Hearings RPiore the Subcommittee on Antitl' mt ano Mono1JoJy of +/," Senate Committee on the Judiciary, H4th Cong. , 1st Sess. 326 (1955) (testing:ony of Assistant Attorney Genel' '': Barnf's) ihereinafter cited as 1955 Hcaringsl; ct. United Stat"N v. El Pab(J Nahaal Gab Co. 376 'C, S. 651 , 661 (:964); Crown Zellerbach Corp, Fcdc7",l Tn.de C07nmi8sion 296 F. 2d 800 , 832 (9th Ci,.. 1961), cert, denied. 370 U. S. fJ37 (19(;2). ::. . , ITED STATES STEEL CORP. 1307 1270 Dissenting Opinion that no other purchaser was available." The question for decision is, therefore, what is the legal significance of that finding? Consideration of the failing company doctrine must begin with the International Shoe case. The merger in that case involved two of the largest shoe manufacturers in the world. International Shoe Company was, at the time of tbe merger engaged in manufacturing leather shoes of various kinds. It had a large number of tanneries and factories and sales houses located in several states. Its business was extensive, and its products were shipped and sold to purcbasers practically throughout the United States. " 7 International Shoe had acquired the stock of the W. H. McElwain Company, a substantial Kew England-based shoe manufacturing firm which had factories capable of producing 38 000 to 40 000 pairs of shoes daily.

The record disclosed that McElwain was the victim of falling prices for shoes, had an excessive inventory of new shoes, overextended itself in making commitments to purchase hides, and was unable to raise money to payoff its substantial debts: Kew orders were not coming in; losses during 1920 amounted to over 000 000; a surplus in May, 1920 of about $4 000,000, not only was exhausted, but within a year had been turned into a deficit of $4 382 136. 70. In the spring of 1921 the company owed approximately $15 000 000 to some sixty or seventy banks and trust companies, and, in addition, nearly 000 000 on current account. Its factories, which had a capacity of 38 000 to 40 000 pairs of shoes per day, in 1921 'were producing only G OOO or 000 pairs.

The company was, according to the Court, faced with but two alternatives: "liquidation through a receiver or an outright " :Jsale, Finding that McElwain was in "failing- circumstances " the Court stated:

"A number of crit I";a have been uti:ized by the Commi"ion and the courh in determining whether' 1I comjJany is indeed failing. See Low The Failing Company Doct6nc: An illusive Economic Dejenae Under Section of the C/.yton Act 35 Ford. L. Rev. 425 , 4:-\- (1\)67); Have & Hale 81'pra note 5; Wiley, =PTIl note 1 , 41 B.l.. L. Rev, at 502-12; d. :varcu The " Failin Q Industry" and the " Pniliny Manaycment " f)od6ncs in A"r.itn,st 11 Antitnl Bull. 8.33 (1%6): Vnit"J Srntea v Third ,Vaem",!' HI1"k 390 U. . 171. 183 (1968). In view of the theo!") on which this case has been argued to the Commi ion, complaint coungel virtually conceding that Certitied was failing at the time of the acquigition, its is Imnece,o"""y in this opinion to exi,)"re further the question of what standards are to be "pplicd 7 280 U. S. at 295.

'ld. at 289- :JOO: cf. United States Crmtinental Oil Co" 37 U. L, Week ::1.S0 (U. S. Oct.)l"" , 1968) (the facts are set out in the first opinion of the District Court, 19115 Trade Ca es, r 71 557 (D M. 1965)); United States Third . ational Bank 390 U. S. 171 , 183 (1968) (:ailin C01lJjar. y do( !'ine inaJjpJicable where acquired firm continued to be profitabk find flbsolut", size of its business increased altbough its percentage share of t!w market. did not) u 2 80 1 . S. at 299 Dissenting Opinion 74 F.

In the light of the case thus disclosed of a corporation with resources so depleted and the prospect of rehabilitation so remote that it faced the grave probability of a business failure with resulting loss to its stockholders and injury to the communities where its plants were operated, we hold that the purchase of its capital stock by a competitor (there being no other prospective purchaser), not with a purpose to lessen competition, but to facilitate the accurnulated business of the purchaser and with the effect of mitigating seriously injurious consequences otherwise probable, is not in contemplation of law prejudicial to the pubile and does not substantially lessen competition or restrain commerce within the intent of the Clayton Act. To regard such a transaction as a violation of law, as this court suggested in Vnited States v. United States Steel Corp. 251 U, S. 417, 446 447 '" " '" would 'seem a distempered view of purchase and result. ' See also American Press Asso. v, United States " * 245 Fed, 91 , 93 , 94. As the Commission points out, legal purists might regard the above statement as dictum because the Court had earlier concluded that the merger did not lessen competition between Mc- Elwain and International Shoe, an essential element of the violation under Section 7 which, as it then existed, was considerably narrower and more parochial than the amended version. Whatever may be concluded as to the continuing validity or vitality of the market definition adopted by the Court in reaching its conclusion that the two firms were not in competition " it is clear that the Court's alternative conclusion-that the failing company doctrine immunized the merger under Section 7-has survived and is applicable under the amended statute. As the Commission acknowledges, both the Senate and House Reports on the Celler- Kefauver amendments specifically cited the International Shoe decision, including the language just quoted, with approval and expressed the view that despite the absence of a reference to the failing company doctrine in amended Section 7 the doctrine would continue to apply; the failing company portion of the International Shoe decision, interpreting former Section 7 which also made no explicit mention of a failing company exception, was carried over intact into the amended statute. The doctrine 'Old. at 302-03.

