Before KALODNER, STALEY and FORMAN, Circuit Judges.
A. G. Spalding & Bros., Inc. (Spalding) seeks to review and set aside an order of the Federal Trade Commission (Commission) directing it to divest itself of all the capital stock and assets of Rawlings Manufacturing Company (Rawlings) which it acquired in 1955. The order was based upon the Commission's opinion concluding that the acquisition of Rawlings by Spalding violated § 7 of the Clayton Act, as amended, 64 Stat. 1125, 15 U.S.C. § 18, which provides in pertinent part as follows:
"No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly."
PLEADINGS AND PRIOR PROCEEDINGS
The complaint, filed December 8, 1955, before the Federal Trade Commission, charged, among other things, the following allegations: that Spalding is a corporation of Delaware and Rawlings of Missouri; that on or about December 6, 1955, Spalding acquired all of the outstanding capital stock of Rawlings; that Spalding is engaged in the manufacture of athletic goods and the sale and distribution thereof in interstate commerce to "other manufacturers and distributors, sporting goods stores, department stores, mail order houses, golf professionals and others on a national basis"; that it is one of the four largest manufacturers and distributors of athletic goods in the United States, its sales for 1954 amounting to $23,350,000.
It is further charged that Rawlings, prior to the and at the time of the acquisition, was likewise engaged in the manufacture of athletic goods and the sale and distribution thereof in interstate commerce to "other manufacturers and distributors, sporting goods stores, department stores, mail order houses and others throughout the nation" and that its line is in direct competition with the line distributed and sold by Spalding and that Rawlings is also one of the four largest manufacturers and distributors of athletic goods in the United States, the sales of which during 1954 amounted to $10,500.000.
The complaint also alleged that by the acquisition of the capital stock of Rawlings, Spalding has eliminated one of the four largest competitors in the manufacturing and distribution of its athletic goods line and has acquired Rawlings's manufacturing facilities to make certain athletic goods which Spalding had theretofore been compelled to purchase from Rawlings or some other manufacturer and that the acquisition "may have the effect of substantially lessening competition or tending to create a monopoly" in the manufacture, sale and distribution of athletic goods in violation of Section 7 of the Clayton Act.
In its answer Spalding admitted that it acquired all of the outstanding capital stock of Rawlings on December 8, 1955. It stated that prior to and at the time of the acquisition it manufactured certain athletic goods which it sold largely through its Spalding Sales Corporation which distributed such items nationally together with complementary items manufactured by others and that the total of its sales and those of Spalding Sales Corporation during 1954 amounted to $18,783,639.
Spalding further stated in its answer that Rawlings was likewise engaged in the manufacture of certain athletic goods which it sold largely to its Rawlings Sporting Goods Company which distributed such items nationally together with complementary items manufactured by others with its total sales and those of Rawlings Sporting Goods Company amounting to $8,282,505 for the year 1954.
Spalding generally denied other allegations contained in the complaint as well as the charge that, by its acquisition of the stock of Rawlings, it violated Section 7 of the Clayton Act.
Jurisdiction of this court is properly invoked pursuant to, and venue is based upon, Section 11 of the Clayton Act, 15 U.S.C. § 21, as amended.
Integration of Rawlings's facilities with Spalding's during the pendency of the proceedings has been controlled by a stipulation executed by counsel supporting the complaint before the Commission and counsel for Spalding, whereby Spalding agreed, in substance, to maintain the pre-merger status of Rawlings and to make no changes therein without advance notice to the Commission.
Hearings commenced on April 30, 1956 before a Hearing Examiner and continued intermittently through December 16, 1958. The refusal of two witnesses to produce documents called for by subpoenas duces tecum resulted in the institution of enforcement proceedings terminating favorably to the Commission.*fn1 Spalding rested without offering evidence and moved for dismissal of the complaint.
Before the Hearing Examiner counsel for the Commission selected 19 products manufactured and sold by both Spalding and Rawlings (including those that are sold by both but not manufactured by both),*fn2 as "illustrative of the area in which the acquisition of Rawlings will have a substantial economic impact." They were:
Golf clubs (irons) Footballs
Golf clubs (woods) Football helmets
Golf balls Football shoulder pads
Baseballs Football hip and kidney pads
Basemen's mitts Tennis balls
Soccer balls Tennis racket frames
Volley balls Strung tennis rackets
Badminton rackets (frame and strung rackets)
Spalding made no substantial objection to the consideration of the list as selected. The Hearing Examiner's findings with respect to the competitive effect of the merger were based primarily on an analysis of the following product lines: baseballs, footballs, softballs, volley balls, soccer balls and baseball gloves and mitts. The Commission likewise confined its consideration to the same product lines.
