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February 27, 1991


The opinion of the court was delivered by: Garrett E. Brown, Jr., District Judge.



This is an antitrust action brought by Ansell Incorporated pursuant to Section 16 of the Clayton Act, 15 U.S.C. § 26, to challenge the acquisition of Allercare/NSL, Inc. by Schmid Laboratories, Inc., as violative of Section 7 of the Clayton Act, 15 U.S.C. § 18. The amended complaint seeks an order of divestiture and or rescission, and such other relief as may be just and proper. Plaintiff asserts no claim for money damages. This Opinion constitutes my Findings of Fact and Conclusions of Law.


A. The Parties

Plaintiff Ansell Incorporated ("Ansell"), a Delaware corporation with its principal place of business in Eatontown, New Jersey, is a wholly-owned subsidiary of Pacific Dunlop Holdings, Inc., a Delaware corporation wholly owned by Pacific Dunlop Limited, a Victoria (Australia) corporation with its principal place of business in Melbourne, Australia. Ansell is engaged in the business of manufacturing and selling latex rubber condoms, among other consumer products, and describes itself as the largest international producer of such latex consumer products as condoms and gloves. Ansell currently produces in excess of 7.5 million gross in condoms annually out of its condom manufacturing facilities in Troy, Alabama and Dothan, Alabama.

Defendant Schmid Laboratories, Inc. ("Schmid"), currently a division of London International U.S. Holdings, Inc. ("LIUS") is in the business of manufacturing and selling latex condoms and other lines of health care consumer products. LIUS is a wholly-owned subsidiary of London International Group, a United Kingdom corporation. Schmid currently produces approximately 800,000 gross in condoms annually out of its condom manufacturing plant in Anderson, South Carolina.

Defendant Allercare/NSL, Inc. ("Allercare/NSL" or "NSL") is a packager and distributor of health and beauty consumer products with its principal place of business in Lincolnwood, Illinois. Allercare/NSL is a wholly-owned subsidiary of Allercare, Inc., a Minnesota Corporation with its principal place of business in Minneapolis, Minnesota. Prior to September 21, 1990, Allercare/NSL was engaged in the business of selling latex condoms.

B. The Schmid-Allercare/NSL Transaction

On August 28, 1990, Allercare/NSL entered into an asset purchase agreement to sell its Protex condom business to Schmid for a purchase price of $4,000,000 subject to adjustments. Schmid purchased all of the assets of NSL relating to NSL's packaging and distribution of latex condoms including inventory and manufacturing equipment together with trademarks, trade names, and customer lists. The Schmid-Allercare/NSL transaction closed on September 21, 1990, with the purchase price from the sale placed in escrow pending the resolution of this action.

C. Procedural Background

Ansell's complaint was filed on September 13, 1990, along with an application for an Order to Show Cause, Temporary Restraining Order and Preliminary Injunction. Ansell subsequently withdrew its request for the emergent relief, without prejudice, and the Court entered a Scheduling Order providing for an accelerated discovery schedule and trial. The matter was set down for non-jury trial on Ansell's application for a permanent injunction. Thereafter, defendants filed a motion for summary judgment which was denied on November 13, 1990. On that same date, the hearing on plaintiff's application for a permanent injunction began. The hearing continued on November 15, November 19 and December 3, 1990.*fn1

D. The Condom Industry

A latex condom is a sheath worn over the male sexual organ to prevent conception or venereal infection during sexual activity. The latex condom manufacturing process consists of pouring liquified latex compound into vats into which are dipped glass formers in various shapes. The formers are dipped continuously into the vats while being moved along a manufacturing line. The resulting film of latex on the formers is removed under carefully monitored conditions. When drying is completed, the sheaths are removed from the dipping machine. After finishing and electronic testing, the sheaths are ready for final processing, which may consist of filming and packaging or of treatment with a lubricant, spermicide, or fragrance, followed by filming and packaging. Condom manufacturers (sometimes known as "dippers") sell to retailers and other customers and in bulk to firms that package and market under their own brand names (known as "packagers") as well as to other dippers in the United States and overseas. Plaintiff Ansell is the largest dipper in the United States, currently producing over 7.5 million gross of various styles of latex condoms per year at its two plants in Alabama. Carter-Wallace, Inc. ("Carter-Wallace"), is apparently the next largest dipper in the United States with annual production estimated at approximately 2,000,000 gross. Schmid has annual production of approximately 800,000 gross. There are at least three other dippers operating in the United States; Safetex, Aladan and Killian, with combined annual production of over 1,000,000 gross. Prior to the acquisition, NSL was a packager of condoms. Unlike Ansell, Carter-Wallace and Schmid, it had no manufacturing or "dipping" operations. Instead, NSL purchased condom sheaths in bulk from one or more manufacturers, tested and packaged the condoms, and sold them at wholesale primarily to retail merchandisers and vending machine operators.