a For example, compar.. with definition there adopted, the market definition adopted in United State. Y. Continental Can Co. ::78 U.S, 441 (1964); Hrmen Shoe Co- United States 370 U. S. 294 (1962); ted States v. dupont 35: V. S, ;-\7 (1956). See S, Rep. :Ko, 1775 , 81st Congo, 2d Sess. 7 (1950); H_ R Hep () 59C , 80th Gong. , 15t Sess. 7 (1947); Hearings on E.R. 27;,4 Before a S\.bcommittf'e of Senate Committee on the Judiciary, 81st Cong., 1st & 2d Sess, 79-81 (:950) rh€1"€ir. el' cited as 1950 Senate HearingsJ; Brown Shoe CO. United Sta,tes :170 U- S. 294 , 319 & n. 34. 346 (l9C2); Bok Sect;o- of the Clayton Act (md the Merging of Law and Eco-nomi 74 Ran. . L. Rev, 22(; , 339-41 (1960); Low supra not" 6 j5 Ford . L. Hev . at 426-27; Comment supra not!' 1, Cl Mich. L. R€y, at 571-7Z; cf. United States Van s Grocery Co. 384 U. S- 270 , 277 & n. 13 (1966); United States HI Paso Natura! Gas Co. 76 U. S. 651 , 661 (1964). Bu Sf'e. Connor Section of the Clay/ton Act: The "Failing Company " iHytil 49 Geo. L.J. H4 (1901). g., . . UNITED STATES STEEL CORP. 1309 J270 Dissenting Opinion could thus bc deemed a legislatively approved judicial exception to the statute, codification of which Congress regarded unnecessary, probably because it felt failing-company mergers could not work substantial injury to competition. " 1:1 The Commission purports not to dispute the continuing vitaliy doctrine announced in Internationalof the failing company Shoe. However, starting with the premise that in International Shoe and other cases in which the "failing nature of the acquired company served as a defense, either no defense was needed, , that there was no adverse competitive effect flowing from the merger, or " " * the ultimate question of adverse competitive impact was a close one in which the prospect of economic harm to individuals and to the public that might result from a bankruptcy was decisive," 14 the Commission concludes that: The court did no more than balance the probable injury to competition against injury to stockholders and other third persons and, in the circumstances of that case, decided that the prevention of the latter was of greater importance. 'rve agree with counsel supporting the complaint, therefore that to be consistent with International Shoe and with the legislative intent expressed in the amendment of Section 7 , in any case involving the acquisition of a failing company we must determine whether the acquisition may result in a substantial lessening of competition and, if so, the acquisition must be declared ilegal in the absence of probable harm to innocent individuals so serious and substantial that the public interest requires that the acquisition nevertheless be permitted. How valid is the premise on which this argument is based? Were the anti competitive effects of the merger in the Interna- ". Comment Substantialhl to Lessen Competition CH.rrent Problems of Horizontal Mergers 68 Yale L.J. 1627 , 1664 (l95 ); see Hearings on H.R 988 1240, 2006 , 2734 Befol' e a Subcommittee of the Home Committee on the Judiciary, glst Cong. , 1st Sess, 30- (1949).

H Majority opinion at 1280-121\1.

)"Id. at 17-18 (footnote omitted). It is instructive to note that the principal section of the legislative history of the Celler-Kefauver Act cited by the Commission to support its view is a statement made by Hepl'esentative Patman1 , in testimony given during Senate hearings on the bill. The Commission s apparent belief that Rei))"esentative Patman s views ac.c.urately reflect the intention of Congress in passing the Celler-Kefauver Amendments, is recently come by; the Commission has regularly "'HlDted premel' ger clearances in cases where the mergers would be deal' violations of Jaw Hnde1" the views now expressed by the Commission in the instant case. See advisory opinion digests numbers 176, 177 , 17\), 180 , 182 , 184, 185 , 296 , 297. Compare 1950 Senate Hearings at 1;

Representative Patman. 1 think you would have no trouble getting lan advisory opinions. Th.. facts themselves wuuld be so apparent that you probably would not want to go to the FTC. You would know whether or not you \were in violation. If this lfaiHng eompanyJ is the only ice-cream company in Dothan, Ala., and you a)"e buying it out for Borden Co., why, you would know that i a violation of the law. You would not have to go to the FTC about it. " See id, at 134. B\1t see id. at 101.

