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FEDERAL TRADE COMMISSION v. GREAT LAKES CHEMICAL

July 23, 1981

FEDERAL TRADE COMMISSION, PLAINTIFF,
v.
GREAT LAKES CHEMICAL CORPORATION, ET AL., DEFENDANTS.



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

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This action was commenced by the Federal Trade Commission ("FTC") on June 3, 1981. The FTC's complaint seeks a preliminary injunction barring Great Lakes Chemical Corporation ("Great Lakes") from acquiring the bromine-related assets of Velsicol Chemical Corporation ("Velsicol").

Defendant Great Lakes is a Delaware corporation transacting business in this district. Great Lakes is an integrated producer of elemental bromine and several bromine derivatives, including fumigants, solvents, lubricants and flame retardants. Its 1980 net sales exceeded $125 million.

Defendant Velsicol is a Delaware corporation transacting business in this district. Velsicol is a wholly owned subsidiary of defendant Northwest Industries, Inc., which is also a Delaware corporation transacting business in this district. Velsicol's principal business has been and is the production of agricultural pesticides. In 1976, Velsicol merged with Michigan Chemical Corporation, another Northwest Industries subsidiary, and thereby became a producer of elemental bromine and bromine derivatives. Of Velsicol's total 1980 net sales, less than 7.4% were of bromine and bromine derivatives.

The transaction at issue involves Great Lakes' proposed acquisition of Velsicol's bromine-related assets, which consist of a research and development facility in Ann Arbor, Michigan; a plant in El Dorado, Arkansas that produces bromine and bromine derivatives; Velsicol's bromine fields; and Velsicol's bromine-related receivables. Currently, Velsicol is conducting minimal basic research and development at its Ann Arbor facility, and its El Dorado plant is temporarily shut down. In exchange for these assets, Great Lakes will pay approximately $29.7 million.

A four-day evidentiary hearing was held from June 28, 1981 until July 2, 1981, on the FTC's request for a preliminary injunction. In addition to testimony, the court also had before it numerous affidavits, hundreds of documents, and many depositions.

The FTC's action is brought under Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), which provides that a district court may enjoin an acquisition when, both "weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest."

A preliminary injunction is an "extraordinary and drastic remedy," particularly in the merger and acquisition context. FTC v. Exxon Corp., 636 F.2d 1336, 1343 (D.C. Cir. 1980) (Section 13(b) action). "Experience seems to demonstrate that . . . the grant of a temporary injunction in a Government antitrust suit is likely to spell the doom of an agreed merger. . . ." Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 870 (2d Cir.), cert. denied, 419 U.S. 883, 94 S.Ct. 3210, 41 L.Ed.2d 1161 (1974). These general observations are particularly important here, for Mr. Kampen, Great Lakes' Chief Executive Officer, testified that Great Lakes would exercise its right to cancel the transaction if a preliminary injunction were entered.

In light of the severe adverse consequences of a preliminary injunction, the FTC has a substantial burden under Section 13(b). First, it must prove a "likelihood of ultimate success" in an administrative hearing under Section 7 of the Clayton Act, 15 U.S.C. § 18, which bars mergers whose effects "may be substantially to lessen competition." As this court has previously noted in an essentially similar context:

  What degree of certainty I must reach as to the
  likelihood of such success has been the subject
  of much judicial discussion. It is clear that the
  word "may" in Section 7 is not to be used in the
  loose sense with which it is employed in ordinary
  conversation. The Government must prove not that
  the merger in question may possibly have an
  anti-competitive effect, but rather that it will
  probably have such an effect. And the Government
  must have demonstrated at this stage in the case
  a likelihood that it can meet this burden.

United States v. Amsted Industries, Inc., 1972 Trade Cas. ¶ 73,902 at p. 91,743 (N.D.Ill. 1972).

