[Federal Register Volume 79, Number 76 (Monday, April 21, 2014)]
[Notices]
[Pages 22136-22142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-08951]
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FEDERAL TRADE COMMISSION
[Docket No. 9356]
Ardagh Group S.A., Saint-Gobain Containers, Inc., and Compagnie
de Saint-Gobain; Analysis of Agreement Containing Consent Orders To Aid
Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement.
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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair methods of competition.
The attached Analysis of Agreement Containing Consent Orders to Aid
Public Comment describes both the allegations in the complaint and the
terms of the consent orders--embodied in the consent agreement--that
would settle these allegations.
DATES: Comments must be received on or before May 12, 2014.
ADDRESSES: Interested parties may file comments at https://ftcpublic.commentworks.com/ftc/ardaghstgobainconsent online or on
paper, by following the instructions in the Request for Comments part
of the SUPPLEMENTARY INFORMATION section below. Write ``Ardagh Group
S.A and Saint-Gobain Containers, Inc. and Compagnie de Saint-Gobain,--
Consent Agreement; Docket No. 9356'' on your comment and file your
comment online at https://ftcpublic.commentworks.com/ftc/ardaghstgobainconsent by following the instructions on the web-based
form. If you prefer to file your comment on paper, mail or deliver your
comments to the following address: Federal Trade Commission, Office of
the Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue NW.,
Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT: Catharine Moscatelli, Bureau of
Competition, (202-326-2749), 600 Pennsylvania Avenue NW., Washington,
DC 20580.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 3.25(f),16 CFR
Sec. 3.25(f), notice is hereby given that the above-captioned consent
agreement containing consent orders to cease and desist, having been
filed with and accepted, subject to final approval, by the Commission,
has been placed on the public record for a period of thirty (30) days.
The following Analysis to Aid Public Comment describes the terms of the
consent agreement, and the allegations in the complaint. An electronic
copy of the full text of the consent agreement package can be obtained
from the FTC Home Page (for April 10, 2014), on the World Wide Web, at
http://www.ftc.gov/os/actions.shtm. A paper copy can be obtained from
the FTC Public Reference Room, Room 130-H, 600 Pennsylvania Avenue NW.,
Washington, DC 20580, either in person or by calling (202) 326-2222.
You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before May 12, 2014.
Write ``Ardagh Group S.A and Saint-Gobain Containers, Inc. and
Compagnie de Saint-Gobain,--Consent Agreement; Docket No. 9356'' on
your comment. Your comment--including your name and your state--will be
placed on the public record of this proceeding, including, to the
extent practicable, on the public Commission Web site, at http://www.ftc.gov/os/publiccomments.shtm. As a matter of discretion, the
Commission tries to remove individuals' home contact information from
comments before placing them on the Commission Web site.
Because your comment will be made public, you are solely
responsible for making sure that your comment does not include any
sensitive personal information, like anyone's Social Security number,
date of birth, driver's license number or other state identification
number or foreign country equivalent, passport number, financial
account number, or credit or debit card number. You are also solely
responsible for making sure that your comment does not include any
sensitive health information, like medical records or other
individually identifiable health information. In addition, do not
include any ``[t]rade secret or any commercial or financial information
which . . . is privileged or confidential,'' as discussed in Section
6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR
4.10(a)(2). In particular, do not include competitively sensitive
information such as costs, sales statistics, inventories, formulas,
patterns, devices, manufacturing processes, or customer names.
If you want the Commission to give your comment confidential
treatment, you must file it in paper form, with a request for
confidential treatment, and you have to follow the procedure explained
in FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ Your comment will be kept
confidential only if the FTC General Counsel, in his or her sole
discretion, grants your request in accordance with the law and the
public interest.
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\1\ In particular, the written request for confidential
treatment that accompanies the comment must include the factual and
legal basis for the request, and must identify the specific portions
of the comment to be withheld from the public record. See FTC Rule
4.9(c), 16 CFR 4.9(c).
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Postal mail addressed to the Commission is subject to delay due to
heightened security screening. As a result, we encourage you to submit
your comment online. To make sure that the Commission considers your
online comment, you must file it at https://ftcpublic.commentworks.com/ftc/ardaghstgobainconsent by following the instructions on the web-
based forms. If this Notice appears at http://www.regulations.gov/#!home, you also may file a comment through that Web site.
If you file your comment on paper, write ``Ardagh Group S.A and
Saint-Gobain Containers, Inc. and Compagnie de Saint-Gobain,--Consent
Agreement; Docket No. 9356'' on your comment and on the envelope, and
mail or deliver it to the following address: Federal Trade Commission,
Office of the Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue
NW., Washington, DC 20580. If possible, submit your paper comment to
the Commission by courier or overnight service.
Visit the Commission Web site at http://www.ftc.gov to read this
Notice and the news release describing it. The FTC Act and other laws
that the Commission administers permit the collection of public
comments to consider and use in this proceeding as appropriate. The
Commission will consider all timely and responsive public comments that
it receives on or before May 12, 2014. You can find more information,
including routine uses
[[Page 22137]]
permitted by the Privacy Act, in the Commission's privacy policy, at
http://www.ftc.gov/ftc/privacy.htm.
