Graco, Inc.; Analysis of Agreement Containing Consent Order To Aid Public Comment, 24201-24206 [2013-09673]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 78, Number 79 (Wednesday, April 24, 2013)]
[Notices]
[Pages 24201-24206]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09673]


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FEDERAL TRADE COMMISSION

[File No. 101 0215]


Graco, Inc.; Analysis of Agreement Containing Consent Order To 
Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before May 20, 2013.

ADDRESSES: Interested parties may file a comment at https://ftcpublic.commentworks.com/ftc/gracoconsent online or on paper, by 
following the instructions in the Request for Comment part of the 
SUPPLEMENTARY INFORMATION section below. Write ``Graco, File No. 101 
0215'' on your comment and file your comment online at https://ftcpublic.commentworks.com/ftc/gracoconsent by following the 
instructions on the web-based form. If you prefer to file your comment 
on paper, mail or deliver your comment to the following address: 
Federal Trade Commission, Office of the Secretary, Room H-113 (Annex 
D), 600 Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Benjamin Jackson (202-326-2193), FTC, 
Bureau of Competition, 600 Pennsylvania Avenue NW., Washington, DC 
20580.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 2.34, 16 CFR 2.34, 
notice is hereby given that the above-captioned consent agreement 
containing a consent order to cease and desist, having been filed with 
and accepted, subject to final approval, by the Commission, has been 
placed on the public record for a period of thirty (30) days. The 
following Analysis to Aid Public Comment describes the terms of the 
consent agreement, and the allegations in the complaint. An electronic 
copy of the full text of the consent agreement package can be obtained 
from the FTC Home Page (for April 18, 2013), on the World Wide Web, at 
https://www.ftc.gov/os/actions.shtm. A paper copy can be obtained from 
the FTC Public Reference Room, Room 130-H, 600 Pennsylvania Avenue NW., 
Washington, DC 20580, either in person or by calling (202) 326-2222.
    You can file a comment online or on paper. For the Commission to 
consider your comment, we must receive it on or before May 20, 2013. 
Write ``Graco, File No. 101 0215'' on your comment. Your comment--
including your name and your state--will be placed on the public record 
of this proceeding, including, to the extent practicable, on the public 
Commission Web site, at https://www.ftc.gov/os/publiccomments.shtm. As a 
matter of discretion, the Commission tries to remove individuals' home 
contact information from comments before placing them on the Commission 
Web site.
    Because your comment will be made public, you are solely 
responsible for making sure that your comment does not include any 
sensitive personal information, like anyone's Social Security number, 
date of birth, driver's license number or other state identification 
number or foreign country equivalent, passport number, financial 
account number, or credit or debit card number. You are also solely 
responsible for making sure that your comment does not include any 
sensitive health information, like medical records or other 
individually identifiable health information. In addition, do not 
include any ``[t]rade secret or any commercial or financial information 
which * * * is privileged or confidential,'' as discussed in Section 
6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 
4.10(a)(2). In particular, do not include competitively sensitive 
information such as costs, sales statistics, inventories, formulas, 
patterns, devices, manufacturing processes, or customer names.
    If you want the Commission to give your comment confidential 
treatment, you must file it in paper form, with a request for 
confidential treatment, and you have to follow the procedure explained 
in FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ Your comment will be kept

[[Page 24202]]

