Chicago Bridge & Iron Co. N.V. v. Federal Trade Commission

Citations: 534 F.3d 410; 2008 U.S. App. LEXIS 14280Docket: No. 05-60192

Court: Court of Appeals for the Fifth Circuit; July 2, 2008; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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The petition for panel rehearing has been granted, resulting in the withdrawal of the prior opinion in Chicago Bridge, Iron Co. N.V. v. FTC. The new opinion addresses the review petition by Chicago Bridge and Iron Company (CB&I) and its U.S. subsidiary regarding a Federal Trade Commission (FTC) order to divest assets acquired from Pitt-Des Moines, Inc. (PDM). The FTC determined that CB&I's acquisition would likely substantially lessen competition or create a monopoly, violating the Clayton Act and the FTC Act. 

Before the acquisition, CB&I and PDM were the dominant suppliers of liquefied natural gas (LNG), liquefied petroleum gas (LPG), liquid atmospheric gases, and thermal vacuum chambers in the U.S., having a virtual duopoly in these markets. Notably, they were the only builders of LNG tanks in the U.S. between 1990 and 2001 and represented the majority of projects in the LPG tank market during that time. Following the acquisition in February 2001 for approximately $84 million, the FTC raised antitrust concerns and issued an administrative complaint in October 2001, leading to a hearing where an Administrative Law Judge (ALJ) concluded CB&I violated both Acts and ordered divestiture.

The FTC affirmed this decision with modifications, recognizing the established product and geographic markets for LNG, LPG, LIN/LOX tanks, and TVCs. The ALJ's analysis, rejecting the traditional Herfindahl-Hirschman Index (HHI) method for measuring market concentration, was contested by the Commission, which favored a broader analysis of sales data due to the long-term duopoly. The Commission ultimately agreed that the acquisition conferred undue market power to CB&I that could not be mitigated by the entry of new competitors. The petition for review was denied.

The Commission determined that the acquisition by CB&I violated Section 7 of the Clayton Act and Section 5 of the FTC Act due to significant market concentration, which established a prima facie case of presumptive illegality. Qualitative evidence indicated that the acquisition would leave CB&I as the sole major supplier in relevant markets, notably in LNG tank construction. Customer insights revealed that CB&I and PDM were perceived as the only competitors, and internal documents showed they primarily focused on each other, neglecting other potential competitors. High barriers to entry further exacerbated the anti-competitive effects, as the specialized skills and lengthy regulatory processes required for LNG tank construction made timely entry by new competitors exceedingly difficult.

The Commission found that CB&I's dominance provided it with a substantial advantage over potential entrants, and that entry and expansion by newcomers would not adequately replace the competition lost through the acquisition. CB&I's argument that new entrants could mitigate the anti-competitive effects was undermined by evidence showing that these joint ventures lacked the necessary experience, having not built LNG tanks in the U.S. and failing to secure contracts post-acquisition. The Commission concluded that these new entrants could not restore competition in the near future.

Consequently, the Commission ruled that CB&I's acquisition would likely substantially lessen competition and ordered a divestiture, requiring CB&I to create two separate entities capable of competing effectively in the relevant markets. CB&I challenged the Commission's decision on several grounds, including claims of incorrect legal standards applied during the proceedings and insufficient evidence to support the findings against it.

The court applies the substantial evidence standard to review the Commission's factual determinations, defined as evidence providing a substantial basis for reasonable inferences regarding the facts at issue. Legal questions related to Commission orders are reviewed de novo. Section 7 of the Clayton Act prohibits acquisitions that may substantially lessen competition or create a monopoly, emphasizing a standard of reasonable probability rather than mere possibility. The burden-shifting framework for Clayton Act section 7 actions requires the Government to first establish a prima facie case by demonstrating that an acquisition significantly increases market concentration, which creates a presumption of likely anti-competitive effects. The respondent can then rebut this presumption by providing evidence that questions the Government's predictions. If the respondent successfully rebuts, the burden of production shifts back to the Government, which retains the ultimate burden of persuasion.

