Chapter 5. Rebutting the Structural Inference

• Pages: 141-173

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CHAPTER 5

REBUTTING THE STRUCTURAL INFERENCE

Assuming, in the context of a merger or acquisition analysis, that (1)

the relevant market has been defined, (2) market shares have been

calculated for the parties to the transaction, (3) the resulting market

concentration has been ascertained, and (4) the market shares and

concentration resulting from the transaction establish a prima facie

violation of Section 7 of the Clayton Act, the parties defending the

transaction must rebut that structural inference. They must explain why

the market shares and the resulting concentration level do not establish a

violation of Section 7.

A. The General Dynamics Defense: Attacking the Significance of

Market Shares, Market Structure, and Concentration

Since 1974, defendants have relied upon the U.S. Supreme Court’s

decision in United States v. General Dynamics Corp.1 to rebut inferences

that arise from market shares. In General Dynamics, the Antitrust

Division of the U.S. Department of Justice (DOJ or the Division)

challenged the combination of two major coal producers that resulted in

“undue concentration.”2 The U.S. Supreme Court held that “other

pertinent factors” affecting the market “mandated a conclusion that no

substantial lessening of competition occurred or was threatened” as a

result of the transaction.3

The U.S. Supreme Court also held that “[e]vidence of past

production does not, as a matter of logic, necessarily give a proper

picture of a company’s future ability to compete.”4 Unlike markets

involved in earlier U.S. Supreme Court merger decisions, production

statistics (in this instance relating to coal) were not evidence of

competitive strength.5 Instead, the Court implicitly endorsed the district

1.415 U.S. 486 (1974).

2.Id. at 497-98.

3.Id. at 498.

4.Id. at 501.

5.For example, the Court noted that annual sales in the markets in United

States v. Von’s Grocery Co., 384 U.S. 270 (1966) (grocery stores), and

United States v. Pabst Brewing Co., 384 U.S. 546 (1966) (breweries),

were much more likely to indicate future competitive abilities. Current

142 MERGERS AND ACQUISITIONS

court’s decision to analyze evidence of the “structure, history and

probable future” of the relevant product market. For example, because

the major customer of the coal industry (electric utilities) bought the

product pursuant to long-term contracts, the better measure of a coal

company’s ability to compete was the size of its uncommitted reserves,

not its past production.6 Relying upon testimony that the acquired

company’s reserves were “unpromising,” if not “relatively depleted,” the

district court found, and the U.S. Supreme Court affirmed, that the

acquired company was a “far less significant factor in the coal market

than the Government contended or the production statistics seemed to

indicate.”7 The Court concluded that the parties’ current market position

and overall concentration did not show the true competitive effects likely

to result from the transaction.8

The application and implications of General Dynamics have been

debated vigorously. Its holding, its analysis, and its very name have

been cited to support a broad variety of arguments in opposition to a

plaintiff’s prima facie case under Section 7 of the Clayton Act.9 General

Dynamics opened the door for merging parties to rebut a presumption of

anticompetitive effect by showing why the prima facie case inaccurately

predicts the relevant transaction’s probable effect on future

competition.10

sales in those markets were largely attributable to factors such as market

distribution systems and brand recognition, so that competitive strength

could reasonably be predicted to continue. See General Dynamics Corp.,

415 U.S. at 501.

6.General Dynamics, 415 U.S. at 501-02.

7.Id. at 503.

8.In so holding, the Court cited its analysis in Brown Shoe Co. v. United

States, 370 U.S. 294 (1962), which “cautioned that statistics concerning

market share and concentration, while of great significance, were not

conclusive indicators of anticompetitive effects.” United States v.

General Dynamics Corp., 415 U.S. 486, 498 (1974).

9.See Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324, 1336-37

(7th Cir. 1981).

10.The ultimate burden of proof in the case remains, however, on the

plaintiff. See, e.g., United States v. Baker Hughes, Inc., 908 F.2d 981,

991 (D.C. Cir. 1990) (“If the burden of production imposed on a

defendant is unduly onerous, the distinction between that burden and the

ultimate burden of persuasion – always an elusive distinction in practice –

disintegrates completely”); Kaiser Aluminum & Chem. Corp., 652 F.2d at

1340 (although “General Dynamics requires the defendant to come

forward with evidence to rebut the government’s prima facie case of

substantial lessening of competition through statistics showing increase in

Rebutting the Structural Inference 143

The U.S. Supreme Court’s holding that market share statistics do not

necessarily end the inquiry under Section 7 led hopeful merger

defendants to claim that they were actually insignificant or weak

competitors notwithstanding their substantial market shares. Subsequent

lower court decisions, however, have declined to interpret General

Dynamics as a general exemption for high market share and

concentration just because an explanation of some type could be

provided. In FTC v. University Health, Inc.,11 for example, the Eleventh

Circuit, reversing the district court’s denial of a preliminary injunction,

stated its unwillingness to interpret General Dynamics as granting

absolute immunity from Section 7 review:

Rather, we view General Dynamics as standing for the

unremarkable proposition that a defendant may rebut the

government’s prima facie case by showing that the government’s

market share statistics overstate the acquired firm’s ability to

compete in the future and that, discounting the acquired firm’s

market share to take this into account, the merger would not

substantially lessen competition. The weakness of the acquired

firm is only relevant if the defendant demonstrates that this

weakness undermines the predictive value of the government’s

market share statistics.12

In 1997, the Federal Trade Commission (FTC or the Commission)

determined that the weakness of the acquired firm was relevant to its

decision not to challenge the merger of the Boeing Company and

McDonnell Douglas Corporation. The proposed merger raised serious

antitrust issues in the market for large commercial aircraft because the

merging parties were two of three competitors, Boeing had over half the

market, and there were high barriers to entry.13 Nonetheless, a majority

of the Commissioners voted not to challenge the merger because,

market share and concentration in relevant product markets, [t]he

government continues to bear the burden of persuasion even after it has

made out a prima facie case through statistical evidence”).

11.938 F.2d 1206 (11th Cir. 1991).

12.Id. at 1221 (citations omitted). The appellee hospital had successfully

argued in the district court that the competing hospital it proposed to

acquire offered limited services and, therefore, its likelihood of future

success as a meaningful competitor, notwithstanding its present market

share, was “dim.”

13.See Statement of Chairman Robert Pitofsky and Commissioners Janet D.

Steiger, Roscoe B. Starek III, and Christine A. Varney, Boeing Co., File

No. 971-0051 (July 1, 1997), reprinted in 5 Trade Reg. Rep. (CCH)

¶ 24,295.