In addition to proving likelihood of success, the FTC must show that "the equities" favor enjoining the transaction. In essence, this requires the FTC to prove that the harm to the parties and to the public that would flow from a preliminary injunction is outweighed by the harm to competition, if any, that would occur in the period between denial of a preliminary injunction and the final adjudication of the merits of the Section 7 claim. Id. Courts have recognized that public equities such as increased exports and benefits to local communities are "important equities" that can lead to denial of preliminary relief even where the FTC shows the requisite likelihood of success. FTC v. Weyerhaeuser Co., 1981-1 Trade Cas. ¶ 63,974 at pp. 76,047-48 (D.D.C.), aff'd, ___ F.2d ___, 1981-2 Trade Cas. ¶ 64,263 (D.C. Cir. 1981). When weighing these equities, the court must consider whether divestiture would be an adequate remedy if, in fact, the FTC eventually prevails on the merits, since the purpose of Section 13(b) is to preserve the ability to "order effective, ultimate relief," not to bar all mergers that the FTC staff preliminarily views as suspicious. FTC v. Exxon Corp., 1979-2 Trade Cas. ¶ 62,972 at p. 79,538 (D.D.C. 1979), aff'd, 636 F.2d 1336 (D.C. Cir. 1980).

The Section 7 analysis in this case is permeated by the noncompetitive conditions of Velsicol's bromine-related operations. As will be discussed in greater detail subsequently, the weakened state of these operations is significant in three respects.

First, when assessing the likely competitive effects of the transaction, the declining condition and bleak prospects of Velsicol's bromine-related operations are evidence of its "weakness as a competitor." United States v. International Harvester Co., 564 F.2d 769, 773 (7th Cir. 1977) (citation omitted). The competitive weakness of one of the two merging parties goes "to the heart of the Government's statistical prima facie case," United States v. General Dynamics Corp., 415 U.S. 486, 508, 94 S.Ct. 1186, 1199, 39 L.Ed.2d 530 (1974), and warrants a finding that no substantial lessening of competition is likely to occur in any market without reaching the issues of geographic and product markets. Id. at 511, 94 S.Ct. at 1200. As the Seventh Circuit held, such evidence "establishes that the Government's past market statistics are really insufficient to constitute a prima facie case" where the company's weaknesses "would not allow it to be as strong a competitor as the bald statistical projections indicate." United States v. International Harvester Co., 564 F.2d 769, 773 (7th Cir. 1977) (footnote omitted).

Second, the evidence in this case has established a classic "failing company" defense.

Third, even if the court were to conclude preliminarily that the FTC had established a likelihood of success and that Velsicol is not a failing company, the debilitated condition of Velsicol's bromine operations is an important equity to be considered because a preliminary injunction would exacerbate Velsicol's problems even though the preliminary injunction hearing involves only a tentative assessment and a final adjudication of the above two defenses must await an administrative hearing on the merits. See United States v. G. Heileman Brewing Co., 345 F. Supp. 117, 122-24 (E.D.Mich. 1972).

The FTC focused on the definition of the relevant market, which, as the FTC states, is typically where a Section 7 analysis begins. The purpose of defining the relevant market is to provide a commercially meaningful context within which to address the "crucial question" of the merger's competitive effects. United States v. Pabst Brewing Co., 384 U.S. 546, 549-50, 86 S.Ct. 1665, 1667-68, 16 L.Ed.2d 765 (1966).

The court finds that the relevant market in this case encompasses all flame retardants, however derived, rather than brominated flame retardants only. This market definition gives recognition to the substantial evidence of intense competitive pressures flame retardants derived from bromine face from flame retardants derived from other elemental chemicals such as phosphorus, sulfur and chlorine.

Brominated and non-brominated flame retardants must be included in a single market so as "to recognize competition where, in fact, competition exists." Brown Shoe Co. v. United States, 370 U.S. 294, 326, 82 S.Ct. 1502, 1524, 8 L.Ed.2d 510 (1962). Several "practical indicia" point to a single flame retardant market: (1) a single end use; (2) industry recognition; (3) the existence of producers who make both brominated and non-brominated flame retardants; (4) similarity in production processes; (5) common customers; and (6) cross-elasticity of demand.

A variety of chemicals are used to make flame retardants, including aluminum, chlorine, phosphorus, sulfur, antimony, boron, and bromine. Regardless of the chemical from which it is derived, a flame retardant has but one purpose. All flame retardants perform the same function of increasing the ignition temperatures of the product to which they have been added and slowing down the flame spread across the face of the product.

There is widespread industry recognition of a single, overall flame retardant market. As summarized by Barry Saxe of Stauffer Chemical Company, a manufacturer of phosphorus flame retardants:

  In my judgment, there is a flame retardants
  market, which consists of all flame retardants,
  including those containing phosphorus as well as
  those containing bromine. A consumer of flame
  retardants is interested only in obtaining the
  best flame retardant on a cost-performance basis
  for a specific end use, such as urethane foams.
  It generally does not matter to a consumer
  whether the flame retardant it purchases for a
  specific end use contains phosphorus or bromine
  or some other chemical, so long as the flame
  retardant purchased is the most cost-effective
  one available for the specific end use.

(DX 4 (Saxe Aff. ¶ 8)).

Another practical indicia of a single flame retardants market is that at least some producers make both brominated and non-brominated flame retardants. For example, Ferro Chemical Corporation makes brominated and chlorinated flame retardants. Indeed, Velsicol, in addition to making PHT4 and FireMaster 680, both brominated flame retardants, makes chlorindic anhydride, a chlorinated flame retardant which competes with Ethyl's brominated flame retardant for application in polyesters. After the consummation of the challenged transaction, Velsicol will continue to sell its chlorinated flame retardant.

As one FTC affiant testified on deposition, the manufacturing processes of brominated and chlorinated flame retardants are essentially the same in that both require a reaction process, a receiver tank process, separation, grinding, and packaging.

Brominated and non-brominated flame retardants compete for sales to the same customers on two distinct but equally significant levels. On the level of direct sales, customers who produce flame retarded materials (such as plastics and polyesters) can select from among various brominated and non-brominated flame retardants. Examples include:

  (a) Olin's RF-230, which contains phosphorus and
  chlorine, competes with brominated flame
  retardants for application in polyurethane.
  (b) Chlorindic anhydride, derived from chlorine,
  competes with tetrabromophthalic anhydride for
  application in polyunsaturates.
  (c) Dechlorane Plus, derived from chlorine,
  competes with brominated flame retardants for
  application in polyolefin wire and cable.
  (d) General Electric has replaced
  tetrabromobisphenol-A, derived from bromine, with
  a sulfur-based sulphonic acid salt for
  application in its polycarbonate plastic.
  (e) BASF replaced PHT-4, derived from bromine,
  with a chlorinated flame retardant for
  application in rigid urethane systems.
  (f) Ethyl's brominated BT-93 competes with
  Hooker's chlorinated Dechlorane Plus for
  application in cross link polyethylene.
  (g) Ethyl's brominated RB 49 competes with
  Velsicol's chlorindic anhydride for application
  in polyesters.
  (h) DBP, derived from bromine, competes with a
  large number of chlorinated phosphorus compounds
  for application in urethane foams.

Brominated and non-brominated flame retardants also compete as components of materials, such as plastics, which, in turn, compete with one another for end uses. Competition among flame retardants at the end use level is substantial, since the cost of the flame retardant may approach 25% to 30% of the raw material costs of a plastic.

For example, three flame retarded plastics are used in the manufacture of television cabinets, which today must meet certain flame retardant standards. These three plastics are HIPS, ABS, and Noryl. HIPS currently uses a bromine-based flame retardant; Noryl uses a phosphorus-based flame retardant; and ABS uses either a bromine-based or chlorine-based flame retardant. The bromine-based flame retardants presently used in HIPS are completely different than the bromine-based compounds used as flame retardants in ABS and are not interchangeable. In choosing among these three plastics for use in the television cabinet, the cabinet manufacturer looks at the cost of the three plastics in terms of a cost-per-cubic-inch of plastic.

A second example of competition at the end use level involves the competition between expandable polystyrene insulation board and rigid urethane insulation board. Rigid urethane board is more expensive than expandable polystyrene insulation board and the extent to which customers trade off between the two products is determined by the relative selling prices. Any changes in those selling prices would change ...


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