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UNITED STATES v. PHILADELPHIA NATIONAL BANK ET AL.

decided: June 17, 1963.

UNITED STATES
v.
PHILADELPHIA NATIONAL BANK ET AL.



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Warren, Black, Clark, Harlan, Brennan, Stewart, Goldberg; White took no part in the consideration or decision of this case.

Author: Brennan

[ 374 U.S. Page 323]

 MR. JUSTICE BRENNAN delivered the opinion of the Court.

The United States, appellant here, brought this civil action in the United States District Court for the Eastern District of Pennsylvania under § 4 of the Sherman Act, 15 U. S. C. § 4, and § 15 of the Clayton Act, 15 U. S. C. § 25, to enjoin a proposed merger of The Philadelphia National Bank (PNB) and Girard Trust Corn Exchange Bank (Girard), appellees here. The complaint charged violations of § 1 of the Sherman Act, 15 U. S. C. § 1, and § 7 of the Clayton Act, 15 U. S. C. § 18.*fn1 From a judgment for appellees after trial, see 201 F.Supp. 348, the United States appealed to this Court under § 2 of the Expediting Act, 15 U. S. C. § 29. Probable jurisdiction was noted. 369 U.S. 883. We reverse the judgment of the District Court. We hold that the merger of appellees is forbidden by § 7 of the

[ 374 U.S. Page 324]

     Clayton Act and so must be enjoined; we need not, and therefore do not, reach the further question of alleged violation of § 1 of the Sherman Act.

I. THE FACTS AND PROCEEDINGS BELOW.

A. The Background: Commercial Banking in the United States.

Because this is the first case which has required this Court to consider the application of the antitrust laws to the commercial banking industry, and because aspects of the industry and of the degree of governmental regulation of it will recur throughout our discussion, we deem it appropriate to begin with a brief background description.*fn2

[ 374 U.S. Page 325]

     Commercial banking in this country is primarily unit banking. That is, control of commercial banking is diffused throughout a very large number of independent, local banks -- 13,460 of them in 1960 -- rather than concentrated in a handful of nationwide banks, as, for example, in England and Germany. There are, to be sure, in addition to the independent banks, some 10,000 branch banks; but branching, which is controlled largely by state law -- and prohibited altogether by some States -- enables a bank to extend itself only to state lines and often not that far.*fn3 It is also the case, of course, that many banks place loans and solicit deposits outside their home area. But with these qualifications, it remains true that ours is essentially a decentralized system of community banks. Recent years, however, have witnessed a definite trend toward concentration. Thus, during the decade ending in 1960 the number of commercial banks in the United

[ 374 U.S. Page 326]

     States declined by 714, despite the chartering of 887 new banks and a very substantial increase in the Nation's credit needs during the period. Of the 1,601 independent banks which thus disappeared, 1,503, with combined total resources of well over $25,000,000,000, disappeared as the result of mergers.

Commercial banks are unique among financial institutions in that they alone are permitted by law to accept demand deposits. This distinctive power gives commercial banking a key role in the national economy. For banks do not merely deal in, but are actually a source of, money and credit; when a bank makes a loan by crediting the borrower's demand deposit account, it augments the Nation's credit supply.*fn4 Furthermore, the power to accept demand deposits makes banks the intermediaries in most financial transactions (since transfers of substantial moneys are almost always by check rather than by cash) and, concomitantly, the repositories of very substantial individual and corporate funds. The banks' use of these funds is conditioned by the fact that their working capital consists very largely of demand deposits, which makes liquidity the guiding principle of bank lending and investing policies; thus it is that banks are the chief source of the country's short-term business credit.

