Page:Calnetics Corp. v. Volkswagen of America, Inc. (532 F.2d 674).pdf/18



Our resolution of the jury-trial issue makes it unnecessary to deal either with VW’s and Subsidiary’s challenges to the merits of the district court’s holding that the acquisition violated § 7 of the Clayton Act or with their challenges to the equitable relief granted by the district court. Nevertheless, in the interest of judicial economy, it is appropriate to comment briefly on challenged rulings that are likely to recur. On the other hand, our failure to discuss other issues raised by VW and Subsidiary does not indicate approval or disapproval of rulings made below.

A.&emsp;Definition of Product Market.

In defining the product market, the district court explicitly refused to consider the cross-elasticity of production facilities or capacity. Calnetics Corp. v. Volkswagen of America, Inc., 348 F.Supp. at 618. VW and Subsidiary argue that this refusal rendered the ensuing market definition—“air conditioners sold for use in the Volkswagen family of automobiles,” clearly erroneous because not reflective of the sales opportunities of independent manufacturers of automobile air-conditioning equipment. VW and Subsidiary urge that such manufacturers may with little modification of production facilities produce units for different makes of cars.

The district court’s failure to consider production cross-elasticity was inconsistent with the views of the Supreme Court and of this circuit. This is not to say that production cross-elasticity is the only factor which can be considered by the trier of fact in defining the product market.

B.&emsp;Effect of the Acquisition.

VW and Subsidiary argue that the trial court erred by relying exclusively on postacquisition changes in market shares in assessing the legality of the merger while omitting any economic analysis of its anticompetitive effect. Without accepting VW and Subsidiary’s characterization of the district court’s method, we agree that a more careful analysis was required.

The primary, though not exclusive, theory of Calnetics’ § 7 attack on VW’s acquisition of Subsidiary was vertical foreclosure. Foreclosure was threatened, Calnetics argued, not because VW itself was likely to satisfy its own demand from the output of the acquired firm but because VW’s dealers and distributors were likely to satisfy their demand from such supply.

A threat of unlawful vertical foreclosure may exist when there is a vertical tie—such as common ownership of a customer and a supplier—for such a tie creates a danger that the normal competitive forces in the marketplace will be displaced. In a vertical merger the danger is that control over both a customer and a supplier will permit the controlling party to coerce the purchasing or selling policies of the captive firm, resulting in a “ ‘clog on competition’ * * [citation omitted],” Brown Shoe Co. v. United States, 370 U.S. 294, 324, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510, 535 (1962), or a “commanding position [for the controlling party] * * * not gained solely on competitive merit.” United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 605, 77 S.Ct. 872, 884, 1 L.Ed.2d 1057, 1074 (1957).