The opinion of the court was delivered by: TYLER
This suit, instituted by the United States on February 14, 1970, attacks the acquisitions of Uniforms by Ostwald, Inc. ("Ostwald") and C.G. Conn Ltd. ("Conn") by Crowell, Collier and Macmillan, Inc. (CCM) as violative of § 7 of the Clayton Act, 15 U.S.C. § 18. Divestiture of both acquired companies is the relief sought.
Crowell Collier and Macmillan
CCM, the acquiring company, is a conglomerate, ranked by Fortune Magazine as the nation's 286th largest industrial concern, and 238th largest in terms of assets. It has been described by the chairman of its board as a cultural conglomerate, and, looking to its constituent companies, the description is apt. CCM is responsible for Colliers and Merit Students Encyclopedias, and the entire line of Macmillan, the established and reputable publishing house. In the home study field, CCM owns the LaSalle Extension University which, through its various divisions, offers college and high school level programs, the Utilities Engineering Institute and the U.S. School of Music. Berlitz (languages) and Katherine Gibbs (secretarial training) are also CCM subsidiaries. School and institutional materials of all types are manufactured and distributed by CCM, and even a janitorial service is included in the array.
A good number of professional publications are put out by CCM, mostly designed for the educator and school administrator, and several sizeable book retailers, such as Brentanos, are owned. Audio visual aids are another CCM area of endeavor.
In the area of music manufacture and distribution, CCM owns Slingerland Drum Co. and G. Schirmer, Inc. C.E. Ward Company, presently a maker of choir robes and lodge regalia, and, up until at least 1969, a maker of band uniforms, is also a subsidiary.
In 1969, CCM's marketing activities were handled by 1,700 sales personnel, 375 of whom serviced educational institutions. As of 1970, six regional curriculum centers were maintained by CCM as distribution facilities for school directed products.
CCM has reached its present size primarily through a recent program of acquisitions. In 1961 it showed sales of $71,200,000. By 1970, 39 acquisitions later, its gross revenues had reached $400,300,000.
Ostwald was acquired by CCM on December 28, 1968. It is a manufacturer and distributor of band uniforms, with gross sales of $6,391,000 for 1968, of which 96.2% or $6,146,000 reflect purchases by education institutions or booster clubs for educational institutions.
These figures reflect all of Ostwald's sales of band uniforms, and subsumes what has been raised as an issue herein, that traditional military as well as blazer-type uniforms are part of the relevant market. Looking just to traditional uniforms, Ostwald's 1968 dollar volume drops a little over $200,000 to $6,178,000.
A. The Band Uniform Market
Ostwald's 1968 share of the general band uniform market was 41.9%. When the calculations are limited to traditional military type uniforms, Ostwald's share for that year rises to 44.5%. CCM-Ostwald did attempt at trial to expand the scope of the government's universe of band uniform manufacturers and distributors, but the proof on that point was weak, and, in any event, the actual difference of Ostwald's attributed percentages is relatively insignificant within the context of the issues.
Accepting GX 128 and 131, based as they appear to be on defendant's answers to interrogatories and affidavits of band uniform makers, only 17 manufacturers figure in the general band uniform industry, and, of these, only 11 can lay claim to a one percent or greater share of the market. When only traditional uniforms are considered, the 7th ranked company, with 4.1% of the general market, drops out, leaving 16 concerns, 11 of which hold a one percent or greater share of overall sales. Using either ranking, Ostwald is the industry leader, commanding four times the sales of the number two concern.
Below Ostwald, however, there appears to be three plateaus, on either the traditional or general ranking. The top four firms control 69.6% (general) and 73.9% (traditional) of the market.
Testimony at trial established that the industry is made up of family-run concerns (Heldman TR. 61, DeMoulin TR. 128, Frank TR 175). Band uniforms are made to order and produced in small lots; business is highly seasonal (GX 22 at 11, Heldman TR. 105-6, Gibson TR. 548). It is a stable industry, as the major competitors and their respective market shares have remained essentially constant (Frank TR. 186, Heldman TR. 83, DeMoulin TR. 144). Profit margins are lower than in the uniform trade generally (DX-BG, Plaintiff's Answers to Interrogatories 6(p) and 45, Heldman TR. 105-6).
Band uniforms are sold primarily, 80-95%, to schools, universities and booster clubs for universities and schools. (Heldman TR. 64-5, DeMoulin TR. 129-30, GX 20). The marketing process begins by a sales representative personally soliciting a school band director. The director will request sketches which are prepared by the salesman or a designer for the company he represents. These the director may subsequently alter, and will, in any event, circulate to the other uniform makers competing for the order. Specifications are then written up and bids taken. Samples are produced, sometimes before, but normally after an order is placed. The successful salesman takes the measurements of the prospective wearers, and production finally begins. Delivery is made, the salesman fits the uniforms and any necessary alterations are attended to (Portner TR. 743-44).
This process is repeated on a 3, 5 or 10 year cycle, depending on the useful life expectancy of a given uniform (DeMoulin TR. 162-63, Revelli TR. 242, Portner TR. 741, Ohainan TR. 894). In the interim, music educators' conventions and trade shows are attended, at which booths are set up and, hopefully, contacts made (Ohainan TR. 888, DeMoulin TR. 130, Heldman TR. 84, GX 1, para. 24).
Salesmen, for the most part, are independent, as the companies they represent do not generate enough sales to justify full association (Frank TR. 188, Heldman TR. 67, 88-89). Sol Frank Uniforms, Inc., for example, ranked number 3 (general) or 4 (traditional) in the industry (GX 128, 131), has one man working on a drawing account against commissions and 20 to 25 part-time representatives on a commission-only basis (Frank TR. 189-90). Non-employee salesmen carry other products of the companies such as choir robes, diplomas, class rings, year books, paper goods, and banners (Gibson TR. 577, Heldman TR. 66).
Ostwald, prior to its acquisition by CCM, and adding in the sales force of C.E. Ward, a band uniform maker commanding 0.6% of the general market before it joined CCM in 1968, had 24 independent sales representatives as well as representation in the southwest by about 20 agents of the wholly separate Star Engraving Co. (McIlhenny TR. 466, Gibson TR. 547). After CCM's acquisition of Ostwald, the combined sales force still numbered 24, but these were converted to full-time employees, receiving a draw against commissions (McIlhenny TR. 466). Star Engraving Co. still represents Ostwald in the southwestern United States on the same independent basis as before (Gibson TR. 546-47).
Ostwald prefers to hire new salesmen who have had at least some general sales experience (McCarthy TR. 584). New men are put through a training period, beginning with a road trip with a sales training manager. The first two days are spent learning fabrics and terminology, after which follows a demonstration week of customer calls. Then the trainee goes out on his own and is later rejoined by his teacher who observes what progress has been made. The training period lasts from 2 to 5 weeks. (McCarthy TR. 586-87, DeMoulin TR. 138).
Compared to other industries, advertising is minimal, consisting primarily of spots in music educator journals and direct mailings to band directors. According to DX-N, Ostwald's direct advertising costs for the years 1965 to 1972 remained consistently between $30,000 and $36,000, save for 1969 and 1970, when Ostwald spent $67,421 and $56,738 respectively. All promotional expenses, including internal sales contests and the costs of attending conventions, never exceeded $93,307 in any one of these years, reaching a peak in relation to sales revenues of 1.69% in 1969 (DX-N). Discounts for volume in trade magazines at this level of expenditures are insignificant (See, e.g., testimony of John Majeski, Editor of Music Trades Magazine, Inc. in relation to instrument advertisements. TR. 874).
One promotional device attempted by Ostwald after its acquisition by CCM, however, has been the focus of concern herein, not so much for its magnitude but for its implications. CCM, in May, 1969, acquired C.G. Conn, Ltd., a prominent name in musical instrument manufacture. As will be discussed hereinafter, the government attacks the Conn acquisition as a violation of § 7 of the Clayton Act, see Part II infra. It is relevant to note here, however, that, once Conn joined the CCM "family", CCM-Ostwald briefly tried a promotional scheme of offering Conn instruments as bonuses for purchases of Ostwald band uniforms; as will be seen, the scheme "backfired".
As stated, the band uniform trade is a seasonal one, the peak selling period occurring between January and May, with deliveries to be made in August and September (Gibson TR. 548). Ostwald, as the figures given for its sales indicate, reached a peak in 1968 of $6,391,000 (Gibson TR. 552, DX-1). This, defendant suggests in its trial memorandum, came as a result of efforts by Ostwald's "old" or "selling" management to inflate the 1968 sales figures and thus the acquisition price to be paid by CCM.
The results were unrealistic delivery commitments, the effects of which were felt in subsequent seasons. As the 1970 delivery season arrived, Ostwald found production lagging behind obligations by an increment of 5000 units each month (Gibson TR. 550).
To avoid future problems of this nature, CCM-Ostwald decided on a bonus plan giving customers an incentive for early ordering, which in turn would allow pre-peak season production (Gibson TR. 551, GX-84). The incentive itself, as set out in Ostwald's brochure (GX-84), consisted of free Conn instruments, the number dependent on the size of the order.
The result of the plan was the receipt of 52 early orders, 33 of which came from old customers, all together amounting to $315,086 in sales. The instruments cost Ostwald $13,433, and were paid for at dealers' prices (Gibson TR. 555-56).
The offer was not continued past the 1970 season, due to its lack of substantial success and the extremely adverse reactions of instrument retailers, upon whom Conn depended to market its products (Coyle TR. 635, Echols TR. 819-20, Hale TR. 926).
Band uniforms are almost never sold "off the rack ", but, as described above, are made to order based on the final sketches and samples approved by band directors and school purchasing authorities (GX 23-53, 58-63, Heldman TR. 70, 124, DeMoulin TR. 133, Revelli TR. 226-7, Downing TR. 292). Order sizes generally stay under 250 uniforms, and, due to size variations, cutting of the patterns is done a few at a time (DeMoulin TR. 136-37, Portner TR. 743).
The basic jacket and trouser are assembled and sewn as is civilian wear, and, as with the ordinary sports coat, the band jacket is made to retain its shape by installing canvas between the lining and outer cloth, or "fusing" (Portner TR. 707, 709). Unadorned, the finished product resembles a highly styled suit, and differs little in appearance from police garb (Compare DX-X with DX-AL).
Traditional military-type band uniforms have a good deal of braid and trim, which is purchased ready made and merely attached to the garment (Mathews TR. 493, Heldman TR. 121).
This is done with a "Cornelli machine ", a sewing machine operated from under the table with a handle designed to allow the operator to follow the turns and loops in the braid itself (Reinhart TR. 520). It is also used for manufacture of capes and boleros, and to sew on sequins (Id.). Cornellis are not available new, but can be purchased used for around $600. Regular sewing machines can be converted to less efficient versions of the Cornelli (Reinhart TR. 531). Sol Frank, Inc., the 4th ranked manufacturer of traditional band uniforms, with 9.5% of the market in 1968, does not use Cornellis, but has chosen to improvise (Frank TR. 200).
The braid and trim alone, however, do not set apart the band uniform from bellhop or theatre usher outfits. The latter, in fact, can be regarded as more ornate than band uniforms (See DX-AI). What is different about the band uniform is its overlay.
An overlay is like an overvest, sleeveless and generally waist length, and is worn on top of the jacket (Mathews TR. 494-95). It is made of stakleen, a naugahyde plastic material, readily purchased, and in common use for seat coverings and auto upholstery (Mathews TR. 493, Reinhart TR. 526, 536). Braid and trim are applied to stakleen with the Cornelli, and, after cutting, seaming is done with regular sewing machines (Reinhart TR. 528).
Aside from the Cornelli, the only specialized apparatus used in band uniform manufacture is the multiple head embroidery machine, which is also used in making sheets, pillowcases and handkerchiefs (Reinhart TR. 525-26, DK-V). Other machinery, such as single and double needle sewing machines, stitch and filling machines, serging, merrow, button and bar tack, Bonez, Reese pocket, basting, and buttonhole machines are in common use in general garment making (Mathews TR. 488-90, Reinhart TR. 520-23).
Capable production personnel are, for the most part, available to a manufacturer on request to the appropriate union. Markers, cutters, lining men and sewers, for example, are obtained by Ostwald from the Amalgamated Clothing Workers of America (Karmajin TR. 508-12). Braid and trim sewers, if lacking experience in Cornelli or multineedle operation, require some training (Karmajin TR. 514, Frank TR. 179, Heldman TR. 74).
Through 1969 the C.E. Ward Company manufactured band uniforms. Sales for 1968 amounted to $99,000, giving Ward 0.6% of the general market and 0.7% of the traditional.
Ward was acquired by CCM in June, 1968, several months prior to the Ostwald acquisition. Subsequently, in its "1970 Financial Plan" (GX-117), Ward announced that it would discontinue band uniform production.
Ward is primarily a manufacturer of choir robes and lodge regalia, being number one in the latter market and the third ranked company in the former (GX 117, 22). A break-down of its sales revenues, product by product, for 1967 reveals that band uniforms generating $80,554.50, was but a minor facet of its business, as lodge regalia produced $1,105,673.79, church vestments $687,594.87 and caps and gowns $312,931.71 (GX-22, a financial report of the C.E. Ward Co. for 1967).
Mark-up on these uniforms was 60%, lower than on any other of its lines, (GX-22), and, as of 1967, it was the only product to fail to better 1964 sales performance (GX-22, Statement I). Band uniforms, however, did serve to fill a seasonal gap for Ward. Looking to month to month delivery figures, orders for church vestments were filled primarily between November and March, caps and gowns in April and May, with lodge regalia being delivered on a constant monthly basis. Band uniforms were delivered by Ward primarily in August, September and October, which brought these months into line in terms of percentage of total unit shipments with the rest of the year (GX-22).
The express object of this shift out of band uniforms was to allow greater concentration of company resources in its more profitable lodge regalia line (100% mark-up, GX-22 at p. 5) and to begin production of blazers, projected by Ward to be a dollar for dollar substitute for band uniforms (GX-117 at p. 3).
C. Line of Commerce or Products
Section 7 of the Clayton Act proscribes mergers and acquisitions that may substantially lessen competition ". . . in any line of commerce in any section of the country. . . ."
This invites -- indeed, directs -- a court, when presented with a challenge under this provision, to determine at the outset just what subdivision of the economy constitutes a meaningful frame of reference for analysis.
The parties have agreed that the continental United States constitute the "geographical market ". They are in dispute over delineation of the relevant product market.
The government took the position in its complaint that CCM's acquisition of Ostwald threatened anti-competitive repercussions in the band uniform trade generally.
Subsequently, in its trial memorandum, government counsel attempted to differentiate between the traditional military type uniforms and the plainer blazers that are occasionally worn by bands -- and to carve out a submarket comprised of only the former.
Defendant opposes the finding of such a submarket and would expand the line of commerce beyond even that of the general band uniform trade. It contends that the acquisition should be assessed in terms of its effects on the entire made-to-measure uniform industry, encompassing police uniforms, theatre usher garb and the like.
Analysis here should be confined to the effects of the acquisition on the band uniform trade generally. The essence of § 7 is competition, and only those products that actually compete for sales should be grouped and analyzed within the same commercial or product line. Defendant's argument for defining the product market as made-to-measure uniforms ignores this point. As discussed heretofore, there is a good deal of similarity in appearance and manufacture between various types of uniforms, and, as defendant asserts, it would be relatively easy for a maker of one variety to expand his line to others. But, to put the matter somewhat simplistically, there is no competition between usher and firefighter uniforms; policemen do not consider band garb an alternative to their traditional blues.
The Supreme Court has spoken on this precise point in Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962), wherein a merger of two concerns, each a maker and retailer of shoes, was challenged under the Clayton Act. The government asked that the product market be defined as footwear generally, pointing out similarities in appearance, price, manufacture and manner of retailing, but the Court declined to do so. It noted that within this broad category were three distinct segments that in no way competed with each other, men's, women's, and children's shoes, and held that each of these constituted a separate product market for § 7 purposes.
This principle works in the converse as well. The government here would eliminate from consideration blazers sold and used for band uniforms. It argues that in both appearance and price, band blazers differ extensively from traditional military type band garb. This, however, does not negate the fact that blazers are a viable alternative to the more common uniform replete with shako and overlay, and are preferred by a good number of bands in the ...