The opinion of the court was delivered by: FULLAM
This antitrust case, brought under § 16 of the Clayton Act, 15 U.S.C. § 26, to remedy violations of § 7 of the Clayton Act, 15 U.S.C. § 18, and § 2 of the Sherman Act, 15 U.S.C. § 2, concerns a purchase by one company of another company's assets. Plaintiffs assert divestiture is necessary to prevent defendants' monopolization of related wholesale and retail markets. Pending a plenary trial, plaintiffs seek a preliminary injunction directing defendants to manage their assets as if the purchased company and the purchaser company were independent, vigorously competitive entities. Defendants argue that these plaintiffs lack standing to obtain the requested equitable relief, and that the evidence does not justify it. I conclude that these plaintiffs have standing to obtain both divestiture and hold-separate orders, and that the present evidence justifies a preliminary injunction.
The parties do business as bakers. Plaintiffs are Tasty Baking Company and its wholly owned subsidiary, Tastykake, Inc., indistinguishable for present purposes, and hereinafter called Tasty. Defendants are Ralston Purina, Inc., hereinafter Ralston, and its wholly owned subsidiary, Continental Baking Company, hereinafter Continental. For several years the parties have baked competing products under the labels of Tastykake, by plaintiffs, and Hostess, by defendants.
Until early 1986, these products also competed with products labeled Drake, baked by a division of Borden, Inc. By the late spring of 1986, however, Borden considered defendants' offer to buy the Drake division. The companies filed pre-merger notices with the Federal Trade Commission and Antitrust Division of the Justice Department on May 30, 1986, these agencies expressed no objection, and the required waiting period expired June 29, 1986. The next day Borden agreed to sell certain assets and liabilities of the Drake division to defendants. Some details of that deal were kept secret, but the companies announced their agreement on July 1, 1986. On July 12, 1986, the transaction was fully consummated.
On August 21, 1986, upon receipt of plaintiffs' Complaint alleging illegalities in Continental's control of both Hostess and Drake product lines, I granted an ex parte order authorizing expedited discovery and scheduled a hearing on the preliminary injunction motion. After several postponements by agreement of the parties, the hearing began September 25, 1986, continued on the 29th and 30th, and concluded October 7, 1986. I heard oral argument November 6, 1986, and post-argument briefing was completed on January 15, 1987.
As a threshold matter, defendants assert that plaintiffs lack standing to prosecute this suit. I disagree.
Defendants' first argument derives from Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 107 S. Ct. 484, 93 L. Ed. 2d 427 (1986) and Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 50 L. Ed. 2d 701, 97 S. Ct. 690 (1977). In Cargill, the Supreme Court reiterated the view that to obtain injunctive relief under the Clayton Act § 16, "a private plaintiff must allege a threatened loss or damage 'of the type the antitrust laws were designed to prevent and that flows from that which makes defendants' act unlawful.'" 107 S. Ct. at 491 (quoting Brunswick, 429 U.S. at 489).
In this case, plaintiffs have alleged antitrust injury. They claim that defendants' monopolization illegally will impair Tasty's ability to enter new markets and develop business, by facilitating Continental's negotiations with retailers for better store shelf space and promotional time slots in markets where Tasty does compete and by removing Continental's most substantial competitor in various markets and therein allowing Continental to reap monopoly profits that can subsidize predatory pricing in other markets. Complaint paras. 29-30, 34; see generally infra IV.A (on plaintiffs' antitrust injuries). Defendants counter by characterizing Tasty's possible injuries as due to defendants' increased operating efficiencies and better service to customers. This creates a factual dispute, but does not demonstrate any inadequacy of plaintiffs' pleading.
Defendants' next argument derives from Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 20 L. Ed. 2d 1231, 88 S. Ct. 2224 (1968), Illinois Brick Co. v. Illinois, 431 U.S. 720, 52 L. Ed. 2d 707, 97 S. Ct. 2061 (1977), and, most generally, Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 74 L. Ed. 2d 723, 103 S. Ct. 897 (1983). These cases establish that, to collect treble damages under the Clayton Act § 4, plaintiffs must be injured directly by defendants' antitrust violations. This requirement, if applicable to claims for injunctive relief, would bar plaintiffs' claim under defendants' theory that Tasty supplies "independent driver/entrepreneurs" who are defendants' true competitors.
