White, Paul H.

English

Chicago-Kent College of Law

Chicago-Kent Law Review Volume 48 Issue 2 Article 6 October 1971 Conglomerate Mergers and the I.T.T. Consent Decrees Paul H. White Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview  Part of the Law Commons Recommended Citation Paul H. White, Conglomerate Mergers and the I.T.T. Consent Decrees , 48 Chi.-Kent L. Rev. 208 (1971). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol48/iss2/6 This Notes is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact jwenger@kentlaw.iit.edu, ebarney@kentlaw.iit.edu. CONGLOMERATE MERGERS AND THE I.T.T. CONSENT DECREESA litigant can rarely lose every battle and yet win the war. However, thatis just what happened when the Department of Justice attacked three acquisi-tions of the International Telephone and Telegraph Corporation as violatingSection 7 of the Clayton Act.' In United States v. International Tel. & Tel.,'filed in April, 1969, the government sought to force I.T.T. to divest itself ofCanteen Corporation. In United States v. International Tel. & Tel. and GrinnellCorp.3 and United States v. International Tel. & Tel. and The Hartford FireInsurance Company,4 both filed in August, 1969, the government sought to pre-vent the proposed acquisitions of Grinnell Corporation and the Hartford FireInsurance Company by I.T.T. In the last two actions, the government alsosought preliminary injunctions preventing the acquisitions. The court refusedto issue an injunction in either case in October, 1969.5 Then in December, 1970,the trial court found that I.T.T. was entitled to a motion dismissing the com-plaint in the case of the Grinnell acquisition.6 In July, 1971, the trial court inthe Canteen Corporation case found that I.T.T. was also entitled to a judgmentdismissing that complaint. " Thus, the Justice Department lost final judgmentsto I.T.T. in two of the three cases and a preliminary injunction had been deniedin the third.Nevertheless, the government appears to have won the war, since, in Sep-tember, 1971, consent decrees were entered in all three cases." These consentdecrees provide for divestiture by I.T.T. of Canteen Corporation 9 and the FireProtection Division of Grinnell Corporation'0 within two years. In addition thedecrees require I.T.T. to divest itself of either (1) the Hartford Fire InsuranceCompany or (2) Avis Rent-A-Car, I.T.T.-Levitt and Sons, Inc. and its sub-sidiaries, I.T.T. Hamilton Life Insurance Company, and I.T.T. Life InsuranceCo. of New York within three years. Further, if I.T.T. does not divest itself ofHartford, it is restrained from acquiring any leading domestic company ordominant company in a concentrated market without showing in court thatsuch acquisition would not lessen competition or tend to create a monopoly inany line of commerce in any section of the country." Thus, the governmentreceived nearly all the substantive relief it had originally sought in filing theactions. The government, however, failed to get a definitive Supreme Court rul-1 15 U.S.C. § 18 (1970).2 1971 Trade Cas. 90, 530 (N.D. Ill. July 2, 1971).3 324 F. Supp. 19 (D. Conn. 1970).4 Civil Action No. 13320 (D. Conn., filed August 1, 1969).5 United States v. International Tel, & Tel., 306 F. Supp. 766 (D. Conn. 1969).I United States v. International Tel. & Tel., 324 F. Supp. 19 (D. Conn. 1970).7 United States v. International Tel. & Tel., 1971 Trade Cas. 90, 530 (N.D. Ill. July 2,1971).8 521 B.N.A. Antitrust & Trade Reg. Rept. A-4 (Sept. 28, 1971).9 1971 Trade Cas. 90,774 (filed August 23, 1971).10 1971 Trade Cas. 90,763 (entered Sept. 24, 1971).11 1971 Trade Cas. 90,766 (filed Aug. 23, 1971).208NOTES AND COMMENTSing on the novel arguments presented in attacking these mergers. Therein liesthe quandry for attorneys in the field. These novel arguments had been rejectedby the district courts. Why, then, had I.T.T. agreed to the consent decree? DidI.T.T. believe that these arguments would succeed in the Supreme Court? Thisarticle will examine these arguments and explore their probabilities of success.Over forty-five years ago the Supreme Court emphasized that each anti-trust case was sui generis and that the facts of each precedent must be closelyexamined before applying them to any other situation.' 