United States v. Marine Bancorporation, Inc.Annotate this Case
418 U.S. 602 (1974)
U.S. Supreme Court
United States v. Marine Bancorporation, Inc., 418 U.S. 602 (1974)
United States v. Marine Bancorporation, Inc.
Argued April 23, 1974
Decided June 26, 1974
418 U.S. 602
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WASHINGTON
The United States brought this civil antitrust action under § 7 of the Clayton Act to challenge a proposed merger between two commercial banks, which would substitute the acquiring bank for the acquired bank in Spokane, Wash., and would permit the former for the first time to participate directly in the Spokane market. The acquiring bank, appellee National Bank of Commerce (NBC), is a large, nationally chartered bank based in Seattle, Wash., and a wholly owned subsidiary of appellee Marine Bancorporation, Inc., and, in terms of assets, deposits, and loans, is the second largest banking organization with headquarters in Washington, operating 107 branches in the State, including 59 in the Seattle metropolitan area and 31 in lesser developed eastern sections of the State, but none of which is in the Spokane metropolitan area. The acquired or target bank, appellee Washington Trust Bank (WTB), is a medium-size, state-chartered bank located in Spokane, with seven branches, six in the city and one in a suburb, and is the eighth largest bank with headquarters in Washington and the ninth largest in the State, controlling 17.4% of the 46 commercial banking offices and holding 18.6% or the third largest percentage of the total deposits in the Spokane metropolitan area. (The two banks with the largest percentages in the area hold 42.1% and 31.6%, respectively, of total deposits.) The Government bases its case exclusively on the potential competition doctrine, seeking to establish that the merger "may . . . substantially . . . lessen competition" within the meaning of § 7: (i) by eliminating the prospect that NBC, absent acquisition of the market share represented by WTB, would enter Spokane de novo or through acquisition of a smaller bank, and thus would assist in deconcentrating that market over the long run; (ii) by ending present procompetitive effects allegedly produced in Spokane by NBC's perceived presence on the fringe of the Spokane market; and (iii) by terminating the alleged probability
that WTB as an independent entity would develop by internal expansion or mergers with other medium-size banks into a regional or ultimately state-wide actual competitor of NBC and other large banks. The District Court held against the Government on all aspects, and dismissed the complaint.
1. As "a necessary predicate" to deciding whether the proposed merger contravenes the Clayton Act, the District Court properly found that the relevant product market was the "business of commercial banking" and that the relevant geographic market was the Spokane metropolitan area. The entire State is not, despite the Government's contrary contention, an appropriate "section of the country" within the meaning of § 7, since, for the purpose of this case, the appropriate "section of the country" and the "relevant geographic market" are the same, being the area in which the acquired firm is an actual, direct competitor, and since, moreover, the Government has not shown that the effect of the merger on a state-wide basis "may be substantially to lessen competition" within the meaning of § 7. Pp. 418 U. S. 618-623.
2. While geographic market extension mergers by commercial banks must pass muster under the potential competition doctrine, the application of the doctrine to commercial banking must take into account the extensive and unique federal and state regulatory restraints on entry into that line of commerce, including controls over the number of bank charters to be granted, prior bank regulatory agency approval of the opening of branches, and state law restrictions, such as those in Washington, on de novo geographic expansion through branching and multibank holding companies. Pp. 418 U. S. 626-630.
3. The Government's evidence of concentration ratios in the Spokane commercial banking market established a prima facie case that that market was sufficiently concentrated to invoke the potential competition doctrine, and appellees did not demonstrate that such ratios inaccurately depicted the economic characteristics of the Spokane market. Pp. 630-632.
4. In view of the legal barriers to entry, notably state law prohibitions against de novo branching, branching from a branch office, and multibank holding companies, the Government failed to sustain its burden of proof that the challenged merger violates § 7 by eliminating the likelihood that, but for the merger, NBC would enter Spokane de novo by means of sponsorship acquisition or through a foothold acquisition of a small state bank in the Spokane
area, since it was not shown that either of the proposed alternative methods of entry was feasible or offered a substantial likelihood of ultimately producing deconcentration of the Spokane market or other significant procompetitive effects. Pp. 418 U. S. 632-639
5. The Government's failure to establish that NBC has alternative methods of entry offering a reasonable likelihood of producing significant procompetitive effects is determinative of its contention that, without regard to the possibility of future deconcentration of the Spokane market, the challenged merger is illegal because it eliminates NBC as a perceived potential entrant. Assuming that commercial bankers in Spokane are aware of the regulatory barriers that render NBC an unlikely or insignificant potential entrant except by merger with WTB, it is improbable, in light of such barriers, that NBC exerts any meaningful procompetitive influence over Spokane banks by "standing in the wings." Pp. 418 U. S. 639-640.
6. The record amply supports the District Court's finding that the Government "failed to establish . . . that there is any reasonable probability that WTB will expand into other banking markets," since at no time in its 70-year history has WTB established branches outside the Spokane area, acquired another bank, or received a merger offer other than the one at issue here. Pp. 418 U. S. 640-641.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which BRENNAN and MARSHALL, JJ., joined, post, p. 418 U. S. 642. DOUGLAS, J., took no part in the decision of this case.
MR. JUSTICE POWELL delivered the opinion of the Court.
The United States brought this civil antitrust action under § 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U.S.C. 18, to challenge a proposed merger between two commercial banks. The acquiring bank is a large, nationally chartered bank based in Seattle, Washington, and the acquired bank is a medium-size, state-chartered bank located at the opposite end of the State in Spokane. The banks are not direct competitors to any significant degree in Spokane or any other part of the State. They have no banking office in each other's home cities. The merger agreement would substitute the acquiring bank for the acquired bank in Spokane, and would permit the former for the first time to operate as a direct participant in the Spokane market.
The proposed merger would have no effect on the number of banks in Spokane. The United States bases its case exclusively on the potential competition doctrine under 7 of the Clayton Act. It contends that, if the merger is prohibited, the acquiring bank would find an alternative and more competitive means for entering the Spokane area, and that the acquired bank would ultimately develop by internal expansion or mergers with smaller banks into an actual competitor of the acquiring bank and other large banks in sections of the State outside Spokane. The Government further submits that the merger would terminate the alleged procompetitive influence that the acquiring bank presently exerts over Spokane banks due to the potential for it entry into that market.
After a full trial, the District Court held against the Government on all aspects of the case. We affirm that court's judgment. We hold that, in applying the potential
competition doctrine to commercial banking, courts must take into account the extensive federal and state regulation of banks, particularly the legal restraints on entry unique to this line of commerce. The legal barriers to entry in the instant case, notably state law prohibitions against de novo branching, against branching from a branch office, and against multibank holding companies, compel us to conclude that the challenged merger is not in violation of § 7.
The acquiring bank, National Bank of Commerce (NBC), is a national banking association with its principal office in Seattle, Washington. Located in the northwest corner of the State, Seattle is the largest city in Washington. NBC is a wholly owned subsidiary of a registered bank holding company, Marine Bancorporation, Inc. (Marine), and in terms of assets, deposits, and loans is the second largest banking organization with headquarters in the State of Washington. At the end of 1971, NBC had total assets of $1.8 billion, total deposits of $1.6 billion, and total loans of $881.3 million. [Footnote 1] It operates 107 branch banking offices within the State, 59 of which are located in the Seattle metropolitan area and 31 of which are in lesser developed sections of eastern Washington. In order of population, the four major
metropolitan areas in Washington are Seattle, Tacoma, Spokane, and Everett. NBC has no branch offices in the latter three areas.
The target bank, Washington Trust Bank (WTB), founded in 1902, is a state bank with headquarters in Spokane. Spokane is located in the extreme eastern part of the State, approximately 280 road miles from Seattle. It is the largest city in eastern Washington, with a population of 170,000 within the corporate limits and of approximately 200,000 in the overall metropolitan area. The city has a substantial commercial and industrial base. The surrounding region is sparsely populated, and is devoted largely to agriculture, mining, and timber. Spokane serves as a trade center for this region. NBC, the acquiring bank, has had a longstanding interest in securing entry into Spokane.
WTB has seven branch offices, six in the city of Spokane and one in Opportunity, a Spokane suburb. WTB is the eighth largest banking organization with headquarters in Washington and the ninth largest banking organization in the State. At the end of 1971, it had assets of $112 million, total deposits of $95.6 million, and loans of $57.6 million. It controls 17.4% of the 46 commercial banking offices in the Spokane metropolitan area. It is one of 12 middle-size banks in Washington (i.e., banks with assets in the $30 million to $250 million range).
WTB is well managed and profitable. From December 31, 1966, to June 30, 1972, it increased its percentage of total deposits held by banking organizations in the Spokane metropolitan area from 16.6% to 18.6%. The amount of its total deposits grew by approximately 50% during that period, a somewhat higher rate of increase than exhibited by all banking organizations operating in Spokane at the same time. [Footnote 2] Although WTB has exhibited
a pattern of moderate growth, at no time during its 70-year history has it expanded outside the Spokane metropolitan area.
As of June 30, 1972, there were 91 national and state banking organizations in Washington. The five largest in the State held 74.3% of the State's total commercial
bank deposits and operated 61.3% of its banking offices. At that time, the two largest in the State, Seattle-First National Bank and NBC, held 51.3% of total deposits and operated 36.5% of the banking offices in Washington. [Footnote 3] There are six banking organizations operating in the Spokane metropolitan area. One organization, Washington Bancshares, Inc., controls two separate banks and their respective branch offices. As of midyear 1972, this organization in the aggregate held 42.1% of total deposits in the area. Seattle-First National Bank, by comparison, held 31.6%. The target bank held 18.6% of total deposits at that time, placing it third in the Spokane area behind Washington Bancshares, Inc., and Seattle-First National Bank. Thus, taken together, Washington Bancshares, Seattle-First National Bank, and WTB hold approximately 92% of total deposits in the Spokane area. None of the remaining three commercial banks in Spokane holds a market share larger than 3.1% [Footnote 4] One of these banks, Farmers & Merchants Bank, has offices only in a Spokane suburb.
The degree of concentration of the commercial banking business in Spokane may well reflect the severity of Washington's statutory restraints on de novo geographic expansion by banks. Although Washington permits branching, the restrictions placed on that method of internal
growth are stringent. Subject to the approval of the state supervisor of banking, Washington banks with sufficient paid-in capital may open branches in the city or town in which their headquarters are located, the unincorporated areas of the county in which their headquarters are located, and incorporated communities which have no banking office. Wash.Rev.Code Ann. § 30.40.020 (Supp. 1973). But under state law, no state-chartered bank
"shall establish or operate any branch . . . in any city or town outside the city or town in which its principal place of business is located in which any bank, trust company or national banking association regularly transacts a banking or trust business, except by taking over or acquiring an existing bank, trust company or national banking association. . . ."
Ibid. Since federal law subjects nationally chartered banks to the branching limitations imposed on their state counterparts, [Footnote 5] national and state banks in Washington are restricted to mergers or acquisitions in order to expand into cities and towns with preexisting banking organizations.
The ability to acquire existing banks is also limited by a provision of state law requiring that banks incorporating in Washington include in their articles of incorporation a clause forbidding a new bank from merging with or permitting its assets to be acquired by another bank for a period of at least 10 years, without the consent of the state supervisor of banking. Wash.Rev.Code Ann. § 30.08.020(7) (1961 and Supp. 1973). [Footnote 6] In addition,
once a bank acquires or takes over one of the banks operating in a city or town other than the acquiring bank's principal place of business, it cannot branch from the acquired bank. Wash.Rev.Code Ann. § 30.40.020 (Supp. 1973). Thus, an acquiring bank that enters a new city or town containing banks other than the acquired bank is restricted to the number of bank offices obtained at the time of the acquisition. Moreover, multibank holding companies are prohibited in Washington. Wash.Rev.Code Ann. § 30.04.230 (Supp. 1973). [Footnote 7] Under state law, no
corporation in Washington may own, hold, or control more than 25% of the capital stock of more than one bank. Ibid. Violations of the one-bank holding company statute are gross misdemeanors carrying a possible penalty of forfeiture of a corporate charter. Ibid. Accordingly, it is not possible in Washington to achieve the rough equivalent of free branching by aggregating a number of unit banks under a bank holding company. [Footnote 8]
B. The Proceedings.
In February, 1971, Marine, NBC, and WTB agreed to merge the latter into NBC. NBC, as the surviving bank, would operate all eight banking office of WTB as branches of NBC. In March, 1971, NBC and WTB applied to the Comptroller of the Currency pursuant to the
Bank Merger ct of 1966 for approval of the merger. [Footnote 9] As required by that Act, see 12 U.S.C. § 1828(c)(4), the Comptroller requested "reports on the competitive factors involved" from the Attorney General, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. Each of these agencies submitted a negative report on the competitive effects of the merger. The Attorney General relied on the reasons advanced in the instant case. The latter two agencies based their conclusions primarily on the degree of concentration in commercial banking in Washington as a whole.
The Comptroller approved the merger in a report issued September 24, 1971. He concluded that state law precluded NBC from branching in Spokane and "effectively prevented" NBC from causing a new Spokane bank to be formed which could later be treated as a merger partner. He noted that state law prevented the only independent small bank with offices located within the city boundaries of Spokane from merging with NBC, since that bank was state chartered, had been founded in 1965, and was subject to the minimum 10-year restriction against sale of a new bank set out in Wash.Rev.Code
Ann. § 30.08.020(7) (1961 and Supp. 1973). The Comptroller relied heavily on the view that the merger would contribute to the convenience and needs of bank customers in Spokane by bringing to them services not previously provided by WTB.
Acting within the 30-day limitation period set out in the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(7), the United States then commenced this action in the United States District Court for the Western District of Washington, challenging the legality of the merger under § 7 of the Clayton Act. [Footnote 10] As a result, the merger was automatically stayed. 12 U.S.C. § 1828(c)(7)(A). Pursuant to 12 U.S.C. § 1828(c)(7)(D), the Comptroller intervened in support of the merger as a party defendant.
Prior to trial, the United States dropped all allegations concerning actual competition between the merger partners. [Footnote 11] The remainder of the complaint addressed the subject of potential competition. The United States
sought to establish that the merger "may . . . substantially . . . lessen competition" within the meaning of § 7 in three ways: by eliminating the prospect that NBC, absent acquisition of the market share represented by WTB, would enter Spokane de novo or through acquisition of a smaller bank, and thus would assist in deconcentrating that market over the long run; by ending present procompetitive effects allegedly produced in Spokane by NBC's perceived presence on the fringe of the Spokane market; and by terminating the alleged probability that WTB as an independent entity would develop through internal growth or through mergers with other medium-size banks into a regional or ultimately state-wide counterweight to the market power of the State's largest banks. The Government's first theory -- alleged likelihood of de novo or foothold entry by NBC if the challenged merger were blocked -- was the primary basis upon which this case was presented to the District Court. [Footnote 12]
At the close of final oral argument following a week-long trial, the District Judge ruled for the defendants from the bench. Two weeks later, he adopted without change the defendants' proposed findings of facts and conclusions of law, the latter consisting of seven sentences. 1971 Trade Cas.
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