United States v. Falstaff Brewing Corporation

PETITIONER:United States
RESPONDENT:Falstaff Brewing Corporation
LOCATION:University of Washington Law School

DOCKET NO.: 71-873
DECIDED BY: Burger Court (1972-1975)
LOWER COURT:

CITATION: 410 US 526 (1973)
ARGUED: Oct 17, 1972
DECIDED: Feb 28, 1973

ADVOCATES:
Kauper
Matthew W. Goring – for appellees

Facts of the case

Question

Audio Transcription for Oral Argument – October 17, 1972 in United States v. Falstaff Brewing Corporation

Warren E. Burger:

We’ll hear arguments next in No. 71-873, United States against Falstaff Brewing Company.

Mr. Kauper, you may proceed.

Kauper:

Mr. Chief Justice, and may it please the Court.

This is an appeal under the Expediting Act from the order of the United States District Court for the District of Rhode Island dismissing the Government’s complaint with the antitrust laws against the Falstaff Brewing Company.

The complaint alleges that the 1965 acquisition by Falstaff Brewing Corporation, the Nation’s fourth largest brewer of the assets of the Narragansett Brewing Company, the largest brewer in New England violates Section 7 of the Clayton Act as amended.

Like Greeley, the preceding case on the docket, it is a potential competition case.

Central to the case is the need to halt and if possible to reverse the increasing trend towards concentration in the brewing industry in local markets, a trend which was both noted with concern and was the primary basis for this Court’s 1966 holding in United States against Pabst Brewing Company.

The market in this case is not in dispute, it is stipulated, it is the production and sale of beer in the New England area comprised of the six New England States.

There is no allegation in the case at the time of the acquisition.

There was any direct competition between Falstaff and Narragansett.

The Government alleged rather that Falstaff was a significant potential competitor in this market that the market was concentrated and becoming increasingly so and that the net effect of its elimination as a potential competitor therefore substantially lessened competition within the meaning of Section 7.

More particularly, the Government alleged that Falstaff had the incentive to enter — it had the financial capability to enter.

It had reasonable prospects for a successful de novo or toe-hold entry.

The District Court relying on two findings dismissed the Government’s complaint.

More specifically, the Court concluded that Falstaff’s management had considered the acquisition by other means, find them unprofitable, and that therefore, the decision was made by Falstaff not to enter this market by any means other than the acquisition of Narragansett.

Potter Stewart:

Do the — the complaint did not allege, did it that Falstaff was the only brewery with equivalent opportunity and — and resources to enter this market?

Kauper:

No.

Potter Stewart:

Is it —

Kauper:

Mr. Justice, I think the Government’s theory is it was one of the most likely entrants.

Potter Stewart:

If it did —

Kauper:

More specifically, if I’m right, the allegation and the evidence submitted would tend to indicate that it is one of the Nation’s 10 largest brewers.

Seven of those brewers are already in the New England market.

Potter Stewart:

And two of them are way out west somewhere (Voice Overlap).

Kauper:

Two of them — well, I don’t know who had said they were way out west but they were significantly further west than Falstaff and they are also significantly smaller than Falstaff.

Potter Stewart:

So, at least in argument you’re going to say that Falstaff had superior opportunity and resources to any other brewing not already in the New England market to enter.

Kauper:

I believe that was the case.

I don’t think we would have to establish that it was absolutely the only one that could do so.

Potter Stewart:

On the other hand, if the record showed there were 15 or 20 with equal access and resources of the potential competition argument would be much less than Falstaff.

Kauper:

Yes, I think if — if the evidence were to demonstrate that there were very large number of potential entrants, then clearly one would have to take the position elimination of one had no particular impact.

Potter Stewart:

In other words, part of the potential competition theory I should suppose would be a proof that the potential entrant was — if not unique at least one of a very small group, would it not be?

Kauper:

I think that essentially is correct, yes.

So that its elimination had some consequence, otherwise clearly it would not.

The court below, we believe misconceived standards which are to be applied in this sort of a case, more particularly in its two key holdings, we believe that it improperly relied upon subjective statements made after the fact as to what the intentions of Falstaff’s management would have been at a previous point in time.

Second, we believe that it failed to recognize the concentrated nature of the market in the New England area.

In finding that, this particular market was “intensely competitive”.

Finally, we believe it put undue weight upon certain post-acquisition evidence which tended to indicate that following the acquisition by Falstaff, Narragansett’s market share declined.

Let me now briefly deal with the facts.

The New England beer market, first of all, is a growing market sales — total sales increased by 9.5% during the period from 1960 to 1964.

In 1960, the top eight firms in the market controlled 74% of the sales, by 1964, that figure was 81%.

