Appeal from an order of the District Court for the Southern District of New York, Vincent L. Broderick, Judge, granting plaintiffs-appellees a preliminary injunction barring defendants-appellants from consummating an agreement for the sale by Citibank to Schmidt of notes issued by appellee F. & M. Schaefer Corp., which are convertible into 29% of Schaefer's outstanding shares. The trial court granted preliminary relief after determining that (1) Schaefer raised serious questions going to the merits of the legality of the proposed sale under § 7 of the Clayton Act, 15 U.S.C. § 18, (2) Schaefer might suffer irreparable harm if preliminary relief were denied, and (3) the balance of hardships tipped decidedly toward Schaefer. Affirmed .
Before Friendly, Smith and Mansfield, Circuit Judges.
C. Schmidt & Sons, Inc. and Citibank, N.A., appeal a decision of Judge Broderick granting appellees F. & M. Schaefer Corp. and F. & M. Schaefer Brewing Co. (collectively "Schaefer")*fn1 preliminary relief enjoining appellants from executing an agreement entered into by them on April 3, 1978, for the purchase by Schmidt for $6 million*fn2 from a trust administered by Citibank of subordinated, convertible notes issued by F. & M. Schaefer Corp. in the face amount of $20 million, due January 15, 1998. The notes are convertible into 769,232 shares of Schaefer common stock, or approximately 29% Of its outstanding shares after conversion.*fn3 Schaefer is a publicly held company, and the 29% Block would represent the largest single holding. It is undisputed that Schmidt would convert the notes if it were allowed to purchase them, but there is some dispute whether Schmidt would thereby obtain control of Schaefer.
Schmidt and Schaefer are direct competitors; both market various brands of "regional" beers selling at "popular" prices, meaning that they sell primarily within one region of the country and at a price below that of the "premium" labels marketed by the national brewers (e. g., Anheuser-Busch, Inc., Miller Brewing Co., Jos. Schlitz Brewing Co.). Schmidt and Schaefer market largely within the 12-state northeastern region of the United States. A large share of their sales, however, is concentrated in the New York City and Philadelphia metropolitan areas, which in 1977 accounted for about 34% Of Schaefer's total sales and 28% Of Schmidt's total sales. Price competition between the two is vigorous and represents a major factor affecting each company's sales and profits.
Upon learning of Citibank's proposed sale of the notes to Schmidt, Schaefer sued to prevent the sale, claiming that it would violate §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 and § 7 of the Clayton Act, 15 U.S.C. § 18, and moved for a preliminary injunction. After a hearing lasting six weeks, the trial court found that Schaefer and the public would possibly suffer irreparable harm if preliminary relief were denied, that Schaefer had established sufficiently serious questions to provide fair grounds for litigating the merits of the Clayton Act claim, that the proposed combination of the two competitors in the New York and Philadelphia areas created "a presumption that the purchase would violate the antitrust laws," and that Schaefer had demonstrated that the respective hardships caused by granting or denying preliminary relief tipped decidedly toward it. Accordingly, the court enjoined the execution of the agreement pending a plenary trial and decision on the merits.*fn4 See Triebwasser & Katz v. A.T.&.T. Co., 535 F.2d 1356 (2d Cir. 1976); Sonesta Int'l Hotels Corp. v. Wellington Associates, 483 F.2d 247 (2d Cir. 1973). Appellants contest several of the factual and legal conclusions reached by the trial court in determining that Schaefer satisfied the criteria for preliminary injunctive relief. We affirm.
Schmidt first contends that Schaefer has not made an adequate showing on the merits. We disagree. According to the evidence introduced below, Schmidt's proposed horizontal acquisition of a substantial interest in Schaefer would constitute a prima facie violation of § 7. See United States v. Philadelphia National Bank, 374 U.S. 321, 363, 83 S. Ct. 1715, 10 L. Ed. 2d 915 (1963). The companies are locked in vigorous competition with each other in the New York and Philadelphia metropolitan areas, where the two have substantial shares of the market, and elsewhere in the northeastern region. In 1977 four brewers (Schaefer, Schmidt, Anheuser-Busch, and Miller) accounted for 81.8% Of all sales of beer to food stores in the New York metropolitan area, with Schaefer and Schmidt making 23% And 24.3% Of such sales respectively, or a total of 47.3%. In the same year the same four brewers sold 75.2% Of the beer supplied to home vendors in the same area, with Schaefer and Schmidt furnishing 20.1% And 15% Respectively, or a total of 35.1%. The trial court also found that the combined sales of the two companies accounted for 28% Of all sales in the same area for on-premises consumption.
A similar pattern of concentration exists in the Philadelphia metropolitan area, where the same four brewers had a combined market share of 60.4%, with Schaefer and Schmidt accounting for 33.0% Of the total beer sales in that area in 1977. Moreover, according to data submitted by Schmidt, in 1977 it and Schaefer were the fourth and fifth leading sellers of beer in the 12-state northeastern region of the United States, each with about 8.6% Of the market in which the top six competitors (including Schaefer and Schmidt) accounted for 78.1% Of the sales.
The foregoing and other market data in the record indicate clearly that the effect of the acquisition "may be substantially to lessen competition" within the meaning of § 7, which was intended to provide "authority for arresting mergers at a time when the trend to a lessening of competition in a line of commerce was still in its incipiency," Brown Shoe Co. v. United States, 370 U.S. 294, 317, 82 S. Ct. 1502, 1520, 8 L. Ed. 2d 510 (1962); United States v. Penn-Olin Chemical Co., 378 U.S. 158, 170-71, 84 S. Ct. 1710, 12 L. Ed. 2d 775 (1964). As the Court observed in United States v. Pabst Brewing Co., 384 U.S. 546, 550-52, 86 S. Ct. 1665, 16 L. Ed. 2d 765 (1966), there has been an increasing trend toward concentration in the beer industry. Between 1947 and 1974 the number of breweries in the United States has declined from 404 to 58.
The trial court defined each of the two large metropolitan areas (New York and Philadelphia) as a relevant geographic market. The record shows that each is treated as a discrete market by the beer industry in general and by Schaefer and Schmidt in particular. Appellants contend that this demarcation is too narrow and that the relevant market is properly defined as the 12-state northeastern region encompassed within economic shipping distance from the breweries of Schaefer and Schmidt, since this is the complete area in which the two companies compete. Again we must disagree. As the Supreme Court stated in Brown Shoe Co. v. United States, supra, after noting that Congress, in enacting § 7, was "concern(ed) with the protection of Competition, not Competitors," 370 U.S. at 320, 82 S. Ct. at 1521 (emphasis in original), the geographic market must " "correspond to the commercial realities' " and "may be as small as a single metropolitan area." 370 U.S. at 336-37, 82 S. Ct. at 1530. Later, in Philadelphia National Bank, supra, the Court further observed that "the appropriate "section of the country' " for purposes of § 7 analysis, "is not where the parties to the merger do business or even where they compete, but where, within the area of competitive overlap, the effect of the merger on competition will be direct and immediate." 374 U.S. at 357, 83 S. Ct. at 1738. See United States v. Bancorporation, Inc., 418 U.S. 602, 619, 94 S. Ct. 2856, 41 L. Ed. 2d 978 (1974).
Applying these standards, Schaefer has a reasonable basis for claiming that the New York and Philadelphia metropolitan areas are each a relevant "section of the country" and that the effect of the acquisition of the notes "may be substantially to lessen competition" in that market. Moreover, in view of the market shares of the two companies and the competition between them in the 12-state area, Schaefer would have fair grounds for contesting the legality of the acquisition even if appellants' definition of the relevant geographic market were adopted.*fn5
Appellants next maintain that Schmidt's proposed acquisition of the Schaefer securities falls within the "failing company"*fn6 or the "non-competitor"*fn7 exceptions to § 7, a claim usually raised on behalf of the allegedly moribund candidate for acquisition in support of the proposed takeover rather than by the acquiring company. There is no doubt that Schaefer has suffered declining sales and large losses in recent years, although some of the losses are attributable to extraordinary items, such as the closing of an obsolete brewery and the write-off of a large dollar figure attributed to good will, which will not recur. In the past year or so, however, Schaefer has undertaken a number of measures recommended by consultants to rehabilitate the company, the most important of which has been the consolidation of production in its large, modern, and efficient Lehigh Valley brewery. Schaefer also appears to enjoy the continued support of its creditors who have apparently agreed to a restructuring of its long term debt, reducing and deferring interest payments for some years.
Although Schaefer's ability to surmount its present difficulties and reverse its sagging fortunes is not foreordained, Schmidt has not shown that Schaefer's "resources (are) so depleted and the prospect of rehabilitation (is) so remote that it face(s) the grave probability of a business failure," which it must do in order to avail itself of the failing company defense to § 7. International Shoe Co. v. FTC, 280 U.S. 291, 302, 50 S. Ct. 89, 93, 74 L. Ed. 431 (1930); United States v. General Dynamics Corp., 415 U.S. 486, 507, 94 S. Ct. 1186, 39 L. Ed. 2d 530 (1974). Nor does Schmidt's claim that the acquisition is valid under the General Dynamics exception, a cousin to the failing company defense, deny Schaefer fair grounds for contesting the legality of the purchase of the securities. We need not decide whether the theory developed in General Dynamics that an ostensible competitor which is not a failing company may nonetheless offer such ineffective competition as to preclude the acquisition from violating § 7 applies when the acquired company is alleged to be a competitive cipher solely because of financial infirmities. See United States v. International Harvester Co., 564 F.2d 769 (7th Cir. 1977). Here, all the evidence suggests that Schaefer competes vigorously against Schmidt and other brewers.
We turn next to appellants' contentions that the trial court erroneously found that Schaefer would suffer irreparable harm if preliminary relief were denied and that it erroneously weighed the respective hardships. Whether or not Schmidt's acquisition of a 29% Interest in Schaefer will give it control of Schaefer although it is difficult to believe that Schmidt invested in Schaefer without the hope of obtaining control at some point the acquisition would most likely give Schmidt the power to designate one or more members of Schaefer's board of directors.*fn8 Through such designees, Schmidt would have access to the confidential trade information of one of its leading competitors, including its marketing, pricing, advertising, and new product plans, and could possibly steer Schaefer in a direction that would favor Schmidt's interests at the expense of Schaefer. See Hamilton Watch Co. v. Benrus Watch Co., 114 F. Supp. 307, 314 (D.Conn.), Affd., 206 F.2d 738 (2d Cir. 1953).
In addition there would be the risk of decreased organizational morale among Schaefer executives, unsure whether the fruits of their efforts would be siphoned to Schmidt, and among Schaefer's sales personnel and wholesalers, who might forsake it for other brands rather than face the prospect that a Schmidt takeover would result in their being supplanted by its wholesalers. Lastly, Schmidt's own licensing ...