confidential only if the FTC General Counsel, in his or her sole 
discretion, grants your request in accordance with the law and the 
public interest.
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    \1\ In particular, the written request for confidential 
treatment that accompanies the comment must include the factual and 
legal basis for the request, and must identify the specific portions 
of the comment to be withheld from the public record. See FTC Rule 
4.9(c), 16 CFR 4.9(c).
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    Postal mail addressed to the Commission is subject to delay due to 
heightened security screening. As a result, we encourage you to submit 
your comments online. To make sure that the Commission considers your 
online comment, you must file it at https://ftcpublic.commentworks.com/ftc/gracoconsent by following the instructions on the web-based form. 
If this Notice appears at https://www.regulations.gov/#!home, you also 
may file a comment through that Web site.
    If you file your comment on paper, write ``Graco, File No. 101 
0215'' on your comment and on the envelope, and mail or deliver it to 
the following address: Federal Trade Commission, Office of the 
Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue NW., 
Washington, DC 20580. If possible, submit your paper comment to the 
Commission by courier or overnight service.
    Visit the Commission Web site at https://www.ftc.gov to read this 
Notice and the news release describing it. The FTC Act and other laws 
that the Commission administers permit the collection of public 
comments to consider and use in this proceeding as appropriate. The 
Commission will consider all timely and responsive public comments that 
it receives on or before May 20, 2013. You can find more information, 
including routine uses permitted by the Privacy Act, in the 
Commission's privacy policy, at https://www.ftc.gov/ftc/privacy.htm.

Analysis of Agreement Containing Consent Order To Aid Public Comment

    The Federal Trade Commission (``Commission'') has accepted for 
public comment an Agreement Containing Consent Order (``Consent 
Order'') with Graco, Inc. (``Graco'') to remedy the alleged 
anticompetitive effects resulting from Graco's acquisition of its most 
significant competitors, Gusmer Corp. (``Gusmer'') and GlasCraft, Inc. 
(``GlasCraft''). The Commission Complaint (``Complaint'') alleges that, 
at the time of the acquisitions, Graco, Gusmer, and GlasCraft each 
manufactured and sold equipment for the application of fast-set 
chemicals (``fast-set equipment''). Neither acquisition was reportable 
under the Hart-Scott-Rodino Act. The Consent Order seeks to restore 
competition lost through the acquisitions by requiring Graco to license 
certain technology to a small competitor to facilitate its entry and 
expansion, and to cease and desist from engaging in certain conduct 
that may delay or prevent entry and expansion of competing firms. The 
Complaint and Consent Order in this matter have been issued as final 
and the Consent Order is now effective.
    The Complaint alleges that the acquisitions each violated Section 7 
of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the 
Federal Trade Commission Act, as amended, 15 U.S.C. 45.
    The purpose of this Analysis to Aid Public Comment is to invite and 
facilitate public comment concerning the Consent Order. It is not 
intended to constitute an official interpretation of the Agreement and 
Consent Order or in any way to modify their terms.
    The Consent Order is for settlement purposes only. The Commission 
has placed the Consent Order on the public record for thirty (30) days 
for the receipt of comments by interested persons.

I. The Relevant Market and Market Structure

    The relevant market within which to analyze the competitive effects 
of these acquisitions is fast-set equipment used by contractors in 
North America. Fast-set equipment combines and applies various reactive 
chemicals that form polyurethane foams or polyurea coatings used for 
the application of insulation and protective coatings. The essential 
components of a fast-set equipment system are the proportioner, the 
heated hoses, and the spray gun.
    Fast-set equipment manufacturers sell their products almost 
exclusively through a network of specialized, third-party distributors. 
These independent distributors sell to end-users. End-users demand a 
proximate source of expertise, spare parts, and repair services. 
Therefore, a robust network of third-party fast-set equipment 
distributors is necessary for any manufacturer to compete effectively 
in the relevant market.
    Prior to its acquisition by Respondent in 2005, Gusmer was the 
largest and most significant competitor engaged in the manufacture and 
sale of a full line of fast-set equipment throughout North America and 
the world. The acquisition increased Graco's share of the North 
American fast-set equipment market to over 65%, and left GlasCraft as 
Graco's only significant North American competitor. Graco's acquisition 
of GlasCraft in 2008 raised Graco's market share above 90% and removed 
Graco's last significant North American competitor. Following the 
acquisitions of each of Gusmer and GlasCraft, Graco closed both firms' 
fast-set equipment manufacturing facilities and has fully assimilated 
or terminated all remaining assets, products, intellectual property, 
and personnel from both firms.
    Prior to the acquisitions, fast-set equipment distributors 
typically carried products from multiple manufacturers. Distributors 
and end-users were able to mix and match the products from the 
different manufacturers to assemble a fast-set system that best 
satisfied end-users' demands. Further, manufacturers did not impose 
exclusive relationships on distributors--a distributor was free to make 
some or all of its fast-set equipment purchases from whichever 
manufacturers it chose. The Complaint alleges, among other effects, 
that the acquisitions of Gusmer and GlasCraft have removed the ability 
of distributors and end-users to select the equipment that best serves 
their, and their customers', interests and needs.