2 Though a trial courtno longer must undertake an exhaustive economic analysis in every mergercase,' 3 at least some understanding of the economic effects of a merger is neces-sary.14 Consequently, a brief look at the status of the companies involved in theI.T.T. acquisitions is necessary.In 1968, the year prior to the filing of the suits, I.T.T. was the eleventhlargest industrial concern in the United States. Its revenues were just over fourbillion dollars that year. Its holdings in 1968 included Continental BakingCompany, the largest baking company in the U.S.; Sheraton Corporation ofAmerica, one of the two largest hotel chains in the nation; Levitt & Sons, Inc.,the nation's largest residential construction firm; and Avis, Inc., the secondlargest car rental company.In April, 1969, I.T.T. acquired Canteen Corporation, Hartford Fire In-surance Company and, Grinnell Corporation. At that time Canteen was one ofthe few nationwide food vending organizations, with operations in 43 states.Canteen had 1968 revenues of $322 million, 95 percent of which came frommerchandise and equipment sales. Canteen ranked second among companiesoperating in the on site food service market. Hartford Fire Insurance Companywas the fourth largest property and liability insurance company in the country.Hartford had 1968 revenues of $968.8 million. Grinnell Corporation was thelargest manufacturer and installer of automatic sprinkler fire protection systemsin the country. Grinnell had revenues of $341.3 million in 1968 and was the268th largest industrial corporation in the United States. By acquiring thesethree companies, I.T.T. could expect to increase their 1968 revenues of $4 bil-lion by at least $1.5 billion.In light of the Justice Department's avowed intention to attack any mergeramong the top 200 manufacturing firms or firms of comparable size in otherindustries, 15 the vigorous attack on I.T.T.'s acquisitions is not surprising. Whatmay be more surprising is that none of the government's arguments about theeffects of these acquisitions were able to convince the trial judges that:12 Maple Flooring Association v. U.S., 268 U.S. 563, 579 (1925).13 United States v. Philadelphia National Bank, 374 U.S. 321, 363 (1963).14 Id. at 362.15 Address by Attorney General John N. Mitchell before the Georgia Bar Association,June 6, 1969, 5 C.C.H. Trade Reg. Rept. 55,505 (June 19, 1969).CHICAGO-KENT LAW REVIEW[I]n any line of commerce in any section of the country, the effect ofsuch acquisition may be substantially to lessen competition, or to tendto create a monopoly. 16To understand this phenomenon an analysis of the government's principalarguments is each case is required.The government's complaint in the Canteen case17 is primarily foundedon the increased power of I.T.T and Canteen to employ reciprocity or benefitfrom reciprocity effect in the furnishing of vending and in-plant feeding ser-vices. In addition, the complaint alleges that the merger will foreclose competi-tors from vying for I.T.T.'s food service business; the merger will raise barriersto entry in this market and will trigger other defensive mergers. I8 With respectto the first allegation, the court found that since no significant increase in op-portunities for reciprocal dealing was shown, and since I.T.T. would probablynot utilize these opportunities if they did exist, no substantial adverse effect oncompetition was likely. 19 The court also found that the vertical foreclosure ofCanteen's competitors from I.T.T.'s locations, even if it were to occur, wouldforeclose less than one-half of one percent of the market and would be de mini-mus.20 Finally, since no likelihood of reciprocity effects or significant verticalforeclosure existed the court rejected the government's contention that thesecompetitive advantages would hinder entry into the market or trigger othermergers.21 Consequently, the government's complaint was dismissed on themerits.In the case of the Grinnell acquisition, 22 the government first alleged thatGrinnell was a dominant competitor in certain lines of commerce in certainsections of the country.23 The government then alleged that this dominantcompetitor would receive certain competitive advantages from the merger andthus substantially lessen competition. The primary competitive damage allegedwas increased opportunity for reciprocity. In addition, the government also al-leged that the merger would permit Grinnell to sell complete packages or sys-tems, obtain leads for sales of sprinkler systems from Hartford agents, fore-close Grinnell's competitors from competing for I.T.T.'s business, and giveGrinnell access to I.T.T.'s financial and advertising resources. 24 Finally, thegovernment alleged that this merger would increase economic concentrationand result in injury to competition in numerous undesignated lines of com-merce.2516 15 U.S.C. § 18 (1970).17 United States v. International Tel. & Tel., 1971 Trade Cas. 90,530 (N.D. IMI. July 2,1971).'8 Id. at 90,535.19 Id. at 90,548.20 Id. at 90,559.21 Id. at 90,560.22 United States v. International Tel & TeL, 324 F. Supp. 19 (D. Conn. 1970).23 Id. at 24.24 Id. at 30.25 Id. at 52.NOTES AND COMMENTSThe trial court emphatically rejected the government's first contention,that Grinnell was a dominant competitor in any relevant produce or geographicmarket.26 Then, though the court said it need not have reached these questions,it decided that even if Grinnell were a dominant competitor none of the allega-tions of competitive advantages were substantiated. The court found that in-creased reciprocity was not likely to result from the merger. 