Sales of condoms in the United States grew during the 1980's, at first at a stable rate, then with a sudden surge due to the AIDS crisis. From total sales in that year of approximately $50 million to retailers, vending machine operators and institutions, condom sales grew steadily to $81 million in 1988. Since then, growth has leveled off.

The dippers and packagers distribute the condoms through various channels of distribution depending upon the particular characteristics and prices of the products. There are several markets in the United States in which latex condoms are sold. The largest of these U.S. markets is the retail market which consists of sales to retail drug stores, food stores and mass merchandizing outlets.*fn2 The sale of condoms in this market consists primarily of products with well-recognized brand names and specialized packaging.*fn3 Sales in the retail market account for about 90% of all latex condom revenues in the United States. of total estimated 1990 calendar year condom sales of $72,370,000 in this market, retail drug stores account for approximately 70%, food stores approximately 18%, and mass merchandisers approximately 12% of the total. There are two other smaller channels through which condoms are distributed: (1) vending machines, adult stores and mail order catalogues (1990 dollar sales of approximately $3.5 million); and (2) institutional sales, including sales to states, municipalities, clinics and prisons (1990 dollar sales of approximately $5 million).

Ansell also produces, pursuant to receipt of an annual General Services Administration ("GSA") contract awarded on a bid basis, in excess of five million gross of latex condoms. These condoms are distributed free by the United States Agency for International Development ("USAID") outside the United States in third-world countries.


A. Defining the Relevant Product Market

Product market definition is a significant and much disputed issue in this case. Plaintiff claims that the sale of latex condoms through retail outlets in the United States is the relevant product market or submarket. On the other hand, defendants have a much broader view of the relevant product market, claiming that the proper definition of the market is condoms sold at wholesale within the United States including Ansell's substantial sales to USAID under the GSA contract.

"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 non-transitory price increase." United States v. Calmar, 612 F. Supp. 1298, 1301 (D.N.J. 1985) (citing Brown Shoe Co. V. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962); SmithKline Corp. 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)). The relevant product market will necessarily be "composed of products that have reasonable interchangeability for the purpose for which they are produced — price, use and qualities considered." SmithKline Corp., 575 F.2d at 1062-63 (quoting United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 404, 76 S.Ct. 994, 1012, 100 L.Ed. 1264 (1956)). The Supreme Court in Brown Shoe additionally recognized the possibility of considering relevant product submarkets:

  The outer boundaries of a product market are
  determined by the reasonable interchangeability of use
  or the crosselasticity of demand between the product
  itself and substitutes for it. However, within this
  broad market, well-defined submarkets may exist
  which, in themselves, constitute product markets for
  antitrust purposes. The boundaries of such a submarket
  may be determined by examining such practical indicia
  as industry or public recognition of the submarket as
  a separate economic entity, the product's peculiar
  characteristics and uses, unique production
  facilities, distinct customers, distinct prices,
  sensitivity to price changes, and specialized

Brown Shoe, 370 U.S. at 325, 82 S.Ct. at 1524 (footnotes and citation omitted). A well-defined submarket may exist even though all these indicia are not present. General Food Corp. v. FTC, 386 F.2d 936, 941 (3d Cir. 1967), cert. denied, 391 U.S. 919, 88 S.Ct. 1805, 20 L.Ed.2d 657 (1968).