The Hearing Examiner filed his Initial Decision February 27, 1959, dismissing the complaint on the ground that the evidence failed to establish that the effect of the acquisition of Rawlings by Spalding may be substantially to lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Act.*fn3
An appeal to the Commission followed. The Commission in effect reversed the Initial Decision by its order and opinion of March 30, 1960. It ordered divestiture and submission of a plan for compliance by Spalding within 60 days.*fn4
THE GENERAL LINE ATHLETIC GOODS COMPANIES
At the time of the acquisition there were four so-called general line companies in the athletic goods industry. A general line company was considered one which sells a variety of products either directly or through subsidiaries. A signle line company markets one or possibly a few product lines. In addition to Spalding and Rawlings there were two other general line companies, Wilson Athletic Goods Manufacturing Company, Inc. (Wilson) and MacGregor Sporting Products, Inc. (MacGregor).
The total number of firms engaged in the production of athletic goods is approximately 200.
Prior to the acquisition the four general line companies (Wilson, Spalding, MacGregor and Rawlings, in that order) were the principal producers of athletic products in the United States. There were a few companies such as Kennedy Sporting Goods Manufacturing Company, Hutchinson Brothers Leather Co., Dubow Manufacturing Co., Inc., George K. Reach Company and Stall and Dean Manufacturing Company which produced and sold a partial line, but the great majority of the companies are single line companies.
Spalding had its beginning in 1876 when two brothers, Albert G. Spalding and J. Walter Spalding, formed a partnership for the sale of baseball equipment at wholesale and retail. Later a brother in law, William T. Brown, was admitted to the partnership. In 1885 the partnership was incorporated in Illinois under the name of A.G. Spalding & Bros. In 1892 A.G. Spalding & Bros. was incorporated in New Jersey. All of the capital stock of the following corporations was transferred to the New Jersey corporation:
1. A.G. Spalding & Bros., the Illinois corporation;
2. Wright & Ditson, a New Jersey corporation engaged in the manufacture of athletic goods, with emphasis on tennis rackets;
3. A.J. Reach Company, originally a partnership incorporated in about 1885, engaged principally in the manufacture of baseballs and baseball mitts and gloves;
4. George Bernard & Company, a New Jersey corporation engaged in the manufacture of uniforms and knit goods;
5. Spalding Manufacturing Company, an Illinois corporation formed to operate the A.G. Spalding & Bros. baseball-bat factory; and
6. Peck & Snyder, a retail store in New York City dealing in sporting equipment.
It continued its corporate existence without material change until the depression period of the 1930s. In 1934 another reorganization occurred as a solution to the problem of reduced sales of athletic goods which on a national level had dropped about 60%. In 1939 Spalding was reorganized as a Delaware corporation under its present name of A.G. Spalding & Bros., Inc., with all the assets of the former New Jersey corporation.
In December 1955, at the time of the acquisition, Spalding was engaged in the manufacture and sale of a general line of athletic goods. Its full line consists of more than 1100 different articles, including golf, baseball, football, basketball, volley ball, soccer, tennis, badminton and boxing equipment, athletic clothing and related products. Its main factory and executive offices are in Chicopee, Massachusetts. Through its wholly-owned subsidiary, Spalding Sales Corporation, it distributes its products through wholesale distributing depots and sales offices located in principal cities throughout the United States. At the time of the acquisition its assets amounted to $16,665,299 and its sales of finished products in 1955 amounted to $23,200,737.
Rawlings was originally founded in 1898 in St. Louis, Missouri, by George H. Rawlings and Charles W. Scudder for the purpose of manufacturing and selling athletic equipment and sporting goods, primarily clothing, at wholesale and retail. At the time of its acquisition by Spalding in 1955 it was a Missouri corporation engaged in the manufacture and sale of a general line of athletic goods, with its main office and principal place of business located at St. Louis, Missouri, Rawlings had three plants in Missouri, one in St. Louis, one in Newburg and one in Licking. It also had a wholly-owned subsidiary, Rawlings Sporting Goods Company, and sales offices and wholesale distribution depots in St. Louis, Chicago, and Los Angeles.
