Supreme Court Rules Against a Procter & Gamble Merger Summary

  • Last updated on November 10, 2022

The Supreme Court ruled that Procter & Gamble could not merge with Clorox under the terms of the Celler-Kefauver Act. This ruling established that the act could be used to prevent mergers between conglomerates that would hinder competition by other companies, even if the merging conglomerates were not themselves in direct competition with each other.

Summary of Event

On August 1, 1957, Procter & Gamble Company acquired the Clorox Chemical Company. Clorox was the leading producer of liquid laundry bleach and controlled 48.8 percent of the market. Its nearest rival, Purex, had a 15.7 percent market share. The balance of the liquid bleach market was shared by about two hundred small producers. Supreme Court, U.S.;antitrust law Federal Trade Commission v. Procter & Gamble Company (1967)[Federal Trade Commission v. Procter and Gamble Company] Antitrust enforcement Procter & Gamble Company[Procter and Gamble Company] Clorox Chemical Company Conglomeration in business [kw]Supreme Court Rules Against a Procter & Gamble Merger (Apr. 11, 1967) [kw]Procter & Gamble Merger, Supreme Court Rules Against a (Apr. 11, 1967)[Procter and Gamble Merger, Supreme Court Rules Against a] [kw]Merger, Supreme Court Rules Against a Procter & Gamble (Apr. 11, 1967) Supreme Court, U.S.;antitrust law Federal Trade Commission v. Procter & Gamble Company (1967)[Federal Trade Commission v. Procter and Gamble Company] Antitrust enforcement Procter & Gamble Company[Procter and Gamble Company] Clorox Chemical Company Conglomeration in business [g]North America;Apr. 11, 1967: Supreme Court Rules Against a Procter & Gamble Merger[09210] [g]United States;Apr. 11, 1967: Supreme Court Rules Against a Procter & Gamble Merger[09210] [c]Laws, acts, and legal history;Apr. 11, 1967: Supreme Court Rules Against a Procter & Gamble Merger[09210] [c]Business and labor;Apr. 11, 1967: Supreme Court Rules Against a Procter & Gamble Merger[09210] [c]Trade and commerce;Apr. 11, 1967: Supreme Court Rules Against a Procter & Gamble Merger[09210] Douglas, William O. Elman, Philip Haycraft, Everett F. Harlan, John M., II

Procter & Gamble was the nation’s largest producer of soaps, detergents, cleansers, and toothpastes. Household bleach was a logical extension of its product line. As the nation’s largest advertiser, Procter & Gamble spent more than $80 million in 1957, together with an additional $47 million on sales promotion. This prodigious merchandising muscle raised the concern of other bleach producers and the Federal Trade Commission Federal Trade Commission (FTC). Within two months following the merger, a complaint was filed by the FTC to require divestiture (that is, the separation of the two companies) on the grounds that the merger violated section 7 of the Clayton Antitrust Act Clayton Antitrust Act (1914) , as amended by the Celler-Kefauver Act Celler-Kefauver Act (1950)[Celler Kefauver Act] of 1950. This section provided that no corporation could acquire another company if the effect of such an acquisition was substantially to lessen competition or to tend to create a monopoly.

The Clayton Antitrust Act, passed in 1914, was directed at mergers that substantially lessened competition or tended to create a monopoly. It provided that no commercial corporation could acquire or share the stock or capital of any other corporation if doing so would substantially lessen competition between the two corporations. There were two fatal defects in the law, however. The first was that it covered only mergers effected through the acquisition of stock. Accordingly, the law could be circumvented if the acquiring company purchased only the assets of the acquired company. Second, the law applied only if the merger would substantially lessen competition between the two merging companies. This limited application of the act to horizontal mergers, that is, mergers involving companies that produced or sold the same product.

The law did not apply to vertical mergers, mergers between firms at different stages of the production or distribution process. Such mergers occur, for example, when a manufacturer acquires a chain of retail outlets to market its product. Vertical integration had, however, been successfully prosecuted under the Sherman Antitrust Act Sherman Antitrust Act (1890) in United States v. Paramount Pictures, Inc. (1948) United States v. Paramount Pictures, Inc. (1948) , when the major motion picture studios were ordered to divest themselves of the theater chains they owned. More important, the Clayton Act could not be utilized to prevent conglomerate mergers that substantially threatened and lessened competition. A conglomerate merger is a merger between two companies that neither compete with one another nor stand in the vertical relationship of supplier and customer.