Banking operations are varied and complex; "commercial banking" describes a congeries of services and credit devices.*fn5 But among them the creation of additional

[ 374 U.S. Page 327]

     money and credit, the management of the checking-account system, and the furnishing of short-term business loans would appear to be the most important. For the proper discharge of these functions is indispensable to a healthy national economy, as the role of bank failures in depression periods attests. It is therefore not surprising that commercial banking in the United States is subject to a variety of governmental controls, state and federal. Federal regulation is the more extensive, and our focus will be upon it. It extends not only to the national banks, i. e., banks chartered under federal law and supervised by the Comptroller of the Currency, see 12 U. S. C. § 21 et seq. For many state banks, see 12 U. S. C. § 321, as well as virtually all the national banks, 12 U. S. C. § 222, are members of the Federal Reserve System (FRS), and more than 95% of all banks, see 12 U. S. C. § 1815, are insured by the Federal Deposit Insurance Corporation (FDIC). State member and nonmember insured banks are subject to a federal regulatory scheme almost as elaborate as that which governs the national banks.

The governmental controls of American banking are manifold. First, the Federal Reserve System, through its open-market operations, see 12 U. S. C. §§ 263 (c), 353-359, control of the rediscount rate, see 12 U. S. C. § 357, and modifications of reserve requirements, see 12 U. S. C. §§ 462, 462b,

[ 374 U.S. Page 328]

     regulates the supply of money and credit in the economy and thereby indirectly regulates the interest rates of bank loans. This is not, however, rate regulation. The Reserve System's activities are only designed to influence the prime, i. e., minimum, bank interest rate. There is no federal control of the maximum, although all banks, state and national, are subject to state usury laws where applicable. See 12 U. S. C. § 85. In the range between the maximum fixed by state usury laws and the practical minimum set by federal fiscal policies (there is no law against undercutting the prime rate but bankers seldom do), bankers are free to price their loans as they choose. Moreover, charges for other banking services, such as service charges for checking privileges, are free of governmental regulation, state or federal.

Entry, branching, and acquisitions are covered by a network of state and federal statutes. A charter for a new bank, state or national, will not be granted unless the invested capital and management of the applicant, and its prospects for doing sufficient business to operate at a reasonable profit, give adequate protection against undue competition and possible failure. See, e. g., 12 U. S. C. §§ 26, 27, 51; 12 CFR § 4.1 (b); Pa. Stat. Ann., Tit. 7, § 819-306. Failure to meet these standards may cause the FDIC to refuse an application for insurance, 12 U. S. C. §§ 1815, 1816, and may cause the FDIC, Federal Reserve Board (FRB), and Comptroller to refuse permission to branch to insured, member, and national banks, respectively. 12 U. S. C. §§ 36, 321, 1828 (d). Permission to merge, consolidate, acquire assets, or assume liabilities may be refused by the agencies on the same grounds. 12 U. S. C. (1958 ed., Supp. IV) § 1828 (c), note 8, infra. Furthermore, national banks appear to be subject to state geographical limitations on branching. See 12 U. S. C. § 36 (c).

[ 374 U.S. Page 329]

     Banks are also subject to a number of specific provisions aimed at ensuring sound banking practices. For example, member banks of the Federal Reserve System may not pay interest on demand deposits, 12 U. S. C. § 371a, may not invest in common stocks or hold for their own account investment securities of any one obligor in excess of 10% of the bank's unimpaired capital and surplus, see 12 U. S. C. §§ 24 Seventh, 335, and may not pay interest on time or savings deposits above the rate fixed by the FRB, 12 U. S. C. § 371b. The payment of interest on deposits by nonmember insured banks is also federally regulated. 12 U. S. C. (1958 ed., Supp. IV) § 1828 (g); 12 CFR, 1962 Supp., Part 329. In the case of national banks, the 10% limit on the obligations of a single obligor includes loans as well as investment securities. See 12 U. S. C. § 84. Pennsylvania imposes the same limitation upon banks chartered under its laws, such as Girard. Pa. Stat. Ann. (1961 Supp.), Tit. 7, § 819-1006.

