Media for United States v. Philadelphia National Bank
Earl Warren:
Number 83, United States, appellant versus the Philadelphia National Bank et al.
Mr. Loevinger?
Lee Loevinger:
Mr. Chief Justice, may it please the Court.
This is an antitrust case that comes up on direct appeal from a judgment of the District Court in Philadelphia.
The suit seeks to enjoin the merger of the Philadelphia National Bank referred to in the briefs in sometimes as PNB and the Girard Bank on the grounds that the merger violates the antitrust laws.
The District Court found that the Sherman Act applied to the transaction, but that it was not violated.
The application of the Sherman Act is not an issue on this appeal, but its violation is.
The controlling facts are largely statistical and they’re not disputed, although, there is substantial disagreement as to their interpretations.
The crucial questions raised by this case are (a) Does an area in which firms conduct all of their business compete with each other and encounter the preponderant part of their competition constitute a relevant market for a merger case and (b) Does the combination by a merger of firms controlling more than one-third of a large market constitute unreasonable lessening of competition or restraint of trade.
The government contends that both questions must be answered yes.
The issues arise in this fashion; Philadelphia National and Girard Bank are located across the street from each other at Broad and Chestnut Streets in Philadelphia.
Philadelphia National has 27 branches and Girard has 38 branches.
All of these are in Philadelphia or the three adjoining counties of Montgomery, Delaware and Bucks.
By law, the Philadelphia Banks are permitted to have branches or conduct banking business only in these four counties.
These four counties are referred to in the record and here as the Philadelphia metropolitan area or the Philadelphia area.
Philadelphia National has over $1 billion in assets.
Girard has about three quarters of a million dollars in assets.
The merged bank would have one and three quarter billion dollars in assets or 37% of all banking assets in the Philadelphia area.
The merged bank would be 50% bigger than the second biggest bank, three times as large as the third bank and would have more assets than all of the other 37 banks in the Philadelphia area put together.
The reasons given for the merger are that it would give the merged bank a larger lending limit and thus bestow prestige upon it.
Mr. Potts, the President of the Philadelphia National Bank testified then in his judgment, the most important benefit of the merger to the two banks would be the prestige factor, which would include a larger lending limit.
Now, this lending limit is the maximum above that a bank can loan to any single borrower, and amounts go above 10% of the capital and surplus of the bank.
Yes sir.
The Judge outside of prestige, wouldn’t it also enable the merged bank to compete with New York banks and other banks of getting business?
Lee Loevinger:
Yes sir, it would.
This is their contention that it would enable the merged bank to compete with the banks in New York or loans exceeding the lending limit of the two banks, which are $6 million for Girard and $8 million for Philadelphia National.
In other words, it would enable them to compete in the market or submarket for multimillion dollar loans, which as I shall show the Court, constitutes approximately one one-hundredth of 1% of the entire banking market in which these companies are engaged or what I would submit to the Court is this most microscopic submarket that has ever been presented to this Court in an antitrust case.
Potter Stewart:
How many banks are there eligible to make loans of that magnitude?
Lee Loevinger:
There are five other banks in — well, there are no banks in Philadelphia, Your Honor, that are eligible to make loans of $15 million.
There are five other banks in Philadelphia that are eligible to make loans over $1 million and therefore in the plus million or multimillion dollar submarket.
Lee Loevinger:
The precise number in the United States is not specified in the record and there certainly are some in New York, but the alleged reason for the merger was to enable these banks to compete in this multimillion dollar submarket with the New York banks.
This was the precise finding and it was this view that led the District Court to the conclusion that Philadelphia is not a relevant market in which to test the competitive effects of the merger, because the banks had this competition for multimillion dollar loans with the New York banks.
Potter Stewart:
This small figure you gave us, this percentage of a single — fraction of a single percentage point, this was by one bank to one —
Lee Loevinger:
No sir, this is the number of customers of the two banks who are interested in the multi-million dollar loans.
The two banks between them, I have the figures later in my presentation.
Potter Stewart:
Of these two banks?
Lee Loevinger:
Yes sir, of these two banks.
Potter Stewart:
Well neither one of them was eligible to make loans of the magnitude of the New York Banks?
Lee Loevinger:
I’m talking about the amount of loans over $1 million, one-tenth of 1%.
These banks have $6 million and $8 million lending limits now.
One-tenth of 1% of their customers have taken loans over $1 million.
And one-one hundredth of 1% of their customers have ever taken or sought loans over $5 million.
$5 million is well within the lending limit of both banks now, so that the — what they are talking about is the ability to engage in a wholly speculative sub- market, because there isn’t even any showing in this record that they would get a single customer who would take from them a loan in excess of $8 million.
There is a showing that there are a total of nine loans in excess of $5 million, out of a total of over a 120,000 loans that these companies have in the Philadelphia area.
This is the magnitude of the relative markets that we are talking about in this case.
[Inaudible]
Lee Loevinger:
It’s $15 million; actually it’s $1 million more than the combination of the $6 million and $8 million because they intend to transfer some money from profits to surplus.
[Inaudible]
Lee Loevinger:
There is some testimony that there are some loans in the multi-million dollar range in Philadelphia, yes sir.
[Inaudible]
Lee Loevinger:
Sir?
[Inaudible]
Lee Loevinger:
The only evidence on that is the 1955 survey of the Federal Reserve Board that shows that there is something — that there is $113 million loaned in Philadelphia by New York banks.
There is no indication how many loan this is or in what amount.
Actually the evidence in the record shows that there are loans that banks participate in that these banks themselves have participated in, ranging as high as a $162 million for a single loan.
So this 113 might represent one or two or three loans, there is nothing in the record to indicate.
The government contends that the error — yes sir.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
There were some general statements of that character made, yes sir and that is what the bank is arguing.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
There is no evidence supporting that sir.
The appellees called a half a dozen representatives of large business in Philadelphia.
All of them testified that they had accounts in New York as well as in Philadelphia.
They have loans and some of them have loans, not all of them have loans from these banks, none of them were at or near the lending limit of these banks.
All of them have connections with New York banks.
They testified without exception, they would continue their connections with New York Banks, most of them were a large national companies, as indeed these big business customers of these banks are, and these large national companies have accounts with literally hundreds of banks throughout the United States and they do not intend to change.
There was no testimony from any single witness as I recollect the record that said that any loan would be brought to these banks in excess of their present lending limit, if their lending limit were enlarged.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
Yes sir, yes sir.
Tom C. Clark:
And [Inaudible]
Lee Loevinger:
Some of them, yes sir.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
No sir, there is no evidence in the record that that’s so.
There is no reason in the world to assume that this occurred other than by the product of natural growth in the market.
These people talk a lot about meeting the market demands and it is our position that they are perfectly at liberty to meet the market demands.
If the market demands a bank of that size in Philadelphia, these banks will grow to that size of the market.
However, for them by what this Court itself has characterized as the abnormal or unnatural means of swallowing up competitors for them to take this step of engulfing the market is contrary to the Antitrust Laws.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
I have no recollection on the subject sir and there is nothing in the record.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
We have a merger case pending in Chicago.
Tom C. Clark:
[Inaudible]
Lee Loevinger:
Many of these banks have merged and these banks themselves have previously merged.
Philadelphia National has had nine previous mergers and Girard six, if I recollect correctly.
There has been a lot of merger and they have testified that these mergers were with smaller banks in order to give them branches throughout the area in order to enable them to serve their customers, including their big customers incidentally and there has been no objection raised to these mergers.
But there is a difference between a large central city bank controlling on the one hand 21% and another one controlling 16% of the banking assets in a community merger or a bank merging with small outlying bank where the percentage control of banking assets of the community is relatively insignificant, and it is this difference that we say is significant in this case.
William J. Brennan, Jr.:
What’s the measure of lending capacity in that?
Lee Loevinger:
10% of the assets of the capital and surplus sir.
So —
William J. Brennan, Jr.:
[Inaudible] deposits plus —
Lee Loevinger:
I’m not a sufficient expert in banking accounting to tell you and it wasn’t explored in the record.
William J. Brennan, Jr.:
Well, I [Inaudible]
Hugo L. Black:
[Inaudible]
Lee Loevinger:
Sir.
No deposits I think are not included.
William J. Brennan, Jr.:
No asset.
Hugo L. Black:
You know the capital and the surplus, you know —
Lee Loevinger:
Sir?
Hugo L. Black:
What is the capital and surplus of this bank, I don’t find it here?
Lee Loevinger:
Well, it’s at least $80 million because they have an $8 million lending limit.
Their total assets —
Hugo L. Black:
You have that in your brief?
Lee Loevinger:
Sir?
Hugo L. Black:
You have that in your brief.
Lee Loevinger:
Yes, I believe so, the assets are approximately $1 billion for one bank and three quarters of a billion for the other.
This merger had to go before the comptroller [Inaudible]
Lee Loevinger:
Yes sir.
He approved it didn’t he?
Lee Loevinger:
Yes sir.
And what other branches of the government opposed it?
Lee Loevinger:
The Federal Reserve Board and FDIC.
Now, the points that I hope to cover in argument are first, that the most relevant market for this case —
Potter Stewart:
And did Justice Department oppose it from the beginning?
Lee Loevinger:
Yes sir.
Potter Stewart:
Filed an objection with the Comptroller.
Lee Loevinger:
[Inaudible] without saying.
Potter Stewart:
Well, I mean at the comptroller level.
Lee Loevinger:
We opposed it in representations to the comptroller prior to the approval, yes sir.
Hugo L. Black:
Did the Federal Reserve take the position?
Lee Loevinger:
Yes sir.
Lee Loevinger:
The Federal Reserve Board opposed it on the grounds that it would lessen competition in the Philadelphia market, specifically.
The position of the Federal Reserve Board is specifically set forth in our brief.
Arthur J. Goldberg:
[Inaudible]
Lee Loevinger:
No sir.
This is the Federal Reserve Board, the Federal Reserve Board of Governors in Washington.
Arthur J. Goldberg:
Washington?
Lee Loevinger:
Yes sir.
Hugo L. Black:
Do they have a witness or —
Lee Loevinger:
No sir, but their report on this matter is in evidence in full.
Now the points that I shall seek to make are first that the most relevant market for this case clearly is the Philadelphia area for a number of reasons, because the banks involved do all of their business there and indeed are authorized by law to do business only within the Philadelphia area.
The banks complain that the demarkations of political sub-units are arbitrary and indeed they are, in a sense, as all market limits are arbitrary, however in this case they are less arbitrary than usual because the limits of these political subdivisions are the legal limits of the authority of the banks here to do business.
In the second place, the customers in this area require local banks for their banking service as the appellees themselves have shown.
In the third place, over 95% of all the customers of both banks involved here are residents of this area.
In the fourth place, outside competition exists for only fraction of 1% of the customers in this area, as I shall demonstrate and finally because the banks involved here actually compete with each other in this area in every phase of banking.
My second point is that the merger will give the resulting bank control of more than one-third of all the banking business done in this market.
My third point is that the combination by merger of large and viable firms controlling more than one-third of a market as vast as this, lessens competition and restraints trade in violation of the Sherman Act.
A holding here that acquisition of such a market share is legal would sanction the reduction by merger of the number of competitors in this or any similar market to no more than three.
This result, I submit, is completely inconsistent with the competitive market structure and with the antitrust laws.
Now, let me address myself to the issue of the market.
The discussion of the market in terms of the relevant markets suggest that there is or maybe a single unique discrete area that can be identified as the market.
This of course is erroneous and misleading.
The market is simply a conceptual tool for the analysis of complex economic phenomenon.
Markets overlap, and any single enterprise competes in a number of different markets.
A market is always surrounded by a peripheral area in which trade crosses its arbitrary boundaries and the outer limits of all markets are vague and fuzzy.
This was recognized by this Court in the Times Picayune case in which I believe Mr. Justice Clark said, “The “market,” as most concepts in law or economics, cannot be measured by metes and bounds nor does the substance of Sherman Act violations typically depend on so flexible a guide.”
Now, the market that is to be applied in antitrust cases has been laid down by this Court in Standard Stations and the Tampa Electric Case in which it is said that since preservation of competition is the object under the Antitrust Laws, the area of effective competition between the parties is the relevant market.
This concept has been applied in numerous cases such as Paramount where you held first run theaters in a single city to be a relevant market or International Boxing, in which championship boxing matches as distinguished from all other boxing matches were held to be a relevant market and in which the Court said that definition of the part of trade or commerce encompassed by the Sherman Act involves distinctions in degree as well as in kind, which is illustrated in the application of the Sherman Act to trade or commerce in a localized geographical area.
Now the Court here found that commercial banking viewed collectively with the relevant line of commerce of product market and this is not contested and it is not an issue on the appeal.
The banks insist that the mode of competition among commercial banks is unique and they argue that it consists primarily of convenience and quality rather than a price.
Actually, there is substance to this argument, that they don’t carry a fine.
Lee Loevinger:
That the point is that banks sell only service, of course banks deal in money as all businesses deal in money, but this isn’t the commodity that they are selling.
What they are selling is service and all of the service that these banks render, they render within the Philadelphia area.
All of their banking offices are there, all of their deposits are received there.
All of their books of accounts are received there.
All their loans are disbursed there.
All their officers and employees are employed there.
Now, what the controversy in this case arises out of is the fact that although all their business is done in Philadelphia, some of it is done with nonresident individuals or corporations and this is the source of the mass of statistics that you’ll find in the record.
However, there are two points to note in connection with this.
In the first place, the nonresidents constitute a very small minority of the customers of both banks.
This again is sometimes obscured by the presentation of these statistics in dollar figures rather than in terms of the number of customers, but the nonresidents is minute percentage, really, of the total number of customers involved here.
In the second place, the nonresidents no less than the residents who do business in Philadelphia require banking service in Philadelphia.
How about the converse, residents of the Philadelphia area doing business with non area banks, New York banks?
Lee Loevinger:
There is no showing that there are any of these beside from a couple of dollar figures, the 1955 survey that I refer to, sir.
The testimony is and the testimony —
I thought you said there was $113 million of town — out of area banks, business in the area.
Lee Loevinger:
There is no showing that this by residents of the Philadelphia area.
This may very well be by nonresidents.
Now, I don’t know whether it’s worthwhile to take the time to burden the Court with some of the figures or not, but just to give you an idea, the total number of checking accounts in both banks is 236,000, the number of savings and time accounts in both banks is about 240,000.
In both cases, the number by the bank’s own statistics, the number of accounts by nonresidents is less than 5%.
Over 95% of all checking accounts, savings account and time deposits are held by people who are classified as residents.
Potter Stewart:
What’s the percentage in terms of the size of the accounts, the relative figures in dollars not customers?
Lee Loevinger:
Those are in the bank statistics, I don’t have them at my fingertips.
Potter Stewart:
And wouldn’t that be of some relevance to, at least in the banks, looking at the argument that the purpose of this merger was to attract large accounts in Philadelphia?
Lee Loevinger:
It’s of some relevance.
Potter Stewart:
You don’t have the statistics.
Lee Loevinger:
I don’t say that they’re totally irrelevant but I do say this —
Potter Stewart:
Can you tell me where they are in the record?
Lee Loevinger:
No, this is the point Your Honor.
Potter Stewart:
Can you tell me where they are in the record if you please?
Lee Loevinger:
I’m sure that the appellees will have these figures Your Honor.
Lee Loevinger:
I don’t have the figures.
They’re in the appellees’ briefs as a matter of fact by dollar amounts, but my point is simply this.
Assuming that there are large amounts involved by a few customers who are able to go to New York and the testimony of the President of the Girard Bank and of other witnesses was that a customer who desired to borrow $1 million or more could go to another city, but that the smaller customers were confined to their local area and there is no conflict about this testimony, assuming that there are large amounts, even assuming that there was substantially more customers than the record shows, this still does not make Philadelphia either not a market or not relevant.
The important thing is that Philadelphia is a relevant market.
Of course there are other markets that these banks may compete in, and of course there are some large amounts involved in some of these other things, although compared to the total they are not large, but the — I’m sorry in our brief at page 34, using the appellees’ figures we show the distribution by amounts.
For example the demand deposits of individuals by amount 89% of the demand deposits of individuals are from residents of the Philadelphia area.
The demand deposits of corporations and partnerships 71%, of time and savings deposits 88% of amount.
IPC that’s Individual Partnership and Corporation deposits 79% of the amount is from residents of the area and so forth.
[Inaudible]
Lee Loevinger:
Yes sir.
Well the two banks represent the following percentages of the total amounts of the various categories.
The numbers refers only to trust.
Now, the taking commercial and industrial loans all together which are the ones principally in issue here and these are set forth in our appendix, it will be seen that there are just 70 out of over 7,000 commercial and industrial loans that are over $1 million.
Therefore of commercial — of the sub-market of commercial and industrial loans, there is just 1% that lies or less than 1% that lies in this sub-market of multi-million dollar loans.
But when you add to these 7,000 commercial and industrial loans the 115,000 or 120,000 loans to all the residents of the Philadelphia, the Philadelphia area and these are the residents of the Philadelphia area according to defendants’ own exhibits, 120,000 loans, the 70 loans, the 70 business loans in the multi-million dollar markets shrink to one-one hundredth of 1% by number of customers of the people served by these two banks.
And I simply submit that regardless of how much is done in amount by one-one hundredth of 1% of the total number of people served, I don’t say that that’s unimportant to be disregarded.
I do say that you cannot disregard the 99% and 99 one-hundredths percent of the customers who are served in the less than million dollar market and that’s what the Court below did.
The Court below said that Philadelphia was not a relevant market.
Now I don’t see how you can say that any area in which 99 and 99 one-hundredths percent of the customers that you serve reside is not a relevant market.
Arthur J. Goldberg:
[Inaudible]
Lee Loevinger:
Not the factual findings, no Your Honor.
I think that the District Court clearly misconceived the legal concept of the market and the legal intent and the nature of competition, as this Court has outlined it and as all economic and legal students of the subject have said it to be.
It is just a misconception of the facts.
There is no real dispute as to the facts.
Arthur J. Goldberg:
[Inaudible] disregard those findings?
Lee Loevinger:
No, but this is irrelevant.
This is how they do it, a baby grows more than an adult but this doesn’t mean that the adult has no advantage of size.
Of course, the small banks are growing faster.
Small businesses in any field will grow faster measured as the Court measured them, measured in terms of percentage, a bank that starts in business with $1 million or $2 million will increase very rapidly in percentage size, but the growth of all the small banks in the Philadelphia area put together is a small fraction of the total growth of these two banks involved here and would be an even smaller fraction of the merged bank.
The merged bank is not going to grow on percentage terms because it’s just too big to grow in percentage terms.
Arthur J. Goldberg:
[Inaudible]
Lee Loevinger:
I wouldn’t say per se, no we are not arguing for per se rule here, but where there is no other business reason that the merger of two banks in a large market which together between them control more than a third of the market means that this Court must adhere to the same rule for other banks and that therefore this Court is holding that no more than three banks are required in any banking market, and I say — submit that this is not what competition mean, this is what the Antitrust Laws means.
As a matter of fact, this is what the defendant themselves say the situation should be.
The defendant themselves have argued, they argued in their emotion to affirm, their witness Mr. Jennings got on the stand and they have a finding to the effect, that three banking alternatives are all that anyone needs.
However, I submit that this reduction of a market to a very small segment of a few sellers is precisely what the competition does not mean, is in consistent with what this Court has said it means and with what it has been held to mean.
Arthur J. Goldberg:
[Inaudible]
Lee Loevinger:
Yes sir the Columbia Steel case I think is wholly inapplicable.
As a matter of fact, the Columbia Steel case supports our view with respect to the market.
In the Columbia Steel case, U.S. Steel sought to acquire Consolidated Steel and U.S. Steel sold the overwhelming part of its business outside of the nine-state area in which Consolidated did business.
The Court however held that the area in which Consolidated, the acquired company did business was the relevant market for that — for purposes of that case because this was where competition would be effected, if at all.
Incidentally, in the Columbia Steel case Consolidated did do business in the national market, but this Court noted that its business in the national market was one-half of 1% and dismissed this as being of no significance, that is far greater than the percentage participation in the national market of the Girard and Philadelphia National Banks here.
On the other hand, there is no dispute that the overwhelming proportion of the business of the two concerns involved here is in fact done in the Philadelphia area.
Therefore, by the rule of the Columbia Steel case, you must take that area as the relevant market, for purposes of judging the effect of the merging.
Arthur J. Goldberg:
[Inaudible]
Lee Loevinger:
23% sir, but the Court noted that this was a declining and unstable percentage in Girard of very special circumstances which had to do with war production.
If Your Honor will recall this came up shortly after World War II, I think it was 1946, 1947.
It actually reached this Court in 1948, and the Court noted that the exceptional circumstances of the market, of that market and of the national market made the market shares then held very unstable.
It noted for example that the market share of United States Steel had been declining from some 40%, 45% down to about 30% or 29%.
Incidentally the horizontal competition that was involved was that in structural steel products.
Consolidated — only 16% of Consolidated’s output was in structural steel products.
So that the percentage of extinction — the extinction of competition related to a smaller percentage of the market, a declining percentage of the market, a questionable percentage of the market and a very minor percentage of the business of Consolidated as well as a very small percentage of the business of the acquired company.
Here the contrary is true that this is a much larger percentage of the market, a growing percentage of the market, a stable percentage of the market and it involves something between 95% and 100%, or if you want to figure it by, even by these methods of figuring something between 80% and 90% of the business done by the companies involved here.
It’s a wholly different situation factually.
William J. Brennan, Jr.:
Just looking at page 22 to your reply brief, that table?
Lee Loevinger:
Yes sir.
William J. Brennan, Jr.:
Do I correctly understand that the loans over $1 million, 34 are in the four-county area, that is the two banks and 36 are outside the four-county area?
Lee Loevinger:
36 are derived from non residents of the four-county area and 34 derived from residents of the four-county area that’s true —
William J. Brennan, Jr.:
What that’s mean?
What you mean with non residents?
Lee Loevinger:
Well this is the way that statistics comes to us.
Lee Loevinger:
It was never explored in the record.
As a matter of fact, there was some exploration in the record of defendants’ Exhibit 26 and defendants’ Exhibits 40 which reported to list their largest customers by domicile and it was ascertained that on defendants’ exhibit 40 which had 47 of largest customers of Girard all of them had main offices or important offices in the Philadelphia area, 26 which had the 27 largest customers of Philadelphia National, 23 definitely had main offices or important offices in the Philadelphia area, one was in Camden, New Jersey, and one in Baltimore, and two were unknown.
William J. Brennan, Jr.:
Well this doesn’t then necessarily mean that 34 are from businesses within the four-counties and 36 businesses outside the four-counties, is that right?
Lee Loevinger:
No sir, it means that 34 are from businesses that are domicile within the four-counties and 36 —
William J. Brennan, Jr.:
Domicile that leads me up here, what you mean domicile?
Lee Loevinger:
I don’t know the record simply doesn’t explore these subjects sir except — some of the exhibits there was cross examination most of them there was not.
We simply took this — the government attorneys took the statistics that they came from appellees.
Tom C. Clark:
Well, did that say that the 36 came from applicants outside the four-counties?
Lee Loevinger:
This might well be the case.
Tom C. Clark:
What significance do you give that?
Lee Loevinger:
Well, the significance I give to that fact sir is that there are just 34 people who come to these banks for loans over a million dollars from outside the four-county area and that that is very, very few when compared to the 120,000 customers that they have for loans within the four-county area.
Tom C. Clark:
You put the emphasis on the loans within.
Lee Loevinger:
Yes sir.
William J. Brennan, Jr.:
Well, that means something like this Silco is now [Inaudible] as I gather that Silco plant is within the four-county area, that an application of Silco, I don’t know whether they borrow money in these amounts or not, but if they did then an application might now come from Detroit instead of from Philadelphia.
Lee Loevinger:
It might very well, yes sir.
That’s exactly the case.
William J. Brennan, Jr.:
That would then be non resident rather than?
Lee Loevinger:
Yes sir.
This is a distinction that permeates the record.
Now, I could nip it in any event it is immaterial where most of these people, where these loans came from and they certainly in the absence of some showing that there is a necessity for them to do business outside because what they are doing is selling, banking service inside the Philadelphia area.
They themselves stress the fact that they’re selling service and we agree that they’re selling service, they are not selling money; they’re selling banking service.
They’re like banking service stations that have 65 branches within this four-county area.
When a motorist comes to a service station for service he may have a New Jersey or New York or a Honolulu license plate but he want service at the place of that service station Philadelphia or Washington or wherever it is.
When people come to Philadelphia for banking service, the unique and the distinctive and the valuable thing that they are the getting there is not a different kind of money it’s a different location.
They want banking service in the Philadelphia area.
Insofar as there is a multi-million dollar banking loan market, the appellees now are fully qualified and do participate in it and there are extensive exhibits in the record showing their participation in the so called participation loans, loans ranging all the way from $5000 to a $160 million in which they have incidentally participations ranging from under $5000 to over $5 million, but in none of these multi-million dollar loans in which they participate is there is the extent of their participation in excess of $5 million or even close to their lending limits.
Now the — I think that it is therefore fair to say that the Philadelphia area that’s been limited is a market.
Of course there are other markets.
We don’t deny that there are national markets and that there are perhaps even international markets.
All we say is that simply because there are other markets and simply because these banks may have some participation whether it is small as I say it is or slightly larger is immaterial, the degree of that participation is essentially material, that where they have an important participation in an area like Philadelphia as large as it is with as many customers, with as many billions of dollars involved, this is a relevant market.
Lee Loevinger:
Within this relevant market you can measure their market share by indisputable figures.
They have 37% of the assets.
They have 36% of all the deposits.
They have 39 — they will have if they are merged to have 49% of all the deposits of other banks held by Philadelphia Banks.
They will have 34% of all the loans of Philadelphia Banks.
They will have 65 offices or nearly one-forth of all the banking offices in the Philadelphia area.
This market share then represents the proportion of the banking business done in Philadelphia and controlled by these two banks which is all the banking service that is available to 99 or 99 and nine-tenths percent of the residents of Philadelphia who are not in the multi-million dollar loan category.
99 and nine-tenths of a percent of those people who seek loans from banks in Philadelphia, seek loans of less than a million dollars.
As to these people, they are relinquished to the Philadelphia banking assets and if the merger is permitted, these banks will control more than one-third of these banking assets.
Now, the banks contend of market shares have a different significance in banking than they do in other businesses, because as they say banks do not own the funds they lend, they owe them and the bank cannot prevent its depositors from withdrawing demand deposits at any time.
In fact, however, it seems to me to be clear that market shares are more firmly established in banking than they are in most lines of commerce.
There is a continuing relationship between banks and their customers that does not exist in other businesses.
Customers for shoes or gasoline or milk can readily change the seller without notifying the seller.
A bank depositor or a bank borrower can’t payoff his loan or withdraw his deposits without notifying the bank.
It requires significant effort for him to go out and get a substitute bank.
Further banks are used as financial reference sources to control business opportunities.
The need for geographical convenience is been stressed by the bank themselves, in numerous applications for branches which are in evidence and as well in their own testimony.
A business or a professional man cannot afford to incur the ill-will of an important banker.
Consequently bank customers are very slow and low change which was confirmed again by the testimony of Mr. Potts, President of Philadelphia National, who said that if there is one fact “that banks know about it, is that of a nurture and the depositors are very low to change their accounts except for good cause.”
Therefore, this brings you to the controlling question of whether the combination by merger of banks controlling one-third of a market of this size is a restraint, a prey.
Now, it is perfectly clear that all of the competition between the bank themselves would be wholly extinguished, this was found by the Court and there is no denying it.
The Court however says, that the — because this will reduce the number of banks in the Philadelphia area by only one, that it will not have the affect of substantially restraining competition or affecting competition.
William J. Brennan, Jr.:
Let’s see, you said that is a restriction, that was [Inaudible]
Lee Loevinger:
Well, that’s Section 7 sir.
I’m arguing — Section 7 is argued in the brief and we are relying on it, but I simply don’t have time to cover both sections.
I’m relying on Section 1, because I think that the restraint is so perfect, is so clear, that Section 1 fairly invalidates this merger and the Court need to proceed no further.
Our point on Section 7 follows a fortiori.
Now, the decision in the present case was issued in January of 1962 which was some months before the decision of this Court in Brown Shoe.
Consequently the Court below relied on the decision of the Second Circuit in the American Crystal Sugar case and used the so called qualitative substantiality test.
However, I submit that the Court — in the first place this Court has, I think somewhat repudiated that test but even if it had not, that had the Court below read the district court’s opinion in American Crystal Sugar, which was affirmed and expressly endorsed by the Court of Appeals, it would have found that the rule of the American Crystal Sugar case expressly disavows the basis upon which the present case rests.
Lee Loevinger:
In American Crystal Sugar, there were two small companies, neither one of which, there weren’t small, but the two substantial companies, but neither one of which were or were to be come by merger the leaders in the industry who together proposed to combine 13% of the market and they said that by combining 13 X 13% of the market they could better compete with the industry leaders.
The district court alone said this is not what competition means for large companies to compete in order better to compete with giant companies and it held the merger was forbidden and that is the very heart of the case that the appellees made here.
As a matter of fact, that argument —
William J. Brennan, Jr.:
Follows a fortiori.
Lee Loevinger:
— has I think best been met by the words of the Judge Weinfeld in the Bethlehem Steel case, which I submit deserved the specific approbation of this Court.
Judge Weinfeld said, “Congress and its efforts to preserve the free enterprise system and the benefits to flow to the nation and to the consumer, did not, in enacting the antitrust laws, intend to give free play to the balancing power of gigantic enterprises and leaves the less powerful purchaser helpless, but Congress thought to preserve as a social and economic order not dependent on the power of a few to take care of themselves.
And this, as of matter of fact, is very close to the words of Chief Justice Warren dissenting in the DuPont case, although I think that the Court did not disagree with him on this point where he said a few sellers tend to act like one, in industry which does not have a competitive structure, will not have competitive behavior.
The public should not to be left to rely upon the dispensations of many in order to obtain the benefits which normally accompany competition.
Such beneficence is of uncertain tenure only actual competition can assure long run enjoyment of the goals, of a free economy.
I think that we can best test the positions of the government and of the banks in this case by examining the practical consequences of projecting these positions beyond the case.
The government position would not impede the growth of large banks by expansion to meet market demands and it would permit the merger of any but the largest banks holding dominant positions in their local markets.
The government position would ensure the preservation of a substantial number of large, vigorous, and competitive banks in markets of size of Philadelphia.
The bank position, on the other hands they argued, would clearly and certainly permit the reduction of banks in any market to no more than three in any event.
The bank position would carry to it’s logical conclusion, which says that the local market is irrelevant and we can look at the national market would permit the merger of even these three in any markets smaller than New York in order to permit the banks to compete with the larger New York banks.
Thus, the logical result of the bank position would be that we would end by having a single market in every market smaller than New York and probably have only three alternatives or competitors left in New York.
I think that there cannot possibly be any position, any choice between these alternatives nor any doubt as to which one Congress intended this Court to make as between the two of them.
I would like to save the reminder time for rebuttal if it pleases the court.
Earl Warren:
You may judge Loevinger.
Mr. Price?
Philip Price:
With the permission of the Court, we will divide our argument.
I will discuss the facts, how banks operate, what the evidence was — actually was that was presented to the Court below by the appellant and what the evidence was presented by the appellees and so make a very brief reference to the Clayton Act.
Mr. Littleton will discuss the Sherman Act and the effect of the Sherman Act in this case and the facts with particular reference to the Bank Merger Act of 1960 and it’s effect as well as the effect of the legislative history upon the popular interpretation of the rule of reason under the Sherman Act if Your Honors suggest so far.
First, this case is brought in the name of the United States, but the government does not properly —
[Inaudible]
Philip Price:
I’m going to cover the inapplicability of Clayton Act to this case.
Although, this case is brought in the name of the United States, the government is not properly the appellant.
This essentially is a dispute between two branches of the government, the Antitrust Division of the Department of Justice and the Comptroller.
The Comptroller decided this merger question, on the basis of the public interest as he was authorized to do under the Bank Merger Act of 1960.
As he was required to do, he asked for the advice or the suggestions of the Attorney General, the Department of Justice, the Federal Reserve, the FDIC in respect only of their opinion on the effect of this merger on competition, probably without regard to whether the public interest was involved, that wasn’t their function.
The Department of Justice and the Federal Reserve and to some extent the FDIC reported that in their opinions the effect of the merger on competition would be deleterious.
Philip Price:
The only evidence that we have in the case on that subject is the evidence presented by the Department of Justice which the court below found to be totally inadequate to sustain its opinion.
No evidence whatever from either the Federal Reserve or the FDIC, except the X party statement which appeared in the form of their two reports.
No witnesses were called to explain those statements.
No witnesses were called to give the basis for the opinions expressed, and therefore as the court below pointed out, there was no more validity suggested as to those then there was as to the opinion expressed by the Attorney General, which he found to be completely unfounded.
But this case involves a charge of a violation of the Sherman act under the Clayton Act in respect of two banks in Philadelphia.
It has nothing whatever to do.
With the mergers which may or may not take place will be contemplated in New York and Chicago and Lexington and in other places.
It involves solely the question of whether these two banks, the Federal, Girard, and the Philadelphia National Bank in Philadelphia, may properly merge without violation of the Sherman act and if, and whether on the contrary that merger would constitute an improper and excessive diminution in competition in Philadelphia and excess of concentration.
Those are the only two things charged in the complaint which had been pursued since the original complaint.
Now the court below, contrary to what has been suggested a moment ago, decided this case purely as a question of fact.
This Court is asked to review and to reverse the Court below purely on questions of fact.
The Court below assumed that the Clayton act applied, but held that it was not violated.
It held that the Sherman act applied and decided as a matter of fact that it was not violation.
So that, for this Court to reverse, the District Court would require it to declare that the finding of the facts of the court below were clearly erroneous and in order to oppose this subject to the understanding, it’s necessary to consider two things.
First, what is the need to banking; second, what was the evidence presented to the Court below which led it to the conclusion which it announced.
Now, banking is essentially different from general industry, from manufacturing and the complete failure of the Department of Justice to understand and give effect to this difference is probably what is the fundamental basis for this case, and certainly is the fundamental basis for the argument that has been presented, both orally and in the brief.
Now I shall like to say first something about the background situation as it existed in the Philadelphia which led to this merger proposal.
Until 1950, these two banks were essentially wholesale banks, wholesale is a colloquial term applied to banks which deal in large sums, preferably large deposits and large levels.
For example, in the early days the Philadelphia National Bank was probably reluctant to accept a deposit of less than $10,000.
The Girard for many years had only 10,000 depositors and as Girard’s have said they now have over 200,000.
Deposits, individual deposits, and corporate deposits up in the millions of dollars in demand deposits were quite common and it was a bank, or banks which dealt largely in that type of business that were called wholesale banks.
They were looked down upon the retail bank business done by the smaller banks because that involved a lot more trouble and handling small amounts of money and large number of deposits.
However, probably 1933 when it became unlawful to pay interest on the demand deposits, both private depositors and corporate depositors concluded that they shouldn’t leave millions of dollars on deposit earning nothing and with the added sophistication of corporate treasures, those moneys were drawn out in large quantities and invested in short-term government bonds, in commercial paper, in time deposit.
So that the demand deposits, for which the bank could not pay any interest were translated so far as they could be into time deposits where they had to pay the interest in order to get them.
The result of that was, that the banks were required, these wholesale banks were required to seek elsewhere for the cash which they had to have to increase their deposit account, because although it was suggested a moment ago that the deposits were not too significant, actually a bank can’t exist without deposits.
It can’t do business without deposits.
Deposits constitute approximately 90% of the resources of a commercial bank and therefore if the deposits were withdrawn the bank would collapse, it couldn’t possibly do its business with simply this capital and surplus.
So that the banks sought this other source of money, and that required it go into the retail business.
That trust could transfer large sums in the aggregate, but small individually to the suburbs of Philadelphia, led the banks to pursue their customers in the suburbs and in the course of doing so they merged with the local country banks who then were too small to handle the influx of business that had come from the city.
And together the combination produced a benevolent result as it was testified to by the only witness called by the appellant, who knew anything whatever about Philadelphia, and that was Professor Key.
Philip Price:
He said these mergers were beneficial.
They were necessary in order that the banks might keep up with the growing business in the community and it was good for everybody.
Potter Stewart:
You’re talking about the prior mergers?
Philip Price:
I’m speaking now about the mergers which were promoted and prompted and made necessary by the movement of capital to the country.
Those are the mergers which were equal —
Potter Stewart:
But there were some —
Philip Price:
But, it’s not this much.
Potter Stewart:
Some nine mergers, about one of the banks and some —
Philip Price:
That’s correct, yes sir, quite enough.
In addition however —
Arthur J. Goldberg:
[Inaudible]
Philip Price:
Yes sir, yes sir.
Arthur J. Goldberg:
[Inaudible]
Philip Price:
I can do it very briefly by saying that the banks, as business grew, the small banks became totally incapable of handing and they lost business and could only stay alive at all by merging with a larger bank, that’s the point of view of the smaller bank.
The point of view with a large moving into the country, it was the only way it could get into the surrounding area because of the restrictions upon opening new branches.
So that it was not only a marriage of convenience but of a great advantage to both and it resulted in the diminution of the number of banks, but a great increase in the number of branches.
So, that there are now some 300 branches in the four-county area and although there were fewer banks, only 17 banks.
Along with this movement of the country and the growth of activities locally, there was a great improvement in the business situation in Philadelphia and its surroundings so that the amount of business that required banking accommodation greatly increased.
That is shown with the exhibits in the case, in the growth of business in the surrounding area but there was a great lag in the growth of banks so that the largest banks in Philadelphia became totally unable to handle the business which came to them by virtue of they being in the same area and these big businesses which had outgrown the local banks then were forced to go and did go to many cities, but smaller than Philadelphia but which had banks larger than Philadelphia.
For example Pittsburgh, which had a bank then with a $25 million lending limit which was produced by mergers incidentally.
There is a bank in Boston which had $20 million.
There is a bank in Cleveland which has more, Dallas $10 million.
So that these business people, went not only to New York in large numbers which has 17 banks with a lending limit in an excess of a $1 million, but they went to these other cities as well.
There were 41 banks in Philadelphia, the four-county area, handling all the local business, but the large business went elsewhere because it couldn’t be handled locally.
Now, banking is essentially different from commerce or the manufacturing business itself and it is this that should be — is recognized by the Court below following the guide that was given to it by Congress.
When the Congress had before it this Bank Merger Act of 1960, the house report says, banking offers problems acutely different from other types of business.
The Senate report said, it’s impossible to require unrestricted competition in the field of banking and impossible to subject banks to the rules applicable to ordinary industrial and commercial concerns.
And Senator Robinson who is the chairman of the Committee on Banking and Currency said, banking is too important to permit unrestricted competition.
It is impossible to subject bank mergers to the Clayton act under which a merger would be barred if it might tend substantially to lessen competition regardless of the effects on the public interest.
And it was that approach that led the comptroller to reach the conclusion which he did, and which is now challenged not on the ground stated by Congress as the reasons why merger should be allowed but on this very limited statistical approach of the Department of Justice.
Philip Price:
The fundamental difference between banking and manufacturing is this.
When a bank lends all the money that is in the till it has to quit, it can’t make any more.
It’s not the Bureau of Engraving and Printing.
It can’t continue to manufacture money and unless it gets more deposits which are purely the voluntary act of some private individual or a company, it has to go out in lending business until the loans are paid off or until more deposits come in and that’s because the deposits are 90% of the resources that were available to any bank to lend to it’s customers.
Only 10% is due to the capital and surplus of the bank but 90% to the deposits and therefore it is completely dependent upon the uncontrolled will of depositors who can come and go as they please and do as they please.
