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SMITH-VICTOR CORP. v. SYLVANIA ELECTRIC PRODUCTS

June 7, 1965

SMITH-VICTOR CORPORATION, PLAINTIFF,
v.
SYLVANIA ELECTRIC PRODUCTS, INC., DEFENDANT.



The opinion of the court was delivered by: Decker, District Judge.

This suit is brought by Smith-Victor Corporation, plaintiff, against Sylvania Electric Products, Inc., defendant. The complaint bases plaintiff's right to recover damages upon the laws of unfair competition and trade libel, Section 43 of the Lanham Act relating to false advertising, 15 U.S.C. § 1125(a), and the anti-trust laws, specifically Section 2 of the Sherman Act, 15 U.S.C. § 2, and Section 7 of the Clayton Act, 15 U.S.C. § 18.

On February 1, 1965, 242 F. Supp. 302, this Court dismissed that portion of the amended complaint based upon unfair competition and trade libel and that portion of Count IV of the amended complaint based upon Section 7 of the Clayton Act. The facts of this lawsuit are set out fully in that opinion.

With leave of court, the plaintiff has filed an amendment to paragraph 26 of the amended complaint relating to Section 7 of the Clayton Act. The defendant's motion to dismiss amended Count IV, as amended, is now before the Court.

The amendment amplifies factors concerning the acquisitions of the assets or stock of certain other companies made by Sylvania. It is alleged that Sylvania secured research facilities, personnel, experienced salesmen, marketing facilities and advertising abilities as the result of its acquisitions. It is further alleged that Sylvania was acquired by General Telephone and Electronics Corporation (General), which now provides a "deep pocket" (see below) that enhances the competitive position of Sylvania. The amendment alleges that the acquisitions by Sylvania, and the fact that it was acquired by General, give Sylvania overwhelming power in the relevant line of commerce, lighting equipment for the amateur motion picture photographer.

It does not appear from the complaint that Sylvania, General or any of the acquired companies were competing with the plaintiff in any way in the relevant line of commerce before the acquisitions alleged in the complaint. It does not appear that, with the exception of the Argus Camera Company (Argus), any of the acquired companies were engaged in any complementary line of commerce so that they would be purchasers from, or sellers to, the defendant.

Regarding Argus, the complaint alleges that the plaintiff formerly sold its lighting equipment to Argus for resale by Argus as part of a packaged combination of light and camera, and that, as a result of the merger, this market is now foreclosed to the plaintiff. The allegations regarding Argus do not state that competition in the relevant line of commerce may be substantially lessened, or even that the plaintiff has lost a significant amount of business due to this merger.

Finally, the complaint alleges that, prior to the entry of defendant into the relevant market, all of the competitors were small companies with limited resources, and that the defendant lessened competition by entering the relevant market because it was a large diversified company that has more resources, especially the "deep pocket," with which to compete.*fn1

Defendant's motion to dismiss the amendment to the amended complaint raises again the question of whether facts sufficient to state a claim on which relief could be granted are alleged. These legal issues are presented by defendant's motion: (1) does the amended complaint, as amended, allege facts that show a sufficient causal connection between the acquisitions and the lessening of competition in the relevant market, and (2) can a private cause of action be based upon Section 7 of the Clayton Act?

Section 7 of the Clayton Act prohibits acquisitions of assets or stock by one company of another "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." The acquisitions which might violate Section 7 have been divided into categories for reference and discussion by the courts and by commentators. These are horizontal combinations, vertical combinations and conglomerate combinations.

A horizontal combination results when companies that are competitors in the relevant line of commerce are brought under one ownership or one corporate structure. Because one of the competitors in a relevant market has been eliminated, a finding that the proscribed result, potential or actual lessening of competition, may have occurred can be made with relative ease. Cases involving horizontal combinations include Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), and United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963).

Vertical combinations, on the other hand, join complementary facilities by integrating different stages in the production or distribution process. Here, acquisition of a potential customer by a competitor in the relevant line of commerce forecloses competition for that customer's business; where the acquired customer was a significant factor in the market, the courts have found that competition may be substantially lessened. Cases involving vertical combinations include United States v. E. I. DuPont De Nemours & Co., 353 U.S. 586, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957), and Brown Shoe Co. v. United States, supra.

The conglomerate combination involves all other combinations, that is, those in which the constituent companies were neither in the relationship of competitors nor of buyer and seller.*fn2 In these combinations, potential lessening of competition is more difficult to ascertain; nevertheless, certain situations have arisen in which the courts have been able to make a finding that competition may be substantially lessened. A recent Supreme Court case, F. T. C. v. Consolidated Foods Corp., 85 S.Ct. 1220, (Apr. 28, 1965), involved the acquisition of a company, which was a substantial manufacturer of dehydrated onion and garlic, by Consolidated Foods Corporation, a diversified company which sells foot at wholesale and retail, as well as owns food producing plants. The Federal Trade Commission found that Consolidated was able to use its purchasing power to induce reciprocity from those suppliers to Consolidated Foods Corporation which were also purchasers of dehydrated onions and garlic, ___ F.T.C. ___. From this evidence, the conclusion that the acquisition might have lessened competition in the dehydrated onion and garlic market was drawn.*fn3

The farthest that any court has gone in applying Section 7 to a merger solely on the grounds that the resultant aggregation was larger than the competitors existing in the relevant line of commerce was Reynolds Metal Co. v. F. T. C., 114 U.S.App.D.C. 2, 309 F.2d 223 (1962). The theory there espoused, and that upon which the plaintiff rests its case, is called the "deep pocket" theory.*fn4 In essence, the rationale behind the deep pocket theory is that the company with a deep pocket from which to withdraw substantial financial or other backing is given a superior competitive advantage when the competitors in the relevant line of commerce are without the support of their own deep pockets. According to the Court in Reynolds Metal Co. v. F. T. C., supra, this deep pocket:


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