But perhaps the most effective weapon of federal regulation of banking is the broad visitatorial power of federal bank examiners. Whenever the agencies deem it necessary, they may order "a thorough examination of all the affairs of the bank," whether it be a member of the FRS or a nonmember insured bank. 12 U. S. C. §§ 325, 481, 483, 1820 (b); 12 CFR § 4.2. Such examinations are frequent and intensive. In addition, the banks are required to furnish detailed periodic reports of their operations to the supervisory agencies. 12 U. S. C. §§ 161, 324, 1820 (e). In this way the agencies maintain virtually a day-to-day surveillance of the American banking system. And should they discover unsound banking practices, they are equipped with a formidable array of sanctions. If in the judgment of the FRB a member bank is making "undue use of bank credit," the Board may suspend the bank from the use of the credit facilities of the FRS. 12 U. S. C. § 301. The FDIC has an even more formidable

[ 374 U.S. Page 330]

     power. If it finds "unsafe or unsound practices" in the conduct of the business of any insured bank, it may terminate the bank's insured status. 12 U. S. C. § 1818 (a). Such involuntary termination severs the bank's membership in the FRS, if it is a state bank, and throws it into receivership if it is a national bank. 12 U. S. C. § 1818 (b). Lesser, but nevertheless drastic, sanctions include publication of the results of bank examinations. 12 U. S. C. §§ 481, 1828 (f). As a result of the existence of this panoply of sanctions, recommendations by the agencies concerning banking practices tend to be followed by bankers without the necessity of formal compliance proceedings. 1 Davis, Administrative Law (1958), § 4.04.

Federal supervision of banking has been called "probably the outstanding example in the federal government of regulation of an entire industry through methods of supervision . . . . The system may be one of the most successful [systems of economic regulation], if not the most successful." Id., § 4.04, at 247. To the efficacy of this system we may owe, in part, the virtual disappearance of bank failures from the American economic scene.*fn6

B. The Proposed Merger of PNB and Girard.

The Philadelphia National Bank and Girard Trust Corn Exchange Bank are, respectively, the second and third largest of the 42 commercial banks with head offices in the Philadelphia metropolitan area, which consists of the City of Philadelphia and its three contiguous counties in Pennsylvania. The home county of both banks is the

[ 374 U.S. Page 331]

     city itself; Pennsylvania law, however, permits branching into the counties contiguous to the home county, Pa. Stat. Ann. (1961 Supp.), Tit. 7, § 819-204.1, and both banks have offices throughout the four-county area. PNB, a national bank, has assets of over $1,000,000,000, making it (as of 1959) the twenty-first largest bank in the Nation. Girard, a state bank, is a member of the FRS and is insured by the FDIC; it has assets of about $750,000,000. Were the proposed merger to be consummated, the resulting bank would be the largest in the four-county area, with (approximately) 36% of the area banks' total assets, 36% of deposits, and 34% of net loans. It and the second largest (First Pennsylvania Bank and Trust Company, now the largest) would have between them 59% of the total assets, 58% of deposits, and 58% of the net loans, while after the merger the four largest banks in the area would have 78% of total assets, 77% of deposits, and 78% of net loans.

The present size of both PNB and Girard is in part the result of mergers. Indeed, the trend toward concentration is noticeable in the Philadelphia area generally, in which the number of commercial banks has declined from 108 in 1947 to the present 42. Since 1950, PNB has acquired nine formerly independent banks and Girard six; and these acquisitions have accounted for 59% and 85% of the respective banks' asset growth during the period, 63% and 91% of their deposit growth, and 12% and 37% of their loan growth. During this period, the seven largest banks in the area increased their combined share of the area's total commercial bank resources from about 61% to about 90%.

In November 1960 the boards of directors of the two banks approved a proposed agreement for their consolidation under the PNB charter. By the terms of the agreement, PNB's stockholders were to retain their share certificates, which would be deemed to represent an equal

[ 374 U.S. Page 332]

     number of shares in the consolidated bank, while Girard's stockholders would surrender their shares in exchange for shares in the consolidated bank, receiving 1.2875 such shares for each Girard share. Such a consolidation is authorized, subject to the approval of the Comptroller of the Currency, by 12 U. S. C. (1958 ed., Supp. IV) § 215.*fn7 But under the Bank Merger Act of 1960, 12 U. S. C. (1963 ed., Supp. IV) § 1828 (c), the Comptroller may not give his approval until he has received reports from the other two banking agencies and the Attorney General respecting the probable effects of the proposed transaction on competition.*fn8 All three reports advised that the proposed

[ 374 U.S. Page 333]

     merger would have substantial anticompetitive effects in the Philadelphia metropolitan area. However, on February 24, 1961, the Comptroller approved the merger. No opinion was rendered at that time. But as required by § 1828 (c), the Comptroller explained the basis for his decision to approve the merger in a statement to be included in his annual report to Congress. As to effect upon competition, he reasoned that "since there will remain an adequate number of alternative sources of banking service in Philadelphia, and in view of the beneficial effects of this consolidation upon international and national competition it was concluded that the over-all effect upon competition would not be unfavorable." He also stated that the consolidated bank "would be far better able to serve the convenience and needs of its community by being of material assistance to its city and state in their efforts to attract new industry and to retain existing industry." The day after the Comptroller approved the

[ 374 U.S. Page 334]

     merger, the United States commenced the present action. No steps have been taken to consummate the merger pending the outcome of this litigation.

C. The Trial and the District Court's Decision.

The Government's case in the District Court relied chiefly on statistical evidence bearing upon market structure and on testimony by economists and bankers to the effect that, notwithstanding the intensive governmental regulation of banking, there was a substantial area for the free play of competitive forces; that concentration of commercial banking, which the proposed merger would increase, was inimical to that free play; that the principal anticompetitive effect of the merger would be felt in the area in which the banks had their offices, thus making the four-county metropolitan area the relevant geographical market; and that commercial banking was the relevant product market. The defendants, in addition to offering contrary evidence on these points, attempted to show business justifications for the merger. They conceded that both banks were economically strong and had sound management, but offered the testimony of bankers to show that the resulting bank, with its greater prestige and increased lending limit,*fn9 would be better able to compete with large out-of-state (particularly New York) banks, would attract new business to Philadelphia, and in general would promote the economic development of the metropolitan area.*fn10

[ 374 U.S. Page 335]

     Upon this record, the District Court held that: (1) the passage of the Bank Merger Act of 1960 did not repeal by implication the antitrust laws insofar as they may apply to bank mergers; (2) § 7 of the Clayton Act is inapplicable to bank mergers because banks are not corporations "subject to the jurisdiction of the Federal Trade Commission"; (3) but assuming that § 7 is applicable, the four-county Philadelphia metropolitan area is not the relevant geographical market because PNB and Girard actively compete with other banks for bank business throughout the greater part of the northeastern United States; (4) but even assuming that § 7 is applicable and that the four-county area is the relevant market, there is no reasonable probability that competition among commercial banks in the area will be substantially lessened as the result of the merger; (5) since the merger does not violate § 7 of the Clayton Act, a fortiori it does not violate § 1 of the Sherman Act; (6) the merger will benefit the Philadelphia metropolitan area economically. The District Court also ruled that for the purposes of § 7, commercial banking is a line of commerce; the appellees do not contest this ruling.

II. THE APPLICABILITY OF SECTION 7 OF THE CLAYTON ACT TO BANK MERGERS.

A. The Original Section and the 1950 Amendment.

By its terms, the present § 7 reaches acquisitions of corporate stock or share capital by any corporation engaged

[ 374 U.S. Page 336]

     in commerce, but it reaches acquisitions of corporate assets only by corporations "subject to the jurisdiction of the Federal Trade Commission." The FTC, under § 5 of the Federal Trade Commission Act, has no jurisdiction over banks. 15 U. S. C. § 45 (a)(6).*fn11 Therefore, if the proposed merger be deemed an assets acquisition, it is not within § 7.*fn12 Appellant argues vigorously that a merger is crucially different from a pure assets acquisition,*fn13 and

[ 374 U.S. Page 337]

     appellees argue with equal vigor that it is crucially different from a pure stock acquisition.*fn14 Both positions, we think, have merit; a merger fits neither category neatly. Since the literal terms of § 7 thus do not dispose of our question, we must determine whether a congressional design to embrace bank mergers is revealed in the history of the statute. The question appears to be one of first impression; we have been directed to no previous case in which a merger or consolidation was challenged under § 7 of the Clayton Act, as amended, where the acquiring corporation was not subject to the FTC's jurisdiction.