Analysis of Agreement Containing Consent Orders To Aid Public Comment
I. Introduction
The Federal Trade Commission (``Commission'') has accepted, subject
to final approval, an Agreement Containing Consent Orders (``Consent
Agreement'') with Ardagh Group S.A. (``Ardagh''). The purpose of the
Consent Agreement is to remedy the anticompetitive effects of Ardagh's
proposed acquisition of Saint-Gobain Containers, Inc. (``Saint-
Gobain'') from Compagnie de Saint-Gobain. Under the terms of the
Consent Agreement, Ardagh must divest six of its nine United States
glass container manufacturing plants to an acquirer approved by the
Commission. The Consent Agreement provides the acquirer the
manufacturing plants and other tangible and intangible assets it needs
to effectively compete in the markets for the manufacture and sale of
glass containers to both beer brewers and spirits distillers in the
United States. Ardagh must complete the divestiture within six months
of the date it signs the Consent Agreement.
On January 17, 2013, Ardagh agreed to acquire Saint-Gobain from its
French parent company, Compagnie de Saint-Gobain, for approximately
$1.7 billion. This acquisition would concentrate most of the $5 billion
U.S. glass container industry in two major competitors--Owens-Illinois,
Inc. (``O-I'') and the combined Ardagh/Saint-Gobain. These two major
competitors would also control the vast majority of glass containers
sold to beer brewers and spirits distillers in the United States. On
June 28, 2013, the Commission issued an administrative complaint
alleging that the acquisition, if consummated, may substantially lessen
competition in the markets for the manufacture and sale of glass
containers to brewers and distillers in the United States in violation
of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section
5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45.
The Consent Agreement has been placed on the public record for 30
days to solicit comments from interested persons. Comments received
during this period will become a part of the public record. After 30
days, the Commission will review the Consent Agreement and comments
received, and decide whether it should withdraw, modify, or make the
Consent Agreement final.
II. The Parties
Ardagh, headquartered in Luxembourg, is a global leader in glass
and metal packaging. Ardagh entered the United States glass container
industry through two 2012 acquisitions--first acquiring a single-plant
glass container manufacturer, Leone Industries, and then an eight-plant
manufacturer, Anchor Glass Container Corporation (``Anchor''). Through
the Anchor acquisition, Ardagh became the third-largest glass container
manufacturer in the country, supplying glass containers for beer,
spirits, non-alcoholic beverages, and food. Ardagh's nine glass
container manufacturing plants are located in seven U.S. states.
Saint-Gobain is a wholly-owned U.S. subsidiary of Compagnie de
Saint-Gobain, a French company which, among other businesses,
manufactures and sells glass containers throughout the world. In the
United States, Saint-Gobain is the second-largest glass container
manufacturer, supplying beer, spirits, wine, non-alcoholic beverages,
and food containers. Saint-Gobain operates 13 glass container
manufacturing plants located in 11 U.S. states. Saint-Gobain, operates
under the name ``Verallia North America'' or ``VNA.''
III. The Manufacture and Sale of Glass Containers to Brewers and
Distillers in the United States
Absent the remedy, Ardagh's acquisition would harm competition in
two relevant lines of commerce: the manufacture and sale of glass
containers to (1) beer brewers, and (2) spirits distillers in the
United States. Currently, only three firms--Owens-Illinois, Inc.,
Saint-Gobain, and Ardagh--manufacture and sell most glass containers to
brewers and distillers in the United States. Collectively, these three
firms control approximately 85 percent of the United States glass
container market for brewers, and approximately 77 percent of the
market for distillers.
The Commission often calculates the Herfindahl-Hirschman Index
(``HHI'') to assess market concentration. Under the Federal Trade
Commission and Department of Justice Horizontal Merger Guidelines,
markets with an HHI above 2,500 are generally classified as ``highly
concentrated,'' and acquisitions ``resulting in highly concentrated
markets that involve an increase in the HHI of more than 200 points
will be presumed to be likely to enhance market power.'' In this case,
both relevant product markets are already concentrated and the
acquisition would increase the HHIs substantially. Absent the proposed
remedy, the acquisition would increase the HHI by 782 points to 3,657
for glass beer containers, and by 1,072 points to 3,138 for glass
spirits containers. With the proposed remedy, however, Ardagh's
acquisition of Saint-Gobain will result in no increase in HHI in the
glass container market for beer brewers and a 33 point HHI increase in
the glass container market for distillers.
The relevant product markets in which to analyze the effects of the
acquisition do not include other packaging materials, such as aluminum
cans for beer or plastic bottles for spirits for several reasons.
First, Ardagh and Saint-Gobain routinely identify each other and O-I as
their most direct competitors, focusing their business strategies,
market analysis, and pricing on glass container competition. Indeed,
glass container pricing is not responsive to the pricing of other types
of containers. Second, although brewers and distillers use aluminum and
plastic packaging, respectively, for their products, these customers
solicit and evaluate glass container bids independently of their can
and plastic procurement efforts. Third, brewers and distillers demand
glass so that they may maintain a premium image and brand equity and
meet their consumers' expectations. Thus, brewers and distillers cannot
easily or quickly substitute their glass container purchases with other
packaging materials without jeopardizing the sale of their own
products. Finally, Ardagh and Saint-Gobain distinguish glass containers
from containers made with other materials based on qualities including
oxygen impermeability, chemical inertness, and glass' ability to be
recycled.