CB&I’s challenge to the Commission's application of these legal standards asserts that the Commission improperly placed the burden of persuasion on CB&I instead of shifting it back to the Government after CB&I's rebuttal. The court disagrees, concluding that the Commission correctly found that CB&I did not successfully rebut the Government’s prima facie case. The Government’s evidence included significant market concentration data and analysis of competitive conditions, alongside demonstrating barriers to entry in relevant markets. The Commission determined that CB&I's evidence was inadequate to counter the Government's prima facie case.

The review confirms that the Commission's decision is backed by substantial evidence, affirming that CB&I was not improperly burdened with the burden of persuasion. CB&I cites Baker Hughes for its burden-shifting framework, which is interpreted by the Ninth and Eleventh Circuits as flexible rather than rigid. In Olin Corp. v. FTC, the Ninth Circuit ruled that the Commission is not required to shift burdens back to the Government if it addresses the respondent's rebuttal in its prima facie case; thus, it may determine the sufficiency of the respondent’s rebuttal without shifting the burden. The Eleventh Circuit agrees, noting that evidence is typically evaluated together, aligning with the notion that the ultimate burden of persuasion remains with the government. 

CB&I argues that the Commission placed an excessively demanding burden of production that resembles a burden of persuasion. The Commission's role is to assess whether the defendant has provided adequate evidence to counter the government's prima facie case, which is established through statistical evidence. The defendant isn't obligated to prove their case but must produce evidence that supports their arguments. The burden of production requires the court to credit the evidence and determine if it plausibly supports the rebuttal arguments. The Commission's task is to evaluate whether the defendant’s rebuttal effectively demonstrates inaccuracies in the market-share statistics regarding the acquisition's impact on competition. Under a flexible approach, the Commission can assess this in light of any undermining arguments from the prima facie case. However, it cannot impose a standard too close to a burden of persuasion, which would require the defendant to convincingly prove their factual propositions. The Commission retains discretion in deciding whether the respondent's evidence justifies their rebuttal arguments.

CB&I contends that the Commission incorrectly evaluated the necessary extent of market entry to mitigate anti-competitive effects, asserting that any supracompetitive price increase should provoke sufficient entry to counteract it. However, in predatory pricing claims, courts should assess whether significant entry barriers persist after the merged firm has eliminated rivals, as remaining firms may then charge supracompetitive prices. The Commission's analysis incorporated both existing entry and historical entry data to assess the potential for future entry to counteract a merger's anti-competitive impact. Evidence indicated that markets had long been dominated by CB&I and PDM, with no indication that new entrants could effectively challenge CB&I's pricing power. The Commission concluded that the historical context of these markets did not support CB&I's claims of low entry barriers and potential competition. CB&I's argument that potential entrants would constrain its pricing was rejected, as the Commission found insufficient evidence that these entrants could effectively restore competition against supracompetitive pricing. The Commission emphasized that its evaluations considered both immediate and future competitive conditions, concluding that entrenched barriers to entry would persist, and any new entrants would not be able to counteract CB&I's market dominance effectively post-merger. The evidence showed that only a couple of minor competitors engaged in bidding after the acquisition, reinforcing the Commission’s findings.

CB&I's claims of cost-cutting and market change do not sufficiently counter evidence indicating high entry barriers that prevent foreign competition, distinguishing this case from prior rulings such as Stearns Airport Equipment Co. Inc. v. FMC Corp. The Government identified specific barriers that CB&I failed to rebut, which will maintain supra-competitive pricing. For potential entrants to effectively compete, they must have easier entry conditions, which is not the case here due to significant industry-specific obstacles. CB&I misinterprets the Commission's mention of "on par" or "parity," incorrectly suggesting that new entrants must equal CB&I; instead, the Commission highlighted the inability of new entrants to compete on equal footing due to high barriers. While some new suppliers are attempting to enter the market, they cannot restore the lost competition. Other courts have determined that entry must be of sufficient scale to impact pricing and overcome barriers, which is lacking in this situation. The Commission's assessment indicates that current or potential entrants are significantly weaker than CB&I and cannot effectively constrain prices post-acquisition. The Commission's conclusions were based on substantial evidence, meeting the standard of a reasonable mind's acceptance. CB&I's claims that the Commission dismissed its arguments prematurely or misapplied the substantial evidence standard are unfounded, as the Commission thoroughly evaluated CB&I's points. Additionally, CB&I challenges the Commission's reliance on HHI statistics, its finding of high entry barriers, and the lack of real alternatives for CB&I's customers, but these challenges do not undermine the Commission's factual findings.

HHIs (Herfindahl-Hirschman Indices) serve as indicators of potential future competitiveness and are a critical component of the Government's prima facie case regarding market concentration. The merger involves two dominant players in four domestic markets, reinforcing the Government's HHI figures. Notably, post-merger HHIs exceed 1,800, with increases of 2,635 for the LIN/LOX tank market, 3,911 for the LPG tank market, 4,956 for the LNG tank market, and 4,999 for the TVC tank market, suggesting significant adverse competitive effects. An HHI of 10,000 indicates a monopoly. 

CB&I contends that the Commission erred in rejecting the ALJ's finding that the HHIs were unreliable due to reliance on sporadic sales data. The Commission countered by extending the sales data period to 11 years (1990-2001) to stabilize year-to-year fluctuations and addressed CB&I's failure to demonstrate any structural market changes during that time. The Commission also highlighted evidence of high entry barriers and customer perceptions of quality differences, supporting a conclusion of high market concentration consistent with precedents like R.J. Reynolds Tobacco Co. v. Cigarettes Cheaper. The use of HHIs is justified as part of a broader analysis of the merger's potential anti-competitive effects, despite CB&I's arguments regarding the reliability of the sales data.

Monopolization claims regarding the “heavy-lift satellite launch services for the government” market were dismissed due to insufficient sales data, limited to only two contracts, which undermines a prima facie case. While limited data can be problematic, it is not universally applicable, particularly as there is no broad consensus in academic literature that small markets are inherently problematic. Under the Clayton Act, the size of the market does not impact the legality of mergers. In contrast, for three of the four examined markets, data on market concentration is more robust than in the Lockheed Martin case. 

In the LNG market, nine tank plants were awarded between 1990 and the acquisition, with CB&I winning five and PDM four. CB&I and PDM constructed nearly all LNG peak-shaving plants in the U.S., with only six built by a now-defunct competitor. In the LPG market, they similarly dominated the awarded projects from 1990 to 2001. Additionally, they built a significant majority of LIN/LOX tanks constructed during that period, with a third competitor going out of business in 2001, indicating a trend towards increased market concentration.

However, in the TVC market, evidence was deemed too sparse, relying on only one past project and one proposed project to calculate HHI statistics, rendering them unreliable. Despite this, substantial evidence, including customer testimonies and internal documents, supported the conclusion that the merger would have anti-competitive effects in the TVC market. The Government demonstrated that CB&I and PDM have been the only competitors in the TVC market since 1960.

The record indicates that HHIs, while not entirely disregarded, should be interpreted cautiously alongside long-term market trends, which suggest that the proposed merger would significantly reduce competition. Even without HHI analysis, the Government's evidence substantiates a prima facie case across all markets, including the TVC market. Lastly, CB&I's assertion that the Commission did not adhere to the Merger Guidelines—by identifying CB&I as a dominant player rather than treating potential entrants equally—was noted as a point of contention.

CB&I's argument lacks merit due to a misinterpretation of the Merger Guidelines, which state that firms must have an equal likelihood of securing sales to be assigned equal market shares. The Commission found overwhelming evidence indicating that such equal likelihood does not exist, primarily due to high entry barriers related to CB&I’s reputation and skilled labor control. The Commission's rejection of CB&I's rebuttal, concerning alleged market entry and low entry barriers, is backed by substantial evidence. While post-acquisition evidence can be relevant to assess new entrants' potential to mitigate anti-competitive effects, its probative value is limited when it can be manipulated. The Supreme Court has previously noted that relying heavily on post-acquisition evidence can lead to unjust outcomes, allowing violators to evade accountability by altering their behavior when facing legal scrutiny. Thus, the Commission correctly determined that post-acquisition evidence should be weighed cautiously, especially when it could be perceived as subject to manipulation. Despite CB&I's claims that its post-acquisition evidence is valid, the Commission maintained that the potential for manipulation diminishes its probative value, supporting its decision that evidence subject to manipulation should carry little weight.

Price reductions mentioned by the Respondents occurred after the Complaint was issued and are seen as potentially manipulable evidence. The post-acquisition scenario suggests that CB&I could strategically refuse bids or impose harsh terms to allow new entrants to appear competitive. CB&I claims that foreign competitors have successfully entered four markets post-acquisition, which it argues demonstrates that actual entrants can mitigate anti-competitive effects. However, the Government asserts that this evidence is outside the administrative record and thus not subject to review. 

The specific evidence includes bids for projects like the Hackberry Project and others, but only one instance of a foreign company's successful entry was deemed possibly relevant. This evidence does not significantly impact the Commission's decision. CB&I mischaracterizes the Hackberry Project evidence, which pertains to the entire LNG port rather than just CB&I's bidding chances. After losing a bid, CB&I withdrew from the Freeport LNG project, which limited its opportunities. It only lost a bid for LNG tank work at Sabine Pass, insufficient to challenge the Commission's conclusion about actual entry.

Additionally, CB&I asserts that large foreign firms could act as potential entrants to constrain anti-competitive effects, but fails to rebut evidence indicating high barriers to entry. The potential-competition doctrine requires low barriers for new entrants to effectively challenge a monopolist’s market power. The existence of potential entrants alone is inadequate to counteract the anti-competitive nature of the acquisition without evidence of low entry barriers.

Assertions regarding the impact of potential entry on market power depend on the presence of low or nonexistent entry barriers, as established in Reazin v. Blue Cross. The district court correctly directed the jury to consider barriers that could hinder competition and enable anticompetitive conduct, referencing cases such as United States v. Waste Management and Yamaha Motor Co. The concept of an "alleged potential entrant" necessitates a significant likelihood of producing market deconcentration or other procompetitive outcomes. 

CB&I challenges the Commission's finding that it did not adequately rebut three key barriers to entry: 1) reputation/experience, 2) regulatory and technical expertise, and 3) access to local labor and trained supervisors. The standard of substantial evidence allows the Commission to infer reasonably from the evidence that CB&I failed to counter the prima facie case. 

While CB&I argues that general reputation is not a significant entry barrier, the Government's evidence points to CB&I's specific industry-related reputation, which encompasses traits relevant to LNG projects in the U.S. This reputation acts as a proxy for experience, regulatory knowledge, and competitiveness. The Commission's determination that reputation, characterized by expertise and success in tank project construction in the U.S., constitutes a barrier to entry is supported by substantial evidence, rendering CB&I’s international reputation evidence irrelevant in this context. Thus, the Commission's conclusions are upheld.

Substantial evidence indicates that domestic reputation is vital in the bidding process for this industry, which CB&I did not successfully contest. Key findings include: (a) the bidding evaluation incorporates bidders' prior experience and project history; (b) customer testimonies affirm the importance of reputation, particularly domestic reputation, in bidder selection; and (c) the industry demands sophisticated construction work, with established brand names being crucial due to their association with skilled local crews. Consequently, the Commission concluded that reputation serves as a barrier to entry, which CB&I failed to rebut.

Additionally, CB&I disputed the Commission's assertion that regulatory experience with the Federal Energy Regulatory Commission (FERC) constitutes a barrier. The ability to handle FERC-related work is integral to the bidding process, and CB&I has marketed its familiarity with FERC. Regulatory and technical expertise are recognized barriers to entry, as indicated by relevant case law. There is prima facie evidence from a customer that lacking FERC experience could disqualify CB&I from contracts. While CB&I acknowledged that owners file applications and outside consultants are available, customers still prioritize contractors that can assist with the complex application process in LNG tank building projects.

Although CB&I cited an instance of a foreign firm successfully navigating a large project towards FERC compliance, this was deemed insufficient to counter the Commission's findings. Even if valid, it does not undermine the general conclusion that significant entry barriers exist in these markets, as supported by the previously mentioned factors.

Finally, the control over a specialized labor force is highlighted as a recognized barrier to entry, reflecting the necessity for employee skill levels for success in the industry.

The Government provides evidence that CB&I controls a specialized workforce in cryogenic tank construction, leading to faster project completion and more competitive pricing. CB&I has developed unique welding techniques and trained crews accordingly. The Commission finds that CB&I fails to adequately counter the Government's strong initial case, which identifies significant entry barriers in the market.

