United States v. First National Bank & Trust Company of Lexington

PETITIONER:United States
RESPONDENT:First National Bank & Trust Company of Lexington
LOCATION:Alabama State Capitol

DOCKET NO.: 36
DECIDED BY: Warren Court (1962-1965)
LOWER COURT:

CITATION: 376 US 665 (1964)
ARGUED: Mar 04, 1964 / Mar 05, 1964
DECIDED: Apr 06, 1964

Facts of the case

Question

  • Oral Argument – March 05, 1964
  • Audio Transcription for Oral Argument – March 05, 1964 in United States v. First National Bank & Trust Company of Lexington

    Audio Transcription for Oral Argument – March 04, 1964 in United States v. First National Bank & Trust Company of Lexington

    Earl Warren:

    Number 36, Allen versus First National Bank and Trust Company of Lexington et al.

    Mr. Friedman.

    Daniel M. Friedman:

    Mr. Chief Justice and may it please the Court.

    This is a civil antitrust case in which the government is appealing from the dismissal by the District Court after trial of a compliant challenging a bank merger under the Sherman Act.

    The merger involved a consolidation of the largest and the fourth largest bank in Fayette County, Kentucky and resulting institution, as I shall develop, had better than 50% of all the banking assets in the area.

    Now in this case, unlike the Philadelphia bank case of last term, the government did not challenge this consolidation under Section 7 of the Clayton Act.

    (Inaudible)

    Daniel M. Friedman:

    I think Mr. Justice and the reason for it is this.

    At the time this suit was filed which was approximately about the time of the Philadelphia bank decision, there was considerable uncertainty as to whether Section 7 of the Clayton Act applied to the banks mergers.

    We studied this case and this seemed to us to be a very strong case under the Sherman Act and in this circumstances, it was our considerate judgment that it would appropriate to charge, tackle this bank merger solely under the terms of the Sherman Act.

    The —

    William J. Brennan, Jr.:

    (Inaudible)

    Daniel M. Friedman:

    Primarily Mr. Justice.

    Potter Stewart:

    Exclusively for it’s oral argument then.

    Daniel M. Friedman:

    For it’s oral argument and we — as I have indicated we think that — we had argued to the court that the Philadelphia Bank merger violated the Sherman Act, as I shall develop, we think this is an even stronger case than Philadelphia bank case.

    The —

    Arthur J. Goldberg:

    (Inaudible)

    Daniel M. Friedman:

    Well I just don’t know Mr. Justice.

    It’s — the Philadelphia case certainly gives the government a very — only weapon in dealing with this, but I would be reluctant to say that cases might not arise where it would be appropriate for us to have the Sherman Act.

    And we also — I might say we think that this case is brought under the Sherman Act, and we think in this case we have established a violation of the Sherman Act.

    Lexington, Kentucky which is the county seat of Fayette County, Kentucky, is a medium sized city of about 60,000.

    It’s roughly — the population of the county is roughly twice that.

    The city has — the whole area since the war has undergone a remarkable industrial development.

    Prior to that time it was primarily a farming area.

    Since the war, it has undergone rapid industrialization, characterized primarily by the influx of major national concerns which set up a number of plants in the area.

    At the time of the merger which was March 1st, 1961, there were total of six banks in Fayette county and preliminary matter, the District court in this case treated Fayette County as the relevant geographic market within which — to test the effect of this merger on competition and our opponents do not challenge that ruling.

    The two merging banks were the First National Bank and Trust Company and Security Trust Company.

    The First National was the oldest and the largest bank in the county.

    At the time of the merger, it was more than twice the size of any of the other banks.

    Between its founding in 1865 and 1929, it had been involved in 12 different mergers consolidations or takeovers and at the time of the merger its deposits were $58 million.

    Daniel M. Friedman:

    It had $65 million in total assets and $35 million in total loans and as I shall demonstrate in a moment, this at that point represented the largest bank by far in the community.

    The Security Trust Company had been organized in the 1880s by the businessmen of the community, primarily to provide corporate trust services for the community.

    This bank, until 1947, had not engaged in any so called commercial banking.

    It was limiting itself to making of secured loans and providing trust services.

    However in 1947, it went into the commercial field and experienced a very rapid growth.

    Now we have set forth at Pages 10 and 11 of our brief, charts which show the statistical pattern of the distribution of the banking business in Fayette County and the first chart at the top of Page 10 shows the situation as it was prior to the merger and the Court will notice that at that point First National had roughly 40% of all the banking business in the area.

    It was at that point more than twice as large as the second bank, Citizen’s Union, and was approximately three times or more the size of Security Trust.

    Now the effect of the consolidation is shown in the second chart on Page 10.

    The Court will note that the resulting bank now has more of the assets than all of other banks put together.

    It has roughly 52 or 53% of the assets.

    This bank is now three times as large as the second bank and roughly five or six times as large as the smallest bank.

    The chart at the top —

    Potter Stewart:

    Isn’t there a simply – third or fourth grade addition just add for (Inaudible) 39.83 plus 12.87.

    Daniel M. Friedman:

    That’s correct.

    Potter Stewart:

    Which is again 52.7?

    Daniel M. Friedman:

    That’s right, but that we think is significant Mr. Justice Stewart.

    Of course it’s just addition, but the significance we think is we have a big bank and this big bank has combined into a substantial bank and as I shall develop in a moment, this case rests not just on the percentages of the market.

    We think we have very important and persuasive evidence that in this market, this kind of concentration does have a markedly adverse affect on competition.

    Arthur J. Goldberg:

    (Inaudible)

    Daniel M. Friedman:

    Well one thing Mr. Justice — I have to answer that in several steps.

    One thing as far as security is concerned, is that security did have an advantage, which it had its trust business, and the trust business as the record indicates does give a bank an advantage in going into the commercial business.

    But more important than that we think is that, and just let me say that they make the argument that the fact that First National at a prior period had a larger share of the market and had since drop down to 40%, that shows competition would not adversely affected within this market.

    Well, we think there is two things to that, first there is affirmative evidence by the Presidents of three of the other banks in the area that in these circumstances, combining 50% into this bank, with all of the advantages which I’ll come to in a moment, does place them under a serious competitive advantage.

    Arthur J. Goldberg:

    (Inaudible)

    Daniel M. Friedman:

    Well, I think the answer Mr. Justice to that as the testimony in the record indicates that it’s customary when you have a merger of two banks, if there is some attrition in the share of the merging bank for a brief period and indeed there was recognition that this was not unexpected in this particular case.

    And over and beyond that we think that the competition which is to be protected in this case, the competition, the protection of the other banks that is not, the negative effects are not offset because there has been a slight increase in the percentage shares of the other banks.

    The bankers, the three bankers, the presidents of the other banks in town testified, or testified that there concern was over the long range effect of this, in the long run the greater economic power that this bank would be able to bear, bring to bear.

    Now I think one —

    Potter Stewart:

    In (Inaudible) — the statute was for the protection of the other banks

    Daniel M. Friedman:

    The statute was for the protection of competition.

    Potter Stewart:

    For the protection of competition in the interest of the public.

    Daniel M. Friedman:

    That’s correct.

    And we think it’s in the interest of the public that there be a number of effective banks in the area.

    In other words, what the statute is prohibiting is the elimination of an important competitor where this will have adverse affects on competition.

    And there are adverse effects on competition we think when the remaining competitors in the market will find it more difficult, seriously difficult to be competing as effectively as they had in the past.

    I think Mr. Justice I would like to point to one aspect of the case that I haven’t yet mentioned which is suggested by our chart on the top of Page 11 and that is a tremendous share of the corporate trust business which will be the result of this merger.

    Although First National only went into the trust business about 20 years ago, it had managed to gain a very substantial share of that market.

    At the time of the merger it had roughly 45% as against roughly 50% in terms of total trust assets of Security Trust.

    Now the effect of this merger is to combine in a single bank 95% in dollar amount of all the corporate trusts in the community and I think it would be appropriate, this by the way would be 28 more times as large as any of the other banks in the area, and I think it’s appropriate —

    Potter Stewart:

    Was the trust business the subject of the Section 2 part of the complaint?

    Daniel M. Friedman:

    Well, the complaint charged that both the trust business and commercial banking business was a violation of Section 2 as — the acquisition was both in a combination to monopolize and a restraint of trade.

    We are not pressing before this Court the argument that there was a violation of Section 2 insofar as it affected a combination to monopolize commercial banking.

    The reason for that is we think if we prevail on Section 1, the Court doesn’t have to reach it.

    If we lose on Section 1 frankly we think it is also dispositive of Section 2.

    We are, however, continuing to press our argument that in the field of corporate trust services which we think is a separate part of trade and commerce that this combination, this 95%, does represent a combination to monopolize, but I don’t plan to argue that in this Court.

    I think we will stand on our brief on that because again the Court need to only to reach that argument if it disagrees with those of the Sherman Act point.

    Potter Stewart:

    But you do think that the trust business is a separate part of trade and commerce from commercial banks.

    Daniel M. Friedman:

    We think it’s a relevant seg market yes Mr. Justice.

    Potter Stewart:

    Like these are manufacturing companies difference between ice-skates and shoes or something.

    Daniel M. Friedman:

    Are between men shoes and — well between shoes and men shoes, between professional boxing and championship professional boxing.

    Potter Stewart:

    That kind of distinction.

    Daniel M. Friedman:

    That kind of a distinction.

    Earl Warren:

    What would be –

    William J. Brennan, Jr.:

    (Inaudible) the argument based on the trust business is also part of your Section 1 argument?

    Daniel M. Friedman:

    That is correct.

    We — actually now I would like to come to that we think the fact that these banks have 95% of the trust business is an important element towards showing why in this market, this combination is a restraint of trade in violation of Section 1.

    Arthur J. Goldberg:

    (Inaudible)

    Daniel M. Friedman:

    Yes I will come to that in just one moment if I may.

    This case — this case is perhaps an unusual case in that three of the four other banks in the area, the next three largest, the presidents of those institutions all testified that in their view this merger would adversely affect competition in the community and they explained at considerable length why they believe that this would have such an effect.

    The, I might also just point out once again, reiterate, they recognized that in the year since the merger, the trial is approximately one year after the merger, they had not noticed any discernible immediate effect.

    Daniel M. Friedman:

    In fact their percentages have grown slightly, but they were concerned, they said with the long range trend.

    Now, the first reason they gave why this large bank would put them under a serious competitive disadvantage, rested on the character of the business community of Lexington.

    As I had indicated Lexington has had a very remarkable economic growth and you had a large number of national firms coming in there.

    And they say that when a national firm comes into an area where it is not previously familiar, what the national firm’s officials generally do is they pay great weight to the balance sheet of the banks, they don’t know anything about these banks, they have to select a bank in which to deposit their funds and traditionally they look around, they want to get the largest bank.

    This is understandable of course because the Federal Deposit Insurance Company’s insurance is limited to $10,000.

    So in one of these big firms, it makes very substantial deposit, they want to be able to look and see that they have a powerful, a strong healthy institution.

    And thus each of these individuals testified that the very size of the bank, the fact that it is three times bigger than the next that it has 50% of the market, that fact itself is a powerful magnet in attracting new business to the bank.

    Now in addition, the size would permit the new bank to do various things which would give it a competitive advantage over some of the smaller banks.

    For example, most of the banks spend a great deal of money in advertising.

    This is one of the most vigorous ways in which they compete.

    Traditionally, the amount they spend on advertising is directly related to the amount of their deposits, and so having more deposits, being a bigger bank is able to spend more on advertising and thus get a competitive advantage.

    There are other things for example that the new bank being large, it would be in a better position to put in automated equipment, they will be better able being a larger bank to hire more specialized personnel.

    And now Mr. Justice Goldberg, I would like to discuss a question you raised, what the significance of having 95% of the trust businesses.

    The witnesses discuss that at considerable detail.

    The first thing they pointed out is that trust business and commercial businesses are reciprocal sources.

    In other words, if you have a large active trust department this helps you in obtaining commercial business and conversely if you have a large commercial business, this helps you in obtaining trust business and the record indicates that it was the extensive trust business of Security Trust Company which enabled it to move ahead so rapidly in the commercial field.

    Arthur J. Goldberg:

    (Inaudible)

    Daniel M. Friedman:

    Well I wouldn’t fix that Mr. Justice because while they are interrelated, they do play a part, I would still think that for many purposes the trust business does have sufficiently identifiable characteristics to make it an appropriate sub-mark, but I say I’m now arguing to try to show why within the broader market the trust business has a related significance.

    There was another point that was made by the witnesses, is that this combined bank with its 95% of the trust assets in the community had among other things a very substantial portion of the choice downtown real estate and this they said gave it something of an entrée in getting the commercial business of the tenants of this property.

    Byron R. White:

    (Inaudible)

    Daniel M. Friedman:

    I just don’t know that Mr. Justice.

    I’m sorry I don’t know.

    Byron R. White:

    (Inaudible)

    Daniel M. Friedman:

    Well only in the – on the really conclusively findings Mr. Justice.

    The District Court in this case did not make detailed finding.

    The District Court’s opinion is very short and he did make of course the ultimate finding that this would not restrain competition.

    To that extent that has to be overturned, but I don’t think there are any specific findings in the sense of the — finding that there was no conspiracy, there is not that type of finding.

    This case is somewhat unusual in that the District Court’s findings and opinion occupying only about six pages of the printed record and one other little — just a little fact on the trust business is the effect of the merger was to give this bank control of the only newspaper in town which had previously been in the hands of trust, in the hands of Security Trust and now it’s now in the hands of the merged bank.

    Now the testimony went beyond this, however, because all of these witnesses, these three bank officials testified that the size of Security Trust now gave it such an advantage that the other banks might well have to consider a merger in order to be able to compete effectively against the economic power of Security Trust.

    In this market the number of banks has dropped from 19 — in 1929 there were 10 banks in the area, at the time of this merger there are only five as a result of this merger and that’s what we have, it seems to us in this small city in Central Kentucky, is a confirmation of the broad trend to a concentration in banking which this Court noted last term in the Philadelphia Bank case, and indeed there is dramatic evidence in this case of the danger which we think this merger poses in terms of further accretions of concentration.

    Daniel M. Friedman:

    The second largest bank in the city is the Citizens Union Bank which had roughly 17% of the business.

    The Citizens Union Bank is itself the product of a merger.

    In 1954 two of the other banks merged to form this merger and the President of the Citizens Union Bank testified that he principle reason for this merger was that so that it’s bank, this new bank could compete more effectively with the First National Bank which was then the largest bank in town.

    Now with this — this is the factual situation as it existed and as the result of the merger and we think that these facts show that the consolidation constitute a combination and unreasonable restraint of trade and violation of Section 1 of the Sherman Act.

    As I have indicated on this phase of the case, there is no issue as to either the relevant product market, commercial banking or the relevancy of graphical market and the question before the Court is thus, what the effect of this merger had on competition.

    We rest our case on two perhaps related propositions.

    First proposition is we think under the so called railroad merger cases, this merger was bad because it resulted in the elimination of substantial competition between the two merging companies.

    Secondly, we say that even if it does not violate that standard that under the standards enunciated in this Court’s latest decision dealing with horizontal mergers under Section 1, the Columbia Steel decision, this merger must fall.

    Now, let me just briefly refer to the railroad cases.

    We’ve set them forth, discussing them at considerable length in our brief.

    These were a series of cases in the first quarter of the century in which this Court had before it combinations of railroads, they were mostly transcontinental railroads, and these cases the Court condemned as violations of both Section 1 and Section 2 apparently of the Sherman Act, a combination of railroads which eliminated substantial competition between the merging roads themselves and in reaching — making these holdings the Court did not look to see what was the share of the market not controlled by the other railroads, did not consider how effective the remaining competition was.

    And one of the leading cases for example was the Union Pacific Railroad, where this Court struck down the Union Pacific’s acquisition of a controlling share in the Southern Pacific.

    The Court recognized that the business for which these two carriers were competing was only a comparatively small part of their total traffic, but it nevertheless found that there was a substantial amount of competition between them, because they had competed for million of dollars worth of trade.

    And in the Columbia Steel case of course this Court said that the railroad cases were not that controlling and so they were distinguishable on their facts.

    However, this Court has never questioned the authority of those cases and indeed it cited them apparently with approval, last term, in the Philadelphia Bank case for the proposition of the Sherman Act does apply to horizontal mergers.

    We think those cases sound and we think they basically rest on a self evident economic proposition, which is it there can be no more complete restraint of trade than the combination of two independent companies that are competing with each other.

    When you have two competitors that are combined immediately and forever all competition between them terminates, that’s the end of it.

    As far as the marketplace is concerned there is no competition.

    So that it seems to us —

    Potter Stewart:

    A simple theory, which of course what you say is actually correct, which means that any merger is a per se violative of the Sherman Act if it’s in interstate commerce.

    Daniel M. Friedman:

    And if, and if Mr. Justice, if the two merging companies are themselves engaged in substantial competition between them.

    We think —

    Potter Stewart:

    Two shoe stories in a town where there are 100 shoe stories of large — if they are in interstate commerce and that’s a violation of that Sherman Act.

    You are very simple and very based on what’s undoubtedly perpetually correct that once they merge the competition between them is at an end forever.

    Daniel M. Friedman:

    Well, if there was substantial competition.

    Potter Stewart:

    Now let’s say they were in-vigorous substantial competition —

    Daniel M. Friedman:

    And if there were more —

    Potter Stewart:

    — and they are right next to each other in a town in Lexington, Kentucky and there were 15 other shoe stores in Lexington, and these two merge, that’s the end of it, that’s the per se violation of the Sherman Act according to what you have said.

    Daniel M. Friedman:

    If they were sufficiently large I would say.

    If you had two shoe stores in Lexington, Kentucky each of which had several million dollars in business a year, I would say I would think that would be.

    Potter Stewart:

    But now then by your answer you are conceding that there maybe some other relevant considerations in determining — and thus the simple fact of a merger between two substantially competitive enterprises.

    Daniel M. Friedman:

    Well, then I say it has to be viewed in the light of course of the whole picture, the whole picture.

    If you had two shoe stores each to which did $10,000 worth of business a year and they combined, I wouldn’t think that was violation.

    Potter Stewart:

    If what you say is correct of course, I should think there was no need to at all to enact Section 7 of the Clayton Act.

    Daniel M. Friedman:

    Well, Mr. Justice let me suggest on that, that there are a number of other aspects of this problem.

    I know that Section 7 was intended to go beyond this type of problem and to reach other types of —

    Potter Stewart:

    You’ve already gone so far that you swallowed up, you’re way beyond the Section 7 already in your per se violation if you had two substantial competing enterprises merge.

    Daniel M. Friedman:

    It’s limited Mr. Justice I would suggest to the case where you have horizontal merger between competitors.

    Now, there are many areas which obviously this rule that we are suggesting would not apply.

    Now, just briefly in this case to point out that there is no question that the two banks were vigorous and strong competitors.

    Each had been developing and increased their share of the market and certainly it could not be again said that in this area, the share of first security roughly — no the share of Security Trust roughly 13% and 20 odd million dollars in deposits is a substantial amount.

    May I ask (Inaudible)

    Daniel M. Friedman:

    No Mr. Justice no, and the Court found, the District Court found that the defendants had not engaged in any predatory act.

    (Inaudible)

    Daniel M. Friedman:

    No I don’t think so and we are not challenging the Court’s finding. We do say however that the absence of any predatory purpose doesn’t in any way favor this merger.

    (Inaudible)

    Daniel M. Friedman:

    No, there is no claim here of any predatory or any attempt or purpose on the part of these people to restraint competition.

    Now, I’d like now to turn to the Columbia Steel decision and we have set forth at page 35 of our brief, the quotation in which this Court explained the factors which it they deemed pertinent for testing the validity of this merger and the Court said that the dollar volume itself is not of compelling significance and then –

    Earl Warren:

    (Inaudible)

    Daniel M. Friedman:

    Page 35 Mr. Chief Justice.

    It’s indented paragraph on the bottom.

    It said rather we look to six items, the percentage of business controlled, the strength of the remaining competition whether the action springs from business requirements or purpose to monopolize the probable development of the industry, consumer demand and other characteristics of the market.

    Now this inquiry is very similar we think to any inquiry, the kind of inquiry that the Court traditionally makes in a case under Section 7 of the Clayton Act.

    It’s basically we think an enquiry to the effect of the merger on competition generally as distinguished from what I have been just suggesting the competition just between the acquired and the acquiring companies.

    That of course as this Court explained in the Brown Shoe case was one of the basic changes made when Congress amended Section 7.

    It shifted the emphasis from the competition between the acquiring and the acquired companies to the competition generally in the marketplace and we think therefore that it is appropriate, as this Court has itself recognized, in testing the legality of a horizontal merger under Section 1 of the Sherman Act to give full account and to give consideration to the standard of Section 7 of the Clayton Act.

    And therefore we believe that when we have a merger which plainly violates Section 7 of the Clayton Act, where the affect, the restraint on competition is very clear, we think this goes a long way also to establish that it constitutes an unreasonable restraint of trade.

    And I will therefore, when I now, shall now turn and discuss these various factors mentioned in Columbia Steel —

    (Inaudible)

    Daniel M. Friedman:

    Well I wouldn’t say — we recognize of course that not every violation of Section 7 is a violation of Section 1, and so I think it’s a matter of degree Mr. Justice.

    Daniel M. Friedman:

    We’re always suggesting is that you can properly look to what the considerations in this case are.

    In considering the effect on competition of this merger you can properly compare this to the situation in the Philadelphia Bank case, and as I shall attempt to demonstrate, we think that here this is a much stronger case than the Philadelphia Bank case and therefore we think that since this would plainly violate the standards of the Philadelphia Bank case, that is a very significant element in showing that it also violates the standards of Section 1.

    Potter Stewart:

    Do you say it goes a long way tort showing?

    Daniel M. Friedman:

    Yes.

    Potter Stewart:

    It’s like to saying that proving a person is guilty of manslaughter goes a long way, toward proving is guilty of first degree murder, but in order to convict him of first degree murder you have to go the whole way.

    Daniel M. Friedman:

    Yes.

    Well we have to —

    Potter Stewart:

    I don’t see how it helps you here to show if you can show, and let’s assume arguendo that you can show that this was violation of Section 7 of the Clayton Act, I don’t see how it may go a long, hard way or a long way, towards what you need to prove under the Sherman Act, but under the Sherman Act you need to prove all that’s necessary to prove under the Act, don’t you?

    Daniel M. Friedman:

    Yes.

    But this is a part, seems to — this is a part.

    The policy, the basic congressional policy which Section 7 reflects, the policy of concern over the rising trend of concentration that we think this is appropriate to consider in looking to the effects of this merger on competition under the somewhat stricter standards of Section 1.

    (Inaudible)

    Daniel M. Friedman:

    No, no Mr. Justice. You have in fact – well, the Court has frequently stated that the two statutes are complementary, and in the Columbia Steel case they suggested that the policy of Section 7 illuminates the question of whether there is a violation and we’re not saying that the standards are the same, we’re just saying that this —

    Tom C. Clark:

    (Inaudible) the proof must be much stronger?

    Daniel M. Friedman:

    Oh yeah certainly I mean we have to proof more here, I think it’s a matter of degree.

    Tom C. Clark:

    (Inaudible) Philadelphia on both (Inaudible)

    Daniel M. Friedman:

    Well we did but those doubts were resolved by this Court.

    Now on — let me if I may I’d like to discuss the various factors which the Court said discussed in Columbia Steel and point out why we think that under those standards this merger does run afoul of Section 1.

    The first standard is percentage of business control.

    Here the evidence was that they controlled more than 50%, that they had more than 90% of the trust business, and that the trust business was an important element in developing the commercial business.

    So that in this case the share of the market held by the merging banks is roughly 50% greater than the share of the market held in the Philadelphia Bank.

    The second question is the strength of the remaining competition.

    Well, the merged bank as I have indicated is at least three times as large as the next largest bank.

    It’s six times as large as the remaining bank and in the trust field is 28 times as large.

    In the Philadelphia case, the two combining banks were less than twice as large as the next bank.

    So once again what we have here is the two merging firms, have a very substantial advantage over the next one.

    The third thing is whether the action springs from business requirements or purpose to monopolize.

    Since I advised Mr. Justice Harlan, there is nothing in this record to show any predatory purpose in this record.

    On the other hand, the District Court did find that the banks were healthy and that there was no necessity for this merger to protect the depositors or the stockholders of the banks, and I will in a moment come to the business justifications, which the defendants have suggested for the merger.

    I might just say in anticipation, we don’t think those are sufficient justifications to validate the merger.

    Daniel M. Friedman:

    The fourth item is the probable development of the industry.

    Here again, we have a record of an increase in concentration.

    The number of banks was cut by 50% in a period of less than 35 years.

    The presidents of the three other banks testified that they would have to consider margining in order to meet the economic power of this bank and that finally, one of the leading banks in the community was itself a product of a merger whose purpose was to compete more effectively with the big bank.

    The fifth item is consumer demand.

    Now the merger, the elimination of a strong and vigorous bank took place at a time when this community, this area was undergoing a remarkable economic growth and when as the Federal Deposit Insurance Company stated in it’s report to the Comptroller of the Currency, that the merger had an adverse effect on competition, there was a strong demand for credit in the area.

    And finally the less (Inaudible) of other characteristics of the market we think here the fact of the bigness of the bank in this particular market attracting other customers, the advantages possessed by the trust business and so on.

    I now like to turn to the justifications which the appellees have offered for this merger.

    Basically their justification is that the larger bank will be able to obtain deposits from two new sources.

    First they say being a larger and stronger bank they will be able to obtain deposits from these large corporations coming into the area which they have hitherto not been able to obtain.

    Secondly, they state that being larger, they will be able to obtain from the country banks and the surrounding area, the so called correspondent deposits which they have hitherto been unable to obtain and as large volume as they had hoped and which have been going to larger cities such as Cincinnati and Louisville.

    And the argument then is that having this additional cash in the way of deposits in the bank, and as a result of an increase in the bank’s capital due to combining the two banks, this will enable them to make greater loans and this will benefit to the community.

    Now we have a number of answers to this, the first answer is as far as increasing of the capital is concerned the record shows there are other methods by which a bank may increase it’s capital than merging with a competitor.

    They can issue stock.

    It has been done by some of the banks and there was testimony that — one the witnesses, one of the defendant’s witnesses that he thought this bank could have sold stock.

    They can transfer some of their undivided profits to surplus and thus increase their capital and increase their individual loan limit.

    And as far as making larger loans are concerned, these can be made through participation with the correspondent banks because just as some of the smaller banks maintain deposits in the Lexington banks, so the Lexington banks in turn maintain deposits with larger banks and the larger citizens.

    But basically we think this argument comes down to the contention that because this merger will be beneficial to the community, because it’ll help banking in the community this somehow validates it.

    Now, really we think this is basically the same argument which was made in the Philadelphia Bank case in which this Court rejected in Philadelphia Bank case.

    The argument is frequently made in anti-trust cases that what has been done is valid because it’s serving a legitimate commercial purpose.

    For example in the Fashion Originators Guild the argument was made that what was there been done was all right because it was necessary to prevent style piracy.

    And we think that when conduct as this kind of a merger has what is to us a demonstrated anti-competitive effect.

    It doesn’t lose it’s anti-competitive consequence, because of the fact that in other areas, in other aspects of the economy there maybe certain beneficial advantages.

    Now, the legal argument, the legal argument that is made here basically is that the fact and I’ve referred to this earlier, the fact that the share of the market which the first National Bank had some 20 years ago, at that time it was 50% and in the intervening period it has dropped to roughly 40%.

    The argument is that this decline in the shares of the, of the old bank indicates that having this kind of a share of the market does not in fact cause any injury to competition.

    That smaller banks are able to compete despite the size of the large bank and then of course the stress point is also made that this is confirmed according to the appellees by the statistic showing that in the 10 months since the merger, the merging bank’s share of the market has declined slightly 1% to 2% as I have indicated on that.

    There was evidence that this is not unusual and was anticipated.

    Now, the record doesn’t show why in a 20-year period the First National Bank’s share of the market dropped from roughly 50% to roughly 40%.

    We don’t know whether the conditions that existed in this market at that time are comparable to those today.

    We do know and the record shows that at the present time, the competing banks are very much concerned at the increase in the power of, the economic power which this bank would have as a result of the merger.

    Daniel M. Friedman:

    And as far as it can be told, as far as this record shows, what has happened is that in the 20-year period since the First National had 50% of the market, it dropped as little as 10 points presumably as a result of normal competitive process, this is competition.

    You may have one share of the market and if you don’t competitive effectively you may not be able to hold it and we think that if this one thing that’s clear under the antitrust laws is that when you lose part of your market through the normal processes of competition, if you want to get that share of the market back, you have to get it back through competition and you can’t, having less than 10% through competition, get the 10% back by buying up one of your competitors.

    I’d like to reserve the balance of my time.

    Earl Warren:

    Okay.

    Mr. Odear.

    Robert M. Odear:

    Mr. Chief Justice, honorable members of the Court, distinguished counsel for the opposition.

    As I listened to the argument of distinguished counsel for the opposition, I could not help, but arrive at the conclusion that what they’re attempting to do or ask this Court to do in this case is to apply the Clayton Act test to a Sherman Act case.

    Now in getting to that I would like to first address myself to a question which Mr. Justice Goldberg asked and that is as to the importance of the decision in this case as a precedent, and it seems to me that since the decision in the Philadelphia case that there is practically no importance precedent wise in the decision of this case and therefore it’s not of great importance to the government or the Department of Justice.

    That is not true if you turn the situation around because this is a case of first impression in this Court.

    On the proposition that here is a bank which has already merged and has operated for a substantial period of time as a merged bank and now you are being asked to adjudge that bank guilty of a violation of the Sherman Act on proof which amounts to almost nothing more than percentage of concentration without any proof as to the effect of that percentage, which might be proper and a Clayton Act test which we submit is no answer at all in the Sherman Act test.

    And we are faced on the other hand it is a matter of grave importance to us, because if a divestiture should ordered and that is, that is the remedy which the government seeks in this case, it puts our bank in small community of Lexington in a position that no banks has ever been in before and it’s difficult to know what would result from that.

    When was the merger (Inaudible)

    Robert M. Odear:

    The merger was effected on March 1st, 1961.

    (Inaudible)

    Robert M. Odear:

    Sir?

    (Inaudible)

    Robert M. Odear:

    The suit was filed on the same day that the merger took place if Your Honor please, later in the day.

    The — I want to address myself to the proposition of the time schedule a little later on if I may, but as to what the effect of ordering a divestiture in the case of a bank which has merged and has operated for a considerable period of time, the effect of that would be appalling and I like to quote from, for you very briefly if I may from an affidavit which was filed by my good friend Mr. Larry Williams who tried this case for the government in Lexington, Kentucky.

    And in that affidavit which was filed in the California bank litigation, he had trust litigation, he said in these cases where the merging banks have merged before a temporary restraining order or temporary injunction could issue, serious problems, insoluble by a divesture decree may have been created.

    Even attempts made in good faith to separate the properties and accounts of merged banks pending a final decision on the merits of a challenged merger cannot avoid inconvenience, extreme inconvenience to (Inaudible).

    Now that’s very appropriate in this case because at the outset the District Court entered an order directing the merged bank to try to keep separate books to show what business might have belonged to one bank and what business might have belonged to the other.

    But the court recognized that that had never been tried before and might be impossible and so he (Inaudible) order in the language that the merged bank could, should do that insofar as it could do it in conformity with banking regulations and existing laws and in conformity with the standards of good sound banking and we have tried this situation.

    We have tried to keep those books in that manner and it has proven to be physically and absolutely impossible to do so.

    So that language from Mr. William’s affidavit is very appropriate, he is right.

    Hugo L. Black:

    (Inaudible) had any notice from the government or the banks of the filing of the suite on the day of the merger?

    Robert M. Odear:

    Yes, not on the day of the merger, no Your Honor.

    The situation on that, I might as well go into the time schedule since you are interested in it.

    Hugo L. Black:

    What I meant was had the government been notified of this, had there been any talk about it according to the record or it just come like bolt out of the blue?

    Robert M. Odear:

    No sir it did not come just like bolt out of the blue.

    Now let me address myself to that if I may.

    Robert M. Odear:

    This application for merger was filed in the later part of 1960 and of course when that is filed with the Comptroller, the Justice Department is immediately notified and they are immediately are under the duty to investigate the situation as to the competitive effects, which might result and the affect on interstate commerce which might result from the merger.

    And so the government in this case did make such an investigation and we are fully cognizant of the situation long before the merger took place, when they filed their report with the Comptroller.

    Now back in January the 10th the banks received a letter from the Justice Department in which they said, we are looking into this matter.

    In effect they said, we are looking into this matter of your merger and if there is anything wrong with it, we are going to let you know.

    Now the next thing we knew and we knew that the Department of Justice and the FDIC and various other branches of control were supposed to file reports and the final decision of the Comptroller was to be based on those.

    We didn’t know whether the report of the Justice Department was favorable or unfavorable, but some weeks after we got that letter, on the 24th day of February of 1961, we received a telephone call from the Comptroller’s office advising us that the merger had been approved.

    We had no reason to suspect if there was an adverse report from the Justice Department, because on January the 10th they have said, don’t you contact us, we’ll let you know, we’ll let you hear from us and we had heard nothing and it was in the press and the government knew that it had been approved and they took — they didn’t tell us that we shouldn’t, they took no steps to stop us and so we asked the Comptroller to make it affective on March the 1st and Comptroller acquiesced in that and did make it affective on March the 1st This merger was approved at the same time that the Philadelphia merger was approved.

    Government had no difficult in stepping in and filing their suit before the Philadelphia banks merged and thereby didn’t allow them to get themselves and not only themselves, but the general public into the situation which we would be faced with, of trying to separate these merged banks, and so the government, they knew what was going on and they told us that they would write us a letter and let us hear from them about their decision in their matter and we heard nothing and we went on in normal course of business and merged on the 1st day of March.

    (Inaudible)

    Robert M. Odear:

    The next proceedings in the litigation were that the government attorneys contacted us as attorneys for the bank and they said that we don’t — we are going to make a what amounts to an ex parte motion today for a temporary restraining order to enjoin you from going any further with this proposition.

    (Inaudible)

    Robert M. Odear:

    That was on the first day of March, the same day when the merger took place and when the lawsuit was filed.

    William J. Brennan, Jr.:

    (Inaudible) bank until March the 1st.

    Robert M. Odear:

    Between us and the bank?

    William J. Brennan, Jr.:

    With you on the part of antitrust.

    Robert M. Odear:

    No.

    William J. Brennan, Jr.:

    You or the bank before March the 1st.

    Robert M. Odear:

    No except the communication which they had sent us on January the 10th saying that were investigating it and would let us know. They said to us in effect that while we are not, it is not legal notice, you would happy to have you come up and be present and so we appeared and were present and they – sir?

    Tom C. Clark:

    On the first of March?

    Robert M. Odear:

    On the first day of March yes sir, they presented to the District Court the ex parte, although we were there with no preparation of any kind and without any notice except the invitation to that day, they presented to the District Court a motion for a temporary injunction and the Court asked us if we accepted notice and would it be an ex parte proceeding or would we be in it and we said we were only there by invitation and not by notice and were not prepared.

    So he said well nevertheless if the affidavit supporting this motion shows that any irreparable injury might occur, the Court be inclined to consider to ex parte and so they addressed themselves to that proposition and this hearing I’m mistaken, it was on the second day of March, the day following, I’m still on the first, I was in error there.

    My recollection was from the same day, but it was the next day.

    William J. Brennan, Jr.:

    I wonder if I — but it’s still the fact that Mr. Odear that the government initiated the action on the first?

    Robert M. Odear:

    Yes.

    William J. Brennan, Jr.:

    And did you have notice of it on the first?

    Robert M. Odear:

    The only notice we had on the first it was that heard of it.

    William J. Brennan, Jr.:

    But you were not officially advised by anyone in — any government attorney of the filing of the action?

    Robert M. Odear:

    Oh yes, I think they contacted us.

    William J. Brennan, Jr.:

    On the first.

    Robert M. Odear:

    Yes sir, that’s correct, after the merger had taken place but on the same day.

    William J. Brennan, Jr.:

    What hour of the day was the merger complete?

    Robert M. Odear:

    You see Your Honor it was early in the morning, not early by — I don’t mean we got up before daylight and did it, but it was to it was our intention to close business off for the two banks as of the end of the month and to start them — start the new bank as of the first of the month and therefore when it opened its doors and business commenced it was our purpose that it would be commenced as a merged bank and therefore we got (Inaudible) to do it on the first and took the necessary steps, got the notices out and took the necessary steps with the Board of Directors of two banks and so forth to open on that day, and later in the day the government filed its action and we heard of it.

    (Inaudible)

    Robert M. Odear:

    Yes, that all —

    Tom C. Clark:

    Did you actively merge the assets of the two banks, that day you put all the money together and all the stock and bonds and everything else?

    Robert M. Odear:

    As to whether we did that physically or not, I’m sure that some of it was done but whether it was completely accomplished on that day I wouldn’t be able to say.

    In effect two original banks went out of existence on that day.

    Tom C. Clark:

    And even merged that.

    Robert M. Odear:

    Yes sir that is —

    Tom C. Clark:

    I know you said (Inaudible) mentioned in his order denying the writ of temporary restraining order, (Inaudible) directs you to maintain your books in such a way that you could divest yourself (Inaudible)

    Robert M. Odear:

    He didn’t make it absolute if Your Honor please what I said a moment ago.

    He said that insofar as you can maintain separate records compatibly with sound banking practices and compatible with the rules and regulations and the laws governing the conduct of banking you do that.

    We found it was impossible to do it many fields of the bank’s activities and in many others it was very much incompatible with sound banking practices.

    As a matter of fact just for example there were checks of course, printed checks on this Security Trust and on the First National Bank and by trying to keep separate accounts somebody who had money in the merged bank might write a check on the First National and that would be on the Security Trust in these records and these check would get sent back insufficient funds when as a matter of fact he had plenty of money in the merged bank to take care of it and there were many fields where it mixed us up so that it was just not in accordance with sound banking principles to be able to do it.

    In others we had continued to up to the present time as best we could.

    We have given bonafide effort to fulfill in that direction of the Court.

    (Inaudible) and acquisition time to discuss the merger because you are up here as the presenting party —

    Robert M. Odear:

    Exactly sir, exactly sir.

    Byron R. White:

    (Inaudible) on a preliminary injunction following of course that this wouldn’t have been any more steps taken to implement the merger isn’t that?

    Robert M. Odear:

    Exactly we would have abided by the order of the Court.

    Byron R. White:

    And if that had happened and you, then you happened lose this case, there would be no problem about that (Inaudible)

    Robert M. Odear:

    Well, it would have been a different situation I think which would have —

    Byron R. White:

    Well I understand that it was possible it was different but if that had occurred there would be no problem about the divesture (Inaudible)

    Robert M. Odear:

    If that had occurred I think we would have probably sought permission to get the banks separate again and then try to case out and put them back together afterwards which would have relieved us from the situation which we found ourselves.

    Byron R. White:

    (Inaudible)

    Robert M. Odear:

    How is that?

    Byron R. White:

    You did object to injunctive relief at that stage.

    Robert M. Odear:

    Yes sir, the Court didn’t hear it on that ex parte hearing.

    He put it off till we had notice and we did go back and appeared, and of course we didn’t know.

    It had never been tried before in the history of banking.

    Robert M. Odear:

    We didn’t know whether we could practically comply with that order or not until we tried it and so we went ahead.

    As the Court said we might as merged bank and tried honestly and faithfully to do that, but it just worked out, it was impossible in many fields of bank.

    Now getting down to the situation of whether or not we are guilty of the Sherman Act rather than addressing myself to the relief in case we are and that is the main issue as far as we are concerned, I think the other one has been somewhat relieved by the Justice Department’s concession in his response to our motion that they are not asking this Court to judge a divestiture now, they are merely asking this — well they are asking the Court to do, but they wouldn’t object if this Court didn’t judge that, but would send it back to the take proof on what would be the appropriate remedy on all the circumstances, but even that puts us in a position where we don’t know what might happen to our bank.

    It might cost a run on the bank, except we have no crystal ball, we don’t know, it’s never been tested.

    I am almost at 2:30, so I like to just read you one very short quotation on that particular problem before I go on to the question of whether the Sherman Act has actually been violated here or not, and that is a quotation from a Mr. Funk who is an eminent writer on the Laws of Banking and economics and in a work entitled Antitrust Legislation Affecting Bank Mergers here is what he had to say.

    The picture of an attack on a bank merger after it has been consummated is a shocking one.

    Public confidence in the institution would be shaken and might be entirely destroyed.

    The task of disentangling the two components of the merged bank would be almost inseparable.

    Great loss might result to the shareholders and possibly to the public and that’s what we are up against.