The factual premise of defendants' theory is far-fetched. In any event, as a matter of law, the requirement of direct injury does not apply to claims for injunctive relief. Mid-West Paper Products Co. v. Continental Group, Inc., 596 F.2d 573, 590-94 (3d Cir. 1979); see Cargill, 107 S. Ct. at 489-90 & nn. 5 & 6.
Defendants' last standing argument derives from International Telephone and Telegraph Corp. v. General Telephone & Electronics Corp., 518 F.2d 913, 920-25 (9th Cir. 1975), followed without elaboration in Langenderfer, Inc. v. S.E. Johnson Co., 729 F.2d 1050, 1060 (6th Cir.), cert. denied, 469 U.S. 1036, 83 L. Ed. 2d 401, 105 S. Ct. 510, 105 S. Ct. 511 (1984). In these cases, based on an analysis of the antitrust laws' legislative history, the courts held that no divestiture remedy may be obtained by plaintiffs challenging a competitor's acquisition of another competitor. That rule would bar plaintiffs' claims.
However, that rule has not found favor in this Circuit, and will not be applied here. Over a decade ago, in NBO Industries Treadway Cos., Inc. v. Brunswick Corp., 523 F.2d 262, 278-79 (3d Cir. 1975), vacated on other grounds, 429 U.S. 477, 97 S. Ct. 690, 50 L. Ed. 2d 701 (1977), Judge Gibbons explained that, even if the statute's original drafters assumed that the Clayton Act § 16 did not create a private divestiture remedy,
it is quite another question whether legislative history from 1914, strong as it appears, should control the contemporary application of a statute laying down a fundamental national economic policy. This is especially true when the significance of the circumstances to which application is sought were perceived dimly, if at all, at the time of passage. The antitrust laws are of necessity statements of general principle. They must be given meaning in specific applications on a case-by-case basis. It is impossible for a legislature to devise codes so all-encompassing as to predict every case to which the general principle should apply. So, too, with antitrust remedies. There is a danger in permitting the pronouncements of statesmen long deceased to control the contemporary meaning of statutes which are almost an economic constitution for our complex national economy.
This language was not necessary to the disposition of NBO Industries, because the court went on to find that, under the facts of that case, divestiture would not be appropriate. Id. at 279. However, based on the requirement of case-by-case application of the antitrust laws in above-quoted passage, Judge Troutman refused to preclude a plaintiff from seeking divestiture. Joseph Ciccone & Sons, Inc. v. Eastern Industries, Inc., 537 F. Supp. 623, 630 (E.D. Pa. 1982).
The correctness of Judge Gibbons' position was acknowledged in Cia. Petrolera Caribe, Inc. v. ARCO Caribbean, Inc., 754 F.2d 404, 414 & 426-27 (1st Cir. 1985). In that decision, Judge Bownes fully explained why competitor-plaintiffs deserve a divestiture remedy in appropriate cases. Id. at 413-30. Given the Supreme Court's recognition that "sections 4 and 16 [of the Clayton Act] are . . . best understood as providing complementary remedies for a single set of injuries," Cargill, 107 S. Ct. at 491, I find that competitor-plaintiffs, who would be entitled to seek treble damages, can seek the equitable relief of divestiture.
It is not surprising that one competitor should be accorded standing to challenge another competitor's acquisition that reduces competition in a shared market. See Cargill, 107 S. Ct. at 495, approving on this point, 761 F.2d 570, 577 (10th Cir. 1985) (collecting cases granting standing based on such allegations). While in some cases competing companies all may benefit by increasing oligopolistic character of a market, in other cases competitors -- with specialized knowledge of their market -- may recognize that an acquisition will enable the acquiring company to harm competition by harming the remaining competitors; with this special knowledge that enables rapid action, together with their access to resources needed to prosecute an antitrust action, competitor-plaintiffs well may assure that "a plaintiff adequately represents the interests of 'victims' of the antitrust violation" and that "in fashioning relief [judges] appropriately address and remedy the actual violation rather than simply correct an incidental injury." Schoenkopf v. Brown & Williamson Tobacco Corp., 637 F.2d 205, 210-11 (3d Cir. 1980). In all cases, of course, plaintiffs must prove that they face threatened antitrust injury, but evaluation of this proof is best separated from the standing analysis, and deferred for consideration as part of the merits of the case and as a factor determining the adequacy of plaintiffs' remedy at law. Accord Monfort of Colorado, Inc. v. Cargill, Inc., 761 F.2d 570, 574 n.2 (10th Cir. 1985), rev'd on other grounds, 479 U.S. 104, 107 S. Ct. 484, 93 L. Ed. 2d 427 (1986).
Notwithstanding the fact-sensitive nature of this case, at the preliminary injunction hearing the parties' strategies differed markedly. Plaintiffs presented five live witnesses and one witness by video deposition, submitted 105 trial exhibits and portions of ten depositions, and, in thorough briefs, explained how their evidence proved defendants' violations of the antitrust laws. By contrast, although defendants did submit some evidence, they did not submit much; as conceded in Defendants' Post-Hearing Reply Memorandum, at 9, they "'haven't yet begun to fight' . . . the antitrust merits of the case." The relative lack of defendants' factual submission cannot be excused by the preliminary nature of the proceedings -- over a month elapsed between the lawsuit's initiation and the hearing, plaintiffs conducted all their discovery during this period, and defendants did not seek a postponement of the hearing. In all, the record includes plaintiffs' exhibits (PXs), defendants' exhibits (DXs), parts of individual depositions (Dep.s), the various briefs, trial testimony recorded in a consecutively paginated hearing transcript (Tr.), and a transcript of the oral argument (ATr.).
To obtain relief under the Clayton Act § 16, plaintiffs must prove a probability of success on the merits of their claims under the Clayton Act § 7 or the Sherman Act § 2. The Clayton Act § 7, designed "primarily to arrest apprehended consequences of intercorporate relationships before those relationships could work their evil," U.S. v. E.I. Du Pont de Nemours & Co., 353 U.S. 586, 597, 77 S. Ct. 872, 1 L. Ed. 2d 1057 (1957), broadly prohibits any acquisition with an effect that " may be substantially to lessen competition, or to tend to create a monopoly." Brunswick, 429 U.S. at 485 (emphasis supplied in the quoted statute by the Supreme Court). The Sherman Act § 2, in addition to punishing actual monopolization, forbids attempts, as well as combinations or conspiracies, where defendants have a specific intent to obtain monopoly power, although monopoly power is not yet obtained. 16B Business Organizations, von Kalinowski, Antitrust Laws and Trade Regulations § 7.01, at 7-16 to 17. Both statutes focus attention on the facts to define the relevant market, with the Clayton Act § 7 then focusing on facts to determine if the acquisition is proscribed because it creates a "probable anticompetitive effect," Brown Shoe Co. v. U.S., 370 U.S. 294, 323, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). and with the Sherman Act § 2 then focusing on facts to determine if the acquisition effects a forbidden intentional plan to achieve monopoly power, see U.S. v. Griffith, 334 U.S. 100, 105-06, 92 L. Ed. 1236, 68 S. Ct. 941 (1948).
Market definition is a central issue in this case. Count I of the Complaint raises claims under the Clayton Act § 7. "Determination of the relevant product and geographic markets is 'a necessary predicate' to deciding whether a[n acquisition] contravenes the Clayton Act." U.S. v. Marine Bancorporation, Inc., 418 U.S. 602, 618, 41 L. Ed. 2d 978, 94 S. Ct. 2856 (1974) (citations omitted). Count II of the Complaint raises claims of actual and attempted monopolization under the Sherman Act § 2. Actual monopolization always requires proof of the relevant market, U.S. v. Grinnell Corp., 384 U.S. 563, 570, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966), and the same is required to prove plaintiffs' theory of attempted monopolization, see American Bearing Co., Inc. v. Litton Industries, Inc., 729 F.2d 943, 949 (3d Cir.), cert. denied, 469 U.S. 854, 83 L. Ed. 2d 112, 105 S. Ct. 178 (1984); Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 117 (3d Cir. 1980), cert. denied, 451 U.S. 911, 68 L. Ed. 2d 300, 101 S. Ct. 1981 (1981); Coleman Motor Co. v. Chrysler Corp., 525 F.2d 1338, 1348 & n.17 (3d Cir. 1975). For present purposes, a consolidated, fact-oriented market analysis is appropriate.
The relevant product market is some sub-category of the snack food market. In their Complaint, paras. 14-20, plaintiffs initially identified a market in snack cakes and pies. Later, plaintiffs argued that the relevant market is premium snack cakes and pies. Defendants apparently prefer not yet to address this issue directly, although they have suggested that the relevant products may be sweet snacks, or even all snack foods. At oral argument, defendants' attorney conceded that defendants "haven't yet begun to fight on this aspect of the market. . . ." ATr. 53. On the evidence presented, I find the following:
Snack cakes and pies constitute a recognized market segment of the baking industry. This conclusion reflects testimony of plaintiff's employees, e.g., Tr. 86 (Nagle, Tasty's director of national sales), of non-party witnesses called by plaintiffs, e.g., Tr. 5 (Ratliff, Interstate Brands Corporation's executive vice-president, Dolly Madison Cake Division); Vance (American Bakeries Company, senior vice-president; formerly a vice-president of Continental) Dep. 8, and of one of the highest ranking employees transferred from Borden to Continental as part of the acquisition, e.g., Christodoulou (Continental's vice-president and general manager, Drake Bakeries Division) Dep. 148-49. Most significantly, however, it reflects positions taken in documents prepared by Ralston, Continental, and Borden's Drake division before this litigation began. E.g., PX 51, at 3 (Ralston's 1985 Annual Report to Shareholders states "Continental Baking is regarded as the leader in both bread and snack cakes."); PX 2, at 5 (Continental's 1986-88 Operating Plan includes "snack cakes" and "snack pies" as "markets"); PX 84, at 5 (1985 marketing plan, for Drake products, identifies a "U.S. market for Snack Cakes and Pies"). In this litigation, defendants appear to have adopted a different approach -- they "tend not to define" a line of snack cakes and pies, but still they admit that "many people in the industry [including defendants in the past], call [certain Hostess and Drake products] snack cakes and pies. . . ." Pearce (Ralston's vice-president for consumer products business development) Dep. 66-68. Ultimately, however, defendants cannot deny the existence of a snack cake and pie market segment, a segment that, they recognize, generates between $1.0 and $1.4 billion in annual sales. See, e.g., PX 2, at 2 ($1.0 billion); PX 16, at 3 (1986 Marketing Plan for Drake reports: $1.40 billion retail sales, $1.08 billion manufacturer's sales).
Snack cakes and pies include Tastykake Krimpets, Hostess Twinkies, and Drake Ring Dings. Generally, according to Tasty's attorneys, this market segment includes products that
are fresh, moist, baked (for cakes), baked or fried (for pies) products, generally no larger than approximately five ounces for a (one or more piece) serving, individually wrapped for use on a snack occasion or for the lunch pail or school bag, have a short shelf life, and in most cases are delivered directly to the retail stores, usually daily.
Memorandum of Law in Support of Plaintiffs' Motion for Preliminary Injunction, at 31;
see also Tr. 123-25 (on cross-examination, Tasty's Nagle agrees that these products usually are sweet). This definition satisfies representatives of non-party companies in the baking business, witnesses called by plaintiffs. See, e.g., Tr. 5-7 & 17 (Interstate's Ratliff and Schwab, executive vice-president for marketing); Vance Dep. 10-12. It also satisfies Drake's Christodoulou, Dep. 149-49, and is essentially accepted by Continental, PX 4, at 1 (1986-1988 Strategic Plan focuses attention on "high moisture content, short shelf life baked or fried products in which the most central quality issue is product freshness").
First, they generally offer to prove that snack cakes and pies compete with other sweet goods. As support, defendants submit a summary of a study by the Marketing Corporation of America, which reaches the unremarkable conclusion that "Hostess heavy users appear to seek alternative indulgent sweet foods in the following market: . . . Other easy sweet foods . . . ." DX 44, at 1. They also submit the opinion of Pierce, Continental's director of sales of the eastern region for both bread and cake, that "snack cake and pies . . . compete in the mind of the consumer with . . . fresh baked shop type goods, cake donuts, candy bars, ice cream . . . with all snacks [including cookies]." Dep. 115-16. All this suggests, at best, is that people who buy snack cakes and pies also sometimes buy other sweet snacks. It certainly does not prove that ice cream and snack cakes are substitutes and, more generally, it does not preclude a finding that snack cakes and pies constitute a relevant submarket within the market of all sweet snacks.
Second, defendants claim that the snack cake and pie market includes more products than plaintiffs believe, specifically, that it includes snacks like brownies, danish pastries, doughnuts, and cookies. Brown, Continental's chairman and chief executive officer, testified that snack cakes and pies include "honey buns" and also that he "would put in that category doughnuts that are in individual serving packets. [He doesn't] know if other people would." Dep. 54. Drake's Christodoulou, after some prompting by defendants' attorney, suggested that individual brownies in a family packet, individually served doughnuts and danish, and cookies are snack cakes and pies. Dep. 166-73. Interstate's Ratliff at one point opined that danish and donuts are snack cakes and pies. Tr. 15. However, these statements seem aberrant, not consistent with the agreed-upon definition of snack cakes and pies, and unconvincing. At best, defendants' evidence tends to support a claim that, at the fringes, snack cakes and pies compete with other snack foods. See also Tr. 132-37 (Tasty's Nagle explains that soft cookies compete at the fringes of the snack food market).
Defendants' own documents provide the best reasons not to expansively define the relevant submarket to include cookies, danish, and brownies, in particular, or sweet snacks, in general. In one, dated May 12, 1986, and labeled "FY 1986/87 Hostess Marketing Plans," defendants examine "Sweet Snack Foods Sales Trends," define sweet snacks to include "candy, cookies, yogurt, ice cream, and frozen desserts, etc.," and break out the two distinct submarkets in which Hostess competes -- "cake donuts" and "snack cakes and snack pies," PX 5, at 1; see also, e.g., PX 2, at 2 & 5 (identifying a snack cake and pie market separate from a cake doughnut market). Continental's Chairman Brown, in a December 17, 1985 memorandum to Ralston's Chairman Stiritz, points out that cookies, crackers, and direct store-distributed snack foods are not in any product category within defendants' wholesale baking industry. PX 64; see also Christodoulou Dep. 172 (Drake commissioned a study of the snack cake and pie market excluding doughnuts and cookies); Vance Dep. 18 (when at Continental, he did not treat snack cakes and pies as in the same market as cookies). This evidence confirms plaintiffs' claims, also supported by their own employees' testimony, that bakers treat the snack cake and pie segment as economically significant.
This is further confirmed, without reciting plaintiffs' employees' testimony, by evidence of bakers' pricing practices. See, e.g., Pierce Dep. 21-22 (Continental now prices its Hostess pies against "what other people are selling their individually wrapped pies for," and generally recognizes that Hostess directly competes in the market for "individually wrapped snack cakes and pies"); Vance Dep. 17-18 (Continental previously priced Hostess against Drake and Tastykake products, not against cookies); PX 38 (post-acquisition, Drake products are priced by comparison to Hostess and Tastykake products); Tr. 7-10 (Ratliff affirms that Interstate's Dolly Madison snack cakes and pies are priced against other companies' snack cakes and pies, not against cookies and not against breakfast cakes). Further, by an internal document Continental has recognized that "snack cake and pie [as distinguished from breakfast-oriented baked goods] media efforts [should] be combined for synergy and efficient use of funds," PX 5, at 4, and, when trying to persuade retailers to carry its products, Drake's market share in snack cakes and pies is advertised, e.g., PX 79; see Christodoulou Dep. 138-41. Finally, in addition to its pricing and marketing practices based on a snack cake and pie market, Continental has recognized that its "distribution structure," suited to snack cakes and pies, "is not designed to compete cost effectively in longer shelf-life product categories such as cookies, crackers, or lower quality cakes." PX 4, at 1.
Tasty's Nagle testified, without contradiction, that retailers treat snack cakes and pies as a market: these products are displayed together in high turnover areas of stores (to facilitate impulse buying), not mixed with other products that defendants purport to locate in the same market; these products are advertised in a coordinated way, so that in no week will a retailer promote two lines of snack cakes and pies, while it might well promote doughnuts or cookies of one company in the same advertisement as snack cakes and pies from another. Tr. 96-98. Other bakers' employees confirmed that consumers distinguish snack cakes and pies from breakfast and other dessert items, e.g., Tr. 5, 9-11 (Ratliff), from cookies, ...