Petitions for review of an order of the Federal Trade Commission directing divestiture of a corporate stock acquisition under Clayton Act § 7, 15 U.S.C. § 18, on ground that, inter alia, acquiring firm was an actual potential entrant into the industrial gases market. Order set aside and cause remanded.
Lumbard and Oakes, Circuit Judges, and Bryan, District Judge.*fn*
The legal theory involved in this petition to review lies on the frontiers of antitrust law. See FTC v. Atlantic Richfield Co., 549 F.2d 289, 293 (4th Cir. 1977). The Supreme Court has twice declined, United States v. Marine Bancorporation, Inc., 418 U.S. 602, 639, 41 L. Ed. 2d 978, 94 S. Ct. 2856 (1974) [hereinafter Marine Bancorp.]; United States v. Falstaff Brewing Corp., 410 U.S. 526, 537, 35 L. Ed. 2d 475, 93 S. Ct. 1096 (1973) [hereinafter Falstaff ], to pass on the validity of the theory that has come to be known as the "actual potential entrant" doctrine, Falstaff, supra, 410 U.S. at 560 (Marshall, J., concurring). This doctrine would proscribe as violative of Section 7 of the Clayton Act, 15 U.S.C. § 18, a company's acquisition of a large firm in an oligopolistic market if the acquiring company at some future date is expected to enter the market de novo or through a "toehold" acquisition of a firm lacking a significant share of the market. See Falstaff, supra, 410 U.S. at 537. According to the theory, the effect of such an acquisition "may be substantially to lessen competition." Clayton Act § 7, 15 U.S.C. § 18.
The validity of this type of acquisition is a question squarely presented by the order of the Federal Trade Commission (FTC) under review here. Like the Supreme Court in Marine Bancorp., 418 U.S. at 639, however, we have concluded that a fundamental "precondition" to application of the doctrine has not been established on the record before us. We accordingly set aside the Commission's order and "leave for another day," Falstaff, 410 U.S. at 537, the issue of the doctrine's basic validity.
BOC International Limited (BOC), formerly known as the British Oxygen Company, has petitioned this court, pursuant to 15 U.S.C. § 21(c), to set aside an FTC order directing BOC, inter alia, to divest itself of its controlling stock interest in Airco, Inc.*fn1 As found by the Commission, BOC is a multinational corporation and the world's second largest producer of industrial gases, such as acetylene, carbon dioxide, argon, helium, hydrogen, nitrogen, oxygen, and nitrous oxide, which are used by the medical profession, steel companies, manufacturers, welders, contractors, and others. In re British Oxygen Co. ("Opinion of the Commission"), No. 8955, slip op. at 3, 6 (FTC Dec. 8, 1975) [hereinafter FTC Op.]. BOC has never produced or sold industrial gases in the United States. Airco, according to the Commission, is the third largest industrial gases producer in the United States, with an approximate 16% share of a market in which the top two producers have 26% and 18% market shares. Id. at 3, 10.*fn2 Via a tender offer made in December, 1973, BOC acquired for $80 million a 35% interest in Airco, which then took four BOC representatives onto its sixteen-person board of directors. Id. at 5.
Two months later, the FTC issued a complaint alleging that the acquisition violated the antitrust laws. Id. at 2. Shortly thereafter the Commission obtained a preliminary injunction, pursuant to 15 U.S.C. § 53(b), requiring BOC, inter alia, to maintain Airco as a separate company during the pendency of expedited administrative proceedings. FTC v. British Oxygen Co., 1974-1 Trade Cas. para. 75,004 (D. Del. 1974), vacated in part on other grounds, 529 F.2d 196 (3d Cir. 1976) (en banc). Following some six weeks of hearings, an administrative law judge (ALJ) issued an "initial decision" holding, inter alia, that the BOC acquisition of Airco violated Clayton Act § 7. In re British Oxygen Co., No. 8955 (FTC ALJ Oct. 18, 1974). This holding was affirmed by the FTC in December, 1975, at which time divestiture was ordered. Apparently no effort has been made to enforce the FTC's order during the pendency of proceedings in this court.
The theory on which the FTC based its holding in this case, the actual potential entrant theory, must be distinguished at the outset from the closely related theory, not here involved, addressed to the problem of the "perceived" or "recognized" potential entrant. This latter theory is concerned with a present effect that a company not in an oligopolistic market is having on companies which are in that market. Because the insiders view the outsider as a likely entrant (a competitor "waiting in the wings"), they keep prices and profit margins lower than they would if there were no threat of the outsider entering the market either de novo or via a toehold acquisition of a small firm, a threat that might be realized if prices and profits were higher. When the outsider acquires a large firm in the market, it no longer poses a threat, the "in the wings" effect on prices disappears, and competition is thereby lessened. See Falstaff, supra, 410 U.S. at 559-60 (Marshall, J., concurring); Robinson, Antitrust Developments: 1973, 74 Colum. L. Rev. 163, 186 (1974); Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 Harv. L. Rev. 1313, 1362-79 (1965). Reliance on this theory to block acquisitions under Section 7 has been approved by the Supreme Court. Marine Bancorp., supra, 418 U.S. at 625; Falstaff, supra, 410 U.S. at 532-33.
In the instant case, the FTC specifically found, overruling its ALJ, that there was no proof of any "wings" or "fringe" effect of BOC on the American industrial gases market or on prices therein. FTC Op. at 15 n.8. This finding, not challenged here, makes the instant case different from the typical one, in which there is both a perceived and an actual entrant concern, see FTC v. Atlantic Richfield Co., supra, slip op. at 9 n.6; Turner, supra, 78 Harv. L. Rev. at 1362. Here the FTC has in effect conceded that BOC as a potential entrant was having no present procompetitive effect on the relevant market; the Commission's order is instead grounded entirely on the belief that competition in the American industrial gases market would increase at some time in the future if BOC divests itself of Airco, see Falstaff, supra, 410 U.S. at 560-61 (Marshall, J., concurring). All parties here are agreed that, had the acquisition not been blocked, competition in the American industrial gases market just after the acquisition would have been "exactly as it was [before the acquisition], neither hurt nor helped," id. at 537 (majority opinion).
In determining whether an alleged future effect on competition by itself justifies blocking a present corporate acquisition under the actual potential entrant doctrine, two distinct questions looking to the future must be answered. First, would the firm in question enter de novo or by toehold acquisition*fn3 if not permitted to enter by acquiring a large company? Second, would the de novo or toehold entry of the firm have procompetitive effects on the market in question?*fn4 See Marine Bancorp., supra, 418 U.S. at 633; P. Areeda, Antitrust Analysis 665-66 (2d ed. 1974). There is some question as to the importance of the second of these predictions, since typically in an oligopolistic situation the entry of a large firm as a new competitor necessarily has significant procompetitive effects, see Ford Motor Co. v. United States, 405 U.S. 562, 587, 31 L. Ed. 2d 492, 92 S. Ct. 1142 (1972) (Burger, C.J., concurring and dissenting), at least to the extent of "shak[ing] things up," Turner, supra, 78 Harv. L. Rev. at 1383, or engendering "competitive motion," Robinson, supra, 74 Colum. L. Rev. at 183-84.*fn5 But the importance of the first of the predictions, as to the likelihood of entry, is unquestioned. If there is no showing that the acquiring firm would have entered the market but for the acquisition - and if the acquiring firm is exerting no present influence on the market as a perceived potential entrant, as is concededly the case here - then it cannot be said that the effect of the acquisition "may be substantially to lessen competition," Clayton Act § 7, 15 U.S.C. § 18. In such situations, to the contrary, "there may even be a competitive gain to the extent that [the acquiring firm] strengthens the market position of the acquired firm." Falstaff, supra, 410 U.S. at 561 (Marshall, J., concurring).
In the instant case, with regard to the first of the two predictions, the FTC made a critical, ...