, 1310 FEDERAL TRADE COMMISSIOK DECISIOKS Dissenting Opinion 74 F.

tional Shoe case in fact minimal and does the decision hold that the Commission should engage in a complex and elaborate "public interest" inquiry-which does not fall within its area of ex- pertise and which it is not particularly wen equipped to makeinto the degree of "serious and substantial" injury to "innocent" employees, stockholders, and the communities in which a failing firm does business? The merger attacked by the Commission in the InteTr"ilional Shoe case was not, as the Commission now implies, one involving sman firms or one in which the adverse competitive impact of the merger was slight. On the contrary, the record in that case disclosed that McElwain was the largest shoe manufacturer in New England and one of the four largest in the United States; its gross sales in the year prior to the merger were almost $50 milion and International's exceeded $75 milion. " McElwain s tangible and intangible assets early in 1921 exceeded $31 milion l7 and its tangible assets included ten shoe factories capable of producing 40 000 pairs of shoes per day; International Shoe had 32 shoe factories with a daily capacity in excess of 70 000 or 80 000 pairs. McElwain was sold as a going concern, a factor that of course increased its value to International Shoe. Nor is there any suggestion in the case that :\1cElwain s assets had somehow lost their value, or that the firm s plant and equipment were obsolete. In brief International Shoe was a horizontal merger which united a firm that in 1920, immediately before the merger made more pairs of men, women, and children s shoes than any other manufacturer .in the world" with a firm that in the same year made more pairs of men s and boys' street and dress welt shoes than any other manufacturer in the world " establishing a firm having net tangible assets in excess of $40 minion with "the largest purchasing power in the world for the best hides, leather and other materials " creating "the largest agency for thc manufacture and distribution of shoes in the world. " 10 In view of these facts concerning the merger, it seems clear that the IThternational Shoe case did not involve a merger having no anticompetitive impact, or that its impact was so dubious or so remotely discernible as to bc outweighed by the "economic Docket. No. 1023 , Commission s Ex. 1.

"ld. Respondent' s Ex. 25; see also Respondent s Ex. 32 , 3;-; 1B ld Commission Ex. 1; Respondent' s Ex. 26 Id. Commission s Ex. 2; Respondent' 26 The m",rged firm s combine'; manufacturing capacity was also the largest in the world Ibid. UNITED STATES STEEL CORP. 1311 1270 Dissenting Opinjon harm to individuals and to the public that might result from a bankruptcy. either the Court's finding, based on an extremely narrow definition of the relevant market, that McElwain and International had not competed with each other, nor quibbles concerning the structure of the Court's opinion-which parts of it are holding and which dictum-should be permitted to obscure the net effect of the decision. The Court clearly assumed, for purposes of its analysis of the failing company issue, that the merger would have violated Section 7 were :vcElwain not a failing company. Otherwise it would have had no occasion to rule on the question. The Court of Appeals had dealt with the failing company issue and, applying a stringent test to determine whether McElwain was failing, held that the evidence was insuffcient to show that but for the merger the company would have gone out of business. The Supreme Court did not let this precedent stand and instead announced a more expansive test. The Court excused the merger, despite its manifest anti competitive tendencies and effects, because McElwain was a failing company and injury to stockholders, employees and others would be avoided by the merger. There is no indication in the opinion that the Court endeavored to balance these injuries against the anti competitive effects of the merger. Its rationale was simple and clear: Mc- Elwain was failing; if the merger were forbidden, these injuries would ensue; therefore, the merger was not illegal. Moreover, :Mr. Justice Stone, in his dissenting opinion concurred in by Justices Holmes and Brandeis, did not dispute that the failing company doctrine, if applicable, would be a complete defense to the charge that the merger violated Section 7; instead, he took issue with the fir.ding that McElwain was failing 20 and questioned the Court' conclusion that McElwain and International did not compete. In short, the probability of competitive injury in that case was so great that, as One commentator has suggested, the scales were "about as heavily weighted in favor of preventing merger as possible. " 21 That the Court nevertheless held the merger not to be ilegal indicates that the failing company doctrine is a complete defense.

A more recent case United States v. Maryland Virginia :?J280 u, s. at :J06.

l Comment supra note 1 , 61 Mich. L. Hev, at 583. 3 See -Id. at 578; " In short, it must be realized that the doctrine represents .I valid exception to section 7, and b1d f() the exception . the transaction would be ilegal lis violative of the antitl"ust laws.

Dissenting Opinion 74 F.

Milk Producers Ass confirms this view. The defendant in that case was an association of milk producers charged, insofar as is here relevant, with having violated Section 7 by purchasing the stock of the Richfield-Wakefield dairies. The acquisition had both vertical and horizontal aspects. The evidence indicated that the merger eliminated one of a few remaining substantial purchasers of milk that might be open to a supplier competitor of the respondent" and that the merger would substantially increase concentration among milk dealers in the Washington, D. , area by joining the fifth or sixth largest seller with the fourth largest in a relatively concentrated market where the top four firms in the year before the merger had a market share of almost 70 percent which was increased to approximately 76 percent by the merger,'" In the absence of the failing company defense, the merger would clearly have violated Section 7.20 Yet, the court held that " 27since the acquired company was " on the brink of bankruptcy, the merger did not violate Section 7. "The acquisition of capital stock or assets of a failing corporation is not within the ban of Section 7 of the Clayton Act." 28 It seems to me that here, as in the Maryland Vir-ginia Mille Pr-oducers case, the failing company doctrine of the International Shoe case requires dismissal of the Section 7 complaint. I do not challenge the Commission s finding that United States Steel' s acquisition of Certified has had and may continue to have an anticompetitive impact in the New York Jfarketing area. However, it is not clear that these competitive effects are any worse than the substantial adverse effects, described in part above, to be expected from the International-McElwain horizontal merger. As I have already noted, International acquired McElwain as a going concern; McElwain s plant and equipment ",1167 F. Supp. 799 (D. c. 1958), rcv d on other grounds 362 U.S. 45R (1960). "' See Civ. A. No. 4482-5Ij (D C. 1958). Plaintiff' s Exs. 92 , 93, 120A- 5 See g" id. Plaintiff' s Ex. 120 , Tables, 0, S, T. :!Cf. Department of JUotice, Merger G\.iuelines 9 , 16 (1968). 211fj7 F. Supp. at 808.