In this case, the Court is convinced that the sale of branded latex condoms to retail distributors does constitute an "economically significant submarket" as defined by the "practical indicia" developed in Brown Shoe and its progeny. The analysis which follows will review the parties' claims as to the relevant product market as well as analyze the evidence presented to the Court with reference to the Brown Shoe criteria. The Court will also briefly review the application of the Department of Justice's 1984 Merger Guidelines on defining the relevant product market.

1. The Parties' Claims.

As noted earlier, plaintiff views the sale of latex condoms "at retail" as the relevant product market to be used by the Court in determining whether the acquisition at issue will substantially lessen competition. Plaintiff stresses that the importance of brand loyalty in this particular market separates it from other sales of condoms, like Ansell's bulk sales to USAID. Edward W. Fernas, Vice President of Ansell's Consumer Products Division noted in his testimony:

  The key to successful sales of latex condoms in the
  retail market is a well-known and recognized brand
  name such as Trojan, Ramses or Shiek. In addition to
  the three dominant brands, the only other brands that
  have been able to develop customer recognition and
  loyalty have been Lifestyles, marketed by Ansell, and
  Protex, marketed by NSL. Their relatively limited
  success has been the result of extensive marketing
  efforts over time. No other company has succeeded in
  entering the market to any significant extent.
  Trojan, Ramses and Shiek have been well known brand
  names for decades, and Lifestyles and Protex both have
  been marketed for at least ten years.

Schmid has also recognized the importance of a recognized brand name in the retail market. It is apparent that this factor was a significant consideration in Schmid's decision to acquire the Protex brand from NSL rather than launching a new brand of its own.

Defendants dispute plaintiff's characterization of the market and claim that the market consists of all wholesale sales of condoms within the United States. They claim that since none of the major condom producers or packagers sell directly to final consumers, but rather sell their output to a group of purchasers, including, large retail stores, other retail outlets, wholesale jobbers, health care vendors, state institutions, vending machine operators, mail order houses and the United States Government (principally USAID), who eventually distribute the condoms, all of these sales comprise one product market.

The Court has also reviewed the ample expert testimony presented by the parties on the issue of product market definition. Plaintiff's expert, Dr. David Smith submitted testimony stating that to include Ansell's USAID sales in the United States retail market is equivalent to measuring Ansell's market share in terms of its total production capacity. This he claims is inappropriate for branded products like the condoms sold through retail outlets. Plaintiff's expert relies upon the practical indicia announced in Brown Shoe as well as the analysis employed by the Department of Justice.

Defendant's expert, Dr. M. Bruce Johnson, does not dispute the relevant considerations in defining a product market, however, he arrives at a market definition that includes Ansell's USAID sales. He states that there is a great deal of demand-side substitutability across the products of the different manufacturers. He asserts that the buyers of condoms can and do consider shifting their purchases among the different manufacturer's brands in response to relative prices or other competitive variables. As for the applicability of supply-side substitutability in market definition, Dr. Johnson states that the critical element of supply-side substitutability is the interchangeability of production facilities. He submits that Ansell has the capability of altering its production facilities in order to shift from the production of condoms for sale to USAID to condoms that compete with Schmid's condoms.

2. Applying the Brown Shoe Criteria.

Defendants claim that condoms sold at wholesale within the United States constitutes a relevant product market. Treating this assertion as accurate, however, would not foreclose the possibility that the sale of latex condoms through retail outlets constitutes an "economically significant submarket" within the broader market encompassing all wholesale sales, and that this submarket is itself a "line of commerce" for the purposes of the Clayton Act. See United States v. Mrs. Smith's Pie Co., 440 F. Supp. 220, 228 (E.D.Pa. 1976). Brown Shoe recognized this possibility when it enumerated a set of "practical indicia" to determine the existence of an "economically significant submarket."

                  a) Industry or public recognition of the
                  submarket as a separate economic entity.

Although dippers may sell their products through a number of different channels of distribution, the evidence presented to the Court clearly shows that the industry participants view their sales to the retail trade as a separate economic entity. Ansell has submitted ample documentation in the form of marketing plans and income and expense analyses that treat their sales to U.S. retailers as a separate market. The reference to this market segment is not limited to plaintiff. Schmid's 1988/89-1991/92 Business Plan makes several references to the U.S. retail condom market noting the fact that "[t]he U.S. retail condom market has shifted from pre-AIDS drug store dominance to an emerging 3-outlet configuration with food stores and mass merchandisers enjoying a sustaining growth trend — that is likely to continue." In addition, the Nielsen Company, an independent marketing research firm that surveys and publishes sales statistics and market share data for the condom industry, maintains its data separately for sales of latex condoms to U.S. retail outlets. Defendants argue that Nielsen only surveys market statistics in the channels of distribution requested by its corporate clients such as Schmid. This, however, would only support the proposition that the industry participants view this as an economically distinct market segment.

b) The product's peculiar characteristics and uses.

Several of the product market definition issues presented in this case are similar to those that were presented in United States v. Mrs. Smith's Pie Co., 440 F. Supp. 220 (E.D.Pa. 1976). In that case the court noted that within the frozen dessert pie market, separate submarkets might exist for retail frozen dessert pies and institutional (or food service) dessert pies. The court found that these separate markets were defined on the basis of differences in customers, methods of distribution, advertising, packaging, size of the pies and price. Id. at 225. Significant peculiar characteristics of the two markets included the fact that retail dessert pies were usually eight inches in diameter whereas institutional or food service pies were usually ten inches in diameter. Additionally, as in this case, the packaging for one product, there retail frozen dessert pies, was more expensive since the packaging must be able to attract the consumer's attention, whereas food service pies were packaged in plain boxes. Id.

c) Unique production facilities.

Plaintiff claims that the production facilities that produce condoms for the retail market are different from those facilities used to produce condoms for USAID. The Court is convinced from the evidence presented that the dipping equipment is substantially the same, with the only difference being the different sizes and shapes of the glass formers used for dipping and the metal mandrels used for electronic testing. Plaintiff maintains, and defendants' expert agrees, that the only significant difference in the production of condoms intended for sale to retailers as opposed to those for sale to USAID appears to be the necessary packaging equipment. The Court believes that the requirement of additional packaging equipment is sufficient to differentiate the production facilities. Accord Mrs. Smith's Pie Co., 440 F. Supp. at 228 (noting that "[a]lthough a pie machine can make both fresh and frozen pies, production of frozen dessert pies requires freezing equipment and cold storage facilities, while production of freshbaked pies requires an oven").

d) Distinct customers.

Plaintiff maintains that sales of condoms to retail distributors and to USAID are made to distinct customers arguing that in the "U.S. retail market" condoms are sold to the various retail distributors (drugstores, foodstores and mass merchandisers) for ultimate sale to individual consumers, whereas condoms sold to USAID are distributed outside the United States in developing countries. Defendants contest plaintiff's characterization of customers, claiming that none of the parties in this litigation sells directly to consumers, but rather all sell at the wholesale level to various customers who resell or otherwise distribute to consumers in various ways. Defendants apparently argue that retail distributors and GSA are not distinct customers in this market. The Court cannot agree. As noted earlier, the key to successful sales of latex condoms in the retail market is a well-known and recognized brand name. When a retail distributor makes a decision to buy condoms from a dipper or packager he or she is buying a product with hopes that it will ultimately sell to consumers. Witnesses for both plaintiff and defendants have testified that a retailers' decision to carry a product depends upon the product's proven or reasonably anticipated product turnover. Sales to the retail trade also require an arsenal of marketing tools including advertising, rebates and promotional allowances. Sales of latex condoms to USAID, on the other hand, are made pursuant to the receipt of an annual GSA contract awarded on a competitive bidding basis. Mr. Fernas testified that the selling and marketing expenses for the GSA sales are far less than the selling and marketing expenses involved in selling to U.S. retailers. The annual contract is apparently awarded to the manufacturer submitting the lowest bid.

e) Distinct prices.

The prices of latex condoms sold to retail distributors range from $20 to $30 per gross, while the prices to USAID are in the $6 per gross range. This price discrepancy is ...

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