Federal Trade Commission v. H.J. Heinz Co.
246 F.3d 708 (2001)
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Rule of Law:
In a highly concentrated market, a merger that eliminates a significant competitor and creates a duopoly is presumptively illegal under Section 7 of the Clayton Act. To rebut this presumption, the merging parties must provide concrete, verifiable proof of extraordinary, merger-specific efficiencies that will ultimately benefit consumers and competition.
Facts:
- The U.S. jarred baby food market was dominated by three firms: Gerber Products Company (65% market share), H.J. Heinz Company (17.4%), and Beech-Nut Nutrition Corporation (15.4%).
- Gerber possessed immense brand loyalty and was stocked in over 90% of U.S. supermarkets.
- Heinz marketed itself as a 'value brand' priced below Gerber, while Beech-Nut marketed itself as a 'premium brand' priced similarly to Gerber.
- At the wholesale level, Heinz and Beech-Nut were the only two companies that competed vigorously for the 'second position' on supermarket shelves, often by paying slotting fees that Gerber did not.
- Heinz operated a modern production plant at only 40% capacity, while Beech-Nut used a much older plant built in 1907.
- On February 28, 2000, Heinz entered into an agreement to acquire 100% of Beech-Nut's voting securities for $185 million.
- The proposed plan involved shifting all of Beech-Nut's production to Heinz's underutilized Pittsburgh plant.
Procedural Posture:
- H.J. Heinz Co. and Milnot Holding Corporation (Beech-Nut) filed a Premerger Notification and Report Form with the Federal Trade Commission (FTC).
- The FTC filed a complaint and a motion for a preliminary injunction in the U.S. District Court for the District of Columbia to halt the merger pending a full administrative review.
- The district court, after a five-day hearing, denied the FTC's motion for a preliminary injunction.
- The FTC (appellant) appealed the denial to the U.S. Court of Appeals for the D.C. Circuit, with Heinz and Beech-Nut as appellees.
- The Court of Appeals granted an injunction to prevent the merger from closing while the appeal was being heard.
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Issue:
Is the Federal Trade Commission entitled to a preliminary injunction under Section 13(b) of the FTCA to prevent a merger that would reduce the number of significant national competitors in the jarred baby food market from three to two?
Opinions:
Majority - Circuit Judge Henderson
Yes. The FTC is entitled to a preliminary injunction because it has raised serious and substantial questions about the merger's anticompetitive effects, and the public equities weigh in favor of granting the injunction. The FTC established a strong prima facie case by showing that the merger would occur in an already highly concentrated market (pre-merger HHI of 4775) and would significantly increase concentration (by 510 points), creating a presumption that competition would be substantially lessened. This merger to duopoly would eliminate the existing head-to-head competition between Heinz and Beech-Nut at the wholesale level. The defendants' rebuttal arguments failed to overcome this presumption. Their claims of post-merger efficiencies were not sufficiently proven to be extraordinary, merger-specific, or guaranteed to benefit consumers. Similarly, their argument that the merger was necessary for innovation was speculative and unsupported by reliable evidence. Given the high probability of irreparable harm to competition if the merger proceeded versus the ability to consummate the merger later if it were found lawful, the balance of equities favors granting the injunction.
Analysis:
This case is a landmark decision in modern merger analysis, strongly affirming the power of statistical evidence (HHI) in establishing a prima facie case against a merger in a highly concentrated market. It sets a very high bar for defendants attempting to use an efficiencies defense, requiring rigorous and verifiable proof that the claimed benefits are merger-specific and will be passed on to consumers. The court's skepticism toward speculative claims about innovation and its focus on the elimination of direct, head-to-head competition, even at the wholesale level, provides a clear framework for challenging mergers that create a duopoly or significantly entrench a dominant market leader.
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