Because of these limitations, only fifteen mergers had been ordered dissolved as a result of antitrust actions between 1914 and 1950, and only five of these had been the results of Clayton Act proceedings. The courts interpreted the antimerger provision of the Clayton Act by imposing standards that were used in determining whether a monopoly existed under the Sherman Antitrust Act of 1890: A merger would have to create a market share of monopolistic proportions before it could be struck down.

To remedy these defects in the Clayton Act, Congress in 1950 had enacted the Celler-Kefauver Act. This amendment to the Clayton Act made asset acquisition as well as share acquisition subject to the law. It also made all mergers that would substantially lessen competition subject to the act, not only those that would lessen competition between the acquired company and the acquiring company.

Thus, at the time of the Procter & Gamble case, the Clayton Act had been utilized primarily against horizontal mergers. Such mergers directly and obviously tended to extinguish competition. The Procter & Gamble merger with Clorox, however, was a conglomerate merger. The issue before the FTC was whether this conglomerate merger could be prevented under the amended Clayton Act. An examiner was charged to investigate the situation.

The FTC examiner, Everett F. Haycraft, held that the deal tended to create a monopoly in the bleach business despite the fact that Procter & Gamble had not been in the industry before the acquisition. That, he said, was because of the tremendous economic power that could be brought to bear by Procter & Gamble even in businesses that it did not dominate. As part of Procter & Gamble, Clorox could enhance its position in the bleach field, because it would be backed by Procter & Gamble’s power, promotion experience, consumer acceptance, and control of retail shelf space. None of these advantages could be matched by other bleach manufacturers. Haycraft also noted the decreased market share of other bleach producers following the merger, evidence that Clorox had increased its market power.

Haycraft’s findings were upheld by the Federal Trade Commission. In an opinion written by Commissioner Philip Elman, it was noted that this was not a true conglomerate merger (one that combines two companies with entirely different product lines) but instead what Elman termed a “product extension merger.” Elman considered laundry bleach to be a product extension of laundry detergent, in which Procter & Gamble already controlled the largest market share. The products were virtually indistinguishable when it came to marketing and advertising techniques. Because Procter & Gamble was not in the bleach business prior to the merger, Elman could not rely on the usual test of increased market share to establish a violation. Elman instead devised a new concept of “potential competition” that would make the merger illegal under the Clayton Act.

Elman reasoned that because Procter & Gamble was a potential entrant into the bleach business prior to the merger, it prevented Clorox, the leading producer, from profiting unduly. At any time, Procter & Gamble could have entered the bleach market and gained a sizable market share at the expense of Clorox. The merger removed this potential source of competition and thus rendered the bleach market less competitive. Furthermore, the merger would discourage new companies from entering the bleach market and would adversely affect the existing producers. Procter & Gamble could use its economic clout to get more supermarket shelf space for its bleach, outspend any competitor in advertising, and engage in predatory pricing financed out of its profits from other lines to stifle existing and nascent competition.

Procter & Gamble appealed the FTC’s decision, and the appellate court reversed that decision. The court stated that the findings of the FTC were based on treacherous conjecture. The case was then appealed to the U.S. Supreme Court. The Court, in a unanimous decision issued on April 11, 1967, reversed the court of appeals and upheld the FTC decision ordering divestiture.

Justice William O. Douglas wrote the opinion of the Court. According to Douglas, Procter & Gamble reduced competition by acquiring Clorox and not entering the bleach industry on its own. Smaller firms would become more cautious in competing as a result of their fear of retaliation by Procter & Gamble with its extensive resources and advertising budget, twenty times that of Clorox before the merger. Furthermore, newcomers could not be expected to enter the market under such circumstances. Finally, when Procter & Gamble was on the sidelines of the bleach industry, it was one of the few companies that could have entered on its own with the temerity to challenge a firm as solidly entrenched as Clorox.

Justice John Marshall Harlan II filed a concurring opinion. He criticized the majority opinion for not laying down clearer legal guidelines and thereby leaving the FTC, lawyers, and businesspeople in doubt as to what would be expected of them in future cases. A major source of disagreement between Justices Harlan and Douglas was the use of business efficiency as a defense for a merger. Harlan stated that true business efficiency achieved by a merger should be allowed as a defense. Harlan, however, did not accept the claim of Procter & Gamble that savings in advertising costs represented a legitimate efficiency defense.

