United States v. Engelhard Corporation , 126 F.3d 1302 ( 1997 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 97-8320
D. C. Docket No. 6:95-CV-45-WLS
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
versus
ENGELHARD CORPORATION, FLORIDIN COMPANY
U.S. BORAX INC., and U. S. SILICA COMPANY,
Defendants-Appellees.
Appeal from the United States District Court
for the Middle District of Georgia
(October 23, 1997)
Before EDMONDSON and DUBINA, Circuit Judges, and LIMBAUGH*, Senior
District Judge.
DUBINA, Circuit Judge:
_________________________________________________________________
*Honorable Stephen N. Limbaugh, Senior U.S. District Judge for the
Eastern District of Missouri, sitting by designation.
In this antitrust case, plaintiff-appellant The United States
of America (“the Government”) appeals the district court’s order
denying its request for a permanent injunction prohibiting
defendant-appellee Engelhard Corporation (“Engelhard”) from
acquiring the assets of defendant-appellee Floridin Corporation
(“Floridin”). The district court refused to enjoin the transaction
after concluding that the Government failed to carry its burden of
establishing the relevant product market. For the reasons that
follow, we affirm the judgment of the district court.
I. BACKGROUND
This case involves a transaction between Engelhard and
Floridin -- the two leading producers and distributors of gel
quality attapulgite clay (“GQA”) in the United States. Only three
companies currently produce GQA in the United States. Engelhard
and Floridin each hold over forty percent (40%) of the GQA market.
A third company, Milwhite, holds approximately fifteen percent
(15%) of the GQA market.
Attapulgite is a form of clay found throughout the world. In
the United States it is found only along the Georgia-Florida
border. There are two forms of attapulgite. “Sorbent quality
attapulgite,” as the name would indicate, has absorbent qualities
and is used in products designed to absorb liquids. GQA, the type
of attapulgite at issue in this case, is used as a thickening and
suspension agent in a variety of industrial products, including
suspension fertilizers, animal feeds, paints, asphalt roof-
coatings, tape joint compounds, drilling fluids, and molecular
2
sieves. Engelhard and Floridin process both sorbent quality
attapulgite and GQA. The Government has raised antitrust concerns
solely with GQA.
U.S. Silica, Floridin’s parent corporation, decided to get out
of the attapulgite business and offered to sell Floridin’s assets.
Engelhard expressed interest in purchasing Floridin’s assets, in
large part to acquire Floridin’s more modern processing plant in
Quincy, Florida. In an attempt to avoid antitrust problems, the
parties structured the deal so that Engelhard purchased only the
Quincy processing plant and Floridin’s sorbent quality attapulgite
business, not its GQA business. A third party, ITC Corporation
(“ITC”), would purchase Floridin’s GQA business. ITC and Engelhard
planned to enter a joint venture agreement under which Engelhard
would provide ITC with GQA at cost, the companies would share the
Quincy processing plant, and would otherwise operate as independent
distributors of GQA.
The Government challenged the proposed transaction, arguing
that it would substantially lessen competition in the GQA market.
After a three-week bench trial, the district court found that the
Government failed to carry its burden of establishing the relevant
product market. Based on this threshold ruling, the district court
did not reach the other issues in the case. The district court
entered an interim injunction to allow the Government to seek an
injunction pending appeal from this court. We refused to issue the
injunction but expedited the appeal. The transaction has since
been consummated.
3
II. DISCUSSION
The Government contends incorrectly that the district court
rejected the approach of the U.S. Department of Justice and Federal
Trade Commission Horizontal Merger Guidelines §§ 1.0 and 1.11
(1992) (hereinafter, “the Guidelines”) as to product market
definition. Under the Guidelines, the relevant inquiry is whether
there are substitutes to which a customer would switch in response
to a “small but significant and nontransitory price increase” in
the product in question. See AREEDA, HOVENKAMP & SOLOW, ANTITRUST LAW,
Vol. IIA, ¶ 537a (1995) (hereinafter, “AREEDA”). The Department of
Justice (“DOJ”) quantifies a “small but significant price increase”
as a five to ten percent (5-10%) permanent increase. The DOJ uses
the 5-10% test “to delineate the relevant market, to determine
whether the merger is horizontal, to identify the other competitors
in the market, and to assess the likelihood of entry.” Speech of
Assistant Attorney General James Rill, 7 Trade Reg. Rep. (CCH) ¶
50,032 at 48,639. Under this test, the Government asks whether
customers of a particular product, for example Product A, would
switch to alternative products in the face of a permanent 5-10%
increase in the price of Product A by a hypothetical monopolist,
where the increase is not cost justified. If customers would not
switch, then the Government views Product A as the relevant product
market. If customers would switch to the alternative product, then
the Government believes there is sufficient cross-elasticity of
demand so that Product A and the alternative product are in the
same product market.
4
In this case, the Government relied heavily on the 5-10% test
at trial. The Government produced evidence that current GQA
customers would not switch to alternative products in the face of
a 5-10% increase in the price of GQA. Largely on this basis, the
Government contends that GQA is the relevant product market and
that the district court erred because, according to the Government,
it rejected the 5-10% test.
We disagree with the Government’s characterization of the
district court’s order. The district court did not reject the 5-
10% test. As the district court stated in its order denying the
Government’s motion for an injunction pending appeal:
under the facts of record as presented to the Court, the
5%-10% test, as applied by the plaintiff, to a limited
number of consumers provided contradictory and
inconclusive answers as to what, if any, competition
exists between gel quality attapulgite and other products
for the purposes of relevant product analysis.
Dist. Ct. Order at 4 (RE Tab # 138). In fact, in response to the
Government’s contention that the district court had rejected the 5-
10% test, the court explicitly stated that “[i]n light of the
inadequacies in breadth and scope of the plaintiff’s inquiries to
consumers, the Court could not hold that gel quality attapulgite
constituted a relevant market even under the plaintiff’s 5 to 10
percent standard.” Id. at 5. The district court’s decision turned
on the Government’s failure to prove the product market it alleged.
Establishing the relevant product market is an essential element in
the Government’s case. See U.S. Anchor Mfg., Inc. v. Rule Indus.
Inc., 7 F.3d 986, 994 (11th Cir. 1993) (“Defining the market is a
5
necessary step in any analysis of market power and thus an
indispensable element in the consideration of any monopolization or
attempt case arising under section 2."). Despite the Government’s
protestations to the contrary, this case does not touch upon broad
antitrust principles, but instead turns on a simple question asked
in every civil case -- whether the plaintiff carried its burden of
proof. Therefore, it is unnecessary for us to address, as a
general matter of law, the validity of the 5-10% test.
“The definition of the relevant market is essentially a
factual question.” U.S. Anchor, 7 F.3d at 994. Thus, we review
the district court’s determination that the Government did not
prove the relevant product market under the clearly erroneous
standard. National Bancard Corp. v. Visa U.S.A., Inc., 779 F.2d
592, 604 (11th Cir. 1986); Cable Holdings, Inc. v. Home Video,
Inc., 825 F.2d 1559, 1563 n.6 (11th Cir. 1987). In determining the
relevant market, “[t]he finder of fact normally is presented with
voluminous expert testimony and other evidence. In such a
situation, its factual findings are accorded great deference.”
National Bancard, 779 F.2d at 604. Therefore, the issue before us
is whether the district court committed clear error in finding that
the Government did not prove that GQA is a relevant product market.
“Defining a relevant product market is primarily a process of
describing those groups of producers which, because of the
similarity of their products, have the ability -- actual or
potential -- to take significant amounts of business away from each
other.” U.S. Anchor, 7 F.3d at 995 (quotations omitted). The
6
boundaries of the product market are determined by “the reasonable
interchangeability of use or the cross-elasticity of demand between
the product itself and substitutes for it.” Brown Shoe Co. v.
United States, 370 U.S. 294, 325 (1962); see also, AREEDA, Vol. IIA,
¶ 530a (“[A] market is the arena within which significant
substitution in consumption or production occurs.”). Although
every product has a substitute, the relevant product market does
not encompass all substitutes. Times-Picayune Publ’g Co. v. United
States, 435 U.S. 594, 612 n.31 (1953). “The circle must be drawn
narrowly to exclude any other product to which, within reasonable
variations in price, only a limited number of buyers will turn; in
technical terms, products whose ‘cross-elasticities of demand’ are
small.” Id.
The district court found that the Government did not prove
that GQA was the relevant product market after concluding that the
Government’s methodology used to gather data was grievously flawed.
The court criticized the Government’s case on several grounds.
Likewise, the Government on appeal has roundly criticized the
district court’s view of the evidence. However, we need not
discuss each disputed fact at issue in this case. Under the
clearly erroneous standard, we must affirm the district court
unless review of the entire record leaves us “with the definite and
firm conviction that a mistake has been committed.” Anderson v.
Bessemer City, 470 U.S. 564, 573 (1985) (citing United States v.
United States Gypsum Co., 333 U.S. 364, 395 (1948)). As long as
the district court’s findings are plausible, we may not reverse the
7
district court even if we would have decided the case differently.
Anderson, 470 U.S. at 573-74 (“Where there are two permissible
views of the evidence, the factfinder’s choice between them cannot
be clearly erroneous.”).
There are good reasons for our deference to district courts in
determining matters of fact. As stated by the Supreme Court:
The trial judge’s major role is the determination of
fact, and with experience in fulfilling that role comes
expertise. Duplication of the trial judge’s efforts in
the court of appeals would very likely contribute only
negligibly to the accuracy of fact determination at a
huge cost in diversion of judicial resources. In
addition, the parties to a case on appeal have already
been forced to concentrate their energies and resources
on persuading the trial judge that their account of the
facts is the correct one; requiring them to persuade
three more judges at the appellate level is requiring too
much.
Anderson, 470 U.S. at 574-75. This is all the more true in an
antitrust case such as this where the district court heard
voluminous evidence over the course of a three-week bench trial.
See National Bancard, 779 F.2d at 604. Thus, rather than
discussing each piece of evidence in as much detail as did the
district court, we will focus on what, in our view, are the most
obvious shortcomings in the Government’s case.
First, when determining the relevant market, the question is
whether a hypothetical monopolist could profitably raise price. If
a sufficient number of customers switch to alternative products,
then the hypothetical GQA price increase can become unprofitable.
Furthermore, it is possible for only a few customers who switch to
alternatives to make the price increase unprofitable, thereby
8
protecting a larger number of customers who would have acquiesced
in higher GQA prices. To evaluate such possibilities, the
Government should have ascertained the size of the GQA market in
its different end-use applications. However, the Government’s
expert, Dr. Bodisch, could not identify the number of companies
using GQA in many of its end-use applications. Dist. Ct. Order at
17. This undermines the Government’s entire case. No matter how
many customers in each end-use industry the Government may have
interviewed, those results cannot be predictive of the entire
market if those customers are not representative of the market.
Without knowing the size of the market, we cannot know if the
customers interviewed are representative of that market. In short,
under the circumstances of this case, evidence on the size of the
GQA market was essential, and its absence casts a shadow over the
reliability of all Dr. Bodisch’s conclusions.
Second, the Government failed to consider competition in the
pre-formulation industrial thickener market -- competition before
GQA has been selected as an ingredient. In applying the test, the
Government asked current GQA customers whether they would switch to
alternative products in the face of a permanent 5-10% price
increase. The evidence showed that they would not. However, the
record is replete with evidence that GQA is used in specially
formulated products designed to achieve very particular end-use
requirements. A change in the type of thickener or suspension
agent used may change the product’s end-use performance, thus
requiring testing and reformulation before the product will perform
9
properly. In fact, some GQA customers are even reluctant to switch
among GQA suppliers for fear of reformulation costs and performance
problems. Moreover, some Engelhard customers testified that they
would not switch to Floridin GQA if faced with a 5-10% increase in
price. This makes clear that current GQA customers consider the
high cost of reformulation in their responses to the 5-10% question
posed by the Government. Additionally, GQA customers are reluctant
to switch because GQA makes up only a small percentage of the final
cost of the products in which it is used. See Dist. Ct. Order at
8 (finding that GQA makes up 0.1% to 10% of total cost of products
in which it is an ingredient and on average makes up 5% or less of
total cost). Therefore, a 10% increase in the price of GQA on
average will increase the overall cost of a $100 product by only 50
cents.
Consideration of reformulation costs and the minuscule impact
of GQA prices on the price of the finished products in which it is
used, explain why current GQA users are reluctant to switch in the
face of hypothetical price increases sometimes well in excess of
10%. More importantly, however, it highlights the need for
evidence of pre-formulation competition among GQA and other
industrial thickeners and suspension agents. Certainly, Engelhard
and Floridin are not content to simply hold on to the GQA business
they now have; rather, they hope to expand it. As new products of
all stripes are developed and old products are reformulated, GQA
must compete against other industrial thickeners and suspension
agents or become obsolete. For example, if GQA and an alternative
10
product competed at the pre-formulation stage, that competition
might protect current GQA users (who would acquiesce in much higher
GQA prices) from the exercise of monopoly power. As the district
court stated:
[The Government] presupposes that competition can only
exist at the post-formulation stage, when GQA has already
been chosen as an ingredient in an end-use product. . .
[This] highlights the failure of the 5-10% test to
account for the possibility that purchasers and potential
purchasers of GQA could opt to use a substitute substance
for the same function when creating a new product or
retooling an old one. Such formulation stage competition
could very well serve as a restraint against
anticompetitive price increases by forcing GQA producers
to price their products competitively or price themselves
out of the market completely.
Dist. Ct. Order at 11-12. Given the evidence in the record of high
reformulation costs and the low cost of GQA in relation to the
products in which it is used, evidence on the pre-formulation
industrial thickener market was essential.
Although not directly on point, we agree with the district
court that the Supreme Court’s analysis in United States v.
Continental Can Co., 378 U.S. 441 (1963), supports the district
court’s view of the evidence in this case. Continental Can
involved the merger of the second largest producer of metal
containers and the third largest producer of glass containers.
Although the district court found competition between glass, metal,
and plastic containers, the district court did not find glass and
metal to be in the same market. The Supreme Court reversed.
Although customers who pack their goods in cans versus bottles do
not switch back and forth each day as prices of cans and bottles
11
vary, the Court held that glass and metal containers could
constitute the same product market.
[T]hough the interchangeability of use may not be so
complete and the cross-elasticity of demand not so
immediate as in the case of most intraindustry mergers,
there is over the long run the kind of customer response
to innovation and other competitive stimuli that brings
the competition between these two industries within § 7's
competition-preserving proscriptions. . . That there are
price differentials between the two products or that the
demand for one is not particularly or immediately
responsive to changes in the price of the other are
relevant matters but not determinative of the product
market issue.
Continental Can, 378 U.S. at 455. A similar situation exists in
the industrial thickener market. Although the demand for GQA is
not immediately responsive to changes in the price of GQA or other
industrial thickeners, GQA competes with other industrial
thickeners when products are being formulated. Over the long run,
this pre-formulation competition may protect current GQA users from
the exercise of market power.1 Of course, we do not mean to
1
Professor Areeda describes a similar problem as the “time factor” of market power. It is
illustrative here as well:
A defendant’s market power may be greater in the very short run than in some
longer period. [B]uyers shift quite rapidly among substantially identical products
when relative prices change, quickly revealing the cross-elasticity of demand
between brands X and Y. Shifts may take more time when substitute products
differ significantly in their physical characteristics. A coal-burning boiler may
not be readily convertible to natural gas; a baker’s wrapping machine may handle
only cellophane, not wax paper. Despite a rising relative price for coal or
cellophane, shifting to gas or paper may not be economical for these users until
their boilers or wrapping machines “wear out.” Consequently, demand shifts may
be gradual, thus delaying their full impact on price for several years, during which
the defendant’s power would be declining.
AREEDA, Vol. IIA, ¶ 530c.
12
suggest that this pre-formulation competition necessarily would
prevent a hypothetical GQA monopolist from profitably raising
prices. On this issue, the record is inadequate because the
Government did not offer evidence of pre-formulation competition.
Without such evidence, determining whether a hypothetical
monopolist could profitably raise GQA prices is pure guesswork.
The Government’s methodology for determining the relevant
product market, as applied in this case, was flawed. The
Government failed to ascertain the size of the GQA market and did
not consider the possibility that pre-formulation competition could
restrain GQA prices. After thoroughly reviewing the record, we
cannot say the district court was clearly erroneous in holding that
the Government failed to carry its burden of establishing the
relevant product market.
III. CONCLUSION
For the foregoing reasons, we affirm the judgment of the
district court.
AFFIRMED.
13