Coca-Cola Bottling Co. of the Southwest v. F.T.C. ( 1996 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 94-41224
COCA-COLA BOTTLING COMPANY
OF THE SOUTHWEST,
Petitioner,
versus
FEDERAL TRADE COMMISSION,
Respondent.
Petition for Review of an Order of the
Federal Trade Commission
June 10, 1996
Before REAVLEY, HIGGINBOTHAM, and BARKSDALE, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Today we review a divestiture order of the Federal Trade
Commission. We must decide whether the Soft Drink Interbrand
Competition Act of 1980, 15 U.S.C. § 3501-03, governs the antitrust
legality of an exclusive territorial soft drink license previously
held by a competing soft drink bottler that was a subsidiary of the
licensor. The FTC seeks to undo a 1984 transaction in which the Dr
Pepper Company, a manufacturer of soft drink concentrates and
syrups, licensed the Coca-Cola Bottling Company of the Southwest,
a Texas bottler, to distribute exclusively the Dr Pepper soft drink
brand in a defined territory. The FTC found the Soft Drink Act
inapplicable, ruling that the 1984 licensing of Coca-Cola Southwest
and withdrawal of Dr Pepper from distribution was substantially
likely to lessen competition in violation of § 5 of the Federal
Trade Commission Act, 15 U.S.C. § 45, and § 7 of the Clayton Act,
15 U.S.C. § 18.
We hold that the FTC used the wrong legal standard in finding
that § 5 of the FTC Act prohibited this change in distribution. We
vacate the FTC's divestiture order and remand for a consideration
of the transaction's validity under the Soft Drink Act.
I.
A.
Petitioner, Coca-Cola Bottling Company of the Southwest, is a
regional bottler and fountain distributor of Coca-Cola, Dr Pepper,
and other soft drink brands in South and Central Texas. Coca-Cola
Southwest operates with trademark licenses from manufacturers of
soft drink concentrates and syrups, the flavoring ingredients in
retail soft drink beverages. A license creates an exclusive
territorial franchise whereby the manufacturer supplies soft drink
concentrates and syrups to its licensee, which bottles and sells
the branded soft drinks in a defined geographic area.
The Dr Pepper Company is the nationwide manufacturer of
concentrate and syrup for its Dr Pepper soft drink brand. At issue
in this appeal is a 1984 transaction in which Dr Pepper Company
licensed Coca-Cola Southwest to bottle and distribute Dr Pepper
soft drinks in a ten-county territory around San Antonio, Texas.
Until 1984, Dr Pepper Company was a publicly held corporation that
2
did not distribute through an independent bottler in the San
Antonio area. Rather, it carried its product to the consumer
through its wholly owned bottling subsidiary, San Antonio Dr Pepper
Bottling Company. Dr Pepper-San Antonio was also the exclusive
bottler for other concentrate manufacturers, including Canada Dry,
Big Red, Royal Crown, Crush, and Hires. Here began the events
leading directly to the distribution changes attacked by the FTC.
In 1984, Forstmann Little acquired Dr Pepper Company in a
leveraged buyout. After the buyout, Forstmann Little arranged for
Dr Pepper Company to sell its company-owned bottling operations,
including Dr Pepper-San Antonio, and to distribute through
independent bottlers. Dr Pepper Company attempted to sell the San
Antonio bottling operation as a whole, but was unable to do so.
Coca-Cola Southwest was interested in the subsidiary's Dr Pepper
and Canada Dry licenses, but had no need for its main production
facility. Unable to sell its entire bottling operation, Dr Pepper
licensed Coca-Cola Southwest. Coca-Cola Southwest paid $14.5
million to Dr Pepper for a license to bottle and sell Dr Pepper and
Canada Dry.1 Coca-Cola Southwest also purchased certain of Dr
Pepper Company's property used in distributing its product: a
warehouse, 2150 used vending machines, and 40% of its used delivery
and over-the-road trucks, for $2.5 million.
After the August 1984 transaction, Dr Pepper-San Antonio
retained ownership of its bottling plant and its licenses for
1
Coca-Cola Southwest initially bid $5 million for both the Dr
pepper and Canada Dry franchises, but subsequently increased its
offer to $14.5 million.