Significance

Federal Trade Commission v. Procter & Gamble Company added a new dimension to antitrust law. The meaning of the Celler-Kefauver Amendment to section 7 of the Clayton Act was first tested in Brown Shoe Co. v. United States (1962) Brown Shoe Co. v. United States (1962) . Brown Shoe Company, the nation’s fourth largest shoe company, merged with the G. R. Kinney Company, which operated the nation’s largest chain of retail shoe stores. The companies did not compete against each other. One was a manufacturer, the other a retailer. Nevertheless, the Supreme Court found that this vertical merger was in violation of the amended Clayton Act. The Court reasoned that the merger substantially lessened competition, since other shoe manufacturers had been steadily foreclosed from marketing their shoes in the retail outlets acquired by the Brown Shoe Company.

It was thus clear that the Supreme Court would apply the Clayton Act as amended to vertical mergers as well as horizontal mergers. What was not readily apparent, and what became the complex issue of law in the Procter & Gamble case, was how the Celler-Kefauver Act would be applied to a conglomerate merger. The decision of the Supreme Court in Federal Trade Commission v. Procter & Gamble Company was thus destined to be a landmark case in antitrust law.

In its decision, the Supreme Court adopted and refined the rationale of the Federal Trade Commission. Competition in the bleach industry would be substantially lessened because of the elimination of potential competition and the creation of new barriers to entrants. Procter & Gamble, instead of forming its own bleach company, acquired Clorox. This eliminated potential competition and, under the circumstances, was interpreted to be illegal under the Clayton Act. The presence of Procter & Gamble in the bleach market was so formidable that it would create an insurmountable barrier to any new company that was considering entering the market.

This was a new approach. The decision meant that illegal lessening of competition under antitrust law could flow from the structure of a conglomerate rather than from the makeup of the market in which the conglomerate operates. The rationale for this decision was that a conglomerate’s structure could allow it to cross-subsidize an operation in one area with earnings from another area. Such cross-subsidization would give a conglomerate a tremendous advantage over traditional firms that specialized in one area or product. Thus, Procter & Gamble’s entry into the bleach market through the acquisition of Clorox was destructive of competition, since no other company had the resources to compete with Procter & Gamble.

The Court’s decision in Federal Trade Commission v. Procter & Gamble Company had a chilling effect on the merger mania that was sweeping the United States in the 1960’s. Between 1962 and 1968, 110 of the companies on the Fortune 500 list had disappeared as a result of mergers. It was now established law that companies involved in a merger would not be exempt from antitrust action simply because they were not competitors. Supreme Court, U.S.;antitrust law Federal Trade Commission v. Procter & Gamble Company (1967)[Federal Trade Commission v. Procter and Gamble Company] Antitrust enforcement Procter & Gamble Company[Procter and Gamble Company] Clorox Chemical Company Conglomeration in business

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Areeda, Phillip, Louis Kaplow, and Aaron Edlin. Antitrust Analysis: Problems, Text, Cases. 6th ed. New York: Aspen, 2004. Textbook containing case studies of the major antitrust cases in American history. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Einhorn, Henry Adler, and William Paul Smith. Economic Aspects of Antitrust. New York: Random House, 1968. A collection of readings and cases involving antitrust law. Good for someone seeking basic knowledge. Recommended for understanding the development of antitrust law.
  • citation-type="booksimple"

    xlink:type="simple">Green, Mark J., with Beverly C. Moore, Jr., and Bruce Wasserstein. The Closed Enterprise System. New York: Grossman, 1972. The introduction, written by Ralph Nader, sets forth the views that find support in this book. A well-documented, detailed, and critical survey of antitrust enforcement from a consumerist’s point of view. Easy to read and interesting.
  • citation-type="booksimple"

    xlink:type="simple">Hylton, Keith N. Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge University Press, 2003. Comprehensive text on economic principles behind antitrust and the development of American antitrust law over more than one hundred years of litigation. Includes a chapter on the Alcoa case. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Narver, John C. Conglomerate Mergers and Market Competition. Berkeley: University of California Press, 1967. Traces the development of conglomerate mergers. Small, but one of the most comprehensive books on conglomerate mergers.
  • citation-type="booksimple"

    xlink:type="simple">Singer, Eugene M. Antitrust Economics: Selected Legal Cases and Economic Models. Englewood Cliffs, N.J.: Prentice-Hall, 1968. Classic antitrust cases are examined and analyzed with scholarly thoroughness in both law and economics. Graphs, charts, and economic formulas accompany the analysis. Recommended for advanced students and antitrust lawyers.

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