Appeal by Fruehauf Corporation from a decision of the Federal Trade Commission holding that Fruehauf's acquisition of Kelsey-Hayes Company violated § 7 of the Clayton Act, 15 U.S.C. § 18, and ordering Fruehauf to divest itself of all but a small portion of Kelsey. 91 F.T.C. 132 (1978). Enforcement of the Commission's decision denied .
Before Mansfield and Oakes, Circuit Judges, and Bartels, District Judge.*fn*
Pursuant to 15 U.S.C. § 21 Fruehauf Corporation ("Fruehauf"), the nation's largest manufacturer of truck trailers, petitions to review and set aside a decision and order of the Federal Trade Commission ("FTC") finding that Fruehauf's 1973 acquisition of Kelsey-Hayes Company ("Kelsey"), a manufacturer of components for the motor vehicle and related industries, violated § 7 of the Clayton Act, 15 U.S.C. § 18,*fn1 and directing that Fruehauf divest itself of Kelsey's Auto Truck Group, the preponderant division of Kelsey, and that for 10 years Fruehauf not acquire, without prior FTC approval, any company engaged in manufacture, distribution, or sale of heavy duty wheels ("HDW"), truck trailers or heavy duty antiskid braking devices ("ASBD").*fn2 91 F.T.C. 132 (1978). For reasons set out below, we decline to enforce the divestiture order.
Both Fruehauf and Kelsey are based in Michigan, the former in Detroit and the latter in Romulus. In 1972 Fruehauf had truck trailer sales and rentals of $550 million and assets of $556 million. For the comparable period, Kelsey had net sales of its entire product line of $455 million and assets of $243 million. It is undisputed that the relevant geographic market is the United States and that the product markets in which it was found by the FTC that competition may be substantially lessened as a result of the merger are those for (1) heavy duty wheels (HDW), (2) antiskid brake devices (ASBD), and (3) truck trailers. Kelsey manufactures heavy duty wheels and antiskid brake devices. Both of these products (HDWs and ASBDs) are sold to manufacturers of trucks and tractors (e. g., Ford, International Harvester, General Motors, Rockwell, Chrysler, Caterpillar), as well as to manufacturers of trailers (e. g., Fruehauf, Trailmobile). Fruehauf manufactures trailers for sale to truck fleets such as P.I.E. and United Parcel Service.
A heavy duty wheel or HDW is the assembly connecting the tire to the axle of a vehicle. It consists of a center member, a rim, and a brake drum, which components can be bought as an assembled unit or separately from different manufacturers. There are two different wheel assemblies in use, which are not interchangeable. One is the cast spoke wheel, which consists of a "spider" or cast steel spoke center member with an integral hub, a brake drum, and a detachable rim or rims. The other is the disc wheel assembly, which consists of a steel center member or disc with rim permanently attached (by welding), a hub, and a brake drum. A spider with two rims performs essentially the same function as two disc wheels (with attached rims) and a hub.
The antiskid brake device or ASBD is a supplement to an air brake system which is designed to prevent wheel lock-up, and thereby possible skidding, during emergency braking. This sophisticated device consists of a sensor, a computer or logic module and a valve. The sensor (one at each end of the axle) determines the speed at which the wheel is actually rotating. The computer or logic module calculates the speed at which the wheel should be turning in order to achieve maximum braking efficiency. The logic can determine when a wheel lock-up is impending, and, on signal from the computer or logic, the valve regulates the air pressure to release the brakes momentarily and so prevents lock-up. These components are ordinarily, but not necessarily, produced by the same manufacturer.
The ASBD was developed as the result of a regulation issued by the National Highway Traffic Safety Administration of the Department of Transportation (NHTSA), which is known as Federal Motor Vehicle Standard No. 121 (Standard 121), 49 C.F.R. § 571.121. Standard 121 sets forth performance standards for air-braked vehicles. It does not expressly require the use of ASBD, but experience proved that as applied to trucks Standard 121 could not be satisfied without the ASBD. See Paccar, Inc. v. NHTSA, 573 F.2d 632, 639, n.26 (9th Cir. 1978), cert. denied, 439 U.S. 862, 99 S. Ct. 184, 58 L. Ed. 2d 172 (1979).
A truck trailer, of which thousands are seen on public highways, is a nonpowered vehicle, usually looking somewhat like a railroad box car on rubber-tired wheels, designed to be pulled by a power vehicle (truck tractor) and used for the purpose of transporting products over public highways. It consists essentially of a chassis or frame on wheels and a body attached to the frame. The principal purchasers of trailers are trucking fleets (such as United Parcel Service). Most fleets develop their own respective detailed specifications designating the components to be used in the manufacture of trailers to be used by them, which are then submitted to trailer manufacturers for bidding, rather than accept standardized designs or products made by any specific manufacturer.
The ALJ and the Commission found that the Fruehauf-Kelsey merger might "substantially . . . lessen competition" in three product markets: the truck trailer market, the HDW market, and the ASBD market. In essence, they determined that the merger would impair competition in the trailer market by giving Fruehauf an advantage over other trailer manufacturers in obtaining a supply of HDWs, which have been subject to periodic shortages in the past. In the Commission's view the merger would also impair competition in the HDW and ASBD markets by foreclosing other competing manufacturers of these products from selling to Fruehauf and thus deterring expansion on the part of small existing competitors in these markets or the entry into these markets of new competitors.*fn3 See 91 F.T.C. at 228-29, 234-36. Fruehauf argues that the Commission's decision is factually erroneous, legally misguided, and economically groundless.
Before proceeding to Fruehauf's contentions, some pertinent information about the three relevant markets is essential. The total value of truck trailer shipments in the United States approximates $1 billion per year. In 1973 Fruehauf accounted for about 25% Of the sales, with the top four firms accounting for about 49% Of the truck trailer market and the top eight firms for 64%, respectively. Despite these figures there are scores of other firms engaged in trailer production. Moreover, these figures reflect a modest decline in the market shares of the leading firms in the period from 1968 to 1973, a period during which the dollar volume of sales steadily increased, due in part to inflation, and the quality of trailers improved. 91 F.T.C. at 153-54. HDWs are essential components in the construction of truck trailers, as are ASBDs if Standard 121 is to be in effect.
In 1975 and 1976 seven ASBD manufacturers competed in the ASBD market, which had total sales in 1975 of about $40 million. Kelsey, the leading firm in the ASBD market, accounted for 32.5% Of sales by unit, 28.6% By dollar volume. The two top firms accounted for over 50% Of total ASBD sales by unit in 1975, and the top four accounted for about 75%. In 1975 Fruehauf purchased 5.4% Of the ASBD market's unit volume, 4.7% Of the dollar volume. Id. at 207. There is evidence that prior to the 1973 Fruehauf-Kelsey merger, which took place before Standard 121 went into effect, Fruehauf was not expected to obtain its ASBD requirements from Kelsey because Kelsey lacked an in-axle sensor design. In 1975, however, Fruehauf purchased 42% Of its ASBD requirements from Kelsey. Id. at 150, 207.
The most critical information concerning the ASBD market, however, is not market shares or the costs of entry but the status of the government regulation which is the Raison d'etre of this market. Standard 121 was first proposed in 1967 and, after several postponements and revisions, went into effect in early 1975.*fn4 The record evidence leaves little doubt that truck tractor and trailer buyers will not order ASBDs unless required to do so by the government. Representatives of the trucking industry have protested that available antiskid devices used in order to comply with Standard 121 ...