3
brands other than Dr Pepper and Canada Dry, and for a short while
thereafter, Dr Pepper Company continued operating the subsidiary as
a bottler and distributor for these other brands in its 28-county
territory.2 Later that year, Dr Pepper Company sold Dr Pepper-San
Antonio's bottling plant and its other property and rights to a new
entrant, Grant-Lydick Beverage Company. Thus, by the end of 1984,
Dr Pepper Company had withdrawn from bottling and distribution in
two separate transactions, involving Coca-Cola Southwest and then
Grant-Lydick. Coca-Cola Southwest held the licenses for the Dr
Pepper and Canada Dry brands, along with a handful of Dr Pepper-San
Antonio's assets, while Grant-Lydick had obtained the subsidiary's
remaining assets and rights, its bottling plant and other
licenses,3 including Big Red, Royal Crown, Crush, and Hires.
On July 29, 1988, the FTC issued an administrative complaint
challenging Coca-Cola Southwest's 1984 receipt of the Dr Pepper and
Canada Dry licenses.4 The complaint alleged that this acquisition
2
At the time of the August 1984 transaction, there were a
total of five competing soft-drink bottlers operating in San
Antonio, including Coca-Cola Southwest and Dr Pepper-San Antonio.
After 1984, Coca-Cola Southwest was involved in two additional
transactions resulting in its receipt of new licenses from the Dr
Pepper Company. First, in December 1986, Texas Bottling Group,
Inc. purchased Coca-Cola Southwest; the FTC and the Dr Pepper
Company were notified of the transaction, after which Dr Pepper
Company issued new Dr Pepper licenses to Coca-Cola Southwest.
Texas Bottling Group is still the sole shareholder of Coca-Cola
Southwest. Second, in April 1987, Coca-Cola Southwest acquired the
assets of the bottler of Dr Pepper and Coca-Cola soft drink
products in Corpus Christi; again, as part of that transaction, the
Dr Pepper Company issued new Dr Pepper licenses [to Coca-Cola
Southwest] for the adjacent Corpus Christi territory.
The FTC explains that it did not find out about the 1984
transaction until after it was completed, noting that Coca-Cola
4
substantially lessened competition in violation of § 5 of the FTC
Act, 15 U.S.C. § 45, and § 7 of the Clayton Act, 15 U.S.C. § 18.
It sought, inter alia, to require Coca-Cola Southwest to divest the
Dr Pepper and Canada Dry licenses and assets acquired in 1984.
An administrative law judge held a thirteen-week hearing
beginning on July 10, 1990. On June 14, 1991, the ALJ rendered his
initial decision in favor of Coca-Cola Southwest, concluding that
a reduction in competition was unlikely and ordering dismissal of
the complaint. 5 The FTC's complaint counsel appealed to the full
Commission. On August 31, 1994, the Commission entered a decision
reversing the ALJ's initial decision.6 The Commission declined to
consider Coca-Cola Southwest's 1984 receipt of the Dr Pepper and
Canada Dry licenses under the Soft Drink Interbrand Competition Act
of 1980, 15 U.S.C. § 3501-03, and instead agreed with complaint
counsel that Coca-Cola Southwest's acquisition of the Dr Pepper
franchise violated the FTC Act and the Clayton Act. For different
reasons than those set forth by the ALJ, the Commission ruled that
Southwest's purchase of the Dr Pepper assets was broken into two
contracts (the $14.5 million acquisition and a $2.5 million sales
agreement), each of which was below the Hart-Scott-Rodino Act's
reporting threshold of $15 million.
The ALJ determined that (1) the relevant product market
included all carbonated soft drinks and other similar non-
carbonated soft drinks; (2) the relevant geographic market was
broader than the ten-county San Antonio area pled by Complaint
Counsel; (3) entry was easy; (4) competition had been fierce; (5)
no customer had complained about the situation; and (6) there was
no likelihood of anticompetitive effects from Coca-Cola Southwest's
receipt of the 1984 Dr Pepper licenses.
Three Commissioners participated in the decision; one filed a
concurring and dissenting opinion, and the author of the main
opinion also filed a separate concurring opinion.
5
Coca-Cola Southwest's receipt of the Canada Dry franchise did not
violate the federal antitrust laws.7 Accordingly, the Commission
entered a Final Order requiring Coca-Cola Southwest to divest the
Dr Pepper license and to obtain prior approval from the Commission
before acquiring any additional branded soft-drink assets in areas
in which Coca-Cola Southwest was already doing business.
