Brown Shoe Co. v. United States
8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962)
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Rule of Law:
Under Section 7 of the Clayton Act, a merger's legality is assessed based on its potential to substantially lessen competition within any economically significant product market and geographic market. Both the vertical (supplier-customer) and horizontal (competitor-competitor) aspects of the merger must be analyzed, and a merger may be unlawful even with small market shares if it occurs in an industry trending toward concentration.
Facts:
- In 1955, Brown Shoe Co. was the fourth largest shoe manufacturer in the United States by dollar volume and operated over 1,230 retail shoe outlets through various ownership and franchise arrangements.
- G. R. Kinney Company, Inc. was the eighth largest shoe company by dollar volume, primarily engaged in retailing as the operator of the largest family-style shoe store chain in the U.S. with over 400 stores. It was also the twelfth largest shoe manufacturer.
- The American shoe industry was characterized by a large number of manufacturers, but also a 'definite trend' toward vertical integration, where major manufacturers were acquiring independent retail chains.
- Brown had a history of acquiring retail outlets and subsequently increasing its own shoe sales to those outlets, thereby reducing the outlets' purchases from other independent manufacturers.
- Prior to the merger discussions, Kinney bought no shoes from Brown, instead purchasing from a wide range of independent manufacturers.
- The merger between Brown and Kinney was effected on May 1, 1956, combining Brown's significant manufacturing capacity with Kinney's extensive retail distribution network.
Procedural Posture:
- The United States Government filed a civil antitrust action in the U.S. District Court for the Eastern District of Missouri to block a proposed merger between Brown Shoe Co. and G. R. Kinney Company, Inc.
- The complaint alleged the merger would violate Section 7 of the Clayton Act.
- The District Court denied the government's motion for a preliminary injunction, allowing the merger to proceed on the condition that the companies' assets and operations be kept separate.
- After a full trial, the District Court found that the merger violated Section 7 and would likely result in a substantial lessening of competition.
- The District Court issued a judgment ordering Brown to divest itself completely of all its interests in Kinney and to submit a divestiture plan for court approval.
- Brown filed a direct appeal of the District Court's judgment to the U.S. Supreme Court, prior to submitting the divestiture plan.
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Issue:
Does the merger of a leading national shoe manufacturer, Brown Shoe Co., with a leading national shoe retailer, G. R. Kinney Company, violate Section 7 of the Clayton Act by creating a reasonable probability of substantially lessening competition in the national manufacturing market or in local retail markets for men's, women's, and children's shoes?
Opinions:
Majority - Chief Justice Warren
Yes, the merger violates Section 7 of the Clayton Act. A merger must be functionally viewed in the context of its industry to determine its probable future effect on competition. Both the vertical and horizontal aspects of this merger threaten to substantially lessen competition. Vertically, the merger forecloses independent shoe manufacturers from competing for sales in Kinney's numerous retail stores, especially given Brown's policy of supplying its own outlets and the industry's trend toward vertical integration. Horizontally, the merger creates a company with a statistically significant market share in retail shoe sales in numerous cities across the country, which eliminates a substantial competitor in a fragmented market and contributes to a trend of concentration that Congress intended to prevent in its incipiency.
Concurring - Justice Clark
Yes, the acquisition violates Section 7. The record clearly establishes a 'reasonable probability' that competition may be substantially lessened. The line of commerce should be more simply defined as all shoes sold in ordinary retail stores, and the geographic market as the entire country. The integration of Brown's manufacturing with Kinney's 400 retail outlets would inevitably reduce the market available to small, independent manufacturers who previously supplied Kinney, thus lessening competition on a national basis.
Dissenting in part and concurring in part - Justice Harlan
While concurring in the judgment that the merger is illegal, Justice Harlan would have dismissed the appeal for lack of jurisdiction because the District Court's order was not a 'final judgment' until a specific divestiture plan was approved. On the merits, he agrees the merger is unlawful based solely on its vertical effects. The foreclosure of independent manufacturers from the substantial market represented by Kinney's retail stores is sufficient to condemn the merger. However, he finds the statistics in the record unconvincing as to any broader trend toward oligopoly and believes the majority's opinion goes far beyond what is necessary to decide the case.
Analysis:
Brown Shoe was the Supreme Court's first major interpretation of the 1950 Celler-Kefauver amendments to Section 7 of the Clayton Act, establishing a framework for modern merger analysis. The decision created a strong presumption against mergers, even those involving relatively small market shares, if they occurred in industries showing a trend toward concentration. It introduced the influential 'practical indicia' test for defining relevant submarkets and signaled that courts would broadly protect competition to preserve a market structure of small, independent businesses, thereby setting a high bar for mergers for the next two decades.
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