Ford Motor Company v. United States/Opinion of the Court

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This is a direct appeal under § 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U.S.C. § 29, from a judgment of the District Court (286 F. Supp. 407, 315 F. Supp. 372), holding that Ford Motor Co. (Ford) violated § 7 of the Celler-Kefauver Antimerger Act by acquiring certain assets from Electric Autolite Co. (Autolite). The assets included the Autolite trade name, Autolite's only [p565] spark plug plant in this country (located at New Fostoria, Ohio), a battery plant, and extensive rights to its nationwide distribution organization for spark plugs and batteries. The present appeal is limited to that portion of the judgment relating to spark plugs and ordering Ford to divest the Autolite name and the spark plug plant. The ancillary injunctive provisions are also here for review.

I
Ford, the second-leading producer of automobiles, General Motors, and Chrysler together account for 90% of the automobile production in this country. Though Ford makes a substantial portion of its parts, prior to its acquisition of the assets of Autolite it did not make spark plugs or batteries but purchased those parts from independent companies.

The original equipment of new cars, insofar as spark plugs are concerned, is conveniently referred to as the OE tie. The replacement market is referred to as the aftermarket. The independents, including Autolite, furnished the auto manufacturers with OE plugs at cost or less, about six cents a plug, and they continued to sell at that price even when their costs increased threefold. The independents sought to recover their losses on OE sales by profitable sales in the aftermarket where the requirement of each vehicle during its lifetime is about five replacement plug sets. By custom and practice among mechanics, the aftermarket plug is usually the same brand as the OE plug. See generally Hansen & Smith, The Champion Case: What Is Competition?, 29 Harv. Bus. Rev. 89 (1951).

Ford was anxious to participate in this aftermarket and, after various efforts not relevant to the present case, concluded that its effective participation in the [p566] aftermarket required "an established distribution system with a recognized brand name, a full line of high volume service parts, engineering experience in replacement designs, low volume production facilities and experience, and the opportunity to capitalize on an established car population."

Ford concluded it could develop such a division of its own but decided that course would take from five to eight years and be more costly than an acquisition. To make a long story short, it acquired certain assets of Autolite in 1961.

General Motors had previously entered the spark plug manufacturing field, making the AC brand. The two other major domestic producers were independents—Autolite and Champion. When Ford acquired Autolite, whose share of the domestic spark plug market was about 15%, only one major independent was left and that was Champion, whose share of the domestic market declined from just under 50% in 1960 to just under 40% in 1964 and to about 33% in 1966. At the time of the acquisition, General Motors' market share was about 30%. There were other small manufacturers of spark plugs but they had no important share of the market.

The District Court held that the acquisition of Autolite violated § 7 of the Celler-Kefauver Antimerger Act [p567] because its effect "may be substantially to lessen competition." It gave two reasons for its decision.

First, prior to 1961 when Ford acquired Autolite it had a "pervasive impact on the aftermarket," 315 F. Supp., at 375, in that it was a moderating influence on Champion and on other companies derivatively. It explained that reason as follows: "'An interested firm on the outside has a twofold significance. It may someday go in and set the stage for noticeable deconcentration. While it merely stays near the age, it is a deterrent to current competitors. United States v. Penn-Olin Chemical Co., 378 U.S. 158... (1964). This was Ford uniquely, as both a prime candidate to manufacture and the major customer of the dominant member of the oligopoly. Given the chance that Autolite would have been doomed to oblivion by defendant's grassroots entry, which also would have destroyed Ford's soothing influence over replacement prices, Ford may well have been more useful as a potential than it [p568] would have been as a real producer, regardless how it began fabrication. Had Ford taken the internal-expansion route, there would have been no illegality; not, however, because the result necessarily would have been commendable, but simply because that course has not been proscribed.' 286 F. Supp., at 441." See also FTC v. Procter & Gamble Co., 386 U.S. 568; United States v. Penn-Olin Chemical Co., 378 U.S. 158.

Second, the District Court found that the acquisition marked "the foreclosure of Ford as a purchaser of about ten per cent of total industry output." 315 F. Supp., at 375. The District Court added: "In short, Ford's entry into the spark plug market by means of the acquisition of the factory in Fostoria and the trade name 'Autolite' had the effect of raising the barriers to entry into that market as well as removing one of the existing restraints upon the actions of those in the business of manufacturing spark plugs.

"It will also be noted that the number of competitors in the spark plug manufacturing industry closely parallels the number of competitors in the automobile manufacturing industry and the barriers to entry into the auto industry are virtually insurmountable at present and will remain so for the foreseeable future. Ford's acquisition of the Autolite assets, particularly when viewed in the context of the original equipment (OE) tie and of GM's ownership of AC, has the result of transmitting the rigidity of the oligopolistic structure of the automobile industry to the spark plug industry, thus reducing the chances of future deconcentration of the spark plug market by forces at work within that market." Ibid. [p569] See also FTC v. Consolidated Foods Corp., 380 U.S. 592; Brown Shoe Co. v. United States, 370 U.S. 294; United States v. Du Pont & Co., 353 U.S. 586.

We see no answer to that conclusion if the letter and spirit of the Celler-Kefauver Antimerger Act are to be honored. See United States v. Philadelphia National Bank, 374 U.S. 321, 363-363; United States v. Penn-Olin Chemical Co., 378 U.S., at 170-171; Brown Shoe Co. v. United States, 370 U.S., at 311-323.

It is argued, however, that the acquisition had some beneficial effect in making Autolite a more vigorous and [p570] effective competitor against Champion and General Motors than Autolite had been as an independent. But what we said in United States v. Philadelphia National Bank, supra, disposes of that argument. A merger is not saved from illegality under § 7, we said, "'because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial. A value choice of such magnitude is beyond the ordinary limits of judicial competence, and in any event has been made for us already, by Congress when it enacted the amended § 7. Congress determined to preserve our traditionally competitive economy. It therefore proscribed anticompetitive mergers, the benign and the malignant alike, fully aware, we must assume, that some price might have to be paid.' 374 U.S., at 371."

Ford argues that the acquisition left the marketplace with a greater number of competitors. To be sure, after Autolite sold its New Fostoria plant to ford, it constructed another in Decatur, Alabama, which by 1964 had 1.6% of the domestic business. Prior to the acquisition, however, there were only two major independent producers and only two significant producers of original equipment spark plugs. The acquisition thus aggravated an already oligopolistic market.

As we indicated in Brown Shoe Co. v. United States, 370 U.S., at 323-324: "'The primary vice of a vertical merger or other arrangement tying a customer to a supplier is that, by foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a 'clog on competition,' Standard Oil Co. of California v. United States, 337 U.S. 293, 314, which 'deprive[s]... rivals of a fair opportunity to compete.' H.R. Rep. No. 1191, [p571] 81st Cong., 1st Sess. 8. Every extended vertical arrangement by its very nature, for at least a time, denies to competitors of the supplier the opportunity to compete for part or all of the trade of the customer-party to the vertical arrangement." Moreover, Ford made the acquisition in order to obtain a foothold in the aftermarket. Once established, it would have every incentive to perpetuate the OE tie and thus maintain the virtually insurmountable barriers to entry to the aftermarket.

II
The main controversy here has been over the nature and degree of the relief to be afforded.

During the year following the District Court's finding of a § 7 violation, the parties were unable to agree upon appropriate relief. The District Court then held nine days of hearings on the remedy and, after full consideration, concluded that divestiture and other relief were necessary.

The OE tie, it held, was in many respects the key to the solution since the propensity of the mechanic in a service station or independent garage is to select as a replacement the spark plug brand that the manufacturer installed in the car. The oligopolistic structure of the spark plug manufacturing industry encourages the continuance of that system. Neither GM nor Autolite sells private-label plugs. It is obviously in the self-interest of OE plug manufacturers to discourage private-brand sales and to encourage the OE tie. There are findings that the private-brand sector of the spark plug market will grow substantially in the next decade because mass merchandisers are entering this market in force. They not only sell all brands over the counter but also have service bays where many carry only spark plugs of their own proprietary brand. It is anticipated that by 1980 [p572] the total private brand portion of the spark plug market may then represent 17% of the total aftermarket. The District Court added: "'To the extent that the spark [plug] manufacturers are not owned by the auto makers, it seems clear that they will be more favorably disposed toward private brand sales and will compete more vigorously for such sales. Also, the potential entrant continues to have the chance to sell not only the private brand customer but the auto maker as well.' 315 F. Supp., at 378."

Accordingly the decree:


 * (1) enjoined Ford for 10 years from manufacturing spark plugs,


 * (2) ordered Ford for five years to purchase one-half of its total annual requirement of spark plugs from the divested plant under the "Autolite" name,


 * (3) prohibited Ford for the same period from using its own trade names on plugs,


 * (4) protected New Fostoria, the town where the Autolite plant is located, by requiring Ford to continue for 10 years its policy of selling spark plugs to its dealers at prices no less than its prevailing minimum suggested jobbers' selling price,


 * (5) protected employees of the New Fostoria plant by ordering Ford to condition its divestiture sale on the purchaser's assuming the existing wage and pension obligations and to offer employment to any employee displaced by a transfer of nonplug operations from the divested plant.

[p573] The relief in an antitrust case must be "effective to redress the violations" and "to restore competition." United States v. Du Pont & Co., 366 U.S. 316, 326. The District Court is clothed with "large discretion" to fit the decree to the special needs of the individual case. International Salt Co. v. United States, 332 U.S. 392, 401; United States v. Du Pont & Co., 353 U.S., at 608; United States v. Crescent Amusement Co., 323 U.S. 173, 185.

Complete divestiture is particularly appropriate where asset or stock acquisitions violate the antitrust laws. United States v. Du Pont & Co., supra, at 328-335; United States v. Crescent Amusement Co., supra, at 189; Schine Chain Theatres v. United States, 334 U.S. 110, 128; United States v. El Paso Gas Co., 376 U.S. 651.

Divestiture is a start towards restoring the pre-acquisition situation. Ford once again will then stand as a large industry customer at the edge of the market with [p574] a renewed interest in securing favorable terms for its substantial plug purchases. Since Ford will again be a purchaser, it is expected that the competitive pressures that existed among other spark plug producers to sell to Ford will be re-created. The divestiture should also eliminate the anticompetitive consequences in the aftermarket flowing from the second largest automobile manufacturer's entry through acquisition into the spark plug manufacturing business.

The divested plant is given an incentive to provide Ford with terms which will not only satisfy the 50% requirement provided for five years by the decree but which even after that period may keep at least some of Ford's ongoing purchases. The divested plant is awarded at least a foothold in the lucrative aftermarket and is provided an incentive to compete aggressively for that market.

As a result of the acquisition of Autolite, the structure of the spark plug industry changed drastically, as already noted. Ford, which before the acquisition was the largest purchaser of spark plugs from the independent manufacturers, became a major manufacturer. The result was to foreclose to the remaining independent spark plug manufacturers the substantial segment of the market previously open to competitive selling and to remove the significant procompetitive effects in the concentrated spark plug market that resulted from Ford's position on the edge of the market as a potential entrant.

To permit Ford to retain the Autolite plant and name and to continue manufacturing spark plugs would perpetuate the anticompetitive effects of the acquisition.

[p575] The District Court rightly concluded that only divestiture would correct the condition caused by the unlawful acquisition.

A word should be said about the other injunctive provisions. They are designed to give the divested plant an opportunity to establish its competitive provision. The divested company needs time so it can obtain a foothold in the industry. The relief ordered should "cure the ill effects of the illegal conduct, and assure the public freedom from its continuance," United States v. United States Gypsum Co., 340 U.S. 76, 8, and it necessarily must "fit the exigencies of the particular case." International Salt Co. v. United States, 332 U.S., at 401. Moreover, "it is well settled that once the Government has successfully borne the considerable burden of establishing a violation of law, all doubts as to the remedy are to be resolved in its favor." United States v. Du Pont & Co., 366 U.S., at 334.