Rawlings was in sound financial condition in December 1955. Total corporate assets had increased by 22% from 1953 to 1955, to approximately $6,500,000. Net sales for 1955 were $11,209,825. Net worth had increased 25% in the same period to approximately $4,288,000. Net earnings rose from $222,524 in 1953 to $551,824 in 1955. Earnings invested in the business exceeded one million dollars in the three year period and dividends were paid on both preferred and common stock. Twenty percent of the former and 90 percent of the latter was owned by six shareholders. Rawlings distributed its products nationally for many years prior to the acquisition by Spalding.
Spalding acquired Rawlings' capital stock for approximately $5,698,000. Rawlings Manufacturing Company was dissolved immediately thereafter. Spalding continued its business as the Rawlings Division of Spalding using the name Rawlings Manufacturing Company. Among the assets taken over by Spalding was the stock of Rawlings Sporting Goods Company, the wholly-owned subsidiary of Rawlings, which was the sales company for merchandise bearing the Rawlings trademark. It remains in existence competing with Spalding Sales Corporation for the same customers.
Another of the general line companies, Wilson, was organized in 1910 as the Ashland Manufacturing Company, a subsidiary of Wilson and Company, the Chicago meat packing firm. It underwent a number of name changes, emerging in 1941 in its present form and with a wholly-owned sales subsidiary, Wilson Sporting Goods Company. In the course of some four decades Wilson acquired at least seven smaller firms and in 1955 operated 13 manufacturing plants in various parts of the country. Wilson sells a general line of athletic goods, either manufactured by it or purchased from other manufacturers for resale through its 29 branches in 28 states and has been recognized for a number of years as the leading producer of athletic goods in the industry.
MacGregor, the other leading general line competitor of Spalding and Rawlings at the time of the 1955 acquisition, was founded in 1875 as a partnership, incorporated in 1922. In 1958, 98% of MacGregor's outstanding stock was acquired by Brunswick-Balke-Collender Company. Between 1875 and 1958 MacGregor acquired at least five other small producers and in 1955 it was recognized as the third-largest in the industry in point of sales.
THE ATHLETIC GOODS MANUFACTURING ASSOCIATION
Prior to 1925 manufacturers of athletic goods organized a trade association known as the Athletic Goods Manufacturing Association (AGMA). Its purposes are listed in Article II of its constitution and by-laws to be:
". . . the protection and advancement of the athletic goods industry, the promotion and encouragement of athletic activities, the exchange of credit information, the development of adequate cost systems, the standardization of trade description and the simplification of lines, the development, promotion and enforcement of a code of trade practices."
At the time of the acquisition about 25 firms were members including the principal companies engaged in the industry.
From 1949 to 1954 AGMA engaged in gathering and publishing statistics of the industry's production. At first this was to aid industry members in obtaining raw material allocations in times of national emergency. After such commodities became plentiful the information was deemed valuable to the members of the industry and therefore the practice was continued. Beginning in 1949 questionnaires were prepared and sent to all known manufacturers of athletic products requesting that they report their annual sales of some 43 specified items on both a quantity and dollar basis. The inquiry requested production figures broken down into specific price categories. For example, the 1955 questionnaire called for information on production of baseballs on the basis of prices charged to dealers in the following classifications:
$9.01 to $16.00 per dozen
Molded or Rubber Covered Baseballs."
Information according to price categories for other products such as softballs, footballs, and boxing gloves was similarly solicited. A compilation of the individual reports showing total annual production of each item was prepared by an accounting firm and was known as "AGMA's Census Reports" or "Census Surveys."*fn4a
In 1954, 74 of 184 firms to whom the questionnaire was sent responded. In 1955, 75 out of 197 firms participated.
During the years 1953-1958, one or more of the four companies, Spalding, Rawlings, Wilson and MacGregor were represented in the officer complement of AGMA.
Spalding raises two issues by this review:
(1) Whether there is substantial evidence to support the Commission's findings that the relevant lines of commerce are (a) the athletic goods industry and (b) higherand low-priced categories within particular product lines; and
(2) Whether there is substantial evidence to support the Commission's findings that the acquisition of Rawlings by Spalding may substantially lessen competition or tend to create a monopoly.
PRICE CATEGORIES AS RELEVANT LINES OF COMMERCE
At the outset, we are confronted with the task of considering whether the Commission properly determined the relevant lines of commerce in this case.
