The opinion of the court was delivered by: DEBEVOISE
This is an action which the United States instituted under Section 15 of the Clayton Act, 15 U.S.C. Section 25, as amended, seeking to enjoin the merger of defendants Calmar Incorporated and Realex Corporation. The government charges that the effect of implementation of an August 6, 1984 merger agreement between the defendants would be substantially to lessen competition in interstate trade and commerce in violation of Section 7 of the Clayton Act 15 U.S.C. Section 18, as amended. The government sought a preliminary injunction, and an evidentiary hearing was held from January 21 -- January 25, 1985. This opinion constitutes my findings of fact and conclusions of law.
The complaint defines two relevant product markets, each of which is subject of this action.
The second market consists of "regular dispensers." The complaint defines a regular dispenser as "a plastic pump with a spout that, when fully depressed, dispenses a steady stream of approximately one to two cubic centimeters of viscous liquid from a container."
Further, the complaint alleges, and defendants do not deny, that the United States is the relevant geographic market in which both regular sprayers and regular dispensers are sold.
The complaint purports to measure the effects of the proposed merger by application of the Herfindahl-Hirschman Index (the "HHI"). The HHI measures market concentration by squaring the market share of each firm competing in the market and then summarizing the resulting numbers.
There are, according to the complaint, three domestic manufacturers of regular sprayers including Calmar with 60 percent of the market and Realex with 23 percent of the market. The HHI is now approximately 4,400. Calmar's acquisition of Realex would increase the HHI by more than 2,700 to more than 7100.
There are, according to the complaint, five domestic manufacturers of regular dispensers including Calmar with 58 percent of the market and Realex with 21 percent of the market. The HHI for the market is now approximately 4,000. Calmar's acquisition of Realex would increase the HHI by more than 2,400 to more than 6400.
The complaint charges that this dramatic increase in the HHI in each of the product markets defined in the complaint reflects the actual anticompetitive effect in the marketplace which would result from the merger, for example, the elimination of competition between Calmar and Realex, increased concentration in already highly concentrated markets and a substantial lessening of competition in the two markets.
II. The Applicable Legal Principles
To obtain a preliminary injunction a party must demonstrate (i) a reasonable likelihood of eventual success on the merits and (ii) the probability of irreparable injury if the relief is not granted. The Court must also consider the consequences which the decision would have upon other persons and it must consider the overall public interest. Freixenet, S.A. v. Admiral Wine & Liquor Co., 731 F.2d 148 (3d Cir.1984). In an action brought by the United States to enforce Section 7 of the Clayton Act irreparable injury is presumed once the government has established a reasonable likelihood of success on the merits. United States v. Ingersoll-Rand Co., 320 F.2d 509 (3d Cir. 1963).
The substantive law which governs the determination whether the government has demonstrated a reasonable likelihood of eventual success on the merits is readily stated, though it is frequently less readily applied.
Section 7 of the Clayton Act, 15 U.S.C. Section 18, prohibits acquisitions that may substantially lessen competition in any line of commerce in any section of the United States. The determination of whether a particular acquisition, such as Calmar's acquisition of Realex, may have the prohibited effect requires first that the line of commerce or product market in which competition might be effected be defined. Next it is necessary to define the area of the country or geographic market in which any anticompetitive effect of the merger would be felt. Having defined the relevant product in geographic markets, the structure of the market must be examined to determine the share of competitors and the degree of concentration and to evaluate all the market factors which could affect competition in the market. Allis-Chalmers Manufacturing Co. v. White Consolidated Industries, Inc., 414 F.2d 506 (3d Cir. 1969) cert. denied, 396 U.S. 1009, 90 S. Ct. 567, 24 L. Ed. 2d 501 (1970).
In the present case the parties agree that the relevant geographical market is the entire United States. Therefore, the market inquiry is addressed only to the appropriate product market, an issue on which the parties disagree profoundly.
To define the bounds of the product market it is necessary to determine what products are reasonably interchangeable with the product in question, that is to say, products to which consumers would switch if there were a small but significant nontransitory price increase. Brown Shoe Company v. United States, 370 U.S. 294, 82 S. Ct. 1502, 8 L. Ed. 2d 510 (1962). SmithKline Corporation v. Eli Lilly and Co., 575 F.2d 1056 (3d Cir.) cert. denied, 439 U.S. 838, 99 S. Ct. 123, 58 L. Ed. 2d 134 (1978).
Many factors have to be taken into account in measuring the so-called "cross-elasticity of demand," for example, industry or consumer recognition of the products as a market, the peculiar uses and characteristics of the products, the kinds of production facilities, sensitivity to price change, specialized users and vendors.
While supply alternatives might better be considered in connection with the case of entry evaluation which is mentioned below, it may be appropriate in determining the product market to identify alternative suppliers. That is to say, firms which can easily and quickly switch their current production to the product in question. Allis-Chalmers Manufacturing Co. v. White Consolidated Industrial, Inc., supra.
If the definition of the product and geographic market shows a high degree of concentration resulting from a merger, a prima facie case of illegality has been established. United States v. Philadelphia National Bank, 374 U.S. 321, 83 S. Ct. 1715, 10 L. Ed. 2d 915 (1963). In that case the Court concluded that a merger resulting in a single firm controlling 30 percent of a market where the four-firm concentration ratio exceeded 70 percent was presumptively illegal. United States Department of Justice 1984 merger guidelines employ the Herfindahl-Hirschman Index to measure market concentration. The guidelines characterize a market as unconcentrated if the HHI is below 1,000, moderately concentrated if the HHI is between 1,000 and 1800, and highly concentrated if the HHI is above 1800. Here, of course, according to the government, the HHI in the regular sprayer market will be 7100 after the merger and the HHI in the regular dispenser market will be 6400 after the merger.
If a merger does not result in an impermissible degree of market concentration, no further inquiry is required. However, if a merger does result in a high degree of concentration, it still may be shown that the merger will not result in a substantial lessening of competition because factors at work in the market will make it unlikely that the remaining producers in the market will be able to exercise market control. An example of such a factor is ease of entry, a condition which defendants urge exists in this case. If ease of entry in the market is such that the producers in the market could not long sustain an unjustified price increase, then in spite of a high degree of concentration there has not been a substantial lessening of competition. United States v. Waste Management, Inc., 743 F.2d 976 (2d Cir. 1984).
III. The Industry and Products
Calmar, a publicly held corporation, has a plant in Ohio and a plant in California at which it manufactures a wide variety of plastic dispensing devices -- devices through or by which products are removed from their containers for use. The products include pump dispensers (which deliver lotions, liquids and viscous creams), pump sprayers (which deliver liquid in the form of a fine spray or a mist), trigger sprayers (which deliver liquids in the form of a mist, spray or stream through the use of a trigger type device), and closures (which include a wide variety of caps and tops for bottles and other containers).
Realex operates a manufacturing plant in Missouri. It manufactures a variety of pump dispensers and pump sprayers. Another division of Realex not pertinent to this case manufactures various household products.
The pertinent products manufactured by Calmar and Realex consist primarily of injection molded plastic parts, along with some other parts such as springs and balls. These parts are assembled into finished products either by hand or by using machinery. The products contain from 6 to 13 parts.
The products to which the parties have referred in this case and which must be considered in determining the relevant market are the following, the figures being in most instances 1984 figures:
1. Regular Dispensers : These are mechanical pump devices which fit on the top of containers. They dispense liquid or viscous material in the container by use of the finger pressing on a pumping means.
The market for this product as shown on G-24 is 140 million units of which 75 million units were used for liquid soap, 45 million units were used for hand and body lotion, two million units were used for mustard and ketchup, ...