When it was first enacted in 1914, § 7 referred only to corporate acquisitions of stock and share capital; it was silent as to assets acquisitions and as to mergers and consolidations.

[ 374 U.S. Page 338]

     Act of October 15, 1914, c. 323, § 7, 38 Stat. 731-732, note 18, infra. It is true that the omission may not have been an oversight. Congress' principal concern was with the activities of holding companies, and specifically with the practice whereby corporations secretly acquired control of their competitors by purchasing the stock of those companies. Although assets acquisitions and mergers were known forms of corporate amalgamation at the time, their no less dangerously anticompetitive effects may not have been fully apparent to the Congress.*fn15 Still, the statutory language, read in the light of the overriding congressional purpose to control corporate concentrations tending to monopoly, lent itself to a construction whereby § 7 would have reached at least mergers and consolidations. It would hardly have done violence to the language so to have interpreted the vague term "share capital," see 30 Geo. Wash. L. Rev. 1024, 1027-1028 (1962), or to have adopted the view that: "where the assets are exchanged for the stock of the purchasing company, assuming that the two companies were previously in competition, it is apparent that the seller has acquired stock in a competing company . . . [and] therefore, that in effecting the merger section 7 was violated and hence the distribution of the stock received by the selling company to its shareholders and its subsequent dissolution are no bar to proceedings by the government to set aside the purchase." Handler, Industrial Mergers and the Anti-Trust Laws, 32 Col. L. Rev. 179, 266 (1932).*fn16

But the courts found mergers to be beyond the reach of § 7, even when the merger technique had supplanted

[ 374 U.S. Page 339]

     stock acquisitions as the prevalent mode of corporate amalgamation. United States v. Celanese Corp. of America, 91 F.Supp. 14 (D.C. S. D. N. Y. 1950); see Thatcher Mfg. Co. v. Federal Trade Comm'n and Swift & Co. v. Federal Trade Comm'n , decided together with Federal Trade Comm'n v. Western Meat Co., 272 U.S. 554; Arrow-Hart & Hegeman Elec. Co. v. Federal Trade Comm'n, 291 U.S. 587.*fn17 As a result, § 7 became largely

[ 374 U.S. Page 340]

     a dead letter. Comment, 68 Yale L. J. 1627, 1629-1630 (1959); see Federal Trade Commission, The Merger Movement: A Summary Report (1948), 1, 3-6; Henderson, The Federal Trade Commission (1924), 40. Meanwhile, this Court's decision in United States v. Columbia Steel Co., 334 U.S. 495, stirred concern whether the Sherman Act alone was a check against corporate acquisitions. Note, 52 Col. L. Rev. 766, 768 (1952).

It was against this background that Congress in 1950 amended § 7 to include an assets-acquisition provision. Act of December 29, 1950 (Celler-Kefauver Antimerger Act), c. 1184, 64 Stat. 1125-1126, 15 U. S. C. § 18.*fn18

[ 374 U.S. Page 341]

     The legislative history is silent on the specific questions why the amendment made no explicit reference to mergers, why assets acquisitions by corporations not subject to FTC jurisdiction were not included, and what these omissions signify. Nevertheless, the basic congressional design clearly emerges and from that design the answers to these questions may be inferred. Congress primarily sought to bring mergers within § 7 and thereby close what it regarded as a loophole in the section.*fn19 But, in addition, it sought to reach transactions such as that involved in Columbia Steel, which was a simple purchase

[ 374 U.S. Page 342]

     of assets and not a merger.*fn20 In other words, Congress contemplated that the 1950 amendment would give § 7 a reach which would bring the entire range of corporate amalgamations, from pure stock acquisitions to pure assets acquisitions, within the scope of § 7. Thus, the stock-acquisition and assets-acquisition provisions, read together, reach mergers, which fit neither category perfectly but lie somewhere between the two ends of the spectrum. See pp. 336-337, and notes 13, 14, supra. So construed, the specific exception for acquiring corporations not subject to the FTC's jurisdiction excludes from the coverage of § 7 only assets acquisitions by such corporations when not accomplished by merger.