In 1960, the top four firms controlled 50% of the market, the top four firms in 1965, 61.3% of the market.

In the seven years preceding the acquisition, the number of brewers operating plants in New England declined from 11 to 6.

In short, we believe that this evidence carefully tracks the same trends which were noted by this Court in United States against Pabst Brewing Company in 1966.

The increasing trend towards concentration, the decline in number of brewers is approximately the same.

We also, as I indicated, Mr. Justice Stewart, the facts are indicated that there are 10 — of the 10 largest brewers in the Nation, seven are already marketing in the New England area.

The remaining three — of the remaining three, Falstaff is clearly the largest, it is also the one most geographically proximate to the New England market although I think we would all recognize that it’s not within, let’s suppose, a hundred mile.

The market is characterized as is the marketing at most beer by heavy promotional and advertising expenditure.

The Narragansett Brewing Company acquired by Falstaff at the time of acquisition was the leading brewer in terms of sales in the New England area with approximately 20% of the market.

It was at the time of the acquisition, a healthy firm, its profits and sales had increased substantially during the four years prior to the acquisition.

It had engaged in significant planned expansion and indeed inquired — acquired certain assets from certain other brewers during that same period.

Its distribution system was primarily through independent wholesale distributors.

They were not bound by contract to Narragansett, to handle Narragansett’s beer exclusively and indeed the evidence suggest than in most instances they did not.

The Falstaff Brewing Company, the acquiring corporation, at the time of the acquisition was the fourth largest brewer in the United States having 5.9% of the market.

It at that time operated eight breweries.

Most of those breweries had been acquired by Falstaff during a 20-year period.

In most instance, there were small failing breweries of capacities of some hundred, two hundred thousand barrels.

In each instance, Falstaff had substantially modernized those plants, had greatly expanded their capacity, and in that manner, had developed the system which made them, by 1965, the fourth largest brewer in the Nation.

During the period preceding — immediately preceding the acquisition, Falstaff’s sales and profits had also expanded greatly.

It was a financially healthy company.

It had no difficulty in securing capital.

Falstaff distributed its beer in two ways.

Kauper:

Approximately 80% of its beer in various markets was distributed through independent wholesale distributors.

Most of those distributors were non-exclusive distributors.

I think the figure is something like 75% of the total wholesale distributors did not carry Falstaff’s line exclusively.

The balance of its beer was distributed through its own owned branch operations.

Now that was true in cities where it operated breweries.

It was also true in the number of cities in California.

So that it was experienced with at least two types of distribution system namely the independent wholesale distributor as well as the branch distributor which it owned.

So far as entry is concerned, Falstaff had conceived or perceived by — that national breweries and you had Mr. Metzger in the previous case referred to probably the four best known international brewers, by virtue of their national status had certain competitive advantages over Falstaff.

This includes the ability to advertise on a national basis and what is referred to as the so-called prestige factor.

In fact, an individual who goes in to buy a can or a bottle of beer, he gets accustomed to a particular brand which he can find anywhere in the United States.

In 1958, Falstaff commissioned a report to be made ahead on its future growth.

That report is referred to throughout the record as the Arthur D. Little Report which was submitted to Falstaff in 1960.

That report was designed to indicate the method of growth for the Falstaff Brewing Company in the years to come.

It made a number of recommendations but I’d — let me refer to three.

First, it rather clearly and categorically stated that if Falstaff was to expand its sales, it would need to become a national brewer, but national brewer status.

Second, it recommended that entry be made into new markets by the building of new brewers.

Specifically, in the context of our case, it suggested that — excuse me — Falstaff should enter into the New England market — pardon, the Northeastern market by the building of a new brewery, which was to be located in Baltimore, Maryland.

But more generally, it concluded that building of a new brewery was more economical than entry by other means.

It also indicated that distribution by Falstaff through its own company-owned outlets was more profitable to Falstaff than entry — pardon me, distribution through the use of independent distributors.

Following a receipt of that report, Falstaff began through public pronouncement and otherwise to indicate its desire to become a national brewery.

Foremost among its desires was an entry into the Northeastern market.

In pursuing that particular goal, it had negotiations with several other brewers before culmination of the acquisition of Narragansett.

These brewers — I think it — must be indicated that at least in several instances came to Narragansett and not came to Falstaff and not the other way around, but there were extended negotiations with the Liebmann Brewing Company.

There were extended negotiations with Rheingold Brewers.

These are both brewers operating primarily or have brewing headquarters in New York — in the New York City area but marketing in the New England area.

Employees were sent to visit the plants of the Piel brewery, plants both in New York and Massachusetts.

There were contacts made with other brewers in the Upstate New York area and indeed contacts inquiries made of Falstaff by several smaller brewers, at least two, pardon me, in the New England areas.

Now it’s in that setting that the Government contends that the acquisition of Narragansett by Falstaff eliminated a significant potential competitor from this market.

Falstaff does not, as we understand it, deny that it had the capability, financial, technical capability to enter the New England market, nor does it deny at least in general — in general that it had a strong incentive to enter the Northeastern market.

It does not assert as out far as we can tell that there were any other brewers who are more likely to enter into the New England market.

Kauper:

Its essential argument as we understand it, is that it could not enter this market other than by its acquisition of the Narragansett Brewing Company because and this was the basis defining by the District Court, statements made by its executives that it was necessary to secure a strong, viable distribution system to enter the Northeastern market and that kind of system could be obtained only through the acquisition of Narragansett.

Hence, I think the issue in a large part comes down to the criteria by which one identifies a potential competitor in a given market.

That is in a sense issue one.

Second of all, I think it should be pointed out that Falstaff also contends that this market was in fact intensely competitive.

Now I take it that the relevance of that is that if the market was intensely competitive before the acquisition, intensely competitive after the acquisition, the elimination of the significant potential competitor in and of itself would not materially hold the competition in the marketplace, and hence under those circumstances, we should not be concerned about the question whether Falstaff is such a significant potential competitor.

Now in general, I don’t think after the discussion yesterday we need to review in detail the theory of a potential competition case.

In essence, it has two parts, one is that the particular firm, the acquiring firm in this instance was in fact likely to enter the market and that this because of the concentrated nature of the market would be pro-competitive.

That is it is in fact a likely entrant.

Second part of the theory says in essence that its presence as a potential competitor is likely to have had an impact on the behavior of firms already in the market.

And it is that impact which is then eliminated through its entry of a brewer, particularly of the size of this particular firm, Narragansett.

Indeed, in the cases decided by this Court, dealing with potential competition, there appears to be — appears to have been more emphasis on the latter than on the former.

Those cases, the El Paso case, the Penn-Olin case, Procter & Gamble, Ford Motor case decided last term, all emphasize the effect which that particular acquiring firm had on the market even without actual entry, but instead by virtue of its existence, and the phrase which has come to be used is on the wings of the market.

As it was put in the panel, the existence of an aggressive, well-equipped, and well-financed corporation engaged in the same or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substantial incentive to competition.

Now that’s the basic theory.

William H. Rehnquist:

Mr. Kauper.

Kauper:

Yes.

William H. Rehnquist:

The quotation you just read spoke in terms of waiting anxiously and you earlier used the term “likelihood”, don’t those both suggest that the inquiry here is basically factual one?

You wouldn’t disagree with that.

Kauper:

Well obviously, there is a factual question, but it was one thing in any case of this sort, but I think the question is what is it that the facts have to show?

Our contention in this case is what the facts have to show is that there was a substantial incentive to enter, that there was capability to enter, that there were reasonable prospects for entry and that to a reasonable improving management, there was such an opportunity to enter.

William H. Rehnquist:

Well assuming that those facts are at least — as I would say wouldn’t necessarily add up to the concepts — concept of anxiously waiting to enter.

There is a subjective element connoted by the phrase “anxiously waiting” as by the term “likelihood” I think.

Kauper:

Well I think the Court dealt to some extent that same question yesterday.

They questioned what is subjective, what is objective.

I think in the sense of are they anxious, that may not be best term to use.

It is of course, I recognized that the term used by the Court.

But what it suggests is a firm which is positioned at a certain point in the market.

And because of that position, that firm when eliminated, brings about an anticompetitive effect.

Now I think so far as what is subjective, what is objective and that is indeed the major part of what we are concerned with in this case.

Let me if I might turn to that because there were some discussions of that yesterday.

Kauper:

I think the question which was put yesterday is this simply a matter of trying — retrying the facts of this case cannot be put in quite those terms that what we are talking about here is trying to decide what it is the facts have to show.

It is not a question of do the facts show that this firm would or would not in fact have entered.

Instead, the Government’s contention is that the Court should apply here criteria which are objective and structural in nature.

And having applied those criteria, we believe the Government has met its burden on this case.

William H. Rehnquist:

What is the ultimate factual inquiry as —

Kauper:

Our — in our judgment, the ultimately — ultimate factual inquiry, let me put it in several parts because I think there are — there are several issues although in a sense we’re really only talking about one.

Obviously number one, is this a — is it a concentrated mark.

And I — that’s not the point we are talking about now.

Number two, is a question of how many entrants might there be.

Is this a peculiar entrant or one of a group peculiarly like (Inaudible)

But so far as the question of entry itself is our belief and we believe the Court has already so indicated that the standard to be applied is whether or not a reasonable management on the facts established would have believed there was a basis for entry if this acquisition had been prohibited.

Now —

William H. Rehnquist:

Even though the trial court finds as a fact that this particular management however a reasonable manager might have operated did not plan to enter.

Kauper:

I think we would be prepared to make that argument.

Now in this case, Mr. Justice, I think we would also contend that the particular fact on which that finding was based really was not — I’m taking that particular finding, was not based on evidence which show what that management had in fact done in the year 1964 and 1965.

In other words, I think there is a second part to the problem in this case because the testimony which is relied upon by the president of Falstaff in particular, his testimony given in a much later date as to what he would have done or would not have done, what other in the management of Falstaff would or would not have done.

But the testimony being given on the later date has some of the aspects obviously of the self-serving state.

William H. Rehnquist:

Do you say then the District Court should have disbelieved it?

Kauper:

No, I don’t think I would say it should have disbelieved.

I think the argument we are making is that because of the nature of that evidence, it should not be the governing criterion at all.

Now, what I am suggesting is I don’t think it ought to be an issue of credibility of that statement in a case by case sort of basis.

But the standard should be drawn so that that statement is really not the crucial issue.

I don’t know whether I have made that point but it seems to me, when you say is it a matter of should it be believed or should not be believed, I think that the ideal standard would be a situation in which you did not put a man on the stand and say to him, “What would you have done three or four years ago?”

William H. Rehnquist:

You don’t think will remove the concept of anxiously waiting or subjective attempt, make it kind of a reasonable man of negligence.

Kauper:

Yes.

I think that’s not quite the point I am dealing with here.

I think there are two points.

One is, I would not approach this as a standard which is based upon testimony given in a later fact.

Now, your question which goes to anxiously waiting could also go to the use of subjective evidence which is contemporaneous with the evidence but it just seems to me there are two parts to this particular problem.

In this case, the trial court relied upon statements of the management that they would not have entered in any other manner other than the acquisition of Narragansett.

Kauper:

That is testimony taken at a later point in time.

Byron R. White:

My point —

Mr. Attorney General, the — since your premise is that — that this case is likely the impact of Falstaff is sitting on the edge of the market, that — that is an assumption about the — its effect on the contenders in the market.

Kauper:

That’s correct.

Byron R. White:

So, why shouldn’t the standard be what — how contenders in the market would view a potential entrant in the likelihood of potential entry?

Kauper:

Well, I take it — let me see if I understand your question Mr. Justice While.

I take it, what you are suggesting is perhaps what we should do in this case is put the actual members of the industry on the — on the stand.

Byron R. White:

I don’t know how you — but isn’t that —

Kauper:

Well, I –

Byron R. White:

Your argument is that this has an impact on competition.

Kauper:

Yes.

Byron R. White:

And if — if no fool was competing in the market would assume that or would even think that some company would enter, your case (Inaudible)

Kauper:

Yes.

I think — I think that the point is that the question of impact whether we call it on the wings or on the edge or whatever words they use, almost already in the market is a matter and I think this is your point of the perceptions of those within the industry.

That is one reason why we think a statement made after the fact as to what a firm’s intention would have been is not the criteria to be applied in such a case.

Obviously, that is not perceived by those who are already members of the industry.

I think our position on your question would be if the facts in the record demonstrate that there was a basis for entry which would have been acceptable to reasonable man, that that justifies the belief that others would have perceived the same thing.

Potter Stewart:

So really, the basic element is not the actual livelihood of entry but the perceived likelihood of entry by those already in the market.

Kauper:

Well, I think Mr. Justice, there may be a case where it is precisely the question of actual entry.

That is, there could conceivably be again where a firm has no impact on the wings, so to speak, but where in fact it can be demonstrated that it would have entered.

Potter Stewart:

Yes and there could also be a case a 180 degrees the other way, is there not?

Kauper:

Yes, I believe there could be.

Potter Stewart:

Were in fact there was no actual intent or possibility for some reason that was secret there — some family reason or something.

And if — but if they were perceived potential, reasonable — reasonably a probable potential of entry that would be enough to satisfy the test, wouldn’t it?

Kauper:

Yes.

I’m nearing it —

Potter Stewart:

Even though — even though were it quite inaccurate and incorrect perception.

Kauper:

I believe that’s right.

I’m nearing the end of time Mr. Chief Justice.

I think I reserve the balance —

Warren E. Burger:

Very well, Mr. Kauper.

Mr. Goring.

Matthew W. Goring:

Mr. Chief Justice, may it please the Court.

I have been interested in several of the colloquy between counsel not only in this case but in the preceding case in the Court.

One of my interests lies in the dealing of the Government with the subjective evidence.

At one point in the briefing of this case, a suggestion seem to me clearly was that my subjective evidence, the Government did not elect to go so far as to say the subjective evidence should not be admitted and indeed they made no objection to the kind of evidence we are talking about at the trial level.

Nonetheless, admissible or not, the Court should not take it into account to any degree.

Now, as Mr. Justice Stewart suggest, the Government’s attitude would be quite different in the subjective evidence they were thinking.

Now, we have the same sort of problem in the court below and this is somewhat diverting but it is enlightening, I believe with respect to post-acquisition evidence.

And on page 195 of the appendix, what trial counsel for the Government says in substance is that in some cases, well this is a quote, “In some cases, post-acquisition evidence showing any competitive effects after an acquisition is relevant.

However, post-acquisition evidence to show what would have been had this particular acquisition not taking place.”

In other words, if the evidence to be introduced was such to show that after an acquisition anticompetitive effects had been felt in the marketplace that would be admissible.

Judge Day said it would seem that a court common justice would dictate.

The evidence indicated the other way ought to prevent — permit a defendant to introduce it and (Inaudible) and apply the merge.

Now that’s the same matter to the Government has about subjective evidence and let me turn to the subjective evidence and speak upon it.

While I think the decisions of this Court clearly suggest and I know of no contrary decision that it does not deem its function to retry cases and will not do it.

Whether examination is into that question of whether the findings below were clearly erroneous, the discussion have got to run the gamut of significant evidence.

Now, the evidence that were talking about —

John Paul Stevens:

Did the — excuse me.

Did the trial judge here below consider that there would be no likelihood of entry if he was convinced the management actually had no intention of entering?

Is that the standard he applied?

Matthew W. Goring:

That is not the entire standard he applied.

John Paul Stevens:

Is there some — can you tell what the standard they did apply?

Matthew W. Goring:

He referred to that as significant.

What he says about it in the broad is incredible evidence establishes and it was not a potential entrant into said market, by any means or way other than by said acquisition.

John Paul Stevens:

So he does — he does — stated conclusion.

Matthew W. Goring:

He doesn’t — that is correct.

He does not refer the question of whether fact A or fact B leads him to that conclusion.

However in the record —

John Paul Stevens:

Really on analysis the question is a little more subtle than that as my Brother White has suggested though, isn’t it?

John Paul Stevens:

Basically, it’s not actual probability or possibility of entry but the perception of that by those already in the market.

It’s a little bit like the — in naval warfare, the Fleet in Being theory.

Now the British fleet (Inaudible) flow may in fact have all its — all its ships unable to sail, but until or unless the enemy knows that, it’s still the Fleet in Being.

Matthew W. Goring:

I think it’s quite clear that both facets have some significance if they both exist that is the likelihood of entry and the apprehension in the industry, in the market.

Byron R. White:

Was there any evidence that apprehension was taken into account by the District Judge in applying the standard?

Matthew W. Goring:

There was no —

Byron R. White:

In deciding —

Matthew W. Goring:

— evidence of any kind that that apprehension existed, none whatever.

Byron R. White:

But how about it is — in the legal standard that he applied?

Can you tell what legal standards he applied?

I guess you can, he just stated his conclusion.

Matthew W. Goring:

You can’t from the record pinpoint it.

But what I am suggesting is that the things that I’m talking about are in the records and the things — some of the things which we have just talked about a moment two ago are not.

In other words, there was no evidence offered by the Government that the industry in the New England market had any apprehension that Falstaff would enter the market.

And there was therefore no threat by virtue of their being 400 miles away which the Government suggested in New England.

Byron R. White:

But I think the Government’s argument is however if he shows some facts about an industry in a market area and perhaps to be a very effective place to do business, it’s profitable that almost anyone in the industry would think that — that a — an outsider with financial resources would be interested in entering in order to share the prosperity.

I take that’s the Government’s —

Matthew W. Goring:

If there were any —

Byron R. White:

So there’s facts like that, there must be facts about the condition of the market in this record.

Matthew W. Goring:

There are no facts about the profitability —

Byron R. White:

I see.

Matthew W. Goring:

— of any entry which could’ve been made by Falstaff.

Now the Government started this case in 1965.

It took a large quantity of depositions.

It sought answers to a large quantity of interrogatories.

It served upon Falstaff before the acquisition, for the consummation of the acquisition, CID, seeking extensive information.

After the commencement of the suit, it took extensive depositions.

Now I had it chosen to try and show state of mind of the industry in New England with respect to the threat of entry by Falstaff, there were large quantity of witnesses who could have been interrogated on this point other members of the industry.

And I suggest to some evidence of that kind is essential.

I see no way, no reasonable way of suggesting but that in the industry, one competitor who does not know something about what another possible competitor is doing and thinking.

Matthew W. Goring:

Now, the reason behind, I’m having to mixed these things up in part, but the reason behind, the determination of Falstaff management, not to enter New England market either independently or by what is referred to as a toe-hold entry, whatever that mean, laying the fact that they had attempted to enter the Detroit market.

They had attempted to penetrate Chicago market.

They being in the north — in north — Northern California, attempted to penetrate the Southern California market.

And in each case, those attempts were dismal failures.

And they were dismal failures so Mr. Griesedieck testified because of the fact that there was not in fact when they went into these areas a healthy distributor organization and in at least one of them, their attempt to create one after entering the market were a failure.

And their conclusions were that they’ll make no attempt to enter a market thereafter.

This occurred before 1964, 1965.

They would make no attempts to penetrate the market unless they knew that they had a distributor organization which was energetic, healthy, and which promise to be able to sell the product which they were producing.

Warren E. Burger:

Mr. Goring, on your suggesting that Government call the other New England brewers or some of them, would you regard them as entirely objective, impartial observers of this scene?

Matthew W. Goring:

To be perfectly frank, I should think they might be very willing to say to the Government exactly what the Government wanted to hear that they were afraid of this just standing in the wind.

They were apprehensive.

It did have something to do with their price structure.

Warren E. Burger:

In other words, there’s a built-in conflict of interest with respect to most of these people, is it?

Matthew W. Goring:

I’m not convinced that when the testimony to be educed that way runs in favor of the Government, the Government have much concern with your observation.

But I do believe that they could have obtained honest evidence no matter what the thinking in the New England beer industry was with respect to the likelihood endanger of entering into (Voice Overlap) —

Warren E. Burger:

From the other brewers, what could be the source?

Matthew W. Goring:

Other brewers?

Warren E. Burger:

Well, I thought you were suggesting that they aren’t — the necessarily the most reliable witnesses on this.

They might be but not necessarily so.

Matthew W. Goring:

They could be honest but let me give you a sample of what is in the record in this case.

It was offered by the appellee, no testimony on this point was offered by the appellant.

Mr. Haffenreffer, who had been the vice president in charge of the sales from Narragansett for a number of years before the acquisitions was called by the appellees and he was — on page 376, “What have you to say about the presence of Falstaff in Ohio on the west and in Washington and/or Richmond, Virginia on the south?

What have you to say about the competitive effect of their presence there (Inaudible)?”

Answer – There were no threat.

We certainly didn’t consider them any threat to us.

Certainly, at that instance, there were no threat because of transportation costs.

Now, there was a witness who at that time had no acts to grind, nothing at stake.

He had — he had been a substantial stockholder in Narragansett.

And when these acquisitions were consummated, the stockholders in Narragansett walked off with 19 and half million dollars scot-free.

The District Court refused to enjoin the acquisition before it was consummated and dismissed Narragansett out of this case thereafter.

Matthew W. Goring:

So at the time Mr. Haffenreffer testified in 1970, there was no possible conflict of interest.

He had no acts to grind.

He had no concern with the outcome of litigation.

That is the only piece of evidence in this record concerning the thinking of people in the industry in 1965 about the danger to their position of a possible entry by Falstaff.

They are eliminated as the potential competitor in that aspect of thing by that piece of testimony.

And the trial judge was of course entitled to accept it as true or rejected as false and he accepted it as true.

With respect to subjective evidence if it is admissible, it is initially at least up to the trier of fact to determine its truth or falsity.

If he finds it true, I suggest he is entitled to find upon the basis of its truth and come to a judgment on the case on that basis.

And unless the Court has changed its mind on the view that it had in Yellow Cab and in Oregon Medical Society, it will be necessary to find that the court below was clearly in error and to be convinced that a serious mistake has been made by the court below.

What the Government is seeking here for all the words they used with respect to incentive to Falstaff to enter this market.

What the Government is really seeking is what it sought in Penn-Olin which is the equivalent of an irrebuttable presumption from two things, apparent financial ability and a desire.

The desire does not reach the heights of incentive.

Incentive must have with it in the context of things like this a reasonable anticipation of product.

And there is no showing in this record by the Government of any reasonable anticipation of profit.

But they used the word incentive almost as though it were the equal of desire and with respect to the question asked by Mr. Justice Rehnquist, trial counsel for the Government in his opening said that he would show that for a number of years Falstaff have had annoying desire to enter the New England market.

Falstaff had had a desire to enter the New England market for a period of years and had never made any attempt to conceal it.

The question of whether it could profit or probably do it either by independent entry or by a toe-hold series which nobody can yet completely define, chances to profit entry in either of those directions were not acceptable to Falstaff.

And they had decided sometime before not to build a brewery in New England for example, a question which I put to Mr. Griesedieck on page 296 of the record.

After he had told me it was his view and the unanimous view of the executive committee that he’d make no attempt to enter independently.

My question is to pinpoint this to a degree, “Had you ever entertained the idea in a period of time from approximately 1950 on, let’s say, of building a brewery in New England?”

The answer was, “No, sir.”

I asked him, “Why not?”

And he told me that the — there was no distributor system and no observable way to acquire one.

Now, let me speak of the Arthur D. Little Report very briefly because that has been — it’s been suggested if that has some significance with respect to the likelihood entry by Falstaff independently or toe-hold.

The Arthur D. Little Report was a result of a study by engineers with respect to certain aspects of Falstaff’s future, what they should do?

What markets they should enter?

How they should try to enter them?

No live witness was called in support of those — of that report.

I objected to it on the ground that it could not stand by itself before its conclusion.

It was omitted.

Matthew W. Goring:

There is nothing in the record to show whether the people who made the study and compose the report and offer their conclusions and opinions in the report itself had enough expertise to qualify the witness and the report is insignificant because of that.

The report did recommend that Falstaff build a brewery in the Baltimore area and Falstaff decided that that part of the report was not valid enough to entertain.

The report did recommend attempts to penetrate the Detroit-Chicago market.

Those suggestions Falstaff analyzed on its own basis found they have some merit, tried them out and as I have told you, failed.

Now, the critical part of this case is that there is no evidence to support the burden which the Government had.

It certainly — the Government certainly have to demonstrate on the one hand that there was in fact likelihood of entry which involves ability to finance, desire to entry and a reasonable profitability on penetrating the market.

The Government did show desire.

They showed apparent financial ability, they showed nothing about profitability and you cannot tell from the Government’s case whether an entry in the — either in the method which they suggest made any sense to a prudent businessman.

And I think it is — seems like confident to remember that this was a public company, stock was widely held and there was some danger of concern, objection, and litigation on the part of stockholders if they made more blunders of the same kind that they had apparently made in both Detroit and Chicago.

There is evidence in the record which we produce showing the lack of sense in entering the market in the two names suggested by the Government.

Dr. Horowitz, we call an expert, he testified was not feasible, not possible enough to build a brewery and certainly not feasible without being able to sell the beer.

Mr. Haffenreffer testified that he did not believe that it was possible for Falstaff to acquire a viable, energetic, reliable, distribute organization.

He did not believe it was feasible.

And there are no facts in the record which carry the Government’s burden to its appropriate conclusion.

There are facts in the record which clearly justify the trial done in entering judgment for the appellee, if in fact, he found the evidence credible and believed it.

Warren E. Burger:

For how long now has Narragansett been operated as an independent division in the city area of Falstaff?

Matthew W. Goring:

After the acquisition.

Warren E. Burger:

Oh, what could —

Matthew W. Goring:

Do you say after the acquisition?

Warren E. Burger:

Yes.

For how long does that gone on?

Matthew W. Goring:

Until the judgment was entered.

I’m not sure — as a matter of fact, I’m not sure that it’s been changed today.

But certainly at the point in time when the judgment was entered, Narragansett was a wholly owned subsidiary of Falstaff and had been so since the acquisition.

Warren E. Burger:

And the acquisition was 19–

Matthew W. Goring:

1965, July 1965.

And that situation was maintained as a request to the Government of Falstaff and by agreement of Falstaff with the Government to do it that way.

Whether that has changed in the meantime, I do not know.

I do not represent Falstaff in any other matter except the matter which is before you.

Potter Stewart:

So, until — at least until the judgment in this — by the District Court, Falstaff did not gain the advantage of marketing beer in the New England market under its Falstaff — under its national brand label?

Matthew W. Goring:

Oh yes, it made attempts to sell Falstaff brand in New England using the distributor organization which he just did in the Narragansett operation.

And the —

Potter Stewart:

Well, was the Narragansett label discontinued?

Matthew W. Goring:

No, no indeed.

There is a mimeograph at the end of the appellee’s brief.

Potter Stewart:

Yes.

Matthew W. Goring:

Which show what happened to barrel sales of various brewers in the period from 1964 through 1968, and it shows that Narragansett was being sold under its own brand during that entire time.

It does not show —

Potter Stewart:

It doesn’t show Falstaff though.

Matthew W. Goring:

No.

And the reason it doesn’t was because the quantity of beer sold by Falstaff didn’t reach the bottom line of the graph.

But the fact is that Falstaff brand was being sold by Narragansett distributors and Narragansett brand continue to be sold by Narragansett distributors from the time of the acquisition to the present time.

Warren E. Burger:

I suppose one could assume that that was regarded by Falstaff as a transitional step in what they hope ultimately would be the result to get the name exposed to some extent before this was finalized.

Matthew W. Goring:

The only information in the record upon that and they should have adverted to this is a testimony of Mr. Griesedieck under examination by me.

My question was in substance, “Have you tried to exploit and promote diligently sale of Falstaff product in this period of time?”

And his answer was they have.

I can conceive for the Government and anybody else suspecting that an acquisitor in a situation of this kind might deliver a (Inaudible)

And my question was designed to get into the record evidence that they did not do so, Your Honor.

Warren E. Burger:

Thank you Mr. Goring.

Mr. Kauper you have four minutes left.

Kauper:

Let me address myself to several matters raised in the argument of counsel.

He suggested there was no evidence of apprehension within the New England market on the part of those in the market of the likelihood of entry by Falstaff.

I think it should be indicated, number one, that the testimony of Mr. Haffenreffer which he read to you of course says he did not fear them because of their transportation cost.

We are not talking about their entry through transportation.

But I think more important, there is an impressive list of concerns marketing in New England who contacted this particular brewing company with respect to likelihood of acquisition, not only the majors which are referred to be — primarily in the brief, but several smaller brewers contacted the Falstaff Brewing Company as a firm whom they believe would be likely to enter.

The letters from distributors which are contained in the record, some 20 of them already existing beer distributors simply elude to the rumors in the likelihood that Falstaff was preparing to enter this market.

And now it’s true there is no testimony by competitors that their conduct was influenced by this individual firm on the edge in the market.

It is quite clear however they were perceived by those in the industry as a rather likely entry.

Warren E. Burger:

Don’t you think the Government had some duty to go forward with the evidence after that testimony on page 2 — 376 from this gentleman, the former —

Kauper:

Are you talking about chief executive officer?

Warren E. Burger:

Yes, the former chief executive officer.

Kauper:

Well, I think that — that what Mr. Haffenreffer said as I understand it is that during the time that he was operating the Narragansett brewery he did not fear and as — maybe I read the statement incorrect, “Shipment into the area by Falstaff.

He puts it specifically in terms of transportation.”

Now it maybe that at that point there was no particular likelihood of that sort of conduct.

But I think given the objective facts here with respect to the likelihood of entry and the perception of Falstaff’s entry by those in the industry and given the concentrated nature of this market that it is reasonable to conclude that their behavior was affected by this particular firm.

Now, I think and let me turn to that issue because we really did not discuss it earlier.

The second critical finding I think made by the judge and there are some difficulties here because the judge made no detail of findings of fact is that the market was intensely competitive.

Now, if that is so, presumably the elimination of the significant potential competitor is a very little customer.

Nowhere in his opinion does he refer to the fact that this was a concentrated market.

Nowhere does he refer to the fact that that trend was increasing.

He accepts primarily the testimony by Falstaff’s president, the chief executive officer of Narragansett and the economic expert put on the stand by Falstaff that this was an intensely competitive market.

And the statement by competitors given the concentration and the increasing trend towards the concentration is precisely the kind of testimony given by bankers in the Philadelphia Bank case which the Court said was lay evidence not entitled to particular weight on this issue.

So far as the economist is concern, he conceded his primary argument was that prices had not risen in this market commensurate with cost.

He conceded that he had not examined the price and cost data for the New England market.

Now under those circumstances the whole thrust of this Court’s opinion in the past has been to look to concentration as the indicator of competition in the marketplace.

I think that brings me to conclusion, Mr. Chief Justice.

William H. Rehnquist:

Mr. Kauper, let — let me ask you on more question if I may in your colloquy with Mr. Justice White about the competitor’s perception of this potential competitor.

I take it ultimately that too is a subjective determination isn’t albeit on the subjective state of mind of the people in the market already, they must have perceived that being — rather than just it being a question of a reasonable person in their position being capable of perceiving.

Kauper:

I think that is a subjective question.

I believe we showed however that perception by objective fact.

Thank you Mr. Chief Justice.

Warren E. Burger:

Thank you Mr. Kauper.

Thank you Mr. Goring.

The case is submitted.