CB&I argues that sophisticated customers can mitigate anti-competitive effects by adjusting bidding processes and seeking alternatives. However, evidence indicates that these customers often procure services from CB&I on a sole-source basis without competitive bidding, demonstrating CB&I's market power. There is no indication that customers who previously relied on CB&I and PDM would consider performing these services independently, nor is there evidence of new competitors entering the market.

Moreover, unlike the case of Baker Hughes, where alternatives existed due to low entry barriers, this market features confidentiality in pricing, limiting customers' ability to assess whether CB&I is charging excessive prices. Buyers lack critical information and face a weak bargaining position, lacking the powers that would support a "sophisticated customer" defense, such as revealing competitive prices or managing supplier dynamics. Consequently, the absence of meaningful alternatives and the unique nature of each project further diminish customer leverage in negotiations.

CB&I's pressure on customers to secure sole-source contracts, coupled with its success in obtaining such contracts, indicates that buyers lack the leverage to influence CB&I during contract negotiations. There is no evidence to suggest that new entrants could achieve "adequate volume and returns" needed for market entry, as buyer power is not concentrated enough. Courts have not recognized the "sophisticated customer" defense as a standalone rebuttal to a prima facie case of anti-competitiveness, although it can be a factor in evaluating antitrust cases. The economic rationale for rebutting presumptions of anti-competitiveness based on large buyer dominance is weak. 

Regarding the Commission’s remedial provisions, CB&I claims they are overly broad and punitive. The Commission's mandates are reviewed for abuse of discretion, with the courts favoring the Commission's decisions. The Commission has significant discretion in determining remedies to address unfair practices. In this case, the Commission ordered CB&I to divest assets to establish a new competitor, PDM, which would operate on an equal footing with CB&I. CB&I objects to this divestiture, which includes assets unrelated to cryogenic tank construction but deemed necessary for competitiveness. Total divestiture is not inappropriate even if the antitrust violation relates to only one aspect of the company. The divestiture aims to restore effective competition, as the acquired entity was previously viable and independent. The inclusion of the water division in the divestiture is relevant, as it provides a steady revenue stream that would support the new competitor's viability.

The order does not establish two competitors of equal size, contrary to CB&I's interpretation. Instead, it requires that the new entities be capable of competing for an equal market share, akin to conditions before the acquisition. The Commission determined that the new CB&I and new PDM can compete on equal footing as before. The order allows CB&I and a third-party monitor to decide how to divide assets to fulfill this requirement, without mandating an equal split of the company. Water assets may be excluded if deemed unnecessary by both the acquirer and the monitor. The Commission's order aims to ensure that the new entity can compete effectively against CB&I, addressing anti-competitive concerns under the Clayton and FTC Acts.

CB&I's argument for a separate evidentiary hearing for the remedy phase is rejected. A hearing is typically necessary only if new evidence or unresolved factual issues arise, which was not the case here. The Commission considered all relevant evidence during the lengthy trial, and CB&I did not present any new issues warranting a hearing. Claims of surprise regarding the extent of the remedy are misinterpretations; the order requires two companies capable of competing for bids, not equal tank companies. This relief was anticipated from the outset, as indicated in the Government's initial complaint.

The document details the Federal Trade Commission (FTC) proceedings related to Chicago Bridge & Iron Company (CB&I) and its acquisition of PDM. It emphasizes the need for creating viable competitive entities to challenge CB&I's market position and concludes that the FTC did not abuse its discretion in denying CB&I’s request for a rehearing regarding remedy measures. Consequently, the petition to review the FTC order is denied.

The term "Commission" refers to the FTC Commissioners, while "Government" denotes the complainant counsel involved in the investigation. On August 29, 2000, CB&I entered a letter of intent to acquire PDM's assets, subsequently notifying the U.S. Department of Justice. After a mandatory 30-day waiting period, the Commission began its investigation, leading CB&I to delay the merger. Ultimately, on February 7, 2001, CB&I completed the acquisition for approximately $84 million.

