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NEW YORK v. KRAFT GEN. FOODS

September 12, 1994

STATE OF NEW YORK, Plaintiff,
v.
KRAFT GENERAL FOODS, INC. NABISCO CEREALS, INC., NABISCO, INC., PHILIP MORRIS COMPANIES INC., RJR NABISCO HOLDINGS CORP., and RJR NABISCO INC., Defendants.



The opinion of the court was delivered by: KIMBA M. WOOD

 WOOD, D.J.

 Plaintiff State of New York ("the State") has renewed its motion for a preliminary injunction. For the reasons set forth below, the State's motion is hereby denied.

 BACKGROUND

 Much of the background of this antitrust action is set forth in the court's Opinion and Order of June 14, 1993, denying the State's first motion for a preliminary injunction. Familiarity with that opinion is assumed. In short, this case arises from the acquisition by defendant Kraft General Foods, Inc. ("Kraft") of defendant Nabisco Cereals, Inc.'s ("Nabisco") ready-to-eat ("RTE") cereal assets (the "Acquisition"). The State asserts claims under Section 7 of the Clayton Act, 15 U.S.C. § 18, Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and Section 340 of New York's Donnelly Act, N.Y. Gen. Bus. L. § 340. New York ultimately seeks either (1) to rescind the transaction between Kraft and Nabisco and thereby return Nabisco to the RTE cereal business, or (2) to divest Kraft of Nabisco's assets to another firm that could function in Nabisco's place as the sixth major competitor in the RTE market.

 The State appealed the court's June 14, 1993 decision denying its first motion for a preliminary injunction, and in an order dated November 5, 1993, the Court of Appeals affirmed, noting with approval that this court was prepared to reconsider granting a preliminary injunction if the State could more substantially establish a threat of irreparable harm. On January 19, 1994, after substantial discovery, the State renewed its request for a preliminary injunction with the instant motion. In February and April, the court conducted evidentiary hearings on the instant motion. *fn1" The State seeks a preliminary injunction prohibiting defendants from taking any action that would impair the commercial value and marketability of the Nabisco RTE cereal assets. More specifically, the State seeks to restrain Kraft from taking any action that would have the effect of merging the "Nabisco Shredded Wheat" brand equity and identity associated with the acquired Nabisco RTE cereal products into its own "Post" line of RTE cereal products. The State claims that such a merger would eliminate the independent "Nabisco Shredded Wheat" brand identity and dissipate brand equity associated with the Nabisco brand. At this juncture, the court considers Kraft's transition plans (1) to reduce the size of the Nabisco triangle, to place the Post logo near the Nabisco logo on the front of the cereal package, and to place on the back of the package a "Dear User" letter explaining the transition; (2) otherwise to associate the Nabisco RTE cereal assets with Post through advertising and promotions; and (3) to discontinue Nabisco's marginal cereal brands.

 DISCUSSION

 I. Legal standard.

 The State of New York sues as parens patriae on behalf of the citizens of New York. Although the State of New York is a governmental actor, it is considered a private party when seeking an injunction pursuant to the Clayton Act. See California v. American Stores Co., 495 U.S. 271, 296, 109 L. Ed. 2d 240, 110 S. Ct. 1853 (1990). The State, therefore, does not benefit from the presumption of irreparable harm enjoyed by the Federal Trade Commission or the Department of Justice when those agencies sue to stop a merger. See FTC v. University Health, Inc., 938 F.2d 1206, 1218 (11th Cir. 1991). Thus, to obtain preliminary injunctive relief, the State must establish "(1) irreparable harm and (2) either (a) likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Consolidated Gold Fields, PLC v. Minorco, S.A., 871 F.2d 252, 256 (2d Cir. 1989) (citation omitted) (emphasis added). Section 16 of the Clayton Act, 15 U.S.C. § 26, requires the State to make "a showing that the danger of irreparable loss or damage is immediate." In affirming this court's decision on the State's initial preliminary injunction motion, the Court of Appeals noted that to obtain the relief sought here, the State "must demonstrate a real and genuine threat of irreparable harm." New York v. Kraft General Foods, Inc., 14 F.3d 590, slip. op. at 3 (1993). Applying the foregoing standard to this case, the court finds a preliminary injunction unwarranted.

 II. Application of the standard for a preliminary injunction.

 The parties agree that the central issue on this renewed motion is whether the Post-Nabisco transition will irreparably harm the competitive viability of Nabisco RTE cereal assets in the event that the court eventually orders rescission or divestiture. State's Post-hearing Reply, at 4; Kraft's Post-hearing Memorandum, at 4. The centerpiece of the Nabisco RTE cereal assets is the goodwill associated with the Nabisco mark, for which Kraft paid three-quarters of the total $ 450 million acquisition price. The primary question with respect to irreparable harm, therefore, is whether the planned Post-Nabisco transition would irreparably erode that goodwill such that it could not be regained by Nabisco or a new entrant ("Newco") upon rescission or divestiture. *fn2"

 The parties agree that the Nabisco mark is strongly associated with shredded wheat products, giving the mark what is known as "brand equity." The parties disagree, however, over what implication the existence of this brand equity has for disposition of the instant motion. The State argues that the brand equity would be essential to the competitive viability of Newco or Nabisco, were the court to order rescission or divestiture. The State claims that the planned transition would erode the Nabisco brand equity and/or transfer some of it to Post. To make possible an effective final remedy, the State urges the court to preserve Nabisco's independent brand equity for possible final transfer to Newco or back to Nabisco. In opposition, Kraft asserts that the Nabisco brand recognition with respect to Shredded Wheat is so strong that there is little danger that the strength would be eroded as a result of being paired with the Post mark during the pendency of this litigation.

 The State posits five consequences of the transition that could weaken the competitive viability of the Nabisco RTE cereal assets: (1) the transition would eliminate the independent identity of the Nabisco brand; (2) the transition threatens to eliminate Nabisco's brand dominance with respect to Shredded Wheat; (3) the transition would weaken consumers' strong positive associations with Nabisco Shredded Wheat; (4) Kraft will appropriate at least some of the Nabisco goodwill; and (5) Kraft will discontinue Nabisco's small brands. State of New York's Post-Hearing Memorandum, at 4. The State claims that these arguments constitute "five separate grounds" for a finding of irreparable harm. The distinctions between some of these points are elusive, however, and much of the same evidence is cited in support of the State's different theories. I find that the evidence may be more clearly categorized in terms of three relatively distinct theories of harm to Nabisco's competitive viability: (1) the ...


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