27 As to the rest ofthe alleged advantages, the court either found that they were not truly advan-tages or that they were not likely to occur.28 Finally, the court rejected theargument that increased economic concentration was forbidden by Section 7 ofthe Clayton Act. The court acknowledged that concentration in a particularmarket was a relevant concern of the statute, but rejected as irrelevant theargument that conglomerate mergers were causing concentration of resourcesin the entire domestic economy.29The Justice Department's action attacking the I.T.T.-Hartford acquisitionnever came to trial. However, the gist of the government's complaint, andof the court's reaction to it, can be determined from the court's decision in re-fusing a preliminary injunction. 30Again in this case, the government allegedthat the acquisition would result in a market structure conducive to reciprocaldealing. 3 ' It also alleged a substantial vertical foreclosure of I.T.T.'s insurancebusiness to Hartford's competitors. 32 In addition, the government claimed thatI.T.T. and its subsidiaries would receive an advantage over their competitors byhaving access to $400 million in excess funds held by Hartford.3 3 The govern-ment also alleged that the merger would eliminate potential competition betweenI.T.T. and Hartford, since Hartford was studying diversification as a way toutilize its $400 million surplus.34 Finally, the government again alleged thatthe merger would further accelerate the trend of increasing concentration inthe economy and thus would have anti-competitive effects.35In refusing the preliminary injunction, the court decided that the govern-ment had not demonstrated a reasonable probability that it would be successfulin sustaining any of its allegations at trial. As to reciprocity, the court foundthat the government had neither shown that the merger created substantiallyincreased opportunities for reciprocity, nor that such opportunities, even ifcreated, were likely to be exploited.36 The vertical foreclosure was found to beinsubstantial, or at least not large enough, by itself to make the merger invalid.3 726 Id. at 29.27 Id. at 46.28 Id. at 47.29 Id. at 53.30 United States v. International Tel. & Tel., 306 F. Supp. 766 (D. Conn. 1969).31 Id. at 786.32 Id. at 792.3 Id. at 791.34 Id. at 795.35 Id. at 796.36 Id. at 791.87 Id. at 795.CHICAGO-KENT LAW REVIEWThe court held further that the government had not shown a probability thatHartford's surplus would be used by I.T.T. subsidiaries 8 The court also heldthat the government had made no showing that the merger eliminated potentialcompetition between I.T.T. and Hartford. 9 Finally, the court found no meritto the government's claim that economic concentration in the aggregate, ratherthan in a particular market, was violative of the Clayton Act.40These three cases together represent the Justice Department's most ambi-tious attack on conglomerate mergers to date. As such, they present severalnovel theories of attack on conglomerates. The first new theory they seek toestablish is that a mere potential for reciprocity is adequate to invalidate amerger. The second new theory is that Section 7 of the Clayton Act was in-tended to remove the anti-competitive effects of concentration of assets in theeconomy as a whole as well as concentration in a particular line. The last newtheory is that two corporations with plans to diversify are potential competitorsand their merger may substantially harm competition.Nothing is novel about attacking mergers because of reciprocity. The Su-preme Court in Federal Trade Commission v. Consolidated Foods Corp.41 madeit clear that reciprocity is one of the anti-competitive practices which the anti-trust laws are intended to counteract. The Court held that reciprocity violatesSection 7 of the Clayton Act if the probability that it will lessen competition isshown. 42 Thus, the novel point argued in the I.T.T. cases was the nature of theproof necessary to show that probability. The government argued that a show-ing that opportunities for reciprocity were substantially increased was adequate.Their argument was strongly supported by two cases decided in the ThirdCircuit, Federal Trade Commission v. Ingersoll-Rand Co.43 and Allis-Chalm-ers Mfg. Co., v. White Consolidated Industries, Inc.44 However the trial courtsfelt that I.T.T. had shown a strong corporate policy against reciprocity and,because of their profit center structure, effectively discouraged it. In the absenceof proof of these corporate policies, the government's argument on reciprocitywould probably have been accepted by the courts. 45 The conclusion must be,therefore, that proof of a market structure significantly increasing the oppor-tunities for reciprocity remains an important means of attack on conglomeratemergers.Like reciprocity, the government's theory of the anti-competitive effectsof eliminating potential competition is simply an extension of accepted law.38 Id. at 792.89 Id. at 795.40 Id. at 796.41 380 U.S. 592 (1965).42 Id. at 595.43 320 F.2d 509 (3d Cir. 1963).44 414 F.2d 506 (3d Cir. 1969), cert. denied, 396 U.S. 1009 (1970).45 See, e.g., United States v. International Tel. & Tel., 306 F. Supp. 766, 783 (D. Conn.1969).NOTES AND COMMENTSUnited States v. Continental Can Co. 4 6 made it clear that mergers between twocompetitors may violate the antitrust laws, even if the competitors producegoods as different as metal cans and glass containers. Further, United Statesv. Penn-Olin Chemical Co.47 stated that a combination between two potentialentrants to a market for the purpose of jointly entering that market is alsowithin the scope of the anti-trust laws. In that case, however, the district courton remand decided that neither joint venturer would have entered the particularmarket alone and consequently no violation occurred. 48 In Hartford, though,the government could point to no particular industry and say that both I.T.T.and Hartford were potential entrants. The mere fact that both were consideringdiversification does not meet the Penn-Olin requirement that a reasonable prob-ability exist that both would have entered a particular market. 49 In fact, sinceboth companies' diversification studies were so wide-ranging, the mathematicalprobabilities that they would have chosen to enter the same market seems verysmall indeed. Therefore, the application of the doctrine of potential competitionto conglomerate mergers appears to be largely foreclosed by the diversifiednature of the conglomerates themselves.The last new theory presented by the government in attacking the I.TT.mergers is that the merger will impair competition by increasing economicconcentration. Economic concentration in a particular line of commerce haslong been a relevant concern in considering the anti-competitive effects of amerger.50 The reason the alleged effect must be limited to a particular line ofcommerce is not clear. The words of the Clayton Act say that the requisitestandard is met if competition is impaired "in any line of commerce in anysection of the country." 51 The House report on the bill said that: "[T] he purposeof the bill is to protect competition in each line of commerce in each sectionof the country." 52 While the intention of the statute is directed toward preserv-ing competition in each line of commerce, it does not follow that concentrationonly in a particular line of commerce can harm that line of commerce. Forexample, concentration in the American steel industry certainly could have aharmful effect on the auto industry. The court decisions, too, seem to justifya broader interpretation if their method of determining a relevant market isexamined. In United States v. Continental Can Co.,53 for instance, the Courtrecognized a line of commerce that included metal cans and glass bottles be-cause what happened in one of those lines affected the other. Thus, if thegovernment could show a casual relationship between conglomerate mergers andharmful effects in several different markets, their argument should be accepted.46 378 U.S. 441 (1964).47 378 U.S. 158 (1964).48 United States v. Penn-Olin Chemical Co., 246 F. Supp. 917 (D. Del. 1965).49 United States v. Penn-Olin Chemical Co., 378 U.S. 158, 175 (1964).50 E.g., United States v. Von's Grocery, 384 U.S. 270 (1966).51 15 U.S.C. § 18 (1970).52 H.R. Rep. No. 1191, 81st Cong., 1st Sess., 8 (1949).53 378 U.S. 441 (1964).214 CHICAGO-KENT LAW" REVIEWCertainly such effects are within the purview of congressional intent in passingSection 7 of the Clayton Act and within the logic of court interpretations ofthe Act. Therefore, an argument which attacks a merger on the basis of theseeffects could be successful.CONCLUSIONThe trial courts refused to accept any of the three novel theories advancedby the Justice Department in attacking the three I.T.T. mergers. Nevertheless,I.T.T. respected the government's arguments enough to agree to a consent decree.On closer examination, at least two of these three novel theories seem to havesome chance for success had they been argued before the Supreme Court. Thus,these arguments will probably continue to be valuable to the government inattacking future conglomerate mergers.PAUL H. WHITE

Conglomerate Mergers and the I.T.T. Consent Decrees

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Conglomerate Mergers and the I.T.T. Consent Decrees

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