It was argued before the Commission that the AGMA Census Report price categories were designed by the manufacturers themselves, through the AGMA Census Report Committee, to define differing physical characteristics, markets, prices and end uses for all of the products for which categories were established. To support the position that the products in each of the price categories are sufficiently different and distinct from those in any other price category within the same product line to constitute each group of products so classified a separate line of commerce for this proceeding, counsel supporting the complaint called as witnesses, George J. Herrmann, Executive Secretary of AGMA, Fred J. Bowman, President of Wilson and Philip H. Goldsmith, Chairman of the Board of MacGregor. Messrs. Bowman and Goldsmith had been officers of AGMA and members of its Census Report Committee.
Mr. Herrmann testified that the price categories into which the inquiries in AGMA's questionnaire were divided were designed "to particularly find out the market for various types of the equipment, the volume that would be in various price classifications."*fn5 In response to the following questions, by counsel supporting the complaint, he further testified.
"Q. Was that also designed to separate any particular classes or products as to quality?
"A. Well, the price would govern whether it was the better quality or whether it might have been in the toy classification, or whether it would be high quality equipment.
"Q. Do you mean by that that the toy classification would be the lower priced equipment?
Mr. Bowman testified in reply to a question on direct examination in which he was asked "about the significance of the price categories, . . . shown in the AGMA Survey", that the price schedule was used instead of specifications to designate the quality of raw materials that went into the product as well as the workmanship. He was then asked, "So that as I understand your answer the price categories are related to the quality of the product sold?". He answered "That is right." Mr. Bowman further testified as to Wilson's American Player line:
"That is what we call the low end. That is not the quality that went in there. That is, they were cheaper materials and less labor would go into that type of merchandise than would go in your better grades."
He also characterized the American Player line:
". . . as the juvenile line of equipment sold for Christmas selling, including lower priced footballs, basketballs, shoulder pads, basketball goals, bat and ball sets, youth boxing gloves and striking bags, equipment of that type sold mostly to the toy departments."
In response to further questions Mr. Bowman replied:
"Q. Mr. Bowman, with respect to the items set forth in the American Player catalog, Commission's Exhibit 50-A, do I understand you correctly to say these items represent something in the nature of toys?
"A. Well, it is not exactly a toy. It goes to the younger children who are not old enough, you may say, to participate in the games and use regular equipment. It is more or less a juvenile line.
"Q. It is a juvenile line and would not be used in professional leagues and by colleges and universities?
Mr. Goldsmith gave the following testimony on the subject of price categories:
"Q. Now, Mr. Goldsmith, I call your attention to price category shown on the A.G.M.A. census reports and ask you to state the significance of the price categories on certain product classifications.
"A. The industry as a whole felt that it was necessary to break it down for quality's sake and you cannot take every item that is made in the athletic goods industry and examine it to find out what category it goes in so that the best thing you can do is by price route. Probably the best illustration I can give would be that of baseballs.
"Q. That is shown on page 4 of CX-70.*fn6
"A. For example, we have baseballs broken down into three price categories. Baseballs up to $9.00 a dozen is Category 1. $9.00 a dozen was just picked out at random because it was a known fact that it would be necessary, that any ball sold for under $9.00 a dozen couldn't be a yarn-wound ball. Nobody in this country could make one for less than $9.00 and have it to be a serviceable ball. So when we look at that figure there we know that there were in that particular year over 5,000 dozen baseballs sold that were not of a yarn-wound construction, that were of an inferior nature that would not be used in league games or in regular competition games.
"Then the next category was from $9.01 to $16.80. That took in all the playable balls that the kids would use, the amateurs, the small leagues, and so forth, up to that price bracket, and we did know from experience that no one could turn out the top ball for less than $16.80 so therefore $16.80 in that particular year anything that was sold, some manufacturers might sell their top ball at $16.80, others at $18.00, others at $19.00, others at $20.00. Anything above that we knew was the official top ball. So that gave the manufacturers then three categories through the route of the price but indicates the quality."
Spalding attacks the qualifications of Mr. Herrmann to testify as to the classifications of the products on the ground that his services to AGMA were clerical and administrative. His testimony that certain items covered by the reports were "toys" was said to be entitled to little or no weight and that whatever weight might be given to it was destroyed by his denial that he knew which AGMA price categories were meant to embrace toys.*fn7 Further Spalding alleges that Mr. Herrmann's testimony as to the aspect of toys was uncorroborated and that in any event Mr. Herrmann merely meant by his reference to "toys" items not of official size and weight.
Mr. Herrmann was Treasurer of AGMA from 1949 until he became Executive Secretary in 1953 and his duties, among other things, consisted of handling the statistical data which it was the object of AGMA to collect and distribute. In this regard, it is true, Mr. Herrmann acted in an administrative capacity but his testimony concerning the mechanics of AGMA's operations was quite within his qualifications. He testified that AGMA categories defined certain products as toys, but he was not able to designate at what point the classification operated in this manner. Mr. Herrmann's idea of the word "toys" may not have been precisely descriptive of the lower priced category of athletic goods. It is to be noted that Mr. Bowman testified in describing Wilson's "American Player line," a less expensive line of products produced and sold by Wilson, as being items that were "sold mostly to the toy departments."
On the whole Mr. Herrmann's statements were consistent with the general intent of the AGMA classifications as expressed by Messrs. Goldsmith and Bowman. Taken together the testimony of the three witnesses formed a substantial foundation for the findings of the Commission that:
"We think it clear from this testimony that in each of the various product lines for which AGMA price categories were established there is a separate line of low priced items which is not sold in competition with other items in the same product line. These low priced items may properly be classified as toys or as products not suitable for use in organized competitive games. Other items within the same product line are of higher quality, more durable and are designed for use in regular competition by both professional and amateur teams and players.The products in each of these categories are physically distinct from those in the other; they are different in quality and price, as well as in the purpose for which they are made and used. There can be no doubt that these two categories within the various product lines can be distinguished competitively from each other and that they constitute separate and distinct lines of commerce within the meaning of Section 7.
"Using baseballs as an example, the uncontradicted testimony of the witness Goldsmith establishes that there are sufficient differences between baseballs selling for under $9.00 a dozen and those selling for more than $9.00 a dozen to constitute them separate lines of commerce. One is yarn-wound; the other is not. One is suitable for use in organized competitive play; the other is not. They are of different quality, are sold at different prices, and have different end-uses and different markets.The market for the higher priced baseballs consists of major and minor league teams, semi-professional and amateur teams, colleges and high schools, and all others who use baseballs in organized games. The low priced baseballs are not suitable for use by customers who make up this market and for that reason cannot be considered to be competitive with the higher priced baseballs.
"Counsel supporting the complaint contends that there are three separate lines of commerce within the baseball product line. The first or low priced line, includes baseballs selling for under $9.00 a dozen. The second, or medium priced line, includes baseballs in the $9.01 to $16.80 category. This line consists of baseballs used primarily by juveniles in organized competition. The third, or high priced line, includes baseballs selling for more than $16.80 a dozen. This line is used primarily by professional leagues, colleges, and others who require a top quality baseball.
"He has also proposed similar lines for other products, such as footballs, basketballs and boxing gloves. While we agree that the record supports his contention that there are separate and distinct markets for low, medium and high priced items within each of several product lines, we are of the opinion that for the purposes of this proceeding it will be necessary to consider only the lower priced and higher priced lines as indicated above."
Spalding further takes exception to the reference by the Commission to "toys" in its definition of a line of commerce in "low priced items". The Commission used the term in its opinion saying: "These low priced items may be properly classified as toys or as products not suitable for use in organized competitive games." The characterization of "toys" is in the disjunctive along with "products not suitable for use in organized competitive games." Whether or not the lower priced items are actually "toys" is of little importance. The conclusion of the Commission as to the separate categories of higher-priced and lowerpriced athletic goods was well within its province under the evidence before it.
In its recognition of price categories as relevant lines of commerce the Commission differed with the Initial Examiner. It held that he "failed to recognize that there are separate and distinct markets for different lines of products within each of these product lines."
It also found that the Examiner
". . . compounded this error by emphasizing the number of items produced rather than the value of such items in comparing the competitive positions of Spalding and Rawlings with other manufacturers in the industry. As a result, his comparisons, in many instances do not reflect the true competitive relationship existing among these companies."
The Hearing Examiner devised the following table showing the market shares of all manufacturers who participated in the 1954-1955 AGMA Census Survey based on the data relating to the number of baseballs produced:
Kennedy Less than 1%. . . Less than 1%
From this he concluded that in 1955 Spalding with its 15.3% was surpassed in production of the number of baseballs by Lannom with 19.2%, de Beer with 17.9% and Wilson with 17.5%. He further found that the combined production quantitatively of Spalding and Rawlings would be but 24.7% against the next largest producer, Lannom with 19.2%.
The Commission regarded this quantitative analysis as inadequate since, as it stated, it ignored completely the value of the baseballs produced by the same companies which reported to AGMA. It formulated the following table of market shares based on the value of all baseballs produced: