Federal Trade Commission v. Swedish Match
2000 U.S. Dist. LEXIS 19168, 131 F. Supp. 2d 151 (2000)
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Rule of Law:
A federal court may grant the Federal Trade Commission (FTC) a preliminary injunction under Section 13(b) of the FTC Act to block a proposed merger if the FTC demonstrates a reasonable probability that the merger will substantially lessen competition under Section 7 of the Clayton Act and that the public equities weigh in favor of the injunction.
Facts:
- Swedish Match North America, Inc. ("Swedish Match") was the largest producer of loose leaf chewing tobacco in the United States, holding 42% of the market in 1999.
- National Tobacco Company, L.P. ("National") was the third largest producer of loose leaf chewing tobacco in the United States, holding 18% of the market in 1999.
- In 1997, Swedish Match and National unsuccessfully attempted to form a joint operation agreement.
- On February 10, 2000, Swedish Match and National entered into an asset purchase agreement for Swedish Match to acquire National's loose leaf tobacco brands and certain related assets for approximately $165 million.
- Swedish Match sought to utilize its significant excess manufacturing capacity, while National aimed to alleviate its own excess capacity and challenges competing with moist snuff producers.
- The loose leaf tobacco market was characterized by declining demand, high brand loyalty among consumers, consistently rising prices, and wide profit margins despite producers having excess capacity.
Procedural Posture:
- On February 18, 2000, Swedish Match and National Tobacco filed Premerger Notification and Report forms with the Federal Trade Commission (FTC) pursuant to the Hart-Scott-Rodino Improvements Act of 1976.
- On June 22, 2000, the FTC, by a 5-0 vote, authorized its staff to seek a temporary restraining order or preliminary injunction to prevent the merger under Section 13(b) of the Federal Trade Commission Act.
- The defendants subsequently agreed they would not effectuate the asset purchase agreement during the pendency of the preliminary injunction proceedings, thus eliminating the immediate need for a temporary restraining order.
- On June 23, 2000, the FTC filed suit in the United States District Court for the District of Columbia, seeking a preliminary injunction against the merger.
- The District Court held a five-day evidentiary hearing beginning on September 5, 2000, with closing arguments heard on September 27, 2000.
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Issue:
Does the Federal Trade Commission establish a reasonable probability that Swedish Match North America, Inc.'s proposed acquisition of National Tobacco Company, L.P.'s loose leaf chewing tobacco business will substantially lessen competition, and that the equities favor an injunction, thereby warranting a preliminary injunction under Section 13(b) of the Federal Trade Commission Act?
Opinions:
Majority - Thomas F. Hogan, District Judge
Yes, the Federal Trade Commission has shown a reasonable probability that the proposed acquisition will substantially lessen competition and that the equities favor an injunction, warranting a preliminary injunction. The Court first addressed the FTC's likelihood of success on the merits, beginning with the relevant product market definition. While acknowledging some functional interchangeability and dual usage between loose leaf tobacco and moist snuff, the Court found insufficient price sensitivity to include moist snuff in the same market. Applying the 'practical indicia' from Brown Shoe Co. v. United States, the Court concluded that loose leaf chewing tobacco constitutes a distinct relevant product market due to differences in characteristics, customer demographics, and independent pricing. The geographic market was stipulated as the United States. Regarding the probable effect on competition, the Court found that the merger would give Swedish Match 60% of the loose leaf market, and the top two firms (Swedish Match and Conwood) would control 90%. The Herfindahl-Hirschman Index (HHI) would increase from 3,219 to 4,733, a 1,514-point increase, establishing a prima facie presumption of anticompetitive effects under United States v. Philadelphia National Bank. The defendants' rebuttal arguments were rejected: (1) declining demand and excess capacity had not led to price competition, but rather to sustained high prices and margins, indicating oligopolistic behavior; (2) claims that rivals or new entrants would replace lost competition were unsubstantiated given strong brand loyalty, advertising restrictions, shrinking shelf space, and substantial sunk costs, making effective entry unlikely; and (3) the 'efficiencies defense' was deemed inappropriate given the high market concentration, and the purported cost savings were speculative and unlikely to be passed to consumers, with Swedish Match's own projections anticipating price increases. Second, the Court weighed the equities. It determined that the strong public interest in effective antitrust enforcement significantly outweighed the private corporate interests of Swedish Match and National and their speculative claims of public benefit from efficiencies. Granting the injunction was deemed necessary to maintain the status quo and prevent the 'irreparable scrambling' of assets that would make effective relief impossible if the merger were later found illegal after administrative proceedings.
Analysis:
This case underscores the rigorous standard applied in Section 13(b) preliminary injunction actions to prevent mergers deemed anticompetitive. It highlights the criticality of defining the relevant product market, demonstrating how courts leverage 'practical indicia' and economic analysis (like the hypothetical monopolist test) to identify distinct submarkets even amid some product overlap. The opinion also reinforces the high burden on defendants to rebut a prima facie case of illegality, especially in highly concentrated markets, and illustrates the limited acceptance of an 'efficiencies defense' in such scenarios, requiring clear proof that benefits will outweigh competitive harm. The ruling's emphasis on the 'irreparable scrambling' of assets provides a strong rationale for preventative injunctions in merger cases.