The focus of the discussion is primarily on the LNG market. CB&I filed a petition for reconsideration on February 1, 2005, citing new evidence of foreign competitors entering the market. However, the Commission denied this petition on May 10, 2005, stating CB&I did not demonstrate that new entrants could mitigate competitive losses from the acquisition. The appeal predominantly addresses Section 7 of the Clayton Act, with Section 5 of the FTC Act considered derivative. The document also notes a misinterpretation by CB&I regarding the burden-shifting framework discussed by the Eleventh Circuit.

The Eleventh Circuit views the Baker Hughes framework as generally adaptable, particularly emphasizing the necessity for flexibility in time-sensitive situations, such as when the government seeks a temporary restraining order or preliminary injunction. The court maintains that it can independently review the context of the Commission’s conclusions, regardless of the Commission's use of the term "persuasive," which does not imply improper burden-shifting or comparison with CB&I’s evidence. The Commission labeled CB&I’s arguments as "unpersuasive" without addressing the evidence directly, and similarly critiqued a customer’s statement for inconsistency with other evidence. 

Barriers to entry are defined as costs new entrants incur that incumbents do not, or as market factors that allow incumbents to maintain monopoly returns. CB&I misinterpreted the Commission’s findings regarding post-acquisition price increases, which did not definitively rule out the existence of such increases but rather indicated that the Government did not need to demonstrate them. The Commission dismissed the Government's evidence of post-acquisition price increases, asserting that existing evidence sufficiently indicated anti-competitive conditions. The admissibility of post-acquisition evidence is contingent upon its nature, with relevant case law providing discretion for trial courts in determining its admission.

The Commission's ruling was upheld, as it did not abuse its discretion. CB&I's argument, based on Baker Hughes, that the mere threat of foreign entry can mitigate anti-competitive effects is deemed misplaced. The Baker Hughes standard has faced criticism, particularly regarding its perceived leniency towards respondents. It is emphasized that a high threshold exists for proving a company as a potential entrant in anti-trust terms; evidence must show a likelihood of entry that meets a "reasonable probability" to "certainty" standard. CB&I's evidence failed to meet this threshold, failing to counter the prima facie case against the merger's anti-competitive effects. The Commission found substantial evidence, supported by market trends in Herfindahl-Hirschman Index (HHI) changes, indicating that CB&I and PDM are dominant in their markets, and that the merger would exacerbate market concentration. While Merger Guidelines are not legally binding, they serve as a persuasive benchmark in assessing mergers for potential anti-competitive outcomes.

Merger Guidelines serve as enforcement policy statements rather than binding legal standards for agency and court decisions, as established in cases such as Native American Arts, Inc. v. Waldron Corp. and Olin Corp. The Guidelines are non-binding on both the courts and the Commission, with enforcement being an area where courts are generally hesitant to intervene. They emphasize a flexible application of standards based on specific facts and circumstances rather than a rigid interpretation.

The discussion highlights concerns regarding market entry for new competitors, noting that winning bids does not guarantee successful market entry, particularly given CB&I's control over skilled labor, which other competitors may lack. Post-acquisition evidence may be unreliable due to potential manipulation. The Commission identified that CB&I's reputation contributes to its competitive advantage, creating entrenched buyer preferences that act as barriers to entry. Such barriers, including established brand reputations, are critical considerations, as courts assess whether they are significant enough to warrant judicial concern. The existing economies of scale and strong reputations of the defendants present challenges for new competitors seeking to expand.

Reputational barriers to entry are context-dependent, with varying weight in different cases. CB&I argues that the Commission did not differentiate between "after-acquired" and "before-acquired" properties, referencing Reynolds Metals Co. v. FTC. In Cascade Natural Gas Corp. v. El Paso Natural Gas Co., the Supreme Court indicated that after-acquired assets could be included in divestiture orders but remanded for a hearing on asset division. In this instance, the Commission delegated the authority for asset determination to CB&I and a monitor trustee, which is permissible under its broad authority to craft remedies. This approach is considered potentially more effective than holding an additional hearing. The Commission's justification for the remedy, articulated in its Opinion and Decision on Petition for Reconsideration, was deemed adequate and more comprehensive than that in United States v. Microsoft, where a remand was ordered due to insufficient explanation. CB&I's claims of surprise regarding the remedy's extent do not warrant reversal, as they failed to demonstrate resulting prejudice or that the lack of notice hindered their ability to present evidence supporting their case.