Dr Pepper/Seven-Up Companies, Inc. v. Federal Trade Commission

Citations: 151 F.R.D. 483; 1993 U.S. Dist. LEXIS 15053Docket: Civ. A. No. 92-2760

Court: District Court, District of Columbia; October 21, 1993; Federal District Court

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The case involves the bottling and distribution of Seven-Up soft drinks in New York City, initiated by plaintiffs Harold A. Honickman and Dr Pepper/Seven-Up Companies, Inc. (DPSU) against the Federal Trade Commission (FTC). This litigation follows a previous case, DPSU I, regarding Honickman's attempted acquisition of assets from the defunct Brooklyn Bottling Company. The current case focuses on Honickman's proposed acquisition of distribution rights from the also-defunct New York Seven-Up Bottling Company, which previously held exclusive rights in the New York metropolitan area.

The FTC denied Honickman's request for approval of this acquisition, citing its potential anticompetitive effects in Manhattan, the Bronx, and Westchester Counties, thereby violating the Clayton Act and the FTC Act. Plaintiffs argue that the FTC's decision was arbitrary, capricious, and infringed upon Honickman's due process and antitrust rights. The Court has ruled in favor of the plaintiffs' motion for summary judgment while denying the FTC's cross-motion. The background includes Honickman's earlier consent order with the FTC from 1991, which settled prior litigation regarding his distribution rights.

For ten years following the finalization of the Consent Order in the Settlement Agreement, respondents are prohibited from acquiring any part of the stock, equity interest, or assets of any Bottling Operation in the New York Metropolitan Area without prior approval from the Commission. A "Bottling Operation" is defined as any entity that distributes CSDs directly to supermarkets using company-owned or equity distribution, excluding those that operate solely through warehouse delivery or non-franchised beer distributors. Seven-Up Brooklyn qualifies as a Bottling Operation under this definition, requiring Mr. Honickman to obtain approval to reacquire its assets and franchise rights, which the FTC denied in a previous case (DPSU I).

In October 1991, Mr. Honickman submitted a request to the FTC to acquire specific licensing rights from New York Seven-Up Bottling Company after New York Bottling ceased operations. His application argued that the prior approval requirement did not apply since the acquisition was from DPSU, a concentrate manufacturer not classified as a Bottling Operation. He contended that with New York Bottling's cessation of operations, the transaction did not involve acquiring a Bottling Operation's assets as defined. Additionally, he asserted the acquisition would enhance competition by creating efficiencies in distribution and marketing within the New York market.

Mr. Honickman asserted that the proposed transaction, even if not deemed procompetitive, qualifies under the "failing company defense," as New York Bottling was a failed firm with no chance of reorganization and he was the only viable purchaser. When he submitted his application to the FTC, he was simultaneously involved in litigation concerning Brooklyn Seven-Up, which the plaintiffs tried to link with the New York Bottling transaction. However, Judge Revercomb denied their request to amend the complaint and dismissed New York Bottling claims due to ripeness, pending FTC's ruling on Honickman’s application. The FTC made the application public for comments, receiving input from Honickman and DPSU, who also met with FTC staff and Commissioners. On November 16, 1992, the FTC issued an opinion letter partially granting Honickman’s request, leading to subsequent litigation.

The primary issue differentiating this case from DPSU I is whether the Consent Order's prior approval requirement applies to the proposed transaction. The FTC argues that the court lacks jurisdiction to address this, claiming the issue is not ripe for review until the FTC seeks enforcement through civil penalties under 15 U.S.C. 45(1). The FTC contends Honickman should complete the acquisition and wait for enforcement action before asserting non-coverage as a defense. The implication of this argument is that the court should assume consent order coverage and focus on the merits of the FTC’s decision. The FTC supports its position with precedents, noting that prior cases involved non-self-implementing letters and lacked enforcement actions when declaratory relief was sought.

At the time of the plaintiffs' complaints, the FTC had not initiated civil penalty actions against them. The case of Floersheim v. Engman involved an FTC finding that certain forms sold by the plaintiff to creditors did not comply with a cease-and-desist order, leading the plaintiff to seek a declaration of compliance and prevent the FTC from pursuing civil penalties. Both that case and the current situation involve attempts to review FTC determinations regarding consent or cease-and-desist orders before formal agency action occurred under 15 U.S.C. 45(1) and 5 U.S.C. 704. 

In contrast, the current case involves an FTC determination related to the scope of a Consent Order alongside an agency action that is subject to court review. Specifically, the FTC denied Mr. Honickman’s application for prior approval as required by the Consent Order, granting the FTC a veto over proposed acquisitions. This veto is recognized as an adjudication under the Administrative Procedure Act (APA), qualifying as final agency action, provided the prior approval provisions apply to the proposed transaction. If they do not apply, the denial could be deemed arbitrary or capricious.

The court will now interpret the Consent Order concerning Mr. Honickman’s transaction. The interpretation follows principles akin to contract analysis, considering the Consent Order's language and context. Plaintiffs claim that New York Bottling's cessation of activities before Mr. Honickman’s application rendered the prior approval clause inapplicable. They argue that since New York Bottling shut down its operations prior to the application, it no longer qualifies as a "Bottling Operation" under the Consent Order, which defines the term in relation to entities actively distributing and selling carbonated soft drinks.

New York Bottling is accused of breaching its license agreements by ceasing distribution of soft drinks. The licenses for Seven-Up were suspended by DPSU on November 9, 1991, and effectively terminated by a bankruptcy court on November 6, 1991. Consequently, although New York Bottling's license might have technically remained "vested," it no longer had the legal capacity to bottle or distribute Seven-Up, leaving Mr. Honickman with nothing to acquire. Plaintiffs argue that Honickman's attempt to acquire the Seven-Up licenses was directly from DPSU, not New York Bottling. Since DPSU does not operate as a Bottling Operation as defined in the Consent Order, this transaction is deemed "vertical" and outside the scope of the Consent Order, which pertains only to "horizontal" acquisitions from other bottlers. The plaintiffs assert that the Consent Order's prior approval clause does not apply to such vertical assignments.

The Court finds the plaintiffs' arguments persuasive for several reasons. The FTC's interpretation of the "directly or indirectly" rights in the Consent Order is weakened by its specific language and the negotiating history. Notably, the term “Bottling Operation” is clearly defined as an entity currently distributing CSDs to supermarkets, excluding those that no longer do so. The negotiating history reveals that FTC staff initially proposed language requiring prior approval for acquiring assets related to the soft drink business, which Honickman rejected. The final agreement limited prior approval to assets related to active Bottling Operations, which are defined in the present tense. Upholding the FTC’s broader interpretation would contradict the explicit terms of the Consent Order and expand its meaning contrary to the parties' negotiations. Furthermore, FTC staff involved in the negotiations believed that the final language did not apply to vertical assignments and communicated this to the Commission prior to the final acceptance of the Consent Order. The FTC's changed stance on this interpretation arose only after Honickman submitted his application.

The Court finds that the opinions of FTC staff, while not necessarily reflecting the views of Commission members, provide insight into the parties' intent regarding the coverage issue during the negotiation of the Consent Order. Specifically, the Court references Judge Revercomb's previous opinion stating that the parties agreed to use the FTC's 1989 administrative complaint against Mr. Honickman to interpret the Consent Order's terms. This complaint indicated that Honickman's acquisition of assets from Seven-Up Brooklyn could reduce competition by eliminating a competitor, suggesting concerns about horizontal transactions. The Court asserts that the staff memoranda imply that the Consent Order granted the FTC veto power over future horizontal acquisitions by Honickman but not over vertical acquisitions from concentrate manufacturers. The FTC's broader interpretation of the Consent Order is deemed inconsistent with the parties' intentions and the circumstances of its formation. Consequently, the Court rules that Honickman's proposed acquisition of a license to bottle and distribute Seven-Up is not covered by the 1991 Consent Order. The Court concludes that the FTC's contrary decision is arbitrary and capricious under the Administrative Procedure Act (APA). As the coverage issue is decisive, the Court will issue an Order granting Honickman's Motion for Summary Judgment, denying the FTC's motion, and declaring that the acquisition does not require prior approval under the Consent Order, while also enjoining the FTC from opposing this interpretation.

The Order is limited to addressing the issue of Consent Order coverage and does not influence other actions the FTC may take regarding the proposed transaction or the soft drink market in metropolitan New York. The case was initially heard by Judge George H. Revercomb, who passed away before its conclusion. The Court has reviewed the Administrative Record and the transcript from the June 7, 1993 hearing. Prior to its closure in October 1991, New York Bottling held a franchise territory that included parts of New York, New Jersey, and Connecticut, distributing brands such as RC Cola, Barq’s, and Crush. Mr. Honickman, who acquired Seven-Up Brooklyn in 1987, sold most of his interests before the FTC filed an administrative complaint. The exact date of New York Bottling's closure is disputed, with records indicating it closed between October 18 and October 24, 1991. Mr. Honickman’s Application for interim distribution was filed after the company ceased operations. On December 16, 1991, the FTC partially approved his request for interim distribution in New Jersey but not in New York. Following this, plaintiffs sought emergency injunctive relief, which Judge Revercomb denied on December 19, 1991. Additionally, New York Bottling's distribution licenses for Barq's and Crush reverted to the franchisors upon the company's closure.