Section 7 of the Clayton Act forbids one corporation to acquire
stock of another corporation (both being engaged in interstate
commerce), where the effect of such acquisition may be to
substantially lessen competition between them or to restrain such
commerce in any section or community, and declares that it shall
not apply to corporations purchasing such stock solely for
investment and not using the same to bring about the substantial
lessening of competition.
Held:
(1) In a suit to enforce an order of the Federal Trade
Commission requiring one corporation to divest itself of the stock
of another alleged to have been acquired by the former in violation
of this section, findings of the Commission that substantial
competition existed between the two corporations at the time of
such acquisition and that the effect of such acquisition was
substantially to lessen such competition and to restrain interstate
commerce cannot be accepted if not supported by the evidence. P.
280 U. S.
297.
Page 280 U. S. 292
(2) The section forbids only such stock acquisitions as probably
will result in lessening competition to a substantial degree --
i.e., to such a degree as will injuriously affect the
public, and is inapplicable where there was no preexisting
substantial competition to be affected. P.
280 U. S.
297.
(3) In the present case, it is plain that the products of the
two shoe manufacturing companies in question, because of the
difference in appearance and workmanship, appealed to the tastes of
entirely different classes of consumers; that, while a portion of
the product of each company went into the same states, in the main
the product of each was in fact sold to a different class of
dealers, and found its way into distinctly separate markets, so
that, in respect of 95% of the business, there was no competition
in fact and no contest, or observed tendency to contest, in the
market for the same purchasers, and when this is eliminated, what
remains is of such slight consequence as to deprive the finding
that there was any substantial competition between the two
corporations of any real support in the evidence. Pp.
280 U. S. 296,
280 U. S.
298.
(4) The existence of competition is a fact to be disclosed by
observation, rather than by the processes of logic, and the
testimony of the officers of the corporation proceeded against that
there was no real competition between it and the other in respect
of the products in question is to be weighed like other testimony
to matters of fact, and, in the absence of contrary testimony or
reason for doubting the accuracy of observation or the credibility
of the witnesses, should be accepted. P.
280 U. S.
299.
(5) In the case of a corporation with resources so depleted, and
the prospect of rehabilitation so remote, that it faces the grave
probability of a business failure, with resulting loss to its
stockholders and injury to the communities where its plants are
operated, 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 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. P.
280 U. S.
301.
9 F.2d 518 reversed.
Certiorari, 279 U.S. 832, to review a judgment of the circuit
court of appeals affirming on appeal an order of the Federal Trade
Commission.
Page 280 U. S. 293
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
This was a proceeding instituted by complaint of the Federal
Trade Commission against petitioner charging a violation of § 7 of
the Clayton Act, 38 Stat. 730, 731, c. 323 (U.S.C., title 15, §
18), which provides:
"No corporation engaged in commerce shall acquire, directly or
indirectly, the whole or any part of the stock or other share
capital of another corporation engaged also in commerce where the
effect of such acquisition may be to substantially lessen
competition between the corporation whose stock is so acquired and
the corporation making the acquisition, or to restrain such
commerce in any section or community, or tend to create a monopoly
of any line of commerce."
"
* * * *"
"This section shall not apply to corporations purchasing such
stock solely for investment and not using the same by voting or
otherwise to bring about, or in attempting to bring about, the
substantial lessening of competition."
The complaint charges that, in May, 1921, while petitioner and
the W. H. McElwain Company were engaged in commerce in competition
with each other, petitioner acquired all, or substantially all, of
the capital stock of the McElwain Company, and still owns and
controls the
Page 280 U. S. 294
same; that the effect of such acquisition was to substantially
lessen competition between the two companies; to restrain commerce
in the shoe business in the localities where both were engaged in
business in interstate commerce, and to tend to create a monopoly
in interstate commerce in such business. The last-named charge has
not been pressed, and may be put aside. Upon a hearing before the
Commission, evidence was introduced from which the Commission
found: (a) that the capital stock of the McElwain Company had been
acquired by the petitioner at the time charged in the complaint;
(b) that the two companies were at the time in substantial
competition with one another, and (c) that the effect of the
acquisition was to substantially lessen competition between them
and to restrain commerce. Thereupon the Commission put down an
order directing petitioner to divest itself of all capital stock of
the McElwain Company then held or owned, directly or indirectly, by
petitioner, and to cease and desist from the ownership, operation,
management, and control of all assets acquired from the McElwain
Company subsequent to the acquisition of the capital stock, etc.,
and to divest itself of all such assets, etc. Upon appeal by
petitioner to the court below, the order of the Commission was
affirmed. 29 F.2d 518.
The principal grounds upon which the order here is assailed are:
(1) that there never was substantial competition between the two
corporations, and therefore no foundation for the charge of
substantial lessening of competition; (2) that, at the time of the
acquisition, the financial condition of the McElwain Company was
such as to necessitate liquidation or sale, and therefore the
prospect for future competition or restraint was entirely
eliminated. Since, in our opinion, these grounds are determinative,
we find it unnecessary to consider the challenge to the sufficiency
of the complaint and other contentions.
Page 280 U. S. 295
First. Prior to the acquisition of the capital stock in
question, the International Shoe Company was 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 purchasers practically throughout the United States.
The McElwain Company, a Massachusetts corporation with its
principal office in Boston, also manufactured shoes and sold and
distributed them in several states of the Union. Principally, it
made and sold dress shoes for men and boys. The International made
and sold a line of men's dress shoes of various styles, which,
although comparable in price, and to some degree in quality, with
the men's dress shoes produced by the McElwain Company, differed
from them in important particulars. Such competition as there was
between the two companies related alone to men's dress shoes.
The findings of the Commission that this competition between the
two companies was substantial and, by the acquisition of the stock
of the McElwain Company, had been substantially lessened, the court
of appeals affirmed, holding that they were fully supported by the
evidence. Upon a careful review of the record we think the evidence
requires a contrary conclusion.
It is true that both companies were engaged in selling dress
shoes to customers for resale within the limits of several of the
same states; but the markets reached by the two companies within
these states, with slight exceptions hereafter mentioned, were not
the same. Certain substitutes for leather were used to some extent
in the making of the McElwain dress shoes, and they were better
finished, more attractive and modern in appearance, and appealed
especially to city trade. The dress shoes of the International were
made wholly of leather and were of a better wearing quality; but
among the
Page 280 U. S. 296
retailers who catered to city or fashionable wear, the McElwain
shoes were preferred. The trade policies of the two companies so
differed that the McElwain Company generally secured the trade of
wholesalers and large retailers, while the International obtained
the trade of dealers in the small communities. When requested, the
McElwain Company stamped the name of the customer (that is, the
dealer) upon the shoes, which the International refused to do, and
this operated to aid the former company to get, as generally it did
get, the trade of the retailers in the larger cities. As an
important result of the foregoing circumstances, witnesses
estimated that about 95 percent of the McElwain sales were in towns
and cities having a population of 10,000 or over; while about 95
percent of the sales of the International were in towns having a
population of 6,000 or less. The bulk of the trade of each company
was in different sections of the country, that of the McElwain
Company being north of the Ohio river and east of the state of
Illinois, while that of the International was in the south and
west. An analysis of the sales of the International for the twelve
months preceding the acquisition of the McElwain capital stock
discloses that, in 42 states, no men's dress shoes were sold to
customers of the McElwain Company, and that, in the remaining six
states during the same period, a total of only 52 5/12 dozen pairs
of such shoes had been sold to sixteen retailers and three
wholesalers who were also customers of the McElwain Company. This
amounted to less than one-fourth of the production of dress shoes
by the International for a single day, the daily production being
about 250 dozen pairs.
It is plain from the foregoing that the product of the two
companies here in question, because of the difference in appearance
and workmanship, appealed to the tastes of entirely different
classes of consumers; that, while a
Page 280 U. S. 297
portion of the product of both companies went into the same
states, in the main, the product of each was in fact sold to a
different class of dealers and found its way into distinctly
separate markets. Thus, it appears that, in respect of 95 percent
of the business, there was no competition in fact and no contest,
or observed tendency to contest, in the market for the same
purchasers, and it is manifest that, when this is eliminated, what
remains is of such slight consequence as to deprive the finding
that there was substantial competition between the two corporations
of any real support in the evidence. The rule to be followed is
stated in federal
Trade Comm'n v. Curtis Co., 260 U.
S. 568,
260 U. S.
580:
"Manifestly, the court must inquire whether the Commission's
findings of fact are supported by evidence. If so supported, they
are conclusive. But, as the statute grants jurisdiction to make and
enter, upon the pleadings, testimony and proceedings, a decree
affirming, modifying, or setting aside an order, the court must
also have power to examine the whole record and ascertain for
itself the issues presented and whether there are material facts
not reported by the Commission. If there be substantial evidence
relating to such facts from which different conclusions reasonably
may be drawn, the matter may be and ordinarily, we think, should be
remanded to the Commission -- the primary factfinding body -- with
direction to make additional findings, but if from all the
circumstances it clearly appears, that in the interest of justice,
the controversy should be decided without further delay, the court
has full power under the statute so to do. The language of the
statute is broad, and confers power of review not found in the
Interstate Commerce Act."
Section 7 of the Clayton Act, as its terms and the nature of the
remedy prescribed plainly suggest, was intended for the protection
of the public against the evils
Page 280 U. S. 298
which were supposed to flow from the undue lessening of
competition. In
Standard Oil Co. v. Federal Trade
Commission, 282 F. 81, 87, the Court of Appeals for the Third
Circuit applied the test to the Clayton Act which had therefore
been held applicable to the Sherman Act, namely, that the standard
of legality was the absence or presence of prejudice to the public
interest by unduly restricting competition or unduly obstructing
the due course of trade. In
Federal Trade Comm'n v. Sinclair
Co., 261 U. S. 463,
261 U. S. 476,
referring to the Clayton Act and the Federal Trade Commission Act,
this Court said:
"The great purpose of both statutes was to advance the public
interest by securing fair opportunity for the play of the
contending forces ordinarily engendered by an honest desire for
gain."
Mere acquisition by one corporation of the stock of a
competitor, even though it result in some lessening of competition,
is not forbidden; the act deals only with such acquisitions as
probably will result in lessening competition to a substantial
degree,
Standard Fashion Co. v. Magrane-Houston Co.,
258 U. S. 346,
258 U. S. 357
-- that is to say, to such a degree as will injuriously affect the
public. Obviously such acquisition will not produce the forbidden
result if there be no preexisting substantial competition to be
affected; for the public interest is not concerned in the lessening
of competition, which, to begin with, is itself without real
substance. To hold that the 95 percent of the McElwain product,
sold in the large centers of population to meet a distinct demand
for that particular product, was sold in competition with the 95
percent of the International product sold in the rural sections and
the small towns to meet a wholly different demand, is to apply the
word "competition" in a highly deceptive sense. And if it be
conceded that the entire remaining five percent of each company's
product (although clearly it was materially less than that) was
sold
Page 280 U. S. 299
in competitive markets, it is hard to see in this competition of
such substance as to fall within the serious purposes of the
Clayton Act.
Compare Industrial Assn. v. United States,
268 U. S. 64,
268 U. S.
84.
In addition to the circumstances already cited, the officers of
the International testified categorically that there was in fact no
substantial competition between the companies in respect of these
shoes, but that, at most, competition was incidental and so
imperceptible that it could not be located. The existence of
competition is a fact disclosed by observation, rather than by the
processes of logic, and when these officers, skilled in the
business which they have carried on, assert that there was no real
competition in respect of the particular product, their testimony
is to be weighed like that in respect of other matters of fact.
And, since there is no testimony to the contrary and no reason
appears for doubting the accuracy of observation or credibility of
the witnesses, their statements should be accepted.
It follows that the conclusion of the Commission and the court
below to the effect that the acquisition of the capital stock in
question would probably result in a substantial lessening of
competition must fail for lack of a necessary basis upon which to
rest.
Second. Beginning in 1920, there was a marked falling
off in prices and sales of shoes, as there was in other
commodities; and, because of excessive commitments which the
McElwain Company had made for the purchase of hides, as well as the
possession of large stocks of shoes and an inability to meet its
indebtedness for large sums of borrowed money, the financial
condition of the company became such that its officers, after long
and careful consideration of the situation, concluded that the
company was faced with financial ruin, and that the only
alternatives presented were liquidation through a receiver or an
outright sale. New orders were not coming in; losses
Page 280 U. S. 300
during 1920 amounted to over $6,000,000; 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 60 or 70 banks
and trust companies, and, in addition, nearly $2,000,000 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 6,000 or 7,000
pairs. An examination of its balance sheets and statements, and the
testimony of its officers and others conversant with the situation
clearly shows that the company had reached the point where it could
no longer pay its debts as they became due. In the face of these
adverse circumstances, it became necessary, under the laws of
Massachusetts, to make up its annual financial statement which,
when filed, would disclose a condition of insolvency, as that term
is defined by the statute and decisions of the state, General Laws
1921, c. 106, § 65(3);
Holbrook v. International Trust
Co., 220 Mass. 150, 155;
Steele v. Commissioner of
Banks, 240 Mass. 394, 397, and thus bring the company to the
point of involuntary liquidation. In this situation, dividends on
second preferred and common stock were discontinued, and the first
preferred stockholders were notified that the company was
confronted with the necessity of discontinuing dividends on that
class of stock as well.
The condition of the International Company, on the contrary,
notwithstanding these adverse conditions in the shoe trade
generally, was excellent. That company had so conducted its affairs
that its surplus stock was not excessive, and it was able to reduce
prices. Instead of a decrease, it had an increase of business of
about 25 percent in the number of shoes made and sold. During the
early months of 1921, orders exceeded the ability of the company to
produce, so that approximately one-third of
Page 280 U. S. 301
them were necessarily cancelled. In this situation, with demands
for its products so much in excess of its ability to fill them, the
International was approached by officers of the McElwain Company
with a view to a sale of its property. After some negotiation, the
purchase was agreed upon. The transaction took the form of a sale
of the stock, instead of the assets, not, as the evidence clearly
establishes, because of any desire or intention to thereby affect
competition, but because, by that means, the personnel and
organization of the McElwain factories could be retained, which,
for reasons that seem satisfactory, was regarded as vitally
important. It is perfectly plain from all the evidence that the
controlling purpose of the International in making the purchase in
question was to secure additional factories, which it could not
itself build with sufficient speed to meet the pressing
requirements of its business.
Shortly stated, the evidence establishes the case of a
corporation in failing circumstances, the recovery of which to a
normal condition was, to say the least, in gravest doubt, selling
its capital to the only available purchaser in order to avoid what
its officers fairly concluded was a more disastrous fate. It was
suggested by the court below, and also here in argument, that,
instead of an outright sale, any one of several alternatives might
have been adopted which would have saved the property and preserved
competition; but, as it seems to us, all of these may be dismissed
as lying wholly within the realm of speculation. The company might,
as suggested, have obtained further financial help from the banks,
with a resulting increased load of indebtedness which the company
might have carried and finally paid, or, on the other hand, by the
addition of which it might more certainly have been crushed. As to
that, one guess in as good as the other. It might have availed
itself of a receivership,
Page 280 U. S. 302
but no one is wise enough to predict with any degree of
certainty whether such a course would have meant ultimate recovery
or final and complete collapse. If it had proceeded, or been
proceeded against, under the Bankruptcy Act, holders of the
preferred stock might have paid or assumed the debts and gone
forward with the business; or they might have considered it more
prudent to accept whatever could be salvaged from the wreck and
abandon the enterprise as a bad risk.
As between these and all other alternatives, and the alternative
of a sale such as was made, the officers, stockholders, and
creditors, thoroughly familiar with the factors of a critical
situation and more able than Commission or court to foresee future
contingencies, after much consideration, felt compelled to choose
the latter alternative. There is no reason to doubt that, in so
doing, they exercised a judgment which was both honest and well
informed, and if aid be needed to fortify their conclusion, it may
be found in the familiar presumption of rightfulness which attaches
to human conduct in general.
Bank of the U.S. v.
Dandridge, 12 Wheat. 64,
25 U. S. 69.
Aside from these considerations, the soundness of the conclusion
which they reached finds ample confirmation in the facts already
discussed and others disclosed by the record.
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 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
Page 280 U. S. 303
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
United States v. U.S. Steel
Corp., 251 U. S. 417,
251 U. S.
446-447, would "seem a distempered view of purchase and
result."
See also American Press Assn. v. United States,
245 F. 91, 93-94.
For the reasons appearing under each of the two foregoing heads
of this opinion, the judgment below must be
Reversed.
Opinion of MR. JUSTICE STONE.
That the facts found by the Commission are a violation of § 7 of
the Clayton Act is not questioned. Under § 11, 38 Stat. 730
(U.S.C., title 15, § 21), the findings of the Commission, "if
supported by testimony" and the inferences which it may reasonably
draw from the facts proved or admitted, are conclusive upon us.
See Federal Trade Commission v. Pacific States Paper
Assn., 273 U. S. 52.
Congress has thus forbidden the substitution of the judgment of
courts for that of the Commission where it is founded upon
evidence. Conforming to this requirement, I cannot say that its
conclusions here lack the prescribed support. Even without such
statutory limitation, this Court will not set aside the findings of
an administrative board or Commission, upheld, as in the present
case, by a unanimous court below, unless the record establishes
that clear and unmistakable error has been committed.
Cincinnati, H. & D. Ry. Co. v. Interstate Commerce
Comm'n, 206 U. S. 142,
206 U. S. 154;
Cincinnati, N.O. & Texas Ry. v. Interstate Commerce
Comm'n, 162 U. S. 184,
162 U. S. 194;
Illinois Central R. Co. v. Interstate Commerce Comm'n,
206 U. S. 441,
206 U. S.
466.
The opinion of the court and the general testimony of
petitioner's officers of their conclusions that there was no
competition between the two corporations (
See United
Page 280 U. S. 304
States v. Trenton Potteries Co., 273 U.
S. 392) seem to proceed on the assumption that
manufacturers, each engaged in marketing a product comparable in
price and adapted to the satisfaction of the same need, do not
compete if they do not sell to the same distributors.
Without stating it in detail, there appears to me to be abundant
evidence that the competitive products -- made by two of the
largest shoe manufacturers in the world -- reached the same local
communities through different agencies of distribution; the one of
petitioner through sales directly to retailers throughout the
United States, the other, of the McElwain Company, through sales in
thirty-eight states, chiefly to wholesalers located in cities, who
in turn sold to the retail trade. From detailed evidence of this
type, the Commission drew, as I think it reasonably might, the
inference that the rival products, through local retailers, made
their appeal to the same buying public, and so were competitive.
From a comparative study of the statistics of sales, the Commission
might also, I think, reasonably have found that the McElwain
Company was successfully competing, by securing by far the larger
proportion of the trade in this type of shoe, its gross sales of
dress shoes in 1920 being more than $33,000,000 and in 1921 more
than $15,000,000, as compared with petitioner's sales of its
similar dress shoes of approximately $2,500,000.
No useful purpose would be served by reviewing the evidence at
length. To refer to only two of the many items which support the
findings of the Commission, the fact relied upon, that petitioner,
in the year ending May 31, 1921, sold only 52 5/12 dozen pairs of
the competing shoes to dealers patronizing the McElwain Company,
would seem to be without significance in the light of other
evidence that, in one state, Missouri, where petitioner sold its
product to 4,801 of the 5,150 retail shoe dealers in the state, the
McElwain Company sold in the same
Page 280 U. S. 305
year, chiefly through wholesalers and independent jobbers,
25,669 dozen pairs of the competing product. It appears that, in
1921, petitioner sold its shoes to every retailer in Kentucky,
Tennessee, and Texas. In that year, when the value of the gross
sales of the McElwain Company had been cut in half by business
depression, it sold in those states 8,791 dozen pairs of its
competing product, chiefly through independent jobbers, in addition
to its sales in that territory through wholesale houses at
Columbus, Ohio, and Chicago.
Apart from the more general testimony that both companies sold
extensively in the same states and in the same cities, the
inference from this evidence seems irresistible that, in these
states, as was the case in others,
* the competing
products were not only offered through different systems of
distribution to the same retailers, but were by them offered and
sold to the ultimate consumers in their communities. Both products
being made and suitable for the same use, the fact that each
presented some minor advantages over the other, it might reasonably
be inferred, would tend to increase, rather than diminish, the
competition. In fact, the chairman of petitioner's board of
directors testified that its 500 salesmen were unsuccessful in
their efforts to increase in sales of its Patriot Brand of dress
shoes (the alleged competitive product) above about 3,000 pairs a
day because they were unable to convince retailers of the
superiority of petitioner's more serviceable dress shoes over the
better
Page 280 U. S. 306
looking dress shoes of the type manufactured by the McElwain
Company.
Nor am I able to say that the McElwain Company, for the stock of
which petitioner gave its own stock having a market value of
$9,460,000, was then in such financial straits as to preclude the
reasonable inference by the Commission that its business, conducted
either through a receivership or a reorganized company, would
probably continue to compete with that of petitioner.
See
Standard Fashion Co. v. Magrane-Houston Co., 258 U.
S. 346,
258 U. S.
356-357. It plainly had large value as a going concern,
there was no evidence that it would have been worth more or as much
if dismantled, and there was evidence that the depression in the
shoe trade in 1920-1921 was then a passing phase of the business.
For these reasons and others stated at length in the opinion of the
court below, I think the judgment should be affirmed.
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS concur in this
opinion.
* The petitioner sold to three retail dealers in every four in
Illinois. The McElwain Company sold 9,547 dozen pairs of competing
shoes to independent jobbers and retailers in that state. In
addition, an affiliated wholesale house located in Chicago sold
about 18,000 dozen pairs. In California, where the International
Shoe Company sold to seven retail dealers in every ten, the
McElwain Company sold 1,586 dozen pairs to retailers and
independent jobbers, and an affiliated wholesaler located at San
Francisco sold, almost wholly within the state, about 10,000 dozen
pairs of the competing shoes.