II. Conditions of Entry and Expansion

    The Complaint alleges high entry barriers in the relevant market. 
The principal barrier to entry is the need for specialized third-party 
distribution. As a result of its acquisitions, Graco obtained 
substantial control over access to that distribution channel. 
Subsequent Graco practices have further heightened barriers to 
competitive entry and expansion, such that restoration of the 
competition lost as a result of Graco's acquisitions is unlikely to be 
restored unless Graco's continuation of those practices is enjoined.
    Beginning in 2007, former employees of Gusmer began distributing 
fast-set equipment as Gama Machinery USA, Inc., now doing business as 
Polyurethane Machinery Corp. (``Gama/PMC''). In March 2008, Graco sued 
Gama/PMC and others alleging, among other things, breach of contract. 
The continuation of that litigation has reduced the willingness of 
distributors to purchase fast-set equipment from Gama/PMC, for fear 
that their supply of fast-set equipment might later be interrupted as a 
result of litigation. To reduce that barrier, an impending settlement 
of that litigation is incorporated in the Commission's Consent Order.
    Like Gama/PMC, other prospective competitors--some of which 
presently offer only some components, rather than a full line of 
proportioners, hoses, and spray guns--have been unable to gain a 
meaningful foothold in the North American fast-set equipment market

[[Page 24203]]

because of barriers to access to the required specialty distribution 
channel. Following its obtaining of market power through its 
acquisitions, Graco increased the discount and inventory thresholds it 
required of distributors, and threatened to cut off any distributor's 
access to needed Graco fast-set equipment if the distributor purchased 
fast-set equipment from any Graco rival. The reduction of barriers to 
entry and expansion by enjoining the continuation of this conduct is 
necessary to the restoration of competition lost as a result of Graco's 
acquisitions, and certain provisions of the Commission's cease and 
desist order are directed to that end.

III. Effects of Graco's Acquisitions

    As a result of the acquisitions, Graco has eliminated head-to-head 
competition with Gusmer and GlasCraft. The Complaint alleges that 
concentration in the relevant market has increased substantially, and 
given Graco the ability to exercise market power unilaterally. The 
Complaint alleges that Graco has exercised that market power by raising 
prices, reducing product options and alternatives, and reducing 
innovation. The Complaint further alleges that Graco engaged in certain 
post-acquisition conduct that has raised barriers to entry and 
expansion such that the continuation of that conduct must be enjoined 
if the competition lost as a result of Graco's acquisitions is to be 
restored.

IV. The Consent Agreement

    Since the acquisitions were completed some time ago, it is not 
practicable to recreate the acquired firms as independent going 
concerns. Instead, the purpose of the Consent Order is to ensure the 
restoration of the competitive conditions that existed before the 
acquisitions, to the extent possible, by facilitating Gama/PMC's entry 
and expansion and lowering barriers to entry. Therefore, the Consent 
Order requires Graco to enter into a settlement agreement with Gama/PMC 
within ten (10) days of the entry of the Order. In addition, Graco must 
grant to Gama/PMC an irrevocable license to certain Graco patents and 
other intellectual property in order to ensure that Graco cannot 
continue or renew its suit. In exchange, PMC will pay to Graco a sum of 
money for the settlement of the litigation and agree to a deferred 
license fee for the intellectual property. The settlement documents 
will be incorporated by reference into the Consent Order, and cannot be 
modified without the Commission's prior approval. Further, the Consent 
Order independently prohibits Graco from filing suit against Gama/PMC 
for infringing the licensed intellectual property.
    In order to reduce barriers to competitor entry, the Consent Order 
directs Graco to cease and desist from imposing any conditions on its 
distributors that could, directly or indirectly, lead to exclusivity. 
The Consent Order also prohibits Graco from discriminating against, 
coercing, threatening, or in any other manner pressuring its 
distributors not to carry or service any competing fast-set equipment. 
The Consent Order does not mandate that any distributor carry 
competitive fast-set equipment; rather, it bars Graco from imposing 
exclusivity on its distributors.
    The Consent Order further obligates Graco to waive or modify any 
policies or contracts that would violate the Consent Order. Graco will 
have thirty (30) days after the Consent Order is final to negotiate 
changes in the contracts with its distributors to comply with the 
Consent Order. Graco must provide all of its distributors, employees 
and agents with a copy of the Consent Order and a plain-language 
explanation of what is says and requires.
    The Consent Order further requires Graco to provide the Commission 
with prior notice: (1) If it intends to make another acquisition of 
fast-set equipment (after an appropriate waiting period); or (2) if it 
intends, within thirty (30) days, to institute a lawsuit or similar 
legal action against a distributor or end-user with regard to a claimed 
violation of Graco's trade secrets or other intellectual property 
covering fast-set equipment. The Consent Order will remain in effect 
for ten (10) years, and contains standard compliance and reporting 
requirements.

V. Effective Date of the Consent Order and Opportunity for Public 
Comment

    In this instance, the Commission issued the Complaint and the 
Consent Order as final, and served them upon Graco at the same time it 
accepted the Consent Agreement for public comment. As a result of this 
action, the Consent Order has become effective. The Commission adopted 
procedures in August 1999 to allow for immediate implementation of an 
order prior to the public comment period. The Commission announced that 
it ``contemplates doing so only in exceptional cases where, for 
example, it believes that the allegedly unlawful conduct to be 
prohibited threatens substantial and imminent public harm.'' 64 FR 
46,267, 46,268 (1999).
    This is an appropriate case in which to issue a final order before 
receiving public comment because the effectiveness of the remedy 
depends on the timeliness of the private settlement agreement between 
Graco and Gama/PMC, which only becomes effective when the Consent Order 
becomes final. Both Graco and Gama/PMC have made initial efforts to 
address distributor concerns about possible Graco retribution by 
separately sending letters to distributors assuring them that 
preliminary discussions of business relations with Gama/PMC would not 
have any adverse consequences on the distributors' relationship with 
Graco. However, the protections of the applicable license and 
covenants, as well as those included in the Consent Order, are needed 
to provide distributors reasonable assurances that buying from Gama/PMC 
will not jeopardize the distributors' relationship with Graco. As a 
result, any delay in the effectiveness of the Consent Order and the 
associated private settlement will prevent Gama/PMC from finalizing 
relationships with distributors in time for the current construction 
season--and this will have a significant and meaningful impact on 
competition in the fast-set equipment market that the Consent Order is 
intended to foster.
    The Commission anticipates that the competitive problems alleged in 
the Complaint will be remedied by the Consent Order, as issued. 
Nonetheless, public comments are encouraged and will be considered by 
the Commission. The purpose of this analysis is to invite and 
facilitate such comments concerning the Consent Order and to aid the 
Commission in determining whether to modify the Consent Order in any 
respect. Therefore, the Complaint and Consent Order have been placed on 
the public record for thirty (30) days to solicit comments from 
interested persons. Comments received during this period will become 
part of the public record. After thirty (30) days, the Commission will 
again review the comments received, and may determine that the Consent 
Order should be modified in response to the comments.\2\
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    \2\ If the Respondent does not agree to any such modifications, 
the Commission may (1) initiate a proceeding to reopen and modify 
the Consent Order in accordance with Rule 3.72(b), 16 CFR 3.72(b), 
or (2) commence a new administrative proceeding by issuing an 
administrative complaint in accordance with Rule 3.11. See 16 CFR 
2.34(e)(2).


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    By direction of the Commission.
Donald S. Clark,
Secretary.

Statement of the Federal Trade Commission

    Today the Commission has voted unanimously to approve the Complaint 
and Decision & Order (``Order'') against Graco, Inc. (``Graco'') to 
resolve allegations that it violated Section 7 of the Clayton Act when 
it acquired Gusmer Corp. (``Gusmer'') in 2005 and Glascraft, Inc. 
(``Glascraft'') in 2008. At the time of the acquisitions, Gusmer and 
Glascraft were Graco's two closest competitors in the market for fast-
set equipment (``FSE'') used to apply polyurethane and polyurea 
coatings. The acquisitions eliminated the only significant competition 
in the market, and resulted in Graco holding a monopoly position as the 
only full-line FSE manufacturer. The Order contains provisions, 
including prohibitions on discriminating against distributors selling 
competitors' FSE products, that are intended to constrain Graco's 
ability to exclude prospective entrants into the FSE market by 
establishing and/or maintaining exclusive relationships with its third-
party distributors. Commissioner Wright voted in favor of the Complaint 
and Order, but also issued a statement outlining his disagreement with 
these portions of the Order. We respectfully disagree with Commissioner 
Wright, and believe that these specific provisions are necessary to 
remediate the anticompetitive impact of the two mergers in this case.
    The typical remedy for the Commission in a Section 7 matter is a 
divestiture of the illegally acquired assets (and any other assets 
necessary to make the divestiture buyer a viable competitor). Pursuing 
such a remedy in this matter, however, would be difficult, if not 
impossible, because Graco had long ago integrated or discontinued the 
product lines it acquired from Gusmer and Glascraft. There was no 
easily severable package of assets that could be divested to recreate 
one--much less two--viable competitors to replace Gusmer and Glascraft. 
As a result, the most effective relief available was a behavioral 
remedy intended to facilitate entry into the FSE market, which, of 
course, includes addressing the post-acquisition conduct described in 
the Complaint that had precluded entry into the relevant market. 
Specifically, after the acquisitions Graco solidified its market share 
by locking up third-party distributors through a series of purchase and 
inventory threshold requirements, as well as threats of retaliation and 
termination if distributors carried the products of any remaining or 
newly entering FSE manufacturers.
    The evidence gathered in the course of the Commission's 
investigation demonstrates that Graco's efforts were successful; no 
other firm gained more than five percent of the North American FSE 
market and Graco's market share of between 90 and 95 percent has 
remained intact since its 2008 acquisition of Glascraft. Further, the 
investigation uncovered no evidence that Graco's post-acquisition 
conduct provided any cognizable efficiency that would benefit 
consumers. A remedy that does not address Graco's ability to raise and 
maintain nearly insurmountable entry barriers is substantially less 
likely to return competition to the FSE market. The Order provisions 
that Commissioner Wright criticizes, in our view, are integral to 
achieving that goal but will not cause market inefficiencies.
    We believe that exclusive dealing relationships can have 
procompetitive benefits and that such relationships should not be 
condemned in the absence of a thorough factual and economic assessment 
of the circumstances surrounding such conduct. But it is equally 
important to recognize that, when employed by a competitor that has 
acquired significant market power or monopoly power, exclusive dealing 
arrangements have the potential to cement such power and prevent or 
deter entry that would lead to lower prices, higher quality, and better 
service for consumers.\3\ In any event, regardless of how one views 
exclusive dealing arrangements generally, there is ample support for 
the fencing-in relief prescribed in this merger settlement, which is 
designed to restore competition in the FSE market lost as a result of 
Graco's illegal acquisitions.
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    \3\ See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 
71-72, 74 (D.C. Cir. 2001) (holding that Microsoft's exclusive 
dealing arrangements with Internet access providers, independent 
software vendors, and Apple violated Sherman Act Sec.  2).
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    We join Commissioner Wright in commending the Commission staff for 
their hard work in this matter. They have done an excellent job in 
investigating the market involved and the issues raised during the 
course of this investigation.

By direction of the Commission, Commissioner Wright abstaining.

Donald S. Clark,

Secretary.

Statement of Commissioner Joshua D. Wright

    The Commission has voted to issue a Complaint and Order against 
Graco, Inc. (``Graco'') to remedy the allegedly anticompetitive effects 
of Graco's acquisition of Gusmer Corp. (``Gusmer'') in 2005 and 
GlasCraft, Inc. (``GlasCraft'') in 2008. I supported the Commission's 
decision because there is reason to believe Graco's acquisitions 
substantially lessened competition in the market for fast-set equipment 
in violation of Section 7 of the Clayton Act. I want to commend staff 
for their hard work in this matter. Staff has conducted a thorough 
investigation and developed strong evidence that Graco's acquisition of 
Gusmer and GlasCraft likely resulted in higher prices and fewer choices 
for consumers.
    I write separately to discuss two aspects of the Order with which I 
respectfully disagree, namely the provisions prohibiting Graco from 
entering into exclusive dealing contracts with distributors and 
establishing purchase and inventory thresholds that must be satisfied 
in order for distributors to obtain discounts. Both provisions are 
aimed at prohibiting exclusivity or, in the case of purchase and 
inventory thresholds, loyalty discounts that might be viewed as de 
facto exclusive arrangements. I am not persuaded in this case that 
prohibiting exclusive dealing contracts and regulating loyalty 
discounts will make consumers better off. To the contrary, these 
provisions may lead to reduced output or higher prices for consumers. I 
therefore do not believe the limitations on such arrangements imposed 
by the Order are in the public interest.

I. Appropriate Use of Behavioral Remedies

    The majority and I agree that although the most suitable remedy for 
an anticompetitive merger usually is a divestiture of assets, under 
certain circumstances behavioral remedies may be appropriate.\4\ One 
scenario in which behavioral remedies may be appropriate is when the 
challenged merger has long since been consummated and divestiture or 
other structural remedies are not a viable option for restoring 
competition to pre-merger levels. Given that Graco has fully integrated 
Gusmer and Glascraft and discontinued their

[[Page 24205]]

product lines, divestiture is not an option and the Commission should 
rightly consider whether behavioral remedies in this case would protect 
consumers.
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    \4\ See e.g., Fed. Trade Comm'n, Statement of Federal Trade 
Commission's Bureau of Competition on Negotiating Merger Remedies, 
at 5 (2012), available at https://www.ftc.gov/bc/bestpractices/merger-remediesstmt.pdf (stating the Commission favors structural 
relief, such as divestitures, in horizontal mergers, but that 
behavioral relief may be appropriate in some cases).
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    As with merger remedies generally, when deciding whether and what 
behavioral remedy to impose, the Commission must ultimately be guided 
by its mission of protecting consumers.\5\ Because behavioral remedies 
displace normal competitive decision-making in a market, they pose a 
particularly high risk of inadvertently reducing consumer welfare and 
should be examined closely prior to adoption to ensure consumers' 
interests are best served. In particular, effective behavioral remedies 
must be ``tailored as precisely as possible to the competitive harms 
associated with the merger to avoid unnecessary entanglements with the 
competitive process.'' \6\ Merely showing high market shares and the 
unavailability of structural remedies does not justify restricting 
conduct that typically is procompetitive because these conditions do 
not make the conduct any more likely, much less generally likely, to be 
anticompetitive.\7\ A minimum safeguard to ensure remedial provisions--
whether described as fencing-in relief or otherwise--restore 
competition rather than inadvertently reduce it is to require evidence 
that the type of conduct being restricted has been, or is likely to be, 
used anticompetitively to harm consumers.
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    \5\ The Commission should keep in mind that ours is not a binary 
choice simply between imposing a structural or a behavioral remedy. 
The most attractive option from a consumer welfare point of view for 
any given circumstance may be to block the merger in its entirety, 
allow the merger to proceed without any remedy, or a hybrid solution 
combining some aspects of each of these options. Having ruled out 
structural remedies in this case, the question is which, if any, of 
the non-structural alternatives best improves consumer welfare. See 
Ken Heyer, Optimal Remedies for Anticompetitive Mergers, 26 
Antitrust 27 (2012) (arguing behavioