United States v. Marine Bancorporation, Inc. – Oral Argument – April 23, 1974

Media for United States v. Marine Bancorporation, Inc.

Audio Transcription for Opinion Announcement – June 26, 1974 in United States v. Marine Bancorporation, Inc.


Warren E. Burger:

We will hear argument first this morning in 73-38, United States against Marine Bancorporation.

Mr. Friedman, you may proceed whenever you are ready.

Daniel M. Friedman:

Mr. Chief Justice and may it please the Court.

This is a direct appeal from a judgment of the United States District Court for the Western District of Washington dismissing after trial a government civil anti-trust suit challenging a bank merger under Section 7 of the Clayton Act.

The acquiring bank, the National Bank of Commerce at Seattle is both the second largest bank in the State of Washington and the second largest bank in the City of Seattle.

The acquired bank, the Washington Trust Bank, is the third largest bank in the City of Spokane.

It is conceded that the two banks are not in competition with each other because the National Bank of Commerce does not operate in the City of Spokane.

That is in the metropolitan area of Spokane, which the District Court held to be the relevant geographic market in this case.

The theory upon which the Government challenged this merger was that the National Bank of Commerce was a significant potential entrant into the City of Spokane and that by going in for through a major firm in Spokane, the effect of this maybe substantially to lessen competition by eliminating an important potential competitor.

The Court had a similar question before it last term in the Greeley Bank case of Colorado in which by an equally divided Court, it affirmed the District Court’s judgment in that case dismissing the Government’s complaint.

And the United States has brought this case here and brought the question back to the Court because a major effort of the Department of Justice in recent years has been attempting to stop what we consider a very serious trend in the banking industry under which large banks headquartered in the major cities of the state are acquiring market leaders in local and regional markets.

This is a relatively new phenomenon in banking.

In the 1950’s, we had a great wave of bank mergers in which bank in the same city who are competitors would combine.

That trend basically stopped after this Court’s decision of Philadelphia Bank case.

And what is been happening in recent years is that more and more throughout the country, banks, the major banks have been around the state acquiring a large number of significant banks.

And the effect of this trend is to bring more and more of a state’s banking resources under the control of a small number of banks.

In the State of Washington itself, for example, 75% of all the deposits are now controlled by five banking organizations, even though there are some 90 different banking organizations in the state.

In some states, it’s even more concentrated, a smaller number of banking organizations hold a larger percentage of the shares of the market.

And the government believes that if this trend is permitted to continue, the inevitable result will be a significant and serious diminution of competition in the banking industry.

Since 1968, the Government has brought 20 cases in which it has challenged bank acquisitions on the theory that it eliminated the potential competition which the acquired bank was likely to supply in our view in the market where it made the acquisition.

Now, let me just briefly refer to —

Potter Stewart:

It’s the acquiring bank?

Daniel M. Friedman:

The acquiring bank.

Potter Stewart:


Daniel M. Friedman:

That the acquiring bank is the substantial competitor and it eliminates potential competition which it would supply in the market into which it goes through the acquisition.

Now let me just briefly refer to the facts.

The National Bank of Commerce is a very large bank.

As I have indicated, it is the second largest bank in both the State of Washington and in the City of Seattle.

It has net assets of $1.8 billion and its deposits are more than $1.6 billion.

It has approximately 22% of all the bank deposits in the State.

Daniel M. Friedman:

It operates a 107 branch offices.

The acquired bank, the Washington Trust Bank, is the third largest in the City of Spokane.

It has total assets of $112 million, deposits of $95 million and has eight offices in the City of Spokane.

So, it itself is a very substantial bank.

It is a prosperous bank.

In the five-year period from 1966 to 1971, its totaled deposits increased 60%; its total loans increased 70%.

It’s considerably a well-managed bank.

It pays very high salaries.

The Spokane area in which the bank operates is itself a prosperous and growing area although admittedly not growing as fast other areas of the State of Washington.

The District Court found in the parties who are in agreement that commercial banking is the relevant product market in this case.

Commercial banking in the State of Washington is extremely concentrated.

As I’d indicated, the five largest banks have 75% of all the deposits and additionally have 60% of the banking offices.

The two largest banks, one of which is the National Bank of Commerce and the other is the Seattle First National Bank together, have approximately half of all deposits and more than one-third of all the banking offices.

This pattern of concentration is repeated throughout the state but not surprisingly when you get into smaller cities, it becomes even more concentrated, and in Spokane, the three leading banks have 92% of all the deposits and loans, and there’s almost as higher concentration in the Eastern part of the State of Washington which is geographically separated from the Western part of the State by a very high mountain range.

Now, in 1971, the two banks submitted to the comptroller an application to merge the Washington Trust Bank, the Bank in Spokane, into National Bank of Commerce, the Seattle Bank and the second largest bank in the State.

In accordance with the requirements of the statute, the view’s resort of the two other bank regulatory agencies and the Department of Justice, all three of these groups advised the comptroller that in their view the merger would substantially lessen competition primarily because of its tendency to increase concentration in the state.

The comptroller, however, approved the merger and the Government filed this suit, which had the effect of staying the merger.

After a lengthy trial, the District Court from the bench gave a brief opinion in which he announced that he was holding against the Government on all of its claims and would dismiss the suit.

Following this in accordances with his request, the defendants submitted detailed proposed findings which the District Court adopted without any change.

The theory of the Government’s case was that the National Bank of Commerce could end the Spokane by alternative means, specifically either by making a so-called toehold entry of a smaller bank or by, in effect, opening a branch through a procedure that I will discuss shortly known as sponsoring a bank and subsequently then acquiring it.

The District Court made the following rulings in rejecting our case: First, the District Court held that although there is a high level of concentration in Spokane, nevertheless the market is competitive.

This is on the basis of expert testimony that in fact there’s a great deal of competition in the market because of the large number of sub sizable banking organizations.

Then the District Court held that there was no reasonable likelihood that the National Bank of Commerce would end the Spokane either by sponsoring the bank or by making a toehold acquisition and that this merger was the only way the bank could get in.

Then the Court held that there was no reasonable likelihood that the Washington Trust Bank itself might expand outside of the Spokane region.

This was another theory on which we urged that the merger would substantially lessen competition by eliminating potential competition or that the bank would join other banks in forming a new holding company, a smaller holding company that might compete against the large banks in the state.

And finally, the Court held that even if this merger had, as he discussed, the Court describe that some oral of the anticompetitive effects which the Government alleged nevertheless those effects would clearly outweigh by the effect of the merger in meeting the convenience and needs of the Spokane community.

I will discuss these four grounds in the course of my argument.

Now, last term in the Falstaff case, this Court left open the question as it phrased it, whether a merger would violate Section 7 on the ground that the acquiring company and I now quote “could but did not entered de novo or through toehold acquisition and that there is less competition, then there would have been had entry been in such a manner.”

We think this case presents that question and we urge that the Court should answer it affirmatively, and then, on the principle, it should hold that this merger does violate Section 7.

Warren E. Burger:

Excuse me.

Warren E. Burger:

At some point, I take it, you will discuss the relationship between this transaction in the Falstaff case an unregulated business and a banking, the National Bank, which is regulated.

Daniel M. Friedman:

Let me deal with that right now Mr. Chief Justice.

It is true there is regulation of banking, but this Court in the Philadelphia Bank case has indicated its view that it thinks that the basic principles, the governing Section 7, particularly the stress on market structure and concentration, are equally applicable to banking, even thought it is a regulated industry.

The fact that there is regulation means there is not quite the same ease of entry into the market as in an unregulated industry.

But nevertheless, we still think it is important to preserve — to preserve these alternative sources of competition.

And, we don’t think that the fact that the comptroller has indicated that he doesn’t think he would approve a merger on the basis on what he now knows without any application or in this case that he’s assistant, the Regional Administrator testified that he didn’t think there was any reasonable likelihood that a new charter would be granted.

We don’t think that that is enough to overcome the significant effects upon concentration in banking that exist, and that for which we think this kind of entry poses the only possibility of some help.

The same argument, of course, was equally applicable in the Philadelphia Bank case, in the Phillipsburg case where, again, you had to have regulatory approval before the merger would take place.

Now —

Potter Stewart:

Was there a legislative change after the Philadelphia Bank case?

Daniel M. Friedman:

There was a legislative change Mr. Justice to this extent that after the Philadelphia Bank case, Congress, in the 1966 Bank Merger Act, added the convenience and needs defunct.

But at the same time, at the same time, Congress indicated that it wished bank mergers to be tested under the standards that had adhibit to been applied under the antitrust laws under Section 7, and we think that what Congress did in the 1966 amendments was to say that you continue to evaluate competitive effect the same as it’s always been evaluated.

And I will mention in a minute, this Court has always stressed the structure of the market based on concentration ratios.

But then said, if it turns out that a merger has the prohibited anticompetitive effect, then and only then, it’s the court to consider whether this otherwise a illegal merger is saved.

Potter Stewart:

By convenience and needs.

Daniel M. Friedman:

By convenience and necessity, yes.

Convenience and needs, I am sorry.

Byron R. White:

Mr. Friedman, if you lose on the question, which you said that it was left open in the Falstaff, is that the end of the case, as far as you are concerned?

Do you say this case poses that question?

Daniel M. Friedman:

Yes that —

Byron R. White:

If you lose on the question, should the judgment be affirmed?

Daniel M. Friedman:

No Mr. Justice —

Byron R. White:

Alright, that’s all what I want to know.

Daniel M. Friedman:

We’ve discussed this in our brief that we also claim that this was a perceived entry but the major thrust of this case in the District Court was on this theory.

We are not conceding that if we lose on this theory, we lose the case, but this is the theory which was the major focus in this case.

Potter Stewart:

There are two aspects, there is the actual potential entry and then there is the perceived entry, is that right?

Daniel M. Friedman:

That’s right.

Potter Stewart:

And they are separate.

Daniel M. Friedman:

And the question which is left open in Falstaff was the former.

But we do not concede that if the Court would reject that theory that we lose this case because we’ve indicated in our brief.

Daniel M. Friedman:

We do think there was evidence showing that this bank was to perceive the entrant.

And we also have the other point which I’ll just mention, I’m alluded to previously that if this — the effect of this merger by making Washington Trust a part of the National Bank of Commerce would be to eliminate whatever potential Washington Trust has as a large significant independent bank and the Spokane market of expanding beyond that area and perhaps combining.

Now, the reason we think that the question left open in the Falstaff case should be resolved in favor of the United States position is the whole intent of Congress when it amended Section 7 in 1950 to strengthen, and what Congress was concerned about was what it viewed as the rising increase in concentration in the American economy.

Congress recognized that more and more proportions of the economy were being brought under the control of a small number of large firms.

And Congress, when it strengthened the statute in 1950, was concern about the long-range prospects of the American economy.

It was not looking unlike the Sherman Act to the immediate effect whether a particular transaction restrain commerce; it was looking to the long-range effects.

It wanted to basically to channel business growth into procompetitive channels to stop the practices by which American business was gradually taking more, bringing more and more of the economy under control.

As this Court stated in the Philadelphia Bank case that one premise of Section 7 was that corporate growth by internal expansion is socially preferable to growth by acquisition.

Now, when a market becomes concentrated, what happens according to the economists is that the vigor of competition tends to diminish.

You have a small number of firms in the market; you have accommodation, parallel practices begin to develop.

And the only real hope, frequently, for even deconcentrating the market or shaking it up, so that there will be more competition in the market, is if someone new comes in.

And someone new comes in, in a way that is going to force this new firm to compete vigorously by what, an antitrust jargon is called de novo entry, that is they come in anew either by themselves starting the branch of the business or alternatively by making a toehold acquisition, getting a small segment of the market which enables them to get into the market and from that base by vigorous competition growing and expanding.

But it is essential to stress that in that situation, you have a new firm, a new firm, coming in to the market.

And when a firm that is on the outside and is a likely entrant by one of these two methods, comes in by applying a large share of the market, 22% in this case you’ve not only eliminated the potential for bringing some competition and hopefully eventual deconcentration into this market, but all you have done is substitute one for the other.

So, you’ve not only lost an additional competitor in this process, but you’ve eliminated the potential for improving the competitive situation in the market.

Now, as I have indicated in my response to the Chief Justice, we think that these principles are equally applicable —

Harry A. Blackmun:

You have eliminated the competitor in the market?

Daniel M. Friedman:

No, you’ve eliminated the potential of —

Harry A. Blackmun:

Well, you only done one thing, you have just eliminated the potential of a new entry.

Daniel M. Friedman:

Of a new entry.

Harry A. Blackmun:

You just have a different competitor in the market.

Daniel M. Friedman:

You have a different competitor in the market but you have no new competitor.

You’ve eliminated Mr. Justice the potential.

Harry A. Blackmun:

He may act differently but for your purposes, you’re assuming that he will be exactly the same?

Daniel M. Friedman:

We say basically there’s been no change in the obstructure of this market.

Harry A. Blackmun:


Daniel M. Friedman:

It’s the same as it was before with four or five or whatever number it is.

But although the structure of the market hasn’t change, the structure surrounding the market has changed because the one on the outside when they come in has been eliminated.

Lewis F. Powell, Jr.:

Mr. Friedman, a new competitor would be a stronger bank, what is the Government’s position as to whether or not competition with the new bank in there would be more effective than it is at present?

Daniel M. Friedman:

Well, Mr. Justice, we think that Congress in Section 7 has made the judgment that you cannot justify an acquisition coming into a market in the normal situation on the claim that you will be able to compete more effectively against the large bank.

Daniel M. Friedman:

We think if it all the claim that the new bank will be a more effective competitor in the market is what Congress intended to be studied under the convenience and needs defense, but that that is, we think is a relevant factor in determining the initial threshold question whether there has been anticompetitive effects.

And as we develop in our brief and I hope to get to, we think in this case that the so-called benefits, so-called benefits, which the District Court found this merger would bring to the City of Spokane, those benefits we do not think constitute the kind of benefits that Congress intended to recognize.

Lewis F. Powell, Jr.:

You lose me a little bit when you say that the — and the action said the opposition is that the Government is interested in improving competitive conditions and yet if a stronger competitor enters the market, you don’t lose a competitor, you obtain a stronger one.

How is the public adversity affected by that?

Daniel M. Friedman:

I think Mr. Justice because the stress of Section 7 is on the long-term picture, on the long-term picture.

Initially, it may well be that a bank coming in substituting itself for a somewhat weaker back, may produce an immediate floury of competition, a little more competitive.

But in the long run, in the long run we think, it’s anticompetitive because it stills a concentrated market and you’ve lost one of the significant potentials for deconcentration.

I may add in this case, this is not a case of the acquiring bank coming in because the acquired bank is weak or floundering.

This is a successful, very prosperous, good bank.

It’s a large bank.

It’s a bank that’s roughly $100 million to claim here is defy the larger bank coming in, it will enable the new bank to provide certain specialized services which, because of its smaller size, it’s not been able to provide.

Services, which I might add, are available in Spokane through other banks already in the market.

And we think that that kind of benefit is not enough to justify this merger.

The whole purpose of Section 7 is to try to stop the increases in concentration, to try stop these what Congress believed to be deleterious friends in the economy, and banking itself unfortunately tends to be concentrated.

Banking tends to be concentrated.

Most cities except perhaps with city like New York, we have a large number of banks, you find that banking is concentrated, and this, it seems to us, is all the more important in banking to preserve the possibility of deconcentration resulting from the entrant of a potential competitor, a strong, significant, powerful firm that seeks together into the market.

We think that’s the whole purpose that Congress had when it amended Section 7 in 1950 in order to strengthen it.

William H. Rehnquist:

Mr. Friedman, you commented earlier about the Government’s view of the desirability of de novo entry.

What has been the history or does the record show over the past several decades of de novo entry into the banking market in Spokane?

Daniel M. Friedman:

Not in Spokane Mr. Justice, but let me explain —

William H. Rehnquist:

Does the record show anything about the history of de novo entry into the banking market in Spokane?

Daniel M. Friedman:

No Mr. Justice for the reason that under state law, a bank that has its headquarters in one city is not permitted to branch outside of that city or the county where its headquarter is or into an incorporated village that does not have a bank.

We do not have in the City of Spokane any history of de novo branching.

We have one bank that was found in the 1955, but what we do have Mr. Justice, what we do have is a history in the State of Washington of a practice by banks of sponsoring banks, assisting in their organization, helping them get started and then subsequently acquire them.

We do have that practice.

We do have —

William H. Rehnquist:

Is that concededly legal under the laws of Washington?

Daniel M. Friedman:

There’s a dispute to that.

The appellees contend that the practice is illegal.

We think it is legal.

Daniel M. Friedman:

Let me just briefly — I will come to it later.

Let me just briefly refer to what the practice has been and what the record shows.

One of the banks in Washington, the fifth largest bank, the Old National Bank, itself has assisted in the organization of five banks, which it subsequently acquired.

And according to the deposition of a Mr. Witherspoon, who is the Chairman of the Board of the Old National Bank, they assisted and sponsored these banks and I would quote “with the hope and belief that we would be able to acquire them in the future and make branches of the Old National there.”

And that’s at page 608 of the record.

He also stated in his deposition that they had informed the comptroller of what they intended to do, the way he described it as the informer comptroller of their efforts to establish branches by this means.

That’s at page 610.

And when he was asked to the comptroller object to this, he said on the contrary, in one instance it was the comptroller, that is, rather the assistance comptroller in the presence of the comptroller who suggested that they follow this practice.

And in subsequently approving merges of banks in the State of Washington between the sponsoring bank and the sponsored bank the comptroller has recognized that the bank did play this role.

Now, the acquiring bank in this case, the National Bank of Commerce, itself on one occasion sponsored a bank in the so-called Columbia Shopping Center.

Now, the claim is that they had no intention of ever acquiring it.

Well, this record shows that from months on end, a number of important officials of the National Bank of Commerce were concerned with all the details of this bank.

They aided and they found help find the manager for the bank.

On one occasion, the Board of Directors of the National Bank of Commerce personally selected a man who subsequently declined the post to be the president of this new bank, and, as they say, they say “Well, we hope to be able to acquire the bank”.

And it seems to us in the light of this, it’s much more than they hope.

They obviously anticipated that they would be able to do that. On another occasion, there’s an internal memorandum in which, in 1971, the Director of Marketing Research for the National Bank of Commerce suggested to an Assistant Vice President of the bank that perhaps I might spoke the word he used was “sponsor” a bank in another smaller city in Oregon, Pullman and that’s shown in the record.

Lewis F. Powell, Jr.:

Did CNB acquire this bank that you say was sponsored by it?

Daniel M. Friedman:

That has not yet come to past?

Lewis F. Powell, Jr.:

What is it require in terms of waiting period?

Daniel M. Friedman:

There is no waiting period with respect to federally chartered banks with respect to state chartered banks, there is a requirement that accept with the consent of the State Superintendent of Banking, “no bank can sell any of its shares that controlling it for ten years from the time of acquisition”.

But the normal theory of this is that we concede that you could not, under state law, form and sponsor banks solely for the purpose of acquiring it or with an expressed intention, expressed understanding or agreement to do so.

The way it’s done that the bank and sponsor that has to be on its own two feet; it has to get going and at that point then the acquisition takes place.

Lewis F. Powell, Jr.:

Can I conceal your intentions?

Daniel M. Friedman:

Well, I wouldn’t say conceal, I wouldn’t conceal Mr. Justice.

What I would suggest is that this is a recognized technique in the State of Washington by which banks get into markets where they are not directly permitted.

Lewis F. Powell, Jr.:

What’s the total number of banks in that are established as banks and later acquired by the other bank?

Daniel M. Friedman:

I could not tell you — I couldn’t tell you exactly that.

The record shows I think for between 1960 and 1967, there were I believe 14 banks acquired in the State of Washington.

I don’t know that the record shows which of those were sponsored and subsequently quo.

We do know, we do know Mr. Justice however, that at least five banks that were sponsored by the Old National Bank were subsequently acquired by that bank in the State of Washington.

Byron R. White:

Well, Mr. Friedman, Even if the acquisition doesn’t take place, the fact of organization of the new bank via the efforts of an established organization is undisputed.

Daniel M. Friedman:

I am sorry.

Your question is you mean there’s no question that the existing organization does organize the bank?

Oh yes, there’s no question about that.

Byron R. White:

And which is a substantial benefit in itself in term of —

Daniel M. Friedman:

In the organization of bringing a new competitor in.

Byron R. White:

In terms of correspondent advantages and things like that.

At least it goes on all the time and the organization of other units by an existing bank, whether is later acquired or not.

Daniel M. Friedman:

There is not question for that, yes.

Byron R. White:

Which makes your point just as well doesn’t it?

Daniel M. Friedman:

I’m not certain Mr. Justice.

Byron R. White:

Well, if it’s a new bank, it’s gonna be a new entry?

Daniel M. Friedman:

It provides —

Byron R. White:

Mr. Justice Rehnquist asked you about de novo entry, which is much broader question an entry by an existing organization.

How many new banks have been organized in Spokane in the last ten years, any?

Daniel M. Friedman:

One new bank that I know.

Byron R. White:

Has been organized as started from scratch?

Daniel M. Friedman:

Started from scratch.

This is something called the American Commercial Bank and this is —

Potter Stewart:

The 1950s?

Byron R. White:

That was at 55 —

Daniel M. Friedman:

1955 and this is one of the banks as I will come to — that we think was available as a toehold entry by this bank.

Byron R. White:

But there is no particular legal barriers to new entries in the Spokane area by this new banking organization?

Daniel M. Friedman:

No, this new banking organization — in fact, this banking organization now has four branches since it started with a single and it’s grown and now it has four branches which is only three fewer than the Washington Trust Bank.

Byron R. White:

Well, now why do you say Mr. Friedman that your point isn’t made as well whether or not the newly organized unit is later acquired?

Daniel M. Friedman:

Well, I think if the newly organized unit is not later acquired, you don’t — and it maybe more difficult to say that the putative acquiring bank is eliminated as a substantial competitor, that is — what I am suggesting is if it’s —

Byron R. White:

Well, this eliminated, certainly is eliminated as a possible source of the impetus and energy and perhaps support to organize a new bank.

Daniel M. Friedman:

Well, if the new back is — once the new bank has been organized and once the new bank is in the market, that —

Byron R. White:

That is a competitor?

Daniel M. Friedman:

That is a competitor.

Daniel M. Friedman:

Now, that fact itself of course does not necessarily eliminate the sponsoring bank as an entrant to the market although —

Byron R. White:

This would go back and organize another one to compete with its new bank —

Daniel M. Friedman:

Well, the basic problem there, I suppose, is whether the market would stand two additional banks.

In other words, it may depending again on its relationship — ordinarily the relationship is one would expect between the sponsoring and the sponsored bank is very close.

They normally have that correspondent relationships and stuff.

But the fact is that, of course, this does inject a new bank into the market.

But the question really, it seems to me, is whether fairly viewed, if the acquiring —

Byron R. White:

I doubt if the bank here NBC acquires the bank in Spokane, which it has or wants to, is about to turnaround and organize another bank —

Daniel M. Friedman:

Surely not.

Byron R. White:

Whether it ever acquired it or not?

Daniel M. Friedman:

Surely not.

Lewis F. Powell, Jr.:

Mr. Friedman, I had understood that the Government, in effect, conceded that it has no case under the theory of potential competition unless it is legally feasible and economically justifiable to enter the Spokane market.

That is the NBC that handle that market, is that correct?

Daniel M. Friedman:

I think that is correct Mr. Justice.

The question we posed is on what basis is the Trial Court to decide that question.

Lewis F. Powell, Jr.:

Right, but you have suggested two methods of entry and you have been talking so for the sponsor method and your other suggested method is that you acquire some smaller bank.

Daniel M. Friedman:

That’s right, and we think there are two banks in the market that it could have acquired.

One of them is the American Commercial Bank which we has been discussing that was organized in 1965, which is a bank with 15 million in deposits, four branches in the City of Spokane, roughly 3% of the market.

Now, the reason that the District Court held on the defendant’s contend, this would not be a suitable candidate for acquisition is that under the ten-year limitation on State Law, and this, of course, is the state organized bank, this bank would not be available for acquisition until 1975.

Again, my answer to that is we are dealing here with very long term trends.

The question is whether if the National Bank of Commerce would not be permitted to go under the market through this merger, is it a reasonable likelihood that they would have found some other way to go in?

Now, and in addition to this other bank, there’s another bank the Farmers & Merchants Bank which is a little smaller that it has three offices.

These of course are offices in the suburbs and the interest of the National Bank of Washington in this bank, I think is shown by the fact that shortly before the merger, they were discussing a possible acquisition.

William H. Rehnquist:

Mr. Friedman, supposing that the National Bank of Washington had decided to absorb the 65-form bank, the American Commerce Bank in Spokane, you say there is only three fewer branches in Washington trust.

Wouldn’t the government probably have challenged that merger too as having been anti-competitor?

Daniel M. Friedman:

No Mr. Justice, no Mr. Justice.

Our position is that the — we do not oppose, we do not oppose, the entry by large statewide banks into local and regional banking markets, but we say those — that entry should take place in the least anticompetitive way and we think an entry, if they had acquired — attempted to acquire this bank with only 3% of the market, we would have view that as a so-called permissible toehold acquisition.

William H. Rehnquist:

Well, then It just becomes a question of decree, doesn’t it, and the District Court has got to have some latitude in making a finding one way or the other.

Daniel M. Friedman:

Well, the District Court did not find Mr. Justice, the District Court did not find that this was no difference than a toehold acquisition.

The District Court did not — and I think at some point the matter of decree becomes a matter of quality, but it’s not just quantity, because when they acquire a bank with 22% of the market, that to us is a very different thing from acquiring a bank with 3% of the market.

Daniel M. Friedman:

They acquire back with 3% of the market, they’re not going to be satisfied, it seems to me, a bank like the National Bank of Commerce, coming into Spokane with 3% of the market and setting there with 3% of the market.

They’re going to compete as vigorously as possible and attempt to get into that market and to expend their share of the market.

Whereas if all they do is acquire this 22% share there in the typical situation where you have a small number, three in these case of the bank with 92% of the market.

What you have is you have the same basic structure inside the market and you don’t have the same kind of incentive to compete to be — to bring and inject some new vigor into the market to possibly deconcentrate the market that you would have if they came in by acquiring a small bank, a bank with a very small share which would be the basis for growing.

Now, let me turn to something else which is we have been discussing how they get in.

I think it’s important to find out is that the sort of thing they would likely to do, that they want to get in to Spokane.

How important was it to this bank to get into Spokane, so that if they were unable, if they were unable to get in by making this large acquisition, they do everything they could to get in by some on to that.

We think there is no question about that, that this is one of the things that the National Bank of Commerce has wanted to do for a long, long time.

To begin with, although the National Bank of Commerce is the second largest bank in the state, it’s the only one bank that is represented in only one of the four largest cities.

It is represented only in Seattle.

It is not represented in Spokane, the second largest Tacoma or Everett, the next three largest cities in the state.

The parties to this case stipulated that representation in Spokane has been a long sort goal of NBC.

That’s at 367 of the record.

The Former President of the National Bank of Commerce who is now the President of Marine Bancorporation, which is the bank holding company that has all of the stock of the bank, stated that his bank has been interested in getting into Spokane for a long, long time.

He said since prior to 1933, roughly more than 40 years.

He explained in the deposition that it was important for the National Bank of Spokane to get in there because all of the other major banks are represented there, and he said we feel there’s business available to us in Spokane if we are represented there, that’s at Page 139 of the record.

And similarly in the — its 1970 report to stockholders, the holding company in commenting on this merger said that this finally brought the National Bank of Commerce “within sight of one of its long sort goals representation in the City of Spokane.”

That’s at Page 1270 of the record.

And indeed in a brief filed with the comptroller in support of this merger, a so-called economic brief, discussing the economics of the area and probably the economics of the merger itself, what the bank said was and I quote again from Page 1743 that “If Commerce is to maintain its present relative position with its competitors and maintain the business of its major national customers, Commerce must have representation in Spokane.”

“Must” was the words they used, not that they like to, not they thought it was so, they must have representation in Spokane.

Warren E. Burger:

Well if they have been wanting this for 35 years Mr. Friedman, that means they have been keeping their eyes open for opportunities I assume, does it not?

Daniel M. Friedman:

Yes, and one example I suppose Mr. Justice, one example, was their attempt shortly before this merger took place to purchase the stock of the American Commercial.

Warren E. Burger:

But you don’t suggest there is anything per se wrong or questionable of they’re wanting to get into that market?

Daniel M. Friedman:


I’m sorry Mr. Justice, I didn’t make my self clear.

Warren E. Burger:

Well —

Daniel M. Friedman:

We’re not suggesting there is anything wrong.

In fact, it’s quite understandable and quite appropriate for this bank to want to get into the Spokane market.

What we are arguing is the fact that this bank was so anxious and felt it’s so important to get into Spokane is clear indication and shows that it would have done everything it could to try to get in by these alternative means if it were not permitted to go in by acquiring this large bank in the market now.

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

Warren E. Burger:

Very well Mr. Friedman.

Mr. Moen.

R. A. Moen:

Mr. Chief Justice and may it please the Court.

There has been a question about the desire of the National Bank of Commerce to get into the Spokane market, but if the question is whether or not they would be willing to go into any manner other than this one of this particular merger, there are four principle banking markets in the State of Washington: Seattle, Everett, Tacoma and Spokane.

At the present time, the National Bank of Commerce has all of its officers in the Seattle market.

It does not have any representation in any of the other three markets.

But of course if they, at some acceptable means of entry, were to be developed, they would be very happy to go into that market.

Mr. Friedman referred to the trends and although there is no specific finding on the subject, the evidence in this case shows that there is no discernible trend in the State of Washington towards concentrating — concentration of banking.

As a matter of fact, the number of banks have increased.

In 1960, there were 87 banks; today, there are 92.

In 1960, there were 378 banking offices in Washington; today, there are 681.

If you want to look at the share of the market during the past 10 years, the share of the market which Commerce has picked up has increased from 18.9 in 1960 to 19.1 today, so that the share of the market is practically constant.

So whether you look at the number of banks or you look at the number of branches or whether you look at the share of the market, there is no discernible trend in the State of Washington towards concentration.

Now, justice is really asserting three ways in this merger in which it consummated lessen competition so as to violate Section 7 of the Clayton Act.

First, they contend that but for this merger, these two banks will someday be in direct competition.

Of course, this can happen only in the event that the two banks get offices in the same market.

Either Commerce will have to move into the Spokane market or spoke or the Washington Trust Bank is going to have to move out and into some market where Commerce is doing business.

They make a second contention as to the violation of the act and that they argue that Commerce is now on the fringe of the market and exert some competitive influence on the competitors that are in the market.

The argument upon which they lay the greatest stress is that — but this merger, these two banks will become direct competitors.

And if the merger is enjoined, Commerce will enter Spokane by establishing a branch of its bank de novo or what they call tantamount to de novo, that’s the sponsored bank procedure, or by foothold entry.

Now, the Court is asking questions with respect to foothold entry.

The Trial Court made a finding that there is no bank in Spokane today, which could serve as a foothold entrant.

There are only two banks in the City of Spokane, which are smaller than Washington Trust Bank.

One is the American Commercial Bank, the state bank to which Mr. Friedman alluded.

That bank was formed in 1965, but it has, in its charter, a prohibition against its merger or its sale or combination of any other bank for a period of ten years.

Potter Stewart:

It’s required by law, as I understand it.

R. A. Moen:

That’s required by statute of the State of Washington.

Potter Stewart:


R. A. Moen:

And that period will expire in 1975, but of course, the National Bank of Commerce or no one else has any knowledge or information at this time that that bank will be for sale at the end of the ten year period.

And even if it were for sale, of course, there is no assurance that National Bank of Commerce would be the successful purchaser.

R. A. Moen:

These banks, like any other product, are sold to whoever makes the highest bid, and if this bank were for sale for which we have no reason to believe that would be, it undoubtedly would go to the highest bidder, which might be the Bank of Commerce or it might be one of its competitors.

They’ve also argued —

Potter Stewart:

Then there is the other but the other is small.

R. A. Moen:

Farmers & Merchants Bank.

But the Farmers & Merchants Bank is not within the city of Spokane.

Potter Stewart:

In the suburbs?

R. A. Moen:

The Farmers & Merchants Bank has a branch in the shopping center about five or six miles east of the Center of Downtown, Spokane.

So, we contend that even getting into — if we were to acquire the Farmers & Merchants Bank, it would not be entry into Spokane.

All of the witnesses conceded that you can’t service Downtown Spokane or be a part of the Spokane market if your only branch is out in the suburbs.

Potter Stewart:

Once you were there, would the law forbid 20 year —

R. A. Moen:

Once you were there, you still can’t get into the City of Spokane.

Potter Stewart:

Same county or —

R. A. Moen:

It’s in the same county.

But you can’t go into the city.

The only banks in the city that can give a branch in the city are the banks that have their head office in the city.

Lewis F. Powell, Jr.:

If you acquire a bank by merger that becomes a branch of the acquiring bank from which no other branches can be put under Washington law.

R. A. Moen:

That is correct.

The branches or the bank that you may acquire such as Washington Trust Bank can go out and establish new branches in the City of Spokane.

But once the National Bank of Commerce acquires the Washington Trust Bank, then it can no longer branch in the City of Spokane or in the county, which only in the city where it has its principal place of business and in the county where it has its principal place of business.

Potter Stewart:

You made a pass at acquiring Farmers & Merchants?

R. A. Moen:

There are — there were negotiations for the purchase of the Farmers & Merchants Bank that didn’t even get closer to the price.

I think the record here shows that Commerce have it price in mind to somewhere as maybe one-and-a-half or $2 million and the lowest asked price was somewhere nearly $5 million.

The negotiations did even get the point where the amount of money which Commerce is willing to pay was even transmitted to the Farmers & Merchants Bank.

Potter Stewart:

And how long before this present acquisition, those negotiations occur?

R. A. Moen:

I would say maybe a year or two.

Just a very short time, but I would like to press upon the Court the fact that acquisition of Farmers & Merchants does not put you into the City of Spokane.

William H. Rehnquist:

So that the National Bank’s acquisition of Farmers & Merchants Bank, if it had come about, would not have been a realization of there desire to get into the City of Spokane?

R. A. Moen:

It would not if given the main consents of the City of Spokane.

Now, our defense to this case is not only legal, but factual.

We think that this case primarily is a factual case.

R. A. Moen:

And the Trial Court rejected all three of the arguments of Justice Department and assigned a factual basis for all of them.

The Trial Court found that even the absence of these statutes the bank, the National Bank of Commerce would not go into Downtown Spokane if they had to go in by de novo entry or by the acquisition of a small toehold bank.

The Court found that it wouldn’t be compatible with prudent business practice in commercial banking for a major or full service bank such as Commerce to enter a major metropolitan area such as Spokane with a limited service bank or a small bank which would be compatible with the amount of deposits that they might reasonably expect to obtain.

As we’ve just mentioned if they did go in and they couldn’t branch and that branching in Washington is almost essential to affect the competition in the metropolitan areas, such as Spokane.

There happens to be a very good example in the City of Spokane of the imprudence of attempting to go in with a small branch.

The Pacific National Bank is a subsidiary of Western Bancorporation, the largest bank holding company within Mississippi.

It’s the third largest bank in the State of Washington.

Now, ten years ago in 1964 it did, in fact, go into the city of Spokane by toehold entry, by acquiring a small branch or a small bank which had two branches; one in downtown Spokane and one out on the Whitworth College campus.

Since that time in ten years, they have not been able to increase their share of the market.

But today, they are the smallest bank in Spokane measured by Spokane deposits and there is really no reason to believe that if Commerce attempted to go in by foothold that they could do any better than Pacific Nationals Bank has done.

The growth in Spokane during the last ten years has been slow.

The lower court found that there has been some growth in the last ten years.

I think the town has in fact lost 10,000 population and county has grown about 3%.

Now this compares with other markets where Commerce isn’t now located such as Everett which is increased 10,000 during the period the Spokane has lost 10,000 and the county in which Everett is located has increased in population almost 35%.

The City of Tacoma, which is another market in which Commerce isn’t — doesn’t presently have offices has actually increased about 15,000.

Now, the importance of this is simply that if Commerce did decide that they want to go into one of these other markets and wanted to spend their capital for that purpose, the chances are that they would go into Everett or Tacoma much sooner than they would go into Spokane.

And this was just another reason if the Court assigned as to his finding as to why it was not likely that Commerce would go into Spokane if they had to go in by de novo entry.

The Regional Administrator of National Banks in Washington took the stand and testified that in his opinion it was not likely that there would be any future charters for banks granted in Spokane in the reasonably foreseeable future.

He based this on the population growth of the city and such other factors as the comptroller considers in passing on new bank applications.

Now, as I said we have these factual findings.

What the Court really found was that there just wasn’t sufficient economic incentive to put Commerce into Spokane if they had to go in on a de novo basis.

And of course in addition to that, we have the statutory barriers that Mr. Friedman alluded to.

The statute which prohibits branching in Washington is found in Remington’s Code of Washington, 30.40.029.

It’s reproduced at Pages 4 and 5 of our Brief, and I would like to call the Court’s particular attention to the last paragraph of the statute which appears on Page 4.

Now, this statute provides, this is plainly as it can provide insofar as it’s pertinent to this case that Commerce cannot go into Spokane with a de novo branch.

Justice argues that the statute maybe evaded or circumvented an entry tantamount, a de novo entry maybe achieved by their so-called sponsored bank procedure.

I’d also like to tell the Court this that this word “sponsor” has been a very misleading word in this case, because practically, all new banks in Washington are sponsored in one way or another when they are formed, and the comptroller, of course, encourages this because it’s been official, both to the sponsoring bank as well as to the sponsored bank.

But that does not mean that they have control over the bank or that they can branch when they wanted.

For example, Commerce which has 107 branches, testified that they don’t have one single branch that was ever sponsored bank, I mean the bank that they sponsored.

It’s true that they assist these banks in various ways, but Columbia Center was brought up here.

R. A. Moen:

There is both the Chairman of Columbia Center testified that they’re not obligated to sell their bank to Commerce at any time either the assets of the bank or the stock, and the officers of Marine Bancorporation testified that they have no agreement either oral or written to acquire the bank at any time.

Now it’s true that they —

Thurgood Marshall:

Mr. Moen I am having a little trouble with you say you can help the bank and assist the new bank, but you don’t sponsor it.

What do you mean by sponsor?

R. A. Moen:

The word “sponsor” as we have used it means to aid or assist.

I think the word sponsor as justice has referred to it means to have control of it.

So that they can force the sale of the bank.

Thurgood Marshall:

But which one are you talking about?

You said there’s not a single one of your branch bank that you sponsored, but you did assist it.

Now, where is the line in your book?

R. A. Moen:

Well the sponsored bank procedure, as referred to by the Justice Department, means to have control of it.

What I’m saying is that Commerce has never acquired any bank and we say even assisted — and of course the only bank that I could say that they sponsored was Columbia Center.

I would concede that they sponsored that bank, but even there they sponsored in the sense that they went out and they helped it get management, they helped it get directors.

What really happened here was that the —

Thurgood Marshall:

And just the interest of building that competition?

R. A. Moen:

No, that did it to satisfy a commercial customer.

The allied stores are putting a shopping center into Central Washington, and of course they wanted a banking service there.

Warren E. Burger:

Is this the suburb bank that was referred to?

R. A. Moen:

No, it’s just — we referred to the suburb bank of Farmers & Merchants.

Warren E. Burger:

This is in the City of Spokane?

R. A. Moen:

No, I think what Mr. Justice Marshall is referring to is a bank in Central Washington.

Potter Stewart:


R. A. Moen:

At Columbia Center, yes.

Now it’s true that in that bank, in that particular case, in order to bring banking service into the community, Commerce did, I would say, sponsor a bank in the sense that they went out and help them get management.

They furnish them with about three directors out of seven, but the important thing to me is the purpose for which this was done.

This is not a case for Commerce deciding they wanted to get into bank and sent out people or stockholders to organize a bank.

What really happened was that the business people of the city applied for a bank and they were turned down by the Regional Administrator for the reason that they did not have anyone in the organization that had any particular knowledge of banking.

And so, they came to the National Bank of Commerce and sought that assistance and they obtained it.

But here again as I say that that doesn’t give Commerce any assurance that they are ever going to acquire that bank, and the only thing that’s important with respect to this procedure is whether or not it affords to Commerce some method of getting into the city.

What we are talking about here is means of entry.

R. A. Moen:

We contend we don’t have any means of entry in the Spokane that regard by our statutes.

They come back and say we can get into Spokane and they can get in this particular manner, which they call the sponsored bank method.

And we deny that and what I’m saying that so far as Columbia Center is concerned that that does not afford to us in means of entry into Spokane.

Now, let me mention these five branches with Mr. Whiterspoon contented that the Old National Bank picked up.

They apparently did, on two occasions, they actually sent someone out to attempt to organize the bank and obviously, or Mr. Whiterspoon said, for the purpose of actually acquiring the bank.

Now, the record here isn’t entirely clear as to this is what they did, but what I contend is that it really doesn’t make much difference.

One of these arrangements was made in 1959, two of them were made in 1962, and two of them made in 1964.

And since that time, so far as this record shows, there hasn’t been any such acquisitions or any such means of entry by any other bank.

Well, my co-counsel here has given me a note to make it clear that Columbia Center is not in Spokane, but I think I answered that question that it’s down in Central Washington.

William H. Rehnquist:

Where is it, down on the Columbia River there?

R. A. Moen:

It’s down in Kennewick or in the Richmond area which is near the Columbia River area.

Now, as I’ve said that this statute which prevents us form branching in Washington as one statute, which we are concerned with, there is a second statute, the Holding Company Statute, which prohibits any bank holding company in Washington from owning or controlling more than 25% of the capital stock of another bank.

Now, I point that out to show that we are not only stopped from branching, but we are only stopped from holding company expansion, because the holding company can’t possibly own more than 25% of the stock of the back.

And of course, you cannot control either the seller of the bank or the purchaser of the bank if you only have a 25% control.

In Washington, you have to have 67% of the stock of the bank; you have to have a consent of 67% of the shareholders before you can sell.

So that on this withholding company, this holding company statute, we have new — we don’t have the power or the authority to expand in that way.

The penalty provided in the statute is forfeiture of the holding company charter.

So, no prudent person is going to attempt to expand in that manner.

Now with respect to this so-called Wings Theory, justice is also contending that Commerce, by reason of its positions of the Wings, exerts a beneficial pro-competitive influence on the competitors in the market.

Justice concedes on Page 27 of their brief that this was not the primary basis upon which they tried the case, but it is in the pleadings and always mentioned by two or three witnesses.

But I like to point out that in this respect, all they showed was the proximity to the market and there is utterly no evidence in the record to show that they had any effect upon the competitors in the market.

So that the mere physical proximity, of course, without any showing of, in effect, on a better consumer market, doesn’t show or can’t develop into any blasting of competition.

There were four witnesses for the bank, two bank officers and two economists who testified that Commerce, prior to the announcement of the merger, exerted no influence at all on the Spokane market.

With respect to the Washington State Bank moving out into other areas, I just want to point out that justice did not try the crew what banking markets or what sections they might move out into.

They simply argue that the bank has the capability of expanding and, therefore, its elimination would be a lessening the competition under Section 7.

Now, in conclusion, I would want to point out that both parties in the case are urging what they considered to be pro-competitive action.

What the Justice Department’s case really boils down to simply that they’re saying that it’s pro-competitive to save Commerce for some future entrant into the market.

We contend that if we move into the market right now, a bigger bank, a much stronger bank that that is also pro-competitive.

It’s — the Trial Court found that the Spokane Banking market actually needs another competitor of the size of Seattle First.

And what I think that the real issue for this Court is to which is the more pro-competitive, is it to say this to the bank that they might enter the Spokane market ten years from now, and then maybe spend another ten years in attempting to build their deposits to a point where they can actually compete or wouldn’t it be more pro-competitive for them to go in immediately.

R. A. Moen:

I’d also like to say —

Warren E. Burger:

You’re now moving into Mr. Loevinger’s time Mr. Moen.

R. A. Moen:

Yes I’m afraid I am.

I will bring my argument to the close.

Thank you.

Warren E. Burger:

Mr. Loevinger?

Lee Loevinger:

Mr. Chief Justice and may it please the Court.

I appear for the Comptroller of the Currency and such I believe I speak for the Government.

Normally of course the Department of Justice speaks for the Government.

The Comptroller however is an order agency than the solicitor general of the antitrust provision and indeed older than the antitrust laws themselves.

However, that is not the basis on which I assert this.

The important point is that the Department of Justice in these cases is interested only in protecting a single element, the competitive element, and of course with the antitrust law —

Byron R. White:

Well, let me ask what is the authority of the —

Lee Loevinger:


Byron R. White:

What is the authority of the Comptroller of the Currency to represent himself in this Court?

Lee Loevinger:

Statutory, Your Honor.

Byron R. White:

What does it say?

Lee Loevinger:

I don’t have the statute at hand Mr. Justice, but it is our statutory authority of the Comptroller to appear in these cases and as such he represents the interest of the Government embodied in both the banking and the antitrust laws as I shall hope to demonstrate the Comptroller is interested not simply in banking interest but also in competitive interest and therefore represents the entire public interest which I believe is the viewpoint of the Government and —

Byron R. White:

So I should ask the Department of Justice what there authority is, I suppose?

Lee Loevinger:

Perhaps sir.

In any event, I have six substantive points that I hope to make.

I shall appear twice and I hope to be able to get to them.

I will tell you what they are and then proceed to them.

First, the plaintiff’s argument is basically circular in question begging, because it assumes that Section 7 requires the banking agencies to permit de novo entry.

Second, Section 7 does not supersede the federal banking statutes as plaintiff somewhat explicitly and certainly implicitly contends.

Third, potential competition does not have the same application to banking as to one regulated industries.

Fourth, the plaintiff’s sponsorship scheme does not only illegal dubious means of — legally dubious means of circumventing state law, but is actually anticompetitive in its effect, as I shall demonstrate.

Five, Section 7 does not forbid a merger, which lessens potential competition, but it increases actual competition in the relevant market, which is somewhat different in the question left open in Falstaff.

And finally, the plaintiff would rewrite Section 7 so that potentiality attenuates substantiality to triviality.

Now first, the plaintiff’s argument is basically circular in question begging, because although plaintiff has the burden of proving the violation of Section 7, not depends upon proving that the merger would probably lessen competition.

Lee Loevinger:

Plaintiff admits there is no actual competition.

Therefore, the theory of plaintiff entirely is that absent a merger, the acquiring bank here would enter the market de novo.

This however requires the permission of the banking authorities.

There is objective evidence that this permission would not be given.

Plaintiff attempts to surmount this barrier by assuming that administrative permission is required.

Thus, in the brief in this case at Page 51, plaintiff says, “It must be assumed that the regulatory decision will reflect the national policy in favor of market extensions by internal expansion rather than not by acquisition.”

There is a similar statement in plaintiff’s Connecticut brief at Page 53.

Thus, plaintiff’s entire argument is based upon the assumption that Section 7 requires the permission of the administrative authorities for de novo entry and once you eliminate that assumption, plaintiff does not have an argument on potential competition, but that assumption is the very matter to be proved.

It’s the very question and issue before this Court.

Therefore, it’s an entirely circular and question of begging argument.

Second, plaintiff in effect asserts that Section 7 supersede the federal banking statutes.

Plaintiff clearly argues that in a bank merger case involving potential competition that Section 7 standards must be applied at Page 52 of the brief in this case, plaintiff asserts.

Thurgood Marshall:

Mr. Loevinger, you keep saying plaintiff, who is the plaintiff?

Lee Loevinger:

The plaintiff is the antitrust division under the Department of Justice represented by the solicitor general.

Thurgood Marshall:

Well, I know but your brief says the United States of America.

Lee Loevinger:

That is a formality Your Honor in a sense, the Court is the United States of America.

I believe this Court represents the United States as I do and as Mr. Friedman does.

Thurgood Marshall:

And your brief said, your brief says your brief is to the Comptroller of the Currency?

Lee Loevinger:

Yes sir, and the Comptroller of the Currency is an agency —

Thurgood Marshall:

United States of America is the appellant.

But you keep arguing about plaintiff, you don’t mean the United States of America?

Lee Loevinger:

I mean the interest represented by Mr. Friedman and the antitrust division sir.

I don’t really wish to quarrel with the Court about this.

I don’t regarded that an important substantive point.

I think it is somewhat of formality but I think it helps to keep the matters —

Thurgood Marshall:

I think it’s more than the formality because usually the question up most in my mind is who represents “the United States of America”?

Lee Loevinger:

Well sir the Comptroller has been representing the United States of America since about 1863, which is long before Sherman Act was passed.

So, as I say I would —

Thurgood Marshall:

How many times that the Comptroller of the Currency argued in this Court in all of those hundreds of millions and years?

Lee Loevinger:

I don’t know.

Lee Loevinger:

I’m sorry Mr. Justice I can’t argue that.

I can’t discuss that question.

I would if you will permit me —

Thurgood Marshall:

I don’t know as of now what the position of the Government is.

Lee Loevinger:

May I proceed with my argument Mr. Justice?

Thurgood Marshall:

Well, of course.

Lee Loevinger:

I would like to point out that the Department’s position is that Section 7, in effect, supersedes the Federal banking statutes.

Does it — Page 52 of the Washington brief says only if new entry might threaten the stability of the existing banks, could the Comptroller properly permit — properly refuse to permit new competition.

Now and again, this is repeated in other briefs, and in the plaintiff’s reply brief and Connecticut that argues that the appropriate number of banks is not to be determined by administrator or judicial fiat, but by the market, through the processes of competition.

One wonders if the same statement would be made about the ICC, the CAB and the FCC.

But in any event this is not the law.

In the Philadelphia National Bank’s case, this Court speaking of Mr. Justice Brennan said and I quote it “A charter for a new bank, state or national, will not be granted unless he invested capital and management of the applicant of his prospects for doing sufficient business to operate at a reasonable profit, if adequate protection against undo competition and possible failure.”

Now there is no such policy — no such policy embodied in the antitrust laws.

That is strictly a banking standard.

This rule was not changed by the Bank Merger Act of 1966 and in the Third National Bank of Nashville that this Court said, the purpose of the Bank Merger Act of 66 was to permit certain bank mergers even though they tended to lessen competition.

Congress felt that the role of banks in a community’s economic life was such that the public interest would sometimes to be reserve by a bank merger, even though the lessens competition.

William H. Rehnquist:

But that’s then was about the defensive part of the — that was added in 1966, was it not the basic competitive analysis?

Lee Loevinger:

If that the — apparently the Court said that the basic competitive analysis was to be made first, then the public interest was to be determined on the basis of the competitive analysis as balanced against the other interest.

However, as I shall, point out what happens in a potential merger cases to merge that you don’t have to clean cut kind of dichotomy that you do in an actual competition case where first you see that competition is being extinguished.

And the reason for that is very simple, is that in a potential competition case which you are talking about is potential entry.

But there is no potential entry unless there is a community need and service to the community convenience by that entry.

Therefore, before there can be a potential entry or a probable entry, as this Court has held, there must be a showing of the convenience and needs argument consequently in a potential competition case.

It seems to me as a matter of logic that the Department has the burden of meeting both sides of the equation.

It may have to show both that there is a — well, they don’t even get the competition until they have dealt with community needs, because without community need and probable entry there is no potential competition.

William H. Rehnquist:

But there would be true just of a nationally chartered advantage?

Lee Loevinger:

No sir, that would be true of both national and state banks as was pointed out in the Philadelphia case because the standards are essentially similar.

There are some differences.

Now potential — and this is the reason why I say that potential competition theory does not have the same application to banking as to regulated industries.

The purpose of regulating and limiting the entry into the banking field is to protect the public interest in bank functioning and bank solvency, as the Ninth Circuit has said a bank failure is a community disaster.

We cited in our brief from Mr. Paul Samuels, economist about bank failures.

Lee Loevinger:

Bank failures are not all together a thing of the past, although they have been largely minimized.

Only last October, one of the largest bank failures in the history of the company of U.S., The National Bank in San Diego a billion dollar bank failure.

There had been some bank closings every year since 1934.

There had been 635 bank closings because of financial difficulties.

The FBIC now has 156 banks on its problems list.

The entry into banking requires a showing of community need, of prospective profitability, and of other factors subject to judgment by administrative expertise.

Furthermore, even the perceived entry as distinguished from the actual entry which Justice — Mr. Justice Marshall distinguished in his concurring opinion in Falstaff is different in banking.

Because in an ordinary industry, the contending and competing units must look at those standing on the fringes to see whether economic factors are likely to move them into the market.

However, in banking if one of those standing on the fringes wants to enter the market, he must make application to an administrative agency without exceptions state or national and the banks in the market have an opportunity to go in and to be heard and to oppose the entry of the new entrant.

Consequently, there is no unperceived entry; there is no unperceived potential entrant in banking as there may be in other cases.

Furthermore, the determination of the propriety of the organization of a new bank and its entry into the market, this Court has said is specifically a matter for determination by the banking agencies.

And therefore, I submit, it is not appropriate for determination in the case such as the present one and what the National Bank versus New Orleans case which is a very complicated case explained at Page 55 of the Marine Bank brief.

Basically in order to avoid the restrictions of state laws to branching, to form the bank holding company as the department would have the defendant banks do hear and it organize a new bank.

There was a litigation below, which resulted in an injunction against the bank charter being issued.

When the case came to this Court, this Court held that the lower courts have no jurisdiction to pass upon that question and remanded the matter to the federal reserve or the banking agency in that case saying, we have concluded that District Court that it is the exclusive function of the Federal Reserve Board to act in such cases.

In cases raising issues of fact not within the conventional experience of judges or cases requiring the exercise of administrative discretion, agencies created by Congress for regulating subject matter should not be passed over.

Therefore, we submit that this Court should not, by and grafting the potential competition theory of the Section 7 and then applying that to banking, pass over the expertise of the banking agencies as to who and when there should be entry into the banking field, which is what potential competition means, potential entry.

Now let me say a word about the sponsorship scheme proposed by the department.

It is true as my colleague Mr. Moen has said that there is a good deal of ambiguity about the use of this term sponsorship.

In fact, there is evidence that banking executives like others in other businesses, sometimes help new institutions that they give advice.

Old lawyers do this to young lawyers.

This is not an unknown procedure.

However, sponsorship as used in this case by the Department of Justice means and I think must mean if it is to have significance that contribution of capital and the holding of some sort of a significant legal entrance in the bank, but it doesn’t mean that it means nothing.

Anybody can go and get fringe.

I suppose I could go down and ask my friendly banker how I go about organizing a bank.

However, in the first place this method, if approved by this Court, would be available only to national banks.

There is no contention that Mr. Friedman has conceded.

It wouldn’t be available state banks.

This immediately would destroy the competitive equality between national and state banks which Congress clearly intended, as this Court has often said in cases cited in our brief.

Second place, this would undermine the dual banking system and handicap the state banks by giving the federal banks a technique not available to state banks.

Lee Loevinger:

2/3 of all the commercial banks in the country today are state banks, only1/3 are national.

They happen to be the larger banks but this would give the advantage to the national banks.

Further, at best, this scheme is expensive, difficult, and risky unless available not only — not to all banks but only to the larger banks.

It is clear from the records here that the cost of forming a holding company and organizing a bank is upwards of $2 million.

The statutory minimum is a-million-and-a-half dollars.

However, of all the commercial banks in the United States, 25% are under 5 million in deposits; 48% under 10 million; and 78% under 25 million, both state and federal.

And I submit that as a practical matter, this is a method that would be available really only to the top 5% of the banks in the United States.

Furthermore, this scheme would endanger new and small banks by offering and threatening undue competition.

This appears in the record in the present case at Page 1034.

The Court asked the Department of Justice counsel and I quote, “Your theory is that if a new bank went in there, Spokane, they would take some deposits from the other banks and therefore the other banks wouldn’t make as much money and therefore would increase competition, is that your theory?”

And the department counsel said “Yes sir.”

In other words, new and small banks are likely to be the victim of this procedure.

These are the ones that are owned and by small business and by the minority groups that are struggling for recognition today.

These are the ones that are protected by the bank regulatory agencies.

Under plaintiff’s theory there would be no protection.

Consequently, if the plaintiff’s sponsorship scheme were approved by this Court, this would insure growth by the largest banks.

It would insure the foreclosure of markets to small and medium size banks and it would probably lead to the failure of small banks and thus ultimately to the much greater concentration of banking business in the United States.

Now fifth, Section 7 does not forbid a merger, which lessens potential competition but increases actual competition in the relevant market.

I trust I need not point out that the Court did in Falstaff.

That the Courts opinion said that the question left open was whether a new entry that neither help nor hurt competition was illegal merely because the acquiring company could but did not entered de novo.

That question is not reached here because in both cases, there is evidence that here the entry will make the market more competitive.

The Court found in this case, this merger will make the Spokane market even more competitive as it will replace a bank with a limited competitive ability with one with greater capacity to provide loans and it will remove its competitive disadvantage.

Now, plaintiff, in effect, answers this by saying that to the extent the Court relied on the theory the merger would replace Washington Trust with the bank able to compete more effectively that these are factors to be considered on the community needs and convenience defense and not in asserting the competitive impact of the merger.

If I may be disrespectful, I say nonsense, to say that an increase in competition cannot be considered in appraising the competitive impact simply doesn’t make sense under the antitrust laws or under any other laws.

In fact, Justice Marshall in concurring in Falstaff said that if a company would have remained outside the market but to the possibility of entry by acquisition and if it is exerting no influence as a perceived potential entrant, then there will normally be no competitive loss when it enters by acquisition.

Indeed, there may even be a competitive gain to the extent that it strengthens the market position of the acquired firm, which is exactly the case here.

Furthermore, in Brown Shoe, this Court said, Congress recognized the stimulation to competition that might flow from particular mergers.

When concerned as to the act’s breadth was expressed supporters the amendment indicated, it would not impede, for example, a merger between two small companies to enable the competition to compete more effectively with larger corporations dominating the relevant market.

Here admittedly, there is no change in market structure or concentration.

There is only a strengthening of one competitor, which has already stimulated new competition in Spokane as we point out at Page 53 of our brief.

Lee Loevinger:

And this does not lessen competition but increases competition which is the purpose of Section 7.

Finally, let me come to my last point, last former point and then I will now or later answer some points of the department that the plaintiff would rewrite Section 7 so that potentiality really reduces substantiality to triviality.

There has been some talk as to what potentiality means, and Mr. Friedman has candidly said, they’re looking at very long range effects.

As a matter of fact, this was confirmed by a speech by the acting Deputy Assistant Attorney General the Antitrust Division made the day after we filed our brief and published an ATRR April 16, 1974.

It is number 699 at Pages (d) 1 to 5 in which he said the departments concern for preserving competition is premised upon the belief that existing market structures are not immutable over time. Changes in law, technology, business philosophy and imperatives of the market place may result in future market entry with attended increased competition in a manner, which would not have been predicted at an earlier time.

The department’s efforts, he candidly states, are aimed that these market extension cases, which involves theories of potential competition.

Now I submit that to say that potential competition, which the Department of Justice is now protecting, is the possibility of future market entry in some presently unpredictable or unforeseeable manner, is to say that we are dealing with something that is improbable.

The law simply cannot deal with the unpredictable or the unforeseeable.

The essence of legal probability is foreseeability.

Thus, plaintiff is seeking to have the standard of proof in Section 7 cases, reduced from probability and substantiality to possibility and triviality.

Plaintiff asked the Court to forbid any merger, which might foreclose any unforeseeable future possibility of competition.

But this is impossible to do because the unforeseeable we simply cannot deal with.

This is unreasonable, unworkable, unprecedented, and I submit a formula for stagnation not competition.

Furthermore, in my brief I have submitted to the Court that I believe that this standard, if it becomes established in the law, is a formula that will threaten civil liberties.

The brief was filed April 8.

I suggested that the potential enemies in authoritarian countries are prosecuted as the department would go after potential competitors here.

On April 15, the week after we filed our brief, the Washington Star News published a little item saying that Aleksandr Solzhenitsyn, the well known Russian author, had been exiled because, it was said by a leading Russian spokesman, as he was guilty of making “potentially dangerous proposals”.

They said that he was accused of writing Utopian and potentially dangerous ideas.

Now this is the language of authoritarianism.

This is the doctrine which the Department of Justice would have this Court accept in which I submit if accepted in these cases cannot be confined of these cases.

If we — if potentiality in the sense of unforeseeability, unpredictability that which cannot be really met by present proof, cannot be dealt with on the basis of the contemporary record, then there are simply no standards.

There is no way that we can deal with the data presented with the evidence if the Court is going to permit this kind of proof.

My time is up.

Warren E. Burger:

Thank you.

Mr. Friedman you have about four minutes left.

Daniel M. Friedman:

Thank you Mr. Chief Justice and may it please the Court.

There has been some reference by Mr. Moen to the testimony of the President of the Columbia Bank, the bank that was sponsored in, and we referred to the Columbia bank not that that’s a way of getting into Spokane, but to show, to show that this is a method by which banks do enter markets where they are not permitted directly to branch.

I would like to invite the Court’s attention to two documents in the record.

The first is at Page 1514 of the record.

It’s a letter from Mr. Buck, who was the Senior Vice President of the National Bank of Commerce to a Mr. Looney.

Daniel M. Friedman:

Mr. Looney was an attorney in the area where the Columbia Bank was being formed who became — he had done some work for the branch of the National Bank of Commerce in this area and he ultimately became the Chairman of the Board of the new bank.

So, he was the man who was intimately concerned in the formation of the bank and understanding what was happening.

Now, two paragraphs I’d like to refer to.

The first is in the middle of that page.

At 1514 he said that there’s been no –Mr. Bulk said, there has been no written or oral agreement or understanding with respect to acquisition of the proposed bank.

On advice of counsel, we have been extremely perhaps excessively cautious to avoid this.

It is true nevertheless that our bank has inspired submission of the application and is hopeful that in appropriate future time, it will possible to acquire the bank for incorporation within its present system.

At the bottom of the page, I pointed out that the way the bank was being arranged, the majority stock will be in hands friendly to the National Bank of Commerce.

In order to insure as much as possible its future as a branch of that bank, it avoids certain legal problems, which could arise if we were to agree or contract with respect to its acquisition.

Then at Page 1573 is a letter from Mr. Looney back to Mr. Buck written a few months later and these letters were all contemporaneously written at the time the Columbia Bank was being organized.

And what Mr. Looney said to Mr. Buck at the bottom of page 1513 is “We need a clear definition in understanding of the management responsibilities as between the directors of the unit bank and the management of the National Bank of Commerce.”

That’s between the bank that was sponsoring and the bank that was sponsored.

For example, many of the steps taken initially will have a barring on the long range operation of the bank many years after it has changed from a unit bank to a branch bank.

Now, this seems to us to indicate very clearly that the whole purpose of this arrangement was ultimately to permit the National Bank of Commerce to acquire it.

Now Mr. Loevinger has suggested that because the authorization of the regulatory authorities is needed before a bank can enter the market.

If the regulatory authorities suggest, they would not charter a new bank, that’s kind of the end of a thing.

Well, to begin with, I just point out that that argument of course has no application to the possibility of entry by making a foothold acquisition.

But more fundamentally, it seems to us this is basically not the scheme of Section 7, this is not what Congress did not intend to give the Comptroller of the Currency the authority to veto, the authority to veto that the enforcement of Section 7 of the Clayton Act.

When the Comptroller says that he does not think it’s likely that he would charter a new bank, to begin with of course, his testimony is given in defense of a merger that he is already approved.

But more importantly, of course, the regional comptroller only makes a recommendation, but a regional official may think today he is not going to charter tomorrow or next week changes may occur.

And we do believe that in this situation, the Comptroller’s view that he would not permit a new bank to be charted cannot be this positive on this question.

Thank you.

Warren E. Burger:

Thank you Mr. Friedman.

The case is submitted.