Ford concedes that "[i]f New Fostoria is to survive, it must for the foreseeable future become and remain the OE supplier to Ford and secure and retain the benefits of such OE status in sales of replacement plugs." The ancillary measures ordered by the District Court are designed to allow Autolite to re-establish itself in the OE and replacement markets and to maintain it as a viable competitor until such time as forces already at work within the marketplace weaken the OE tie. Thus Ford is prohibited for 10 years from manufacturing its own plugs. But in five years it can buy its plugs from any source and use its name on OE plugs.

[p576] But prior to that time Ford cannot use or market plugs bearing the Ford trade name. In view of the importance of the OE tie, if Ford were permitted to use its own brand name during the initial five-year period, there would be a tendency to impose the oligopolistic structure of the automotive industry on the replacement parts market and the divested enterprise might will be unable to become a strong competitor. Ford argues that any prohibition against the use of its name is permissible only where the name deceives or confuses the public. But this is not an unfair competition case. The temporary ban on the use of the Ford name is designed to restore the pre-acquisition competitive structure of the market.

The requirement that, for five years, Ford purchase at [p577] least half of its spark plug requirements from the divested company under the Autolite label is to give the divested enterprise an assured customer while it struggled to be re-established as an effective, independent competitor.

It is suggested, however, that "the District Court's orders assured that Ford could not begin to have brand name success in the replacement market for at least 10 to 13 years." Post, at 591. This conclusion distorts the effect of the District Court decree and the nature of the spark plug industry. Ford's own studies indicate that it would take five to eight years for it to develop a spark plug division internally. A major portion of this period would be devoted to the development of a viable position in the aftermarket. The five year prohibition on the use of its own name and the 10-year limitation on its own manufacturing mesh neatly to allow Ford to establish itself in the aftermarket prior to becoming a manufacturer while, at the same time, giving Autolite the opportunity to re-establish itself by providing a market for its production. Thus, the District Court's decree delays for only two to five years the date on which Ford may become a manufacturer with an established share of the aftermarket. Given the normal five-to-eight-year lead time on entry through internal expansion, the District Court's decree does not significantly lessen Ford's moderating influence as a potential entrant on the edge of the market. Moreover, in light of the interim benefits this ancillary relief will have on the re-establishment of Autolite as a viable competitor and of Ford as a major purchaser, we cannot agree with the characterization of the relief as "harshly restrictive," post, at 595, or the assertion that the decree, in any practical and significant sense, "prohibit[s] Ford from entering the market through internal expansion." Post, at 592.

Antitrust relief should unfetter a market from anticompetitive conduct and "pry open to competition a [p578] market that has been closed by defendants' illegal restraints." International Salt Co. v. United States, 332 U.S., at 401. The temporary elimination of Ford as a manufacturer of spark plugs lowers a major barrier to entry to this industry. See C. Kaysen & D. Turner, Antitrust Policy—An Economic and Legal Analysis 116 (1959). Forces now at work in the marketplace may bring about a deconcentrated market structure and may weaken the onerous OE tie. The District Court concluded that the forces of competition must be nurtured to correct for Ford's illegal acquisition. We view its decree as a means to that end.

The thorough and thoughtful way the District Court considered all aspects of this case, including the nature of the relief, is commendable. The drafting of such a decree involves predictions and assumptions concerning future economic and business events. Both public and private interests are involved; and we conclude that the District Court with a single eye to the requirements of § 7 and the violation that was clearly established made a reasonable judgment on the means needed to restore and encourage the competition adversely affected by the acquisition.

Affirmed.

MR. JUSTICE POWELL and MR. JUSTICE REHNQUIST took no part in the consideration or decision of this case.