[ 374 U.S. Page 343]

     This construction is supported by a number of specific considerations.

First. Any other construction would be illogical and disrespectful of the plain congressional purpose in amending § 7, because it would create a large loophole in a statute designed to close a loophole. It is unquestioned that the stock-acquisition provision of § 7 embraces every corporation engaged in commerce, including banks. And it is plain that Congress, in amending § 7, considered a distinction for antitrust purposes between acquisition of corporate control by purchase of stock and acquisition by merger unsupportable in reason, and sought to overrule the decisions of this Court which had recognized such a distinction.*fn21 If, therefore, mergers in industries outside

[ 374 U.S. Page 344]

     the FTC's jurisdiction were deemed beyond the reach of § 7, the result would be precisely that difference in treatment which Congress rejected. On the other hand, excluding from the section assets acquisitions not by merger in those industries does not appear to create a lacuna of practical importance.*fn22

[ 374 U.S. Page 345]

     the Senate Committee on the Judiciary on Corporate Mergers and Acquisitions, 81st Cong., 1st and 2d Sess. 176; to the same effect, see, e. g., id., at 100, 139, 320-325.

Plainly, acquisition of "assets" as used in amended § 7 was not meant to be a simple equivalent of acquisition by merger, but was intended rather to ensure against the blunting of the antimerger thrust of the section by evasive transactions such as had rendered the original section ineffectual. Thus, the stock-acquisition provision of § 7, though reenacted in haec verba by the 1950 amendment, must be deemed expanded in its new context to include, at the very least, acquisitions by merger or consolidation, transactions which entail a transfer of stock of the parties, while the assets-acquisition provision clearly reaches corporate acquisitions involving no such transfer. And see note 22, supra. This seems to be the point of Congressman Patman's remark, typical of many, that: "What this bill does is to put all corporate mergers on the same footing, whether the result of the acquisitions of stock or the acquisition of physical assets." Hearings, supra, at 126. To the same effect is the House Report on the bill to amend § 7: "The bill retains language of the present statute which is broad enough to prevent evasion of the central purpose. It covers not only purchase of assets or stock but also any other method of acquisition . . . . It forbids not only direct acquisitions but also indirect acquisitions . . . ." H. R. Rep. No. 1191, 81st Cong., 1st Sess. 8-9.

Third. The legislative history shows that the objective of including the phrase "corporation subject to the jurisdiction of the Federal Trade Commission" in § 7 was not to limit the amalgamations to be covered by the amended statute but to make explicit the role of the FTC in administering the section. The predominant focus of the hearings,

[ 374 U.S. Page 347]

     debates, and committee reports was upon the powers of the FTC. The decisions of this Court which had uncovered the loophole in the original § 7 -- Thatcher, Swift, and Arrow-Hart -- had not rested directly upon the substantive coverage of § 7, but rather upon the limited scope of the FTC's divestiture powers under § 11. See note 17, supra. There were intimations that the courts ' power to enforce § 7 might be far greater. See Thatcher Mfg. Co. v. Federal Trade Comm'n, supra, at 561; Swift & Co. v. Federal Trade Comm'n, supra, at 563; Federal Trade Comm'n v. Eastman Kodak Co., 274 U.S. 619, 624; Arrow-Hart & Hegeman Elec. Co. v. Federal Trade Comm'n, supra, at 598-599; Irvine, The Uncertainties of Section 7 of the Clayton Act, 14 Cornell L. Q. 28 (1928). Thus, the loophole was sometimes viewed as primarily a gap in the FTC's jurisdiction.*fn23 Furthermore, although the Clayton Act has always provided for dual enforcement by court and agency, see 15 U. S. C. § 25; United States v. W. T. Grant Co., 345 U.S. 629; United States Alkali Export Assn. ...


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