On October 7, 1994, Coca-Cola Southwest filed a motion for
reconsideration and a stay before the Commission. The Commission,
however, never acted on those motions. On November 22, 1994, Coca-
Cola Southwest petitioned for review of the Commission's decision.8
II.
Coca-Cola Southwest challenges the Commission's divestiture
order on multiple grounds. Coca-Cola Southwest argues that the
Commission erred in refusing to apply the Soft Drink Interbrand
Competition Act; in defining the relevant product and geographic
markets; in its findings of barriers to entry; in refusing to allow
Coca-Cola Southwest to rebut certain documents admitted after the
close of evidence; and in according insufficient weight to certain
evidence that favored Coca-Cola Southwest.
Although this case does not yield an easy answer, we are
persuaded that the FTC should have applied the Soft Drink Act in
The FTC found that Coca-Cola Southwest's receipt of the "Dr
Pepper" and "Canada Dry" franchises increased its share of the
relevant market from 44.7% to 54.5%.
The divestiture order is automatically stayed pending this
appeal. 15 U.S.C.A. § 45(g)(4).
6
this instance. We decline to reach Coca-Cola Southwest's remaining
contentions.
A.
We review de novo the question whether the FTC erred in not
applying the Soft Drink Act's legal standard in this case.
The FTC's administrative complaint against Coca-Cola Southwest
charged that the effect of Coca-Cola Southwest's 1984 acquisition
of the exclusive Dr Pepper license for the San Antonio area may be
substantially to lessen competition in soft drink products in that
area in violation of § 5 of the FTC Act, 15 U.S.C. § 45, and § 7 of
the Clayton Act, 15 U.S.C. § 18.9 Coca-Cola Southwest argues that
the FTC erred in examining the 1984 transaction under the Clayton
Act's "effect-may-be-substantially-to-lessen-competition" standard.
According to Coca-Cola Southwest, the Soft Drink Act supersedes the
FTC and Clayton Acts and legitimizes its receipt and use of the Dr
Pepper license for the San Antonio Area so long as the Dr Pepper
brand "is in substantial and effective competition with other
9
Section 7 of the Clayton Act provides: "No corporation
engaged in commerce shall acquire, directly or indirectly, the
whole or any part of the stock or other share capital and no
corporation subject to the jurisdiction of the Federal Trade
Commission shall acquire the whole or any part of the assets of
another corporation engaged also in commerce, where in any line of
commerce in any section of the country, the effect of such
acquisition may be substantially to lessen competition, or to tend
to create a monopoly." 15 U.S.C. § 18. Section 5 of the FTC Act
empowers the FTC with authority to attack transactions that are
unlawful under § 7 of the Clayton Act: "Unfair methods of
competition in commerce, and unfair or deceptive acts or practices
in commerce, are declared unlawful." 15 U.S.C. § 45(a)(1). The
FTC may enter an "order requiring such person, partnership, or
corporation to cease and desist from using such method of
competition or such act or practice." 15 U.S.C. § 45(b).
7
products of the same general class in the relevant market or
markets." 15 U.S.C. § 3501.
Congress enacted the Soft Drink Act in response to two cases
from the 1970's10 in which the FTC ruled that exclusive territories
used by the Coca-Cola Company and PepsiCo were unlawful vertical
restraints of trade in violation of § 5 of the FTC Act. H.R. Rep.
No. 96-1118, 96th Cong., 2d Sess. 3-4 (1980), reprinted in 1980
U.S.C.C.A.N. 2373, 2375; S. Rep. No. 96-645, 96th Cong., 2d Sess.
6-9 (1980). Congress passed the Soft Drink Act to assure that
territorial restrictions in soft drink licenses would be evaluated
under the rule of reason analysis as articulated in Continental
T.V. Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977). To that end,
the Soft Drink Act provides, in relevant part:
Nothing contained in any antitrust law shall render
unlawful the inclusion and enforcement in any trademark
licensing contract or agreement, pursuant to which the
licensee engages in the manufacture (including manufacture by
a sublicensee, agent, or subcontractor), distribution, and
sale of a trademarked soft drink product, of provisions
granting the licensee the sole and exclusive right to
manufacture, distribute, and sell such product in a defined
geographic area or limiting the licensee, directly or
indirectly, to the manufacture, distribution, and sale of such
product for ultimate resale to consumers within a defined
geographic area: Provided, That such product is in
substantial and effective competition with other products of
the same general class in the relevant market or markets.
15 U.S.C. § 3501. The Soft Drink Act defines "antitrust law" to
mean the Sherman Act, 15 U.S.C. 1 et seq., the Clayton Act, and the
FTC Act, see 15 U.S.C. § 3503; its plain text thus establishes that
10
See The Coca-Cola Co., 91 F.T.C. 517 (1978), rev'd and
remanded, 642 F.2d 1387 (D.C. Cir. 1981); Pepsico, Inc., 91 F.T.C.
680 (1978), rev'd and remanded, 642 F.2d 1387 (D.C. Cir. 1981).
8
the FTC and Clayton Acts cannot "render unlawful" an exclusive
territorial restriction in a soft drink license so long as the
licensed brand "is in substantial and effective competition" with
comparable soft drink products in the relevant market. If the Soft
Drink Act applies and the requisite "substantial and effective
competition" exists, the FTC cannot enforce the FTC Act or Clayton
Act in a manner that invalidates the exclusivity provisions in
Coca-Cola Southwest's Dr Pepper license for the San Antonio area.
The FTC contends that while the Soft Drink Act authorizes the
use of territorial restrictions in soft drink licenses, it does not
govern the legality of a horizontal combination of such licenses.
Thus, the FTC insists that the Soft Drink Act is inapplicable here
"[b]ecause this case concerns only the validity of combining in one
bottler the franchises of two competing brands, and in no way
challenges the legality of exclusive territorial restrictions."
According to the FTC:
At issue in this proceeding is whether a combination of the
Coca-Cola franchise with the Dr Pepper franchise in the San
Antonio market may substantially lessen competition in
violation of §§ 5 of the FTC Act and 7 of the Clayton Act.
The Commission is not challenging the right of [Dr Pepper
Company], or any other concentrate manufacturer, to grant an
exclusive franchise for its brand, but only a bottler's right
to acquire a competing bottler's franchise where competition
in the relevant market may be adversely affected. The
Commission has in no way attacked the legality of [Dr Pepper
Company's] exclusive territorial license, and "[n]othing in
[the Soft Drink Act] is intended to protect . . . any other
practice or conduct of licensors or licensees . . . from
challenge under the antitrust laws." S. Rep. 10. In other
words, by merely legitimizing exclusive territories, the [Soft
Drink Act] does not grant a bottler the unfettered right to
acquire any license of its choice.
9
The FTC points out that there was a horizontal transfer of assets
to Coca-Cola Southwest from a former competitor and thus views the
1984 transaction as "a ``garden variety' horizontal acquisition in
which one competitor has purchased the assets of another."
Coca-Cola Southwest disputes the FTC's characterization and
urges that Dr Pepper Company's issuance of the Dr Pepper franchise
to Coca-Cola Southwest was vertical, not horizontal. According to
Coca-Cola Southwest:
The end result of the challenged 1984 transaction was to
structure a vertical exclusive licensing arrangement between
[Dr Pepper Company] and [Coca-Cola Southwest]. If [Dr Pepper
Company] had had no prior presence in San Antonio and in 1984
had structured an exclusive licensing arrangement with [Coca-
Cola Southwest], there could be no question that the [Soft
Drink Act] standard would govern. The policy considerations
under the [Soft Drink Act] are no different when the soft
drink concentrate manufacturer already has a presence in the
territory and structures the exclusive licensing arrangement
with the new licensee [Coca-Cola Southwest].
As the parties see it, this case pivots on dueling
characterizations. On one hand, Coca-Cola Southwest insists that
the Soft Drink Act governs here because its 1984 transaction was
vertical in that Dr Pepper Company issued a new franchise to a
downstream distributor, Coca-Cola Southwest. On the other hand,
the FTC finds the Soft Drink Act inapplicable because the
transaction was horizontal in that Coca-Cola Southwest gained
market share by acquiring an additional exclusive license from a
competing local bottler, Dr Pepper-San Antonio. In short, the
parties' framing of the inquiry suggests that the applicability of
the Soft Drink Act turns on the question of whose characterization
10
prevails: Coca-Cola Southwest wins if we say that the transaction
was vertical, while the FTC wins if we see it as horizontal.
We do not find the applicability of the act to be so easy.
The transaction was neither purely vertical nor purely horizontal.
The events culminating in the grant of the Dr Pepper license to
Coca-Cola Southwest evinced both vertical and horizontal aspects.
Of course, the horizontal features of the transaction are less than
15% of the deal, measured in dollars. FTC does not dispute that
Dr Pepper Company was considering its own interests when it chose
to license Coca-Cola Southwest in connection with its effort to
close down Dr Pepper-San Antonio and distribute instead through an
independent bottler. Coca-Cola Southwest, in turn, does not
dispute that its use and enforcement of the Dr Pepper franchise may
have an impact on interbrand competition at the distributor level.
In sum, even in the language of the parties the critical question
is not whether the transaction was vertical or horizontal, but
whether it was sufficiently vertical to come within the ambit of
the Soft Drink Act. However framed, the ultimate inquiry must be
into economic reality and function where vertical and horizontal
are helpful signals but not controlling categories.
We are not prepared to say that the Soft Drink Act might not
apply in some cases in which an existing bottler acquires either a
competing independent bottler or an additional license from such a
bottler. We are prepared to say that this is not one of those
cases. In sum, though Coca-Cola Southwest and Dr Pepper Company
nominally structured parts of their 1984 transaction as a
11
horizontal purchase, that is not dispositive of the question
whether the Soft Drink Act applies in deciding whether Coca-Cola
Southwest may use and enforce the Dr Pepper franchise. Rather, as
we will explain, we conclude that the economic impact of Dr Pepper
Company's grant of the Dr Pepper license to Coca-Cola Southwest was
more like the economic impact of the territorial restraints and
exclusivity provisions measured by the Soft Drink Act than the
effects of concentration attending mergers and disappearing
competitors.
The FTC’s contention must persuade us that a license by a
manufacturer of a distributor handling competing brands is not
covered by the Soft Drink Act, except in the introduction of new
product. Its contention must accommodate the reality that any
anticompetitive force of granting a license to a distributor
handling competing lines would be drained by dropping the
exclusivity feature of the license – a license provision
explicitly treated by the Act.
B.
Our analysis proceeds in three steps. First, we start with
the proposition that the Soft Drink Act governs when a national
syrup manufacturer issues a new exclusive soft drink license to
facilitate initial entry of a licensed brand in a regional market.
This transaction is aptly characterized as vertical, since the
manufacturer's appointment of a downstream bottler is inspired by
its effort to offer a soft drink brand not otherwise available in
the local market. Second, we assume without deciding that the Soft
12
Drink Act is inapplicable when an existing bottler acquires
additional soft drink licenses for established brands from an
independent competing bottler. Such an acquisition may be seen as
horizontal for Clayton Act purposes insofar as it is impelled
primarily by the interests of the acquiring bottler rather than of
the national syrup manufacturer.
These two inquiries suggest that the applicability of the Soft
Drink Act turns on whether the manufacturer is appointing a new
distributor to facilitate its entry into the local market, or
whether, instead, the receiving bottler acquires the new license
from another existing competitor. Hence, our third step is to
decide whether the 1984 transaction between Coca-Cola Southwest and
Dr Pepper Company properly belongs in the first category or the
second — i.e., whether it is vertically or horizontally inspired.
On this third inquiry, we conclude that the Soft Drink Act does
apply because the forces driving the 1984 transaction did not come
from Coca-Cola Southwest's pursuit of greater market share via the
acquisition of an additional license. Rather, the impetus behind
the transaction was Dr Pepper Company's decision to cease its own
distributing operations and to turn instead to an independent San
Antonio bottler for the first time. This decision necessarily
required that Dr Pepper license a new independently owned entity.
It attempted to sell its subsidiary as a package but was unable to
do so.
13
1.
It is undisputed that the Soft Drink Act supplies the proper
standard for evaluating territorial and exclusivity restrictions in
a soft drink license where the licensed bottler holds that soft
drink license and no others. The difficult question is the extent
to which the Soft Drink Act applies when the license increases the
concentration of exclusive soft drink licenses in the hands of a
single bottler. Our first step is to determine whether the Soft
Drink Act ever applies when a single bottler holds multiple soft
drink licenses.
As the FTC has acknowledged, national syrup manufacturers
often gain entry into a regional market by licensing an existing
regional bottler that already holds licenses from other syrup
manufacturers. This practice is called "piggybacking" in the soft
drink industry, and the FTC concedes that the Soft Drink Act was
premised in part on congressional approval of piggybacking as a
means for market entry:
The legislative history of [the Soft Drink Act] merely
recognizes that piggybacking may facilitate new entry. By
giving favorable antitrust treatment to exclusive territories,
[the Soft Drink Act] allows the new entrant to promise a
prospective bottler an exclusive territory for its brand, and
thereby encourages bottlers to accept new brands.
Thus, in noting that the Soft Drink Act gives "favorable antitrust
treatment to exclusive territories," the FTC recognizes that some
piggybacked soft drink licenses are to be scrutinized under the
Soft Drink Act and upheld so long as the requisite substantial and
effective competition exists.
14
If the Dr Pepper brand had never been distributed in the San
Antonio area, the Soft Drink Act would have governed the validity
of Dr Pepper Company's grant of an exclusive Dr Pepper license to
an existing San Antonio bottler such as Coca-Cola Southwest, even
though that bottler already had other soft drink licenses. Coca-
Cola Southwest's receipt of the additional license from Dr Pepper
Company concentrates product distribution. Nonetheless, the Soft
Drink Act would preclude antitrust scrutiny of the piggybacked Dr
Pepper license so long as the Dr Pepper brand faced substantial and
effective competition in the relevant market.
2.
Having concluded that the Soft Drink Act governs the validity
of a piggybacked soft drink license used to introduce a new brand,
we turn to the FTC's argument that the Soft Drink Act nevertheless
becomes inapplicable when an existing bottler obtains additional
licenses by acquiring them from an established competing bottler.
According to the FTC, "nothing in the legislative history of [the
Soft Drink Act], let alone the statutory text, suggests a new
antitrust standard for evaluating combinations between established
competing brands." On this view, the Soft Drink Act does not
purport to deprive the FTC of its statutory power to challenge a
transaction that amounts to a garden-variety horizontal merger of
soft drink licenses held by existing competitors. Since there is
no reduction in competition for distribution of Dr Pepper
(intrabrand competition) given the exclusivity provisions in the
15
license, the FTC must be challenging a reduction of interbrand
competition.
As we explained today, we assume that the FTC could employ the
traditional measures of the FTC and Clayton Acts in challenging a
transaction in which a bottler with a large market share obtains
additional exclusive licenses for competing soft drink brands
previously held by another independent bottler. This assumption
points to a distinction between the grant of an exclusive license
to facilitate vertical entry and the horizontal combination of
licenses previously held by established independent bottlers. The
Soft Drink Act applies in the former scenario, but not in the
latter.
3.
We think that Dr Pepper's licensing of Coca-Cola Southwest is
best viewed as a predominantly vertical transaction consummated as
part of Dr Pepper Company's effort to end its direct distribution
and enter the San Antonio area market through independent
distributors. Dr Pepper Company withdrew from that competitive
level. Three related factors lead us to this conclusion.
First, Dr Pepper Company initiated the 1984 events. Coca-Cola
Southwest did not seek out the Dr Pepper franchise, and acquired it
only after Dr Pepper Company offered it for sale. The 1984
transaction between Coca-Cola Southwest and Dr Pepper Company is
fueled by different economic impulses and hence different likely
economic consequences, from a situation in which a bottler acquires
additional licenses from another independent bottler; in the latter
16
scenario, the manufacturer need not be involved, and is not
departing and then re-entering. The FTC to be sure, urges that
"the horizontal effects on interbrand competition are identical
regardless of whether the bottler transferring the franchise is
owned by a concentrate company or independently owned." While that
may be accurate, so also are the vertical effects unchanged. Such
horizontal consequences do not change the reality that Dr Pepper
Company entered into this transaction to extricate itself from the
distribution business in San Antonio and then return through
independent distributors.
Second, our characterization of the transaction as vertical
rather than horizontal is consistent with the economic incentives
implicated in Dr Pepper Company's decision to undertake it. As Dr
Pepper Company explains in its amicus brief:
The unique structure of this industry means that the more
competitive the bottler, the better for the concentrate
company, because the more soft drinks the bottler sells, the
more concentrate the bottler purchases. As a result, the
interests of concentrate companies are, as an economic matter,
directly aligned with the interests of the ultimate soft drink
consumer: both want the bottler to produce and sell soft
drinks at the lowest possible cost and price.
We would not expect a manufacturer to accede to a bottler's effort
to acquire additional licenses for the purpose of gaining market
share and exercising market power in the regional market, since
that outcome would reduce the manufacturer's profits. The
dampening effects of horizontal cartelization and horizontally
inspired concentration are not in the economic interests of the
manufacturer. Hence, a transaction sought out by a manufacturer
rather than a bottler is less likely motivated by a bottler's quest
17
for pricing power in the downstream market. It is true that intent
is difficult to ascertain, but our primary litmus is the incentive
for maximization of profits. Here, economic incentives at least
provide corroborating indications that Dr Pepper Company was acting
vertically when it selected Coca-Cola Southwest as its exclusively
licensed San Antonio bottler.
Third, the form of the transaction involved cancellation of
the license held by Dr Pepper Company's former bottling subsidiary
and the subsequent issuance of a new Dr Pepper license to Coca-Cola
Southwest. Thus, the transaction consisted of the cessation of one
vertical arrangement followed by the creation of a second one. We
are mindful, to be sure, that the 1984 transaction was nominally
framed as a purchase, listing Coca-Cola Southwest as the "buyer"
and Dr Pepper Company as the "seller." Nevertheless, the parties
were able to consummate the deal only through a sequence of two
vertical transactions — Dr Pepper Company ended its direct
distribution and then appointed a new, independent bottler.
Indeed, since the Dr Pepper licenses expressly provide that they
are not transferable, Coca-Cola Southwest could not have acquired
the licenses from Dr Pepper-San Antonio without Dr Pepper Company's
consent. Dr Pepper Company sought for the first time to appoint an
independent bottler, and Coca-Cola Southwest answered the call.
Their use of the rubric of a nominal purchase does not change the
reality that the transaction effectuated Dr Pepper Company's
decision to pursue a vertical licensing agreement with a new
distributor.
18
In sum, we find that the 1984 transaction between Coca-Cola
Southwest and Dr Pepper Company was a vertically inspired event
through which Dr Pepper Company issued an exclusive license to
Coca-Cola Southwest as part of its effort to shift to independent
distribution for the first time in the San Antonio area market.
Hence, we conclude that the Soft Drink Act gives the appropriate
standard for deciding whether Coca-Cola Southwest can continue to
hold and enforce the Dr Pepper license.
C.
The FTC relies extensively on legislative history in urging
that the Soft Drink Act is inapplicable here. As we are mindful of
the FTC's admonition against allowing the Soft Drink Act to swallow
the other federal antitrust laws, we find it appropriate to respond
directly to its concerns. We are satisfied that the Soft Drink
Act's legislative history is consistent with our view that the text
of the Soft Drink Act mandates its application in this case.
Congress explained that the purpose of the Soft Drink Act was
"to clarify the circumstances under which territorial provisions
and licenses to manufacture, distribute, and sell trademarked soft
drink products are unlawful under the antitrust laws." S. Rep. No.
645, 96 Cong. 2d Sess. 1 (1980); H.R. Rep. No. 118, 96 Cong. 2d
Sess. 1 (1980), reprinted in 1980 U.S.C.C.A.N. at 4391. The FTC
insists that the "the sole purpose of the Act is to legitimize the
use of exclusive territorial limitations in soft drink trademark
licensing agreements when the requirements of the statute have been
met." The FTC emphasizes the Senate Report's caveat that
19
"[n]othing in this bill is intended to protect any other provisions
in such trademark licenses, or any other practice or conduct of
licensors or licensees of trademarked soft drink products, from
challenge under the antitrust laws." S. Rep. 10. Likewise, the
FTC points to the following statement in the House Report: "The
Committee intends that [the Soft Drink Act] provide necessary
relief without granting antitrust immunity and without establishing
any precedent that would weaken our beleaguered antitrust laws."
H.R. Rep. 7. Thus, according to the FTC, this legislative history
indicates that the Soft Drink Act legitimizes only the use of
exclusive territorial restrictions in soft drink franchises but
does not limit the reach of other antitrust laws with respect to
the actions of the regional bottlers that actually operate with the
exclusive licenses.
The legislative history, however, suggests that the authors of
the Soft Drink Act were concerned primarily about preserving the
vitality of prohibitions on horizontal price fixing and other per
se violations. Thus, to that end, Section 3 of the Soft Drink Act
declares that the Act does not insulate conduct that is otherwise
per se illegal:
Nothing in this chapter shall be construed to legalize
the enforcement of provisions described in section 3501 of
this title in trademark licensing contracts or agreements
described in that section by means of price fixing agreements,
horizontal restraints of trade, or group boycotts, if such
agreements, restraints, or boycotts would otherwise be
unlawful.
15 U.S.C. § 3502. This inclusion of § 3 in the Soft Drink Act is
significant. It suggests that congressional concerns about not
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vitiating other antitrust laws found expression in this provision
limiting the applicability of the Soft Drink Act, not in an implied
limitation on the applicability of § 2. As explained in the House
Report:
Section 2 provides that the antitrust laws will continue to
apply with full force where there is not substantial and
effective competition in the relevant markets. Nor is there
any intent to exempt conduct that constitutes a per se
violation of the antitrust laws. Underlining this concern,
Section 3 of the bill, added by the Committee amendment,
ensures that traditional per se violations will not be
exempted under the guise of attempts to enforce otherwise
lawful territorial restraints.
H. Rep. at 4. In short, we think that the § 3 of the Soft Drink
Act itself gives the best indication of what the Congress meant in
expressing concern about not weakening our "beleagured antitrust
laws." Congress, in explaining that the Soft Drink Act does not
"protect any other provisions in such trademark licenses, or any
other practice or conduct of licensors or licensees of trademarked
soft drink products, from challenge under the antitrust laws," was
simply describing the content of § 3 of the Soft Drink Act rather
than the expressing the inapplicability of § 2.
We are mindful of the FTC concern that "[a]cceptance of [Coca-
Cola Southwest's] novel views regarding the applicability of the
[Soft Drink Act] would effectively shield from antitrust scrutiny
any transfer of a franchise from one bottler to another."11 As we
11
The Commission was persuaded, stating:
In reaching this conclusion, we reject [Coca-Cola Southwest's]
efforts to characterize the horizontal acquisition of assets
(e.g., franchise agreements) from a competing bottler as a
vertical transaction merely because licenses from concentrate
companies are involved. If this argument were accepted, it
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have explained, however, our decision today is sufficiently narrow
and does not extend a shield to all franchise transfers. We hold
only that the Soft Drink Act applies in a case such as this one in
which the manufacturer sells its wholly-owned bottling subsidiary
and then enters the downstream market by licensing an independent
distributor for the first time. We leave open the possibility that
the FTC may challenge a bottler's acquisition of licenses held by
a competing independent bottler, particularly where such a transfer
did not flow from a manufacturer's independent desire to appoint a
new distributor.12
III.
In sum, we agree with Coca-Cola Southwest that the FTC should
have applied the Soft Drink Act in examining Coca-Cola Southwest's
1984 receipt of the Dr Pepper license and asked whether there was
"substantial and effective competition" in the San Antonio area
among soft drink products that compete with the Dr Pepper brand.
would immunize virtually all acquisitions by bottlers, including
the acquisition of a major competitor, from antitrust scrutiny.
12
It bears emphasis that application of the Soft Drink Act does
not result in immunity from federal antitrust laws; rather, the Act
gives a different standard for evaluating soft drink licenses. As
explained in the House Report:
The [Soft Drink Act's] clarification eliminates uncertainty in
the law that has plagued the industry, particularly smaller
bottlers, during the last decade. It does not grant antitrust
immunities. Indeed, the legislation will apply only in
situations in which there is ``substantial and effective
competition' among soft drink bottlers and among their syrup
manufacturers in the relevant product and geographic markets.
H. Rep. 2 (emphasis added).
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Coca-Cola Southwest asks that we render judgment in its favor under
the Soft Drink Act, arguing that the findings below establish that
the Dr Pepper brand does face the requisite substantial and
effective competition. While Coca-Cola Southwest's argument is
strong, we decline its invitation to render judgment at this time.
Instead, we think it appropriate to remand this case so that the
FTC can have the first opportunity to define and apply the Soft
Drink Act. Since the meaning of "substantial and effective
competition" for purposes of the Soft Drink Act is unsettled, we
prefer to give to the FTC the opportunity to first consider these
terms.
VACATED and REMANDED.
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