The United States is the appropriate geographic market in which to
evaluate the likely competitive effects of the acquisition. Ardagh and
Saint-Gobain each maintain geographically diverse networks of plants
that manufacture and sell glass containers to brewers and distillers
throughout the country. Most U.S. brewers and distillers have similar
competitive glass container alternatives from which to choose,
regardless of their geographic location. The relevant geographic market
is no broader than the United States because product weight and
logistics constraints limit brewers' and distillers' ability to
purchase significant volumes of glass containers from outside the
country.
IV. Effects of the Acquisition
Absent relief, the acquisition would result in an effective duopoly
likely to
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cause significant competitive harm in the markets for the manufacture
and sale of glass containers to brewers and distillers. The glass
container industry is a highly consolidated, stable industry, with low
growth rates and high barriers to entry. The acquisition would increase
the ease and likelihood of anticompetitive coordination between the
only two remaining major suppliers. The acquisition would also
eliminate direct competition between Ardagh and Saint-Gobain. Thus, the
acquisition would likely result in higher prices and a reduction in
services and other benefits to brewers and distillers.
V. Entry
Entry into the markets for the manufacture and sale of glass
containers to brewers and distillers would not be timely, likely, or
sufficient in magnitude, character, and scope to deter or counteract
the likely competitive harm from the acquisition. The glass container
industry in the United States enjoys significant barriers to entry and
expansion including the high cost of building glass manufacturing
plants, high fixed operating costs, the need for substantial
technological and manufacturing expertise, and long-term customer
contracts. For these reasons, entry by a new market participant or
expansion by an existing one, would not deter the likely
anticompetitive effects from the acquisition.
VI. The Consent Agreement
The proposed Consent Agreement remedies the competitive concerns
raised by the acquisition by requiring Ardagh to divest six of its nine
glass container manufacturing plants in the United States to an
acquirer within six months of executing the Consent Agreement. In
addition, the Consent Agreement requires Ardagh to transfer all
customer contracts currently serviced at those six plants to an
acquirer through an agreement approved by the Commission.
Under the proposed Consent Agreement, Ardagh will divest six of the
manufacturing plants that it acquired when it purchased Anchor in 2012,
along with Anchor's corporate headquarters, mold and engineering
facilities. The six plants produce glass containers for brewers and
distillers and are located in: Elmira, NY; Jacksonville, FL; Warner
Robins, GA; Henryetta, OK; Lawrenceburg, IN; and Shakopee, MN. Anchor's
corporate headquarters, mold and engineering facilities are located in
Tampa, FL, Zanesville, OH, and Streator, IL, respectively. Other assets
that Ardagh will divest include customer contracts, molds, intellectual
property, inventory, accounts receivable, government licenses and
permits, and business records. In addition, the Consent Agreement
limits Ardagh's use of, and access to, confidential business
information pertaining to the divestiture assets.
Through the proposed Consent Agreement, the acquirer of these
assets will be the third-largest glass container manufacturer in the
United States. These assets replicate the amount of glass containers
for beer and spirits that the third largest supplier offers today. The
acquirer will own plants that span a broad geographic footprint, offer
a well-balanced product mix, and have flexible manufacturing
capabilities. Its presence will preserve the three-way competition that
currently exists in the relevant markets and moderate the potential for
coordination.
Ardagh must complete the divestiture within six months of signing
the Consent Agreement. Pending divestiture, Ardagh is obligated to hold
the divestiture assets separate and to maintain the viability,
marketability and competitiveness of the assets. With the hold separate
in place, the divested assets, under the direction of an experienced
senior management team, will be in a position to compete in the glass
industry, independent from Ardagh. A hold separate monitor will
supervise the management of the divestiture assets until Ardagh
completes the divestiture.
The purpose of this analysis is to facilitate public comment on the
proposed Consent Agreement, and is not intended to constitute an
official interpretation of the proposed Decision and Order or to modify
its terms in any way.
Statement of the Federal Trade Commission \2\
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\2\ Chairwoman Ramirez and Commissioners Brill and Ohlhausen
join in this statement.
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In June 2013, the Commission issued a complaint alleging that
Ardagh Group, S.A.'s proposed $1.7 billion acquisition of Saint-Gobain
Containers, Inc. would reduce competition in the U.S. markets for glass
containers for beer and spirits. Specifically, the Commission alleges
that the acquisition would have eliminated head-to-head competition
between the parties and resulted in a near duopoly in markets already
vulnerable to coordination. If the Commission had not challenged the
deal, the merged firm and its only remaining significant competitor,
Owens-Illinois would have controlled more than 75 percent of the
relevant markets. The Commission staff developed evidence to prove at
trial that the acquisition would likely have substantially lessened
competition in violation of Section 7 of the Clayton Act. After the
start of litigation, the parties chose to settle the matter by
divesting six of the nine U.S. plants currently owned by Ardagh. The
Commission has now accepted the proposed consent order for public
comment and believes it addresses the competitive issues here, as well
as the widespread customer concerns expressed by brewers and distillers
who depend on a steady and competitively-priced supply of glass
containers. We outline below our concerns with this deal and the
benefits of the proposed consent.
The 2010 Merger Guidelines explain that the Commission will likely
challenge a transaction where ``(1) the merger would significantly
increase concentration and lead to a moderately or highly concentrated
market; (2) that market shows signs of vulnerability to coordinated
conduct . . . ; and (3) the Agencies have a credible basis on which to
conclude that the merger may enhance that vulnerability.'' \3\ We have
reason to believe each of these factors is present here. The
transaction would have dramatically increased concentration in already
highly-concentrated markets. The glass container markets for beer and
spirits are vulnerable to post-acquisition coordination, exhibiting
features such as low demand growth, tight capacity, high and stable
market shares, and high barriers to entry that typify markets that have
experienced coordination. The existing three major glass manufacturers
already have access to a wealth of information about the markets and
each other, including plant-by-plant production capabilities,
profitability, the identities of each other's customers, and details
regarding each other's contracts and negotiations with customers.
Customers, industry analysts, public statements, and distributors all
serve as conduits for market information. The Commission found evidence
that companies in this industry understand their shared incentives to
keep capacity tight, avoid price wars, and follow a ``price over
volume'' strategy. We believe this transaction would have made it
easier for the remaining two dominant manufacturers to coordinate with
one another on price and non-price terms to
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achieve supracompetitive prices or other anticompetitive outcomes.
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\3\ U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger
Guidelines Sec. 7.1 (2010) [hereinafter 2010 Horizontal Merger
Guidelines], available at http://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf.
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As noted in the 2010 Merger Guidelines, the Commission will also
likely challenge a transaction producing harmful unilateral effects.
For instance, this could occur where the merged firm would no longer
have to negotiate against other competitors for customer supply
contracts, or where the transaction would eliminate a competitor that
otherwise could have expanded output in response to a price
increase.\4\ The Commission charges that Ardagh's acquisition of Saint-
Gobain would have eliminated head-to-head competition between the two
merging firms, which are the second- and third-largest U.S. glass
container manufacturers in the relevant product markets. Brewers and
distillers have reaped substantial benefits from the rivalry between
the two, often playing one against the other in supply negotiations.
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\4\ See 2010 Horizontal Merger Guidelines Sec. Sec. 6, 6.2-6.3.
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Once a prima facie showing of competitive harm is made, the
Commission will consider evidence from the parties of verifiable,
merger-specific efficiencies that could offset this harm.\5\ In highly
concentrated markets with high barriers to entry, as here, the parties
can rebut the evidence of harm only with evidence of ``extraordinary
efficiencies.'' \6\ Efficiencies represent an important aspect of the
Commission's merger analysis, with a recent study showing that over a
ten-year period 37 of 48 closed investigations involved internal staff
memoranda examining efficiencies.\7\ Similarly, a recent survey
analyzing evidence considered by Commission staff prior to issuing
second requests concluded that staff credited parties' detailed
efficiency claims ``[i]n most cases,'' even if they proved insufficient
to offset competitive concerns about the transaction.\8\
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\5\ See id. Sec. 10.
\6\ Fed. Trade Comm'n v. Heinz, 246 F.3d 708, 720 (D.C. Cir.
2001); In re Polypore Int'l, Inc., Initial Decision, No. 9327, 2010
WL 866178, at *184-85 (FTC Mar. 1, 2010).
\7\ Malcolm B. Coate & Andrew J. Heimert, Merger Efficiencies at
the Federal Trade Commission: 1997-2007 14 n.31 (2009), available at
http://www.ftc.gov/sites/default/files/documents/reports/merger-efficiencies-federal-trade-commission-1997%E2%80%932007/0902mergerefficiencies.pdf.
\8\ Darren S. Tucker, A Survey of Evidence Leading to Second
Requests at the FTC, 78 Antitrust L.J. 591, 602 (2013).
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In this matter, many of Ardagh's proffered synergies were not
merger-specific and could have been achieved absent the acquisition.
For instance, the parties claimed the merger would allow them to reduce
overhead within the Saint-Gobain organization. However, this claim
related to the staffing of the current Saint-Gobain organization alone
and is separate from any additional savings to be reaped from
eliminating staff positions made redundant by the combination of Ardagh
and Saint-Gobain. Thus, the claim is not merger specific. In addition,
Ardagh made broad claims of additional operational efficiencies, and
likely would have achieved some. However, the parties put forward
insufficient evidence showing that the level of synergies that could be
substantiated and verified would outweigh the clear evidence of
consumer harm.
For these reasons, we respectfully disagree with Commissioner
Wright's conclusion that there is no reason to believe the transaction
violates Section 7 of the Clayton Act. We also disagree with
Commissioner Wright's suggestion that the Commission imposed an unduly
high evidentiary standard in analyzing the parties' efficiency claims
here and believe he overlooks several important points in his analysis.
We are mindful of our responsibility to weigh appropriately all
evidence relevant to a transaction and, moreover, understand our burden
of proof before a trier of fact.
Commissioner Wright expresses concern that competitive effects are
estimated whereas efficiencies must be ``proven,'' potentially creating
a ``dangerous asymmetry'' from a consumer welfare perspective.\9\ We
disagree. Both competitive effects and efficiencies analyses involve
some degree of estimation. This is a necessary consequence of the
Clayton Act's role as an incipiency statute. In addition, while
competitive effects data and information tends to be available from a
variety of sources, the data and information feeding efficiencies
calculations come almost entirely from the merging parties. Indeed, the
2010 Merger Guidelines observe that ``[e]fficiencies are difficult to
verify and quantify, in part because much of the information relating
to efficiencies is uniquely in the possession of the merging firms.''
\10\ The need for independent verification of this party data animates
the requirement that, to be cognizable, efficiencies must be
substantiated and verifiable.
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\9\ Dissenting Statement of Commissioner Wright at 5.
\10\ 2010 Horizontal Merger Guidelines Sec. 10.
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Courts have repeatedly emphasized that, ``while reliance on the
estimation and judgment of experienced executives about costs may be
perfectly sensible as a business matter, the lack of a verifiable
method of factual analysis resulting in the cost estimates renders them
not cognizable.'' \11\ This is for good reason. Indeed, ``if this were
not so, then the efficiencies defense might well swallow the whole of
Section 7 of the Clayton Act.'' \12\ The merger analysis the Commission
undertook in this case is thus entirely consistent with the 2010
Horizontal Merger Guidelines and established case law.
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\11\ United States v. H&R Block, Inc., 833 F. Supp. 2d 36, 46
(D.D.C. 2011); see also 2010 Horizontal Merger Guidelines Sec. 10
(noting that it is ``incumbent upon the merging firms to
substantiate efficiency claims so that the Agencies can verify
[them] by reasonable means.'').
\12\ H&R Block, 833 F. Supp. 2d at 46.
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Finally, we also believe the proposed consent order addresses the
competitive concerns we have identified. The proposed order requires
Ardagh to sell six manufacturing plants and related assets to a single
buyer within six months, thereby creating an independent third
competitor that fully replaces the competition that would have been
lost in both the beer and spirits glass container markets had the
merger proceeded unchallenged. In sum, we have ample reason to believe
that the proposed merger was anticompetitive and without appropriate
efficiency justification, and that the proposed remedy will maintain
competition in the market for glass containers for beer and spirits. We
commend and thank Commission staff for their hard work on this matter.
By direction of the Commission, Commissioner Wright dissenting.
Donald S. Clark,
Secretary.
Dissenting Statement of Commissioner Joshua D. Wright
The Commission has voted to issue a Complaint and Decision & Order
(``Order'') against Ardagh Group (``Ardagh'') to remedy the allegedly
anticompetitive effects of Ardagh's proposed acquisition of Saint-
Gobain Containers Inc. and Compagnie de Saint-Gobain (jointly, ``St.
Gobain''). I dissented from the Commission's decision because the
evidence is insufficient to provide reason to believe Ardagh's
acquisition will substantially lessen competition in glass containers
manufactured and sold to beer brewers and spirits distillers in the
United States, in violation of Section 7 of the Clayton Act. FTC staff
and their economic expert should be commended for conducting a thorough
investigation of this matter, working diligently to develop and analyze
a substantial quantity of documentary and empirical evidence, and
providing thoughtful analyses of the transaction's potential
[[Page 22140]]
competitive effects. Indeed, I agree with the Commission that there is
evidence sufficient to give reason to believe the proposed transaction
would likely result in unilateral price increases. After reviewing the
record evidence, however, I concluded there is no reason to believe the
transaction violates Section 7 of the Clayton Act because any potential
anticompetitive effect arising from the proposed merger is outweighed
significantly by the benefits to consumers flowing from the
transaction's expected cognizable efficiencies. It follows, in my view,
that the Commission should close the investigation and allow the
parties to complete the merger without imposing a remedy.
I write separately today to explain my reasoning for my vote in the
matter and to highlight some important issues presented by this
transaction relating to the burden of proof facing merging parties
seeking to establish cognizable efficiencies.
I. Potential Anticompetitive Effects Are Small at Best Relative to
Cognizable Efficiencies
The Commission alleges both unilateral and coordinated price
effects will arise from the proposed transaction. The economic logic of
the unilateral effects theory is straightforward: If the merger
combines the two glass manufacturers who are the most preferred for a
set of customers, there is the potential for a price increase arising
from the loss of competition between those two firms. This is because
sales previously diverted to the next closest competitor in response to
a price increase will now be internalized by the post-merger firm. When
analyzing the potential for unilateral price effects, the 2010 Merger
Guidelines indicate the Agencies will consider ``any reasonably
available and reliable information,'' including ``documentary and
testimonial evidence, win/loss reports and evidence from discount
approval processes, customer switching patterns, and customer
surveys.'' \1\ The Merger Guidelines also contemplate a number of
quantitative analyses to facilitate the analysis of potential
unilateral effects including calculating diversion ratios and the value
of diverted sales. Where sufficient data are available, the Merger
Guidelines indicate ``the Agencies may construct economic models
designed to quantify the unilateral price effects resulting from the
merger.'' \2\ In my view, the totality of record evidence supports an
inference--though a fragile one--that the merger is likely to result in
very modest unilateral price effects at best.
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\1\ U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger
Guidelines Sec. 6.1 (2010), available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter Merger Guidelines].
\2\ Id.
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With respect to the potential coordinated price effects, I find
successful coordination in this market highly unlikely.\3\ However,
even if coordination was a more plausible concern, I am not persuaded
record evidence is probative of the effects that would arise as a
result of this merger. My view and analysis of the record evidence
relied upon to assess the magnitude of any potential coordinated
effects is that it is suspect and cannot identify price differences
attributable to changes in post-merger incentives to coordinate that
would result from the proposed transaction rather than other factors.
In addition, even if coordinated effects were likely, any estimated
expected effect would need to be discounted by a probability of
successful coordination that is less than one.
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\3\ Although coordinated effects may be more likely with two
rather than three key competitors, I do not find evidence sufficient
to conclude coordination is likely. For example, I find that prices
are individually negotiated and not particularly transparent, and
the incentive to cheat without detection would likely undermine a
collusive outcome. In the ordinary course of business, competitive
firms collect information and monitor one another's behavior. There
is no evidence that the information collected by firms in the glass
container market is accurate or that coordination based upon that
information has taken place to date.
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In summary, given the totality of the available evidence, I am
persuaded that the proposed transaction is likely to generate, at best,
small unilateral price effects.
The key question in determining whether the proposed transaction is
likely to violate Section 7 of the Clayton Act is thus whether any
cognizable efficiencies ``likely would be sufficient to reverse the
merger's potential to harm customers in the relevant market.'' \4\ The
2010 Merger Guidelines and standard cost-benefit principles teach that
efficiencies should matter most when competitive effects are small.\5\
The Commission's view of the record evidence is apparent in the
Complaint, which alleges that ``nearly all'' of the efficiencies
proffered by the parties are non-cognizable.\6\ However, my own review
of the record evidence leads me to disagree with that conclusion. In
fact, I find that given reasonable assumptions, cognizable efficiencies
are likely to be substantial and more than sufficient to offset any
anticompetitive price increase. While reasonable minds can differ with
respect to the magnitude of cognizable efficiencies in this case, I do
not find the allegation of zero or nearly zero efficiencies plausible.
Indeed, my own analysis of the record evidence suggests expected
cognizable efficiencies are up to six times greater than any likely
unilateral price effects. The relative magnitude of the expected
cognizable efficiencies set forth is dispositive of the matter under my
own analysis.
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\4\ Merger Guidelines Sec. 10.
\5\ Merger Guidelines Sec. 10 (``In the Agencies' experience,
efficiencies are most likely to make a difference in merger analysis
when the likely adverse competitive effects, absent the
efficiencies, are not great.''). It is sometimes argued, pointing to
language in the Merger Guidelines that ``efficiencies almost never
justify a merger to monopoly or near-monopoly,'' that the Merger
Guidelines rule out or render the burden facing merger parties
practically insurmountable in the case of mergers to monopoly or
``three-to-two'' situations. In my view, this is a misreading of the
Merger Guidelines in letter and spirit. The sentence prior notes
that ``efficiencies are most likely to make a difference in merger
analysis when the likely adverse competitive effects, absent the
efficiencies, are not great.'' The Merger Guidelines' reference to
mergers to monopoly or near-monopoly are illustrations of cases in
which likely adverse effects might be large. The Merger Guidelines
themselves do not rule out an efficiencies defense when a merger
with small anticompetitive effects, with any market structure,
generates cognizable efficiencies that are sufficient to prevent the
merger from being anticompetitive. Nor do the Merger Guidelines
suggest that a merger in a market with many firms that exhibits
significant unilateral price effects should face a less serious
burden in order to establish an efficiencies defense. The Merger
Guidelines' more general shift toward effects over market structure
is also consistent with this analysis and undermines the logic of a
position that the comparison of anticompetitive harms to cognizable
efficiencies should be conducted differently depending upon the
number of firms in the relevant market. To the extent the Commission
believes the judicial decisions cited in note 5 of their statement
endorse the notion that extraordinary efficiencies are required to
justify a merger to monopoly or duopoly even when the
anticompetitive effects from that merger are small, this is the
analytical equivalent of allowing the counting of the number of
firms within a market to trump analysis of competitive effects. The
Commission should reject that view as inconsistent with the goal of
promoting consumer welfare.
\6\ See, e.g. Complaint, In the Matter of Ardagh Group S.A.,
F.T.C. Docket No. 9356 (June 28, 2013), available at http://www.ftc.gov/sites/default/files/documents/cases/2013/07/130701ardaghcmpt.pdf.
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II. When is there an efficiencies defense at the FTC?
I would like to highlight some important issues presented by this
transaction as they relate to how the Commission analyzes parties'
efficiencies claims, and in particular, whether the burden of proof
facing parties seeking to establish cognizable efficiencies is or
should be meaningfully different than the burden facing the agency in
establishing that a proposed merger is likely to substantially lessen
competition.
[[Page 22141]]
My view is that the burden facing the agency with respect to the
likelihood of anticompetitive effects should be in parity to that faced
by the parties with respect to efficiencies. I recognize that this view
is at least superficially in tension with the 2010 Merger Guidelines,
which appear to embrace an asymmetrical approach to analyzing harms and
benefits. Indeed, the 2010 Merger Guidelines declare that ``the
Agencies will not simply compare the magnitude of the cognizable
efficiencies with the magnitude of the likely harm to competition
absent the efficiencies.'' \7\ This tension is easily resolved in the
instant case because the efficiencies substantially outweigh the
potential harms, but it merits greater discussion.
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\7\ Merger Guidelines Sec. 10.
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To begin with, it is important to define which issues are up for
discussion and which are not with some precision. The issue is not
whether the burden-shifting framework embedded within Section 7 of the
Clayton Act is a useful way to structure economic and legal analysis of
complex antitrust issues.\8\ It is. Nor is the pertinent question
whether the parties properly bear the burden of proof on efficiencies.
They do.\9\
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\8\ See, e.g., United States v. Baker Hughes, Inc., 908 F.2d 981
(D.C. Cir. 1990).
\9\ See Merger Guidelines Sec. 10.
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The issues here are twofold. The first issue is whether the
magnitude of the burden facing merging parties attempting to
demonstrate cognizable efficiencies should differ from the burden the
Commission must overcome in establishing the likelihood of
anticompetitive effects arising from the transaction in theory. The
second is whether the magnitudes of those burdens differ in practice.
The Commission appears to answer the first question in the
negative.\10\ With respect to the second question, the Commission
points to some evidence that the Agency does in fact consider
efficiencies claims when presented in many investigations. There is
little dispute, however, that the Commission gives some form of
consideration to efficiency claims; the relevant issue is over
precisely how the Commission considers them. More specifically, must
merging parties overcome a greater burden of proof on efficiencies in
practice than does the FTC to satisfy its prima facie burden of
establishing anticompetitive effects? This question, in my view, merits
greater discussion.
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\10\ Statement of the Commission, In the Matter of Ardagh Group
S.A., Saint-Gobain Containers, Inc., and Compagnie de Saint-Gobain,
File No. 131-0087 (April 11, 2014) (``We also disagree with
Commissioner Wright's suggestion that the Commission imposed an
unduly high evidentiary standard in analyzing the parties'
efficiency claims'').
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Even when the same burden of proof is applied to anticompetitive
effects and efficiencies, of course, reasonable minds can and often do
differ when identifying and quantifying cognizable efficiencies as
appears to have occurred in this case. My own analysis of cognizable
efficiencies in this matter indicates they are significant. In my view,
a critical issue highlighted by this case is whether, when, and to what
extent the Commission will credit efficiencies generally, as well as
whether the burden faced by the parties in establishing that proffered
efficiencies are cognizable under the Merger Guidelines is higher than
the burden of proof facing the agencies in establishing anticompetitive
effects. After reviewing the record evidence on both anticompetitive
effects and efficiencies in this case, my own view is that it would be
impossible to come to the conclusions about each set forth in the
Complaint and by the Commission--and particularly the conclusion that
cognizable efficiencies are nearly zero--without applying asymmetric
burdens.
Merger analysis is by its nature a predictive enterprise. Thinking
rigorously about probabilistic assessment of competitive harms is an
appropriate approach from an economic perspective. However, there is
some reason for concern that the approach applied to efficiencies is
deterministic in practice. In other words, there is a potentially
dangerous asymmetry from a consumer welfare perspective of an approach
that embraces probabilistic prediction, estimation, presumption, and
simulation of anticompetitive effects on the one hand but requires
efficiencies to be proven on the other.
There is ample discretion in the 2010 Merger Guidelines to allow
for this outcome in practice. For example, the merger-specificity
requirement could be interpreted narrowly to exclude any efficiency
that can be recreated with any form of creative contracting. While the
Merger Guidelines assert that Agencies ``do not insist upon a less
restrictive alternative that is merely theoretical,'' there is little
systematic evidence as to how this requirement is applied in practice.
Verifiability, on the other hand, could be interpreted to impose
stricter burden of proof than the agency is willing to accept when it
comes to predictions, estimates, presumptions, or simulations of
anticompetitive effects. There is little guidance as to how these
provisions of the Merger Guidelines ought to be interpreted.\11\
Neither is further guidance likely forthcoming from the courts given
how infrequently mergers are litigated. None of this, of course, is to
say that parties should not bear these burdens in practice.
Efficiencies, like anticompetitive effects, cannot and should not be
presumed into existence. However, symmetrical treatment in both theory
and practice of evidence proffered to discharge the respective burdens
of proof facing the agencies and merging parties is necessary for
consumer-welfare based merger policy.
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\11\ The 2006 Merger Guidelines Commentary provides some
guidance on efficiencies, but offer little guidance on the
interpretation of these provisions and the type of substantiation
required. U.S. Dep't of Justice & Fed. Trade Comm'n, Commentary on
the Horizontal Merger Guidelines (Mar. 2006), available at http://www.justice.gov/atr/public/guidelines/215247.htm#44.
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There are legitimate and widespread concerns that this has not been
the case. Academics, agency officials, and practitioners have noted
that although efficiencies are frequently a significant part of the
business rationale for a transaction, receiving credit for efficiencies
in a merger review is often difficult.\12\ Professor Daniel Crane has
analyzed the perceived asymmetries between competitive effects analysis
and efficiencies discussed above and their implications for competition
systems and consumer welfare.\13\ Others have pointed out that recent
court cases reveal that ``the efficiency defense faces an impossibly
high burden.'' \14\ Moreover, testimony from senior agency officials
recognize the potential costs of imposing an unnecessarily high burden
of proof to demonstrate cognizable efficiencies and states that
symmetrical treatment of the evidence as they related to efficiencies
versus competitive effects is warranted.
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\12\ See, e.g., Michael B. Bernstein & Justin P. Hedge,
Maximizing Efficiencies: Getting Credit Where Credit Is Due,
Antitrust Source, Dec. 2012, available at http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/dec12_hedge_12_20f.authcheckdam.pdf.
\13\ Daniel A. Crane, Rethinking Merger Efficiencies, 110 Mich.
L. Rev. 347, 386-87 (2011). Professor Crane argues that ``as a
matter of both verbal formulation in the governing legal norms and
observed practice of antitrust enforcement agencies and courts, the
government is accorded greater evidentiary leniency in proving
anticompetitive effects than the merging parties are in proving
offsetting efficiencies,'' id. at 348, and rejects a variety of
justifications for asymmetrical treatment of merger costs and
benefits.
\14\ Malcolm B. Coate, Efficiencies in Merger Analysis: An
Institutionalist View, 13 Sup. Ct. Econ. Rev. 230 (2005).
Placing too high a burden on the parties to quantify
efficiencies and to show that they are merger-specific risks
prohibiting transactions that would be efficiency-enhancing. On the
other hand, we are not
[[Page 22142]]
able simply to take the parties' word that the efficiencies they
have identified will actually materialize. Ultimately, we evaluate
evidence related to efficiencies under the same standard we apply to
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any other evidence of competitive effects.\15\
\15\ Statement of Kenneth Heyer on Behalf of the United States
Department of Justice, Antitrust Modernization Commission Hearings
on the Treatment of Efficiencies in Merger Enforcement (Nov. 17,
2005), available at http://govinfo.library.unt.edu/amc/commission_hearings/pdf/Statement-Heyer.pdf.
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The lack of guidance in analyzing and crediting efficiencies has
led to significant uncertainty as to what standard the Agency applies
in practice to efficiency claims and led to inconsistent applications
of Section 10 of the Merger Guidelines, even among agency staff.\16\ In
my view, standard microeconomic analysis should guide how we interpret
Section 10 of the 2010 Merger Guidelines, as it does the rest of the
antitrust law. To the extent the Merger Guidelines are interpreted or
applied to impose asymmetric burdens upon the agencies and parties to
establish anticompetitive effects and efficiencies, respectively, such
interpretations do not make economic sense and are inconsistent with a
merger policy designed to promote consumer welfare.\17\ Application of
a more symmetric standard is unlikely to allow, as the Commission
alludes to, the efficiencies defense to ``swallow the whole of Section
7 of the Clayton Act.'' A cursory read of the cases is sufficient to
put to rest any concerns that the efficiencies defense is a mortal
threat to agency activity under the Clayton Act. The much more pressing
concern at present is whether application of asymmetric burdens of
proof in merger review will swallow the efficiencies defense.
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\16\ In a recent study examining agency analysis of efficiencies
claims, an FTC economist and attorney found significant disparities.
Malcolm B. Coate & Andrew J. Heimert, Merger Efficiencies at the
Federal Trade Commission: 1997-2007 (2009), available at http://www.ftc.gov/sites/default/files/documents/reports/merger-efficiencies-federal-trade-commission-1997%E2%80%932007/0902mergerefficiencies.pdf. Coate and Heimert find that ``BE staff
endorsed 27 percent of the claims considered, while BC accepted
significantly fewer (8.48 percent) of the claims considered during
the studied period.'' The disparity also applies to rejection of
efficiencies claims. The Bureau of Economics rejected 11.9 percent
of the claims, while the Bureau of Competition rejected a
significantly higher 31.9 percent of claims. Id. at 26.
\17\ For example, Professor Crane explains that ``[i]f the
government and merging parties were held to the same standard of
proof--preponderance of the evidence, for example--then,
conceptually, harms and efficiencies would be given equal weight
despite the different allocations of burdens of proof.'' In
addition, ``[i]f probabilities of harm are easier to demonstrate on
an individualized basis than probabilities of efficiencies, even
though in the aggregate both harms and efficiencies are similarly
likely in the relevant categories of cases, then merger policy will
display a bias in favor of theories of harm even if it adopts an
explicit symmetry principle.'' Crane, supra note 11, at 387-88.
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III. Conclusion
There are many open and important questions with respect to the
treatment of efficiencies at the Agencies. While the Agencies'
analytical framework applied to diagnosing potential anticompetitive
effects got an important update with the 2010 Merger Guidelines, there
remains significant room for improvement with respect to the aligning
agency analysis of efficiencies with standard principles of economic
analysis. Primary among these important questions is whether the burden
of proof required to establish cognizable efficiencies should be
symmetrical to the burden the Agencies must overcome to establish
anticompetitive effects. In my view, issues such as out-of-market
efficiencies and the treatment of fixed costs also warrant further
consideration.\18\
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\18\ See, e.g., Jan M. Rybnicek & Joshua D. Wright, Outside In
or Inside Out?: Counting Merger Efficiencies Inside and Out of the
Relevant Market, in 2 William E. Kovacic: An Antitrust Tribute--
Liber Amicorum (2014) (forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411270; Judd E. Stone
& Joshua D. Wright, The Sound of One Hand Clapping: The 2010 Merger
Guidelines and the Challenge of Judicial Adoption, 39 Rev. Indus.
Org. 145 (2011).
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For the reasons set forth in this statement, I conclude that the
harms from the transaction are small at best and, applying a symmetric
standard to assessing the expected benefits and harms of a merger, the
expected cognizable efficiencies are substantially greater than the
expected harms. Accordingly, I believe the merger as proposed would
have benefitted consumers. As such, I cannot join my colleagues in
supporting today's consent order because I do not have reason to
believe the transaction violates Section 7 of the Clayton Act nor that
a consent ordering divestiture is in the public interest.
[FR Doc. 2014-08951 Filed 4-18-14; 8:45 am]
BILLING CODE 6750-01-P