The opinion of the court was delivered by: WARD
Plaintiff United States of America ("the government") moves pursuant to Rule 65, Fed. R. Civ. P., to preliminarily enjoin defendants Culbro Corporation ("Culbro"), Havatampa Holding Company ("the Holding Company"), and HAV Corporation ("HAV") from acquiring defendant Havatampa Corporation ("Havatampa") because the acquisition may violate Section 7 of the Clayton Act, 15 U.S.C. § 18. The acquisition had been scheduled to close on July 1, 1977. However, on June 30, 1977 Judge Edward Weinfeld signed a temporary restraining order enjoining the closing for ten days so that relevant legal and factual matters could be developed at a hearing on the preliminary injunction motion. Upon consent of the parties the restraining order was extended under Rule 65, Fed. R. Civ. P., by this Court for an additional ten-day period which expired on July 20, 1977. Prior to the latter date the defendants agreed to voluntarily suspend any action until July 26, 1977 at which time this Court would render its decision. Based upon approximately five days of evidentiary hearings supplemented by extensive briefs, for the reasons hereinafter given, the motion for a preliminary injunction is denied and the parties are directed to submit prior to the closing a hold separate order in accordance with this opinion.
The proposed transaction calls for Havatampa, a manufacturer and wholesale distributor of cigars and other products, to sell substantially all of its assets, ultimately, to HAV.
HAV will then take over operation of the Havatampa business.
HAV is a wholly-owned subsidiary of the Holding Company. The outstanding shares of capital stock of the Holding Company will be closely held by Oppenheimer & Company (65%), and Ira Hechler, a consultant to Oppenheimer and its Director for Special Acquisitions (30%) ("the Oppenheimer interests"); and Bruce Samson, a Florida investment consultant (5%). Holding Company and HAV are presently inactive corporations organized by Oppenheimer solely for the purpose of acquiring the business assets of Havatampa.
Oppenheimer is a general partnership engaged directly or through its subsidiary Oppenheimer & Co., Inc., in the brokerage, investment banking and mutual fund management businesses. Beginning in 1976, it commenced acquiring the ownership of businesses. It had acquired three businesses prior to the Havatampa transaction, including a supermarket chain and a manufacturer of women's apparel.
In the summer of 1976 Oppenheimer approached Havatampa seeking to acquire Havatampa's business and assets. Negotiations began and in October of 1976 an agreement in principle was reached and was publicly announced. Thereafter, Oppenheimer, which had used investment "partners" in two of its three prior acquisitions, entered into discussions with two potential co-investing "partners," first with U.S. Tobacco Company, a competing cigar manufacturer, and then with Culbro, a competing cigar manufacturer and wholesale distributor of cigars and other products.
Oppenheimer agreed to take on Culbro as an "investment partner." Manufacturers Hanover Trust Company is to provide most of the financing, having given Oppenheimer a letter of intent for a $50,000,000 loan. Culbro's financial contribution to the financing is relatively small, a $2,750,000 subordinated loan to the Holding Company. However, its financial contribution exceeds that of Oppenheimer which is putting up only $1,785,000.
Moreover, Culbro's interest and participation in the acquisition extends well beyond its financial involvement. Approximately three years prior to this transaction Culbro approached Havatampa for possible acquisition and Culbro approached Oppenheimer in this case. Further, "Culbro officials inquired if . . . Culbro could be of any assistance to Oppenheimer in appraising its proposed acquisition" and "Culbro has assisted Oppenheimer & Co. in evaluating the business operations of the Company, has participated in some of the discussions with respect to the terms of the Sale Transaction and has made suggestions with respect to the relevant agreements." In addition, Culbro will be given an option to purchase up to 25% of the outstanding shares of the Holding Company. It intends to exercise this option at the closing as to the full 25%. According to defendants' counsel this option will cost $330,000 and the amount of Culbro's debentures will be reduced by that amount.
Further, Culbro will be given the right to nominate one director to the five-person Board of Directors of the Holding Company; and it intends to exercise this right.
Lastly, following the consummation of the transaction, Culbro will be available to give management advice to the Holding Company, HAV, and Oppenheimer regarding the operation of the business now owned by Havatampa.
The significance of Culbro's participation is that it may provide Culbro with the opportunity to control or influence Havatampa's cigar manufacturing and/or cigar wholesale distributing operations. This, in turn, is significant because Havatampa is the sixth largest manufacturer and the largest wholesale distributor of cigars and other tobacco products in the United States and Culbro is the second largest manufacturer and third largest wholesale distributor. Without going into a necessarily complicated discussion of the merits, suffice it to say that if the Court were to find that there is a reasonable probability of Culbro's exercising control or influence over Havatampa's cigar manufacturing or wholesale distributing operations, then there would be serious and substantial questions as to whether this would reasonably result in horizontal and/or vertical anticompetitive effects.
Preliminary Injunction Standard
Preliminary injunctive relief is a drastic remedy under any circumstance, to be granted only when it is equitable to do so. For this reason, the party seeking such relief must satisfy a stringent standard. In the usual case the standard is that the movant must make a clear showing of either (1) possible irreparable harm and probable success on the merits; or (2) sufficiently serious questions which present a fair ground for litigation and the balance of hardships tipping decidedly in its favor. Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973). Although it may not be apparent on the face of the Sonesta test, the law is clear that irreparable harm is required under both prongs of that test; it is subsumed under the balance of hardship portion of the second prong. Triebwasser & Katz v. AT&T, 535 F.2d 1356, 1359 (2d Cir. 1976); accord, New York v. Nuclear Regulatory Commission, 550 F.2d 745 (2d Cir. 1977); Jacobson & Co. v. Armstrong, 548 F.2d 438, 441 n. 3 (2d Cir. 1977). This follows from the fact that "[if] the element of irreparable damage is prerequisite for relief where the plaintiff must show probable success on the merits, then a fortiori where the plaintiff establishes something less than probable success as to the merits, need for proof of the threat of irreparable damage is even more pronounced." Triebwasser, supra at 1359.
In Government Clayton Act suits, however, the standard appears to be a little different, with more emphasis on probability of success and less emphasis on irreparable harm. As to probability of success,
"[Proof] of a mere possibility of a prohibited restraint or tendency to monopoly will not establish the statutory requirement * * *." Section 7 concerns itself with the reasonable probability of the lessening of competition or tendency toward monopoly as a result of the particular merger being scrutinized -- a showing that such effects are reasonably likely to occur. This is what the words "may be" as used in Section 7 mean. The lessening of competition must also be shown to be "substantial."
United States v. Atlantic Richfield Co., 297 F. Supp. 1061, 1066 (S.D.N.Y. 1969) (footnote omitted, emphasis in original, citing United States v. E.I. Du Pont de Nemours & Co., 353 U.S. 586, 598, 77 S. Ct. 872, 1 L. ED. 2d 1057 (1957)); accord, United States v. G. Heileman Brewing Co., 345 F. Supp. 117, 119 (E.D. Mich. 1972); United States v. IT&T, 306 F. Supp. 766, 774 (D. Conn. 1969), appeal dismissed, 404 U.S. 801, 92 S. Ct. 20, 30 L. ED. 2d 34 (1972).
As to irreparable harm, there is a line of cases which holds that once reasonable probability of success is shown, irreparable harm should be presumed. This is because
[the] enactment into law of [section] 7 was an expression of the public policy of the nation, and the threatened violation of the law here is itself sufficient public injury to justify the requested relief. The Congressional pronouncement in § 7 embodies the irreparable injury of violations of its provisions. No further showing need be made by those directed to enforce that section than that it is being violated or threatened with violation.
United States v. Ingersoll-Rand Co., 218 F. Supp. 530, 543-44 (W.D. Pa.), aff'd, 320 F.2d 509 (3d Cir. 1963); accord, United States v. Atlantic Richfield Co., supra at 1074 n. 21; United States v. Pennzoil, 252 F. Supp. 962, 986 (D. Pa. 1965); United States v. Chrysler Corp., 232 F. Supp. 651, 657 (D.N.J. 1964).
The Court, recognizing that § 7 is designed to prevent incipient, rather than present, anticompetitive effects, accepts this proposition that irreparable harm should be presumed once a reasonable probability of anticompetitive effects has been demonstrated. However, proof of reasonable probability of success and the presumption of irreparable harm do not relieve a court of equity of its duty to balance the hardships,
[for] traditional equitable principles apply in any request for injunctive relief. [Therefore] in addition to considering the probability that a full hearing would establish a violation, the court must consider the relative injury to the parties, the industry, and the public that may or may not result from the issuance of a preliminary injunction.
United States v. G. Heileman Brewing Co., supra at 121. This is the law in this Circuit. Gulf & Western Industries v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 693 (2d Cir. 1973); United States v. IT&T, supra at 797 n. 95.
As to the balance of hardships, the government asserts that this almost always tips in the government's favor, and does so here, because injury to the private parties must be subordinated to the presumed injury (if any) which the private parties' transaction would cause the public. To tip the scales the other way, evidence of injury to the private parties
must be so proportionately persuasive as to submerge the principle that "the status of public interest and not the requirements of private litigation measure the propriety and need for relief."
United States v. Pennzoil, supra at 986 (dicta).
The Court recognizes that to effectuate § 7, the statute's prophylactic purpose of preventing threatened future harm must outweigh the harm the injunction will cause the individual parties, if there is a reasonable threat of the anticompetitive harm occurring. The question, then, is whether there is a reasonable prospect of that harm occurring. The answer depends not only upon the government's proof on the merits, but also upon whether other prophylactic measures can be taken to obviate this threat. This breaks down into four inquiries which the Court must address in determining the propriety and equity of granting or denying the interim relief sought by the government:
1. Has the government demonstrated a reasonable probability that a substantial lessening of competition will occur during the pendency of this action and prior to entry of permanent relief in the event a violation is proven?
2. If so, is there an effective but less drastic preliminary remedy, such as a hold separate order, which will prevent this ...