:sIbid c'U But see LiebeJer Toward (1 Consumer 8 A"t-;tn "t L",w: The Federal Trade Commission and Vertical Mergers in the C meHt Industry, 15 U. L.A. L. Hev, 11,,3 (19611); Comment supra note 1 , 61 Mich. L. Rev. at 572:

The strength uf the IH"Juiring company s business position may, in several respects, justify a court in sustaining the defense. First, it indicates a legitimate need fur the capacity, which negates the claim that the motive fur acquisition was illegal; and, secondly, the sound financial condition of the acquirer tends to insure that the injury which the cuurt8 wish to prevent wil at least, be mitigated by keeping the facilties in operation and avoiding financial coHapse. (Footnotes omitted.

UNITED STATES STEEL CORP. 1313 1270 Dissenting Opinion came to International in good working order, they were not obsolete or unusually expensive to run, and they increased International' s already substantial manufacturing capacity by over 50 percent. International was also able to "maintain the continuity and the good wi1 and the management of (McElwain). " 30 By the acquisition of the stock or share capital of W. H. Mc- Elwain Company, the respondent gained control of the largest manufacturer of street and dress welt shoes for men and boys and eliminated from the field of competition respondent' s largest competitor in the sale of men s dress shoes, and secured immediate entrance into the sales territory of the New England States, and accomplished a nationwide distribution of its prod- " ;11 ucts.

By contrast, in the instant case the merger is vertical, not horizontal, it may involve economic effciencies that the antitrustlaws are intended to encourage 32 and it may permit respondent to compete more effectively with the dominant firm in the New York market " a consideration that might not excuse an otherwise illegal merger but that is surely relevant if, as the Commission holds, this case is to be decided by a "public interest" balancing process. Indeed, disapproving this merger may, as the examiner found, invite even more injurious consequences than \0 F. C. Docket o. 1023 , Commission s Ex. 1. '1 International Shoe Comp(lny, 9 F. . 441 , 452-53 (H)2.S). See Liebel",r 81tprU note 29; Comment, supra note 1 , 61 Mich. L. Rev. at 579-HO; Comment supra note 13, 68 Yale L. J . at 1663. But cf. , Federal Trade Commission, Staff Report on Mergers and Vertical Integration in the Cement Industry 101-04 (1960) (rejecting the argument that vertical integration in the cement industry is attributable :0 the search for economic effciency) ; Wilk Vertical Inte.gration in C"ment Revisited: A Comment on Pecic and McGowan 13 Antitrust BuJl, 619 (19G8). 13 See initial decision 64-67 (71 F. , at 459-462J : Low S11pra not.. 6, 35 Ford. L. Rev. at 430 & n. 41; Hale & Hale supra note 5 , 52 Ky. L. J. at 600; von Kalinowski Section and Competitive Effects 48 Va. L. Rev. 827 , 857-59 (1962); d. (hl1tcd State, Bethlehem Steel Corp. 168 F, Supp, 576 (S. Y. 1958). 3' Cj. Huk 81lprrL note 12 , 74 Harv . L. Rev. at 343-44; Imperfections in our knowledge lead to uncertainty conce)'ning the significance of many acqui. sitions. We have ur ed that such uncertainty be resolved against the merging parties in framing rules under section 7 , and it seems inevitable that the same process must take plac!' even under the flexible approach of the Trade Commission, for otherwise the statute cannot have much real significance apart from the Sherman Act, Once rules and precedents are made strict in this sense, however, the danger arises that they wjI come to he considered as facts, endowed with greater validity than they actually posse;s. While such a process may be harmlesg in the usual case under section 7 , a measure of unfairness may be introduced in cases involving R failing enterprise, In such a case, doubts cannot be r('olved a ainst the defendant for we lire no Jon er imply concerned with fulfil1n the single overridin purpose of preserving competition. For the same Teason, we cannot accurately assess the danger to competition on the basis of rules and precedents in which doubts have been resolved in this manner Instead, it is necessary to bea)' dearly in mind that many of the mergers which would seem seriously anti competitive in terms of existing rules are in fact of very problematical signifi- Dissenting Opinion 74 F.

those anticipated from the merger. The examiner found that had this merger not occurred, Certified's business might weil have gone to the leading firm in the N ew York market, further enhancing its already dominant position." In any event, if the failing company defense is not to be distorted, disregarded, or read out of the merger law, this case is virtually an a fortiori one after International Shoe. The competitive effects likely in that case were at least as injurious to competition as those predictable here." More to the point since the merger in that case was approved despite its obvious anticompetitive potential, the Intel"national Shoe decision suggests that the Commission s "public interest" weighing of anti competitive impact against the injury to be suffered if Certified had gone out of business is neither required nor permitted once it is determined that Certified was a failing company an inescapable conclusion on this record. Nor is there any real doubt that the other requirements set out in the Intel"national Shoe decision have been met. The Commission does not find, and the record does not indicate, that this merger was consummated 'j with a purpose to lessen competition * * * (rather tbanJ to facilitate the accumulated business of the purchaser and with the effect of mitigating seriously injurious " a8consequences otherwise probable * * * There has also been no showing that other prospective purchasers, whose acquisition of Certified might have been more desirable from an antitrust viewpoint, were available. Indeed, the Commission expressly adopts the hearing examiner s finding that: caTIce. It may well be, therefo!' , that many mergers which would normally be IJwhi\Jited ho1Jld he freely allowed where there is a substantial likelihood that the acquired firm ('.mnot survive independently, even though its failure cannot reliably be described as probable. 8., Initial decision at 87 r71 F. , at 479-480J. The examiner also suggested that had Certified gone bankrupt, U. S. Steel, as its major creditor, could have been expected to acquire Certified' s assets and that this "purchase would not have been subject to attack under Section , despite the foreclosure whkh would have l!!sulted. Ibid. 3" It is certainly arguable that under the International Shoe decision, Certified's acquisition by the dominant firm in the New York market would not have offended Section 7 if it could be shown that no other more desirable purchasel' was available. See Low MtpTa note 6, 35 Ford. L. Rev. at 430: 1955 Hearngs at 326 (statement of Assistant Attorney General Barnes); cj. United-CarJital Merger Case CAB Ducket No. 111399 (1961), Aviation L. Rep. 1960-64 Cas. , 132. However, it would not he easy in the hyputhesized case, and in most others where the failing company doctrine might be invoked by a dominant firm, to make the requisite shuwing that nu other)' purchase1' was available. See y" Un1 ted States v. Diebold, Inc. 369 S. 654 (1962); nok supra note 12 , 74 Harv. L. Rev. at 344-47; Low supra note 6 , 35 Ford. L. Rev. at 432-34; Marcu slIpra note 6; Wiley, 81!pra note I, 41 n. L. Rev . at 509- 12; Comment S1tl)Ta note D , 68 Yale L. J. at 1666 68 (1959). nut d. von Kalinowski supra note 33 48 Va. L . Rev. at 844.

; Compare Bok 81lpra note 12 , 74 Han. L. Hev . nt 343 , where it is suggested that "as the magnitude of the acquisition increa, a graver likeJihcod of business failure seems necessary to justify the exception if we an to give expre ion o ::!: of the interests of concern to Congress.

iI" 280 -eS. at 302; ee initial decision 64-67 (71 F. C., at 459-462J. U:'\HTED STATES STEEL CORP. 1315 1270 Dissenting Opinion * * * the fact that U.S. Steel had assisted Certified financially in January 1963 , does not establish the availability of other purchasers not does it establish that U.S. Steel knowingly contributed to the lack of availabilty of other purchasers, as complaint counsel suggest at another point (CB, at p. 31). , "' * There is not the slightest evidence that U. Steel was aware of the Bangor & Aroostock offer, or that it arranged for the Bankers Trust loan in order to head off Certified's acceptance of that offer.

The record amply supports the examiner s conclusion that Certified was a failing company, that through no fault of respondent no other prospective purchaser was available, and that "the requirements of the failng company defense have been met. " 40 The Commission does not modify or reverse these findings. The Commission finds that Certified was failing and it virtually concedes that the other elements of the defense, lack of an illegal purpose and no alternative purchaser, have been proven. The Commission does not hold the merger ilegal on the ground that there has been a failure of proof of the elements of the failing company defense.

This is not the first case in which the Commission has declared a merger to be ilegal despite the assertion of a failing company defense. However, in all previous cases the Commission has held that some key element of the defense, usually evidence that the acquired company was failing, was lacking. This is the first instance in which tbe Commission has found that a company was in fact failing, and that no prospective purchasers other than the respondent were available but that the merger was ilegal. In a novel decision, the Commission now holds that the failing company doctrine does not constitute a complete defense to a Section 7 complaint. .

1" Initial dec.i8iun f71 F. , at 474J ; majurity opinion at 1280 '" InitRI decision R4- 85 l71 F. , at 477-478J. ': See. fI. , CnYlvn Zellerbach Corp. v. Federal Trade Commission 296 F. 2d 800 (9th Cir. 1(61), cert, denied 370 U. S. 9;37 (1902) (acquired cumpany not failing): Erie Sand ond Gravel v. Federal Trade Comm;ssio-n 291 F, 2d 279 (3rd Cir. 1(61) (acquired company not failing); Pillsbury Mils. Inc. 57 F. C. 1274 , 1407-10 (1960) (acquired company not faWns;, alternative purchasers RvaiIable); Fa1-m .Jollrnal, Inc- 53 F. C. 26 , 47-48 (1956) (acquired company not failing; alternative purchasers Rvailable: illegal motive for acquisition). '2 But r/. Pilsbury Mms, Inc 57 F. C- 1274 , 1409 (1960) (dictum). The Commission purports to ti!1d 8support fo!' its view in Er;e Sand and Grit1Jel Co. v, Federal Trade Commission 1 F. 2d 27 , 280-81 Ulrd Gir . 1(61). Th" court held only that the acquired firm in thrt case was not failing-. Moreove1' , the court', dictum to the effect thrt " It was in . . . (the circumstances described in International Shoes that a merger was viewed R8 likely to be less harmful in its possible adverse effect on competition than obviously advantageous in saving creditors g Dissenting Opinion 74 F.

Underlying the Commission s conclusion that the failing company defense requires an elaborate "public interest" inquiry into the socially undesirable effects that the merger avoids and a balancing of these effects against the antitrust injury perceded to flow from the merger, is its notion that the defense rests on the proposition "that the acquisition of a failing company could not possibly substantially injure competition." 43 A few commentators and dicta in some opinions have suggested that "the assumption underlying the defense is that when a 'failing firm is acquired, there can be no violation of Section 7, since the firm ultimate elimination precludes the possibility of future competition from it or of restraint by the acquiring firm." 14 Were the failing company doctrine premised solely on the bare assumption that acquisition of a failing firm could never injure competition there would be strong grounds for questioning the rationality and logic of the defense and for limiting its scope. It is clear that the acquisition of a failing company by a substantial rival, or even by a large conglomerate firm not previously involved in the failing firm s market, may have important anticompetitive effects. As the Supreme Court pointed out in the International Shoe opinion, such a merger can strengthen the acquiring firm s position or increase its dominance by permitting it immediately to acquire facilities it would otherwise have to build. " Acquisition by a dominant company of a failing firm that owned a desirable asset, for example a patent, but lacked adequate funds to take advantage of its resources, would surely have an impact on competition. Acquisition by a dominant owners and employees of the failing business from serious impending- loss " relied on by the Commission does not carry the weig-ht 01' impact the Commission gives to it (majority opinion at 12 7). First, if the statement is interpreted as the Commission suggest. . it is inconsistent with the court's earlier Collect statement that the failing rompany "doctrine, as its name suggests makes Section 7 inapplicahle to the acquioition of a competitor which is in such straits that the termination of the pnterprise and the dispenal of its assets seems inevitable unless Ii rival proprietor shall acquire and continue the business." There is, moreover, no indication in the International Shoe opinion that the Court weighed the presum",d injury to stockholders and others again t the anti competitive effects of the m",n;;el' . In addition, as we have seen, the facts before the Court in International Shoc were about as heavily weighted in favor' of IJl"eventing me)' ' as possible " (Comment l1pra note 1 , 61 Mich . L. Rev, at 51\3), and yet the Court, hypoth",sizing injury to stockholders and communities where McElwain s factories were located, upheld the merge)'. If the suppm;ed balancing test favored the merger in that case, it should here as well.

'3 Majority opinion at 1288.

"Note, Horizontal Mcrgcr8 and the " F"uiling Firm " Defense Under Section of thc Clayton Act: A Cavcat 45 Va. L. Rev. 421 , 425 (1959); oce G'united States v. Mflryl(Lnd Virginia Milo Prod1tccrs Ass 167 F. Supp. 799 , 808 (D. C. 19S ); Connor S1tpra note 12 , 49 Geo. J. at 92; Hale & Hale SU1JT(L note 5, 52 Ky. L.J. at 598; von Kalinowski supra note 33 , 48 Va. L. Rev. at 841: Comment supra note 13 , 68 Yale L. J. at 1663- ;5280 U. S. at 301; see Comment 81/jJra note 1 , 1J1 Mich. L. Rev. at 577. See Low supra note 6, 35 Ford, L, Rev. at 428-29. UNITED STATES STEEL CORP. 1317 1270 Dissenting Opinion company may also serve as a means for forestallng new entry since, as a result of the merger, a prospective new entrant would have to build new facilties which might expand the total productive capacity of the market without any increase in demand." Similarly, vertical acquisitions involving a failing company may, as the Commission finds in this case, have serious anticompetitive effects. Even this partial list makes clear that a merger involving a failng company may have substantial adverse effects on competition.

Acknowledging that a merger involving a failing company is not always defensible on the ground that it has no impact on competition does not indicate that the failing company doctrine is based on false premises. On the contrary, it suggests that there may be other considerations, some related to antitrust policy and some not, underlying the failing company defense. The Supreme Court set out some of those considerations in the International Shoe case when it held that the "seriously injurious consequences" which would ensue if the merger was not permittedloss to (McElwain s) stockholders and injury to the communities where its plants were operated" excused the merger. The prevention of bankruptcy "precludes or minimizes losses to stockholders and creditors of the ' failing firm' and thus prevents adverse repercussions throughout the economy. " 4G Congress was not specific in defining its reasons for carrying the failing company doctrine forward into amended Section 7. However, in view of the Court' s concern expressed in International Shoe and in view of "the rather obvious legislative bias in favor of smail businessmcn and tradespeople" apparent in the legislative history of Section 7 00 it is perhaps true that "the strongest reasons" for the failing company doctrine "stemmed from a legislative concern over the various interests involved in the life of a failing enterprise. Creditors, owners, employeescould have an interest in avoiding a total collapse or in realizing as high a seiling price as possible." C1 Smail businessmen were 07 See generally. Bain Barriers to New Competition, 52- passim (1956). 's See Low SUPUL note 6 , 35 Ford. L. Rev. at 428, Comment supra note 1, 61 Mich. L. Rev. at 577-n; cJ. Comment upra tlote 13, CS Yale L.J. at l662.-6R, '0 Note, supra note 44, 45 Va. L. Rev. at 42.5. "0 Bok supra tlote 12, 74 Harv . L. Rev . at 340; see 1\)50 Sctlate Hearin"s !It, 99- 105 115 198.

"' Bok supra tlote 12, 74 Har" . L. Rev . at 340 (footnotp omitted): see Wiley, 8UjJra note I 42 B. L. Rev. at 511; Hearitl!;s On B. R. 9R3 . 1240 , 2006 , 2734 , Before a Subcommittee of the House Committee on the ,Judiciary, 31st COtlg-., :8t 51'88. 30 (J949); cJ. Hearings on H. lt. 515 Before a Subcommittee of the House Committee Otl the Judiciary, 80th Cong. , 1st Sess. 10- (1947) (thctl Represetltative Kefauver stated that h!tcn!!ltionul. Shoe is a " very dditlite precedent to protect the public and the owner ). But d. 1950 Sctlate Hearings 134-36 (remarks of Representative Patman).

Dissenting Opinicn 74 F.

not to be required to sell their firms and their assets in a forced sale at distressed prices: their savings and their property were not to be sacrificed to antitrust policy. A contrary decision by Congress would have added to the already considerable risks confronting new or small business enterprises and might have seriously impeded the flow of capital into such firms. " Finally, it has also been argued that the failing company doctrine is justifiable on strict antitrust grounds as a means for facilitating the withdrawal from the market of seriously ineffcient firms. Whatever the merits of each of these contentions concerning the basis for the doctrine, it is clear both that the failing company doctrine is not premised solely on the simplistic notion that mergers involving a failing firm can never affect competition and that the doctrine is not based only on antitrust considerations. On the contrary, due process, the fundamental principle that private property may be taken for a public use only if just and equitable compensation is paid, may underlie the Court' concern in late' rnational Shoe shared by Congress, that small businessmen and investors not be forced to sacrifice their assets lose their equity, and suffer bankruptcy, in the interest of antitrust policy.

Certainly, if this is the policy involved, it is better served by Certified' s sale as a going concern than by sale of its assets . bankruptcy." Sale as a going concern helps minimize the impact On stockholders, creditors, employees, and the communities in which Certified's facilities are located. Continued operation by Certified wil, of course, protect its employees and the community and simultaneously affords shareholders and creditors an opportunity to salvage a greater proportion of their investment: It may be that the line should be drawn somewhat differently in defining what constitutes "failure" 5C and that the availabilty of alternative purchasers should be examined carefully before a merger is approved on failing company grounds." Perhaps, in See 19S0 Senate Hearings at 102- , 115-16: 1"0te, 81(1)7"(1 note 44 , 45 Va. L. Rev. at 426; cf. Bradley, Oligopoly Power Under the Sherman and Clayton Acts, from Economic Theory to f-eyal Policy. 19 Stan. L. Rev. 285, 363-64 (1968). 53 See Comment supr(L note 13 , 68 Yale L.J. at 1663; cf. Bok $1tprrL note 12, 74 Harv. L. Rev. at 340; Low supra note G , at 431. But c/. Hale & Hale, S11jJTn note 5. 52 Ky. L. J. at 599. ,I The examiner sug-gested that failure to allow the merger would enable United States Steel, which was Certified' s major creditor and which had sec1J"ed much of it outstanding loan with mortgages on Certified' s assets, to acquire Certified's assets in bankruptcy. Initial decision 87 (71 F. , at 480J.

55 See Comment SI'PTrL note 1 , 6; Mien . L. Rev. at 579; Low supra note 6 , 35 Ford. L. Rev. at 440.

:; See alJthorities cited,supra note 6; Bok supra note 12. 74 Han. L. Rev. at 342-45. 57 See authorities cited supra note 36. g..

UNITED STATES STEEL CORP. 1319 1270 Final Order view of the large number of cases involving failng company issues 58 a reap-disposed of informally by the antitrust agencies praisal of the doctrine s effect on antitrust enforcement may be in order. However, regardless of what shortcomings or undesirable effects the failing company doctrine is thought to have, the Commission is bound to implement it-and not merely, as we have been doing, in unreviewed advisory opinions issued parte. We are not free to amend the defense, dilute it, or circumvent its purpose by treating the fact that an acquired firm was failing as merely one factor to be considered in assessing the "public interest" impact of the merger. Nor does the Commission s expertise equip it to make the elaborate inquiry necessary to deal with the complex problem of determining in each case what weight to assign to the injuries that might be suffered by employees, stockholders and others, and then to balance such injuries against the anti competitive effects foreseen from the merger. In the past, merely ascertaining and evaluating such anti competitive effects, a function that the Commission was created to perform, has proven to be a diffcult and timeconsuming task. Moreover, any test such as the Commission proposes would virtually preclude a large firm from acquiring a failing company, even if, as in the instant case, no other purchaser was available. To limit the defense to mergers in which the acquiring company is "relatively or absolutely small' " 5!)amounts almost to an elimination of the exception. Until such time as the law is changed by Congress, the Commission is not free to rewrite or limit the failng company doctrine in this way. It seems to me that the Commission is constrained to hold that regardless of the impact of a merger on competition if the acquired company was in fact failing and the other requirements of the doctrine are met, Section 7 is not violated. The failng company defense is just that, a defense to the charge that a particular merger-otherwise anticompetitiveoffends Section 7.

FINAL ORDER The hearing examiner having filed his initial decision in this proceeding dismissing the complaint charging- respondent with having- violated Section 7 of the Clayton Act, as amended, by its lis Set' Federal Trade Commi sion advisory opinion . 165-1GfJ, 175-1HO, 182 184-189 296, 297; Low supra note G, 35 Ford. L. Rev . at 430 and nn. 40, 41: Comment supra note 13 6B Yale L.J. at 1667.

uHale & Hale, 8U,jJTrL note 5, 52 Ky. L.J. at G06: 8ee Wiley, SltjJTn not.' 1, 41 B."C.L. Rev. at 511.

Final Order 74 F.

acquisition of the assets and outstanding capital stock of Certified Industries, Inc. ; and Counsel supporting the complaint having appealed from the initial decision assigning as error the hearing examiner s holding as to the scope of the protection afforded by the failing company defense to a proceeding under Section 7 of the amended Clayton Act and the hearing examiner s holding that the evidence fails to establish that the effect of the acquisition of Certified Industries Inc., by respondent may be substantially to lessen competition or tend to create a monopoly in any line of commerce; and The Commission having determined, for the reasons set forth in the accompanying opinion, that the appeal of counsel supporting the complaint should be granted and that the initial decision should be modified by striking therefrom the conclusions pertaining to the failing company defense, the conclusions pertaining to the competitive effect of said acquisition, and the order dismissing the complaint:

It is ordered That the hearing examiner s initial decision be modified by striking therefrom the conclusions beginning on page 59 (71 F. C. 395, 455J with the words "V. Competitive Effect" and ending on page .92 (71 F. C. 395 , 485J thereof and substituting therefor the findings and conclusions contained in the accompanying opinion.

It is further ordered That the initial decision be modified by striking therefrom the order dismissing the complaint and substituting therefor the following:

It is oo'dered That respondent, United States Steel Corporation, divest all stock and/or assets acquired by L"united States Steel Corporation as the result of its acquisition of Certified Industries, Inc., together with all additions thereto and replacements thereof, to a purchaser approved by the Federal Trade Commission who shall operate said assets as a going concern in the ready-mixed concrete industry. It is further ordered that United States Steel Corporation begin to make good faith efforts to divest said stock and/or assets promptly after the effective date of this Order, and that it continue such efforts to the end that thc divestiture thereof be accomplished within one (1) year.

It is further ordered That, pending divestiture, L"united UNITED STATES STEEL CORP. 1321 1270 Final Order States Steel Corporation not make any changes in any of the aforesaid stock and/or assets which would impair their present capacity for the production and sale of ready-mixed concrete, or other products produced, or their market value. It is furthe1' ordered That, in the aforesaid divestiture none of the stock and/or assets be sold or transferred directly or indirectly, to any person who is at the time of divestiture an offcer, director, employee, or agent of, or under the control or direction of, United States Steel Corporation or any of its subsidiaries or affliates, or to any person who owns or controls, directly or indirectly, more than one (1) percent of the outstanding shares of common stock of United States Steel Corporation or any of its subsidiaries or affliates.

It is further ordered That United States Steel Corporation, for a period of ten (10) years from the date this Order becomes final, cease and desist from acquiring, directly or indirectly, by any device or through subsidiaries or otherwise, the whole or any part of tbe stock, share capital, or assets (other than products sold in the course of business), of any firm engaged in the production and/or sale of readymixed concrete without the prior approval of the Federal Trade Commission.

It is further ordered That United States Steel Corporation within sixty (60) days from the effective date of this Order, and every sixty (60) days thereafter until it has fully complied with the provisions of this Order, submit in writing to the Federal Trade Commission a report setting forth in detail the manner and form in which it intends to comply, is complying, and/or has complied with this Order. All compliance reports shall include, among other things that wil be from time to time required, a summary of all contacts and negotiations with potential purchasers of the stock and/or assets to be divested under this Order, the identity of ajj such potential purchasers, and copies of ajj written communications to and from such potential purchasers. It is further ordered That the hearing examiner s initial de- Complaint 74 F.

cision, as modified, be, and it hereby is, adopted as the decision of the Commission.

Commissioner Elman dissented and filed an opinion. Commissioner MacIntyre did not participate. Commissioner Nicholson did not participate for the reason oral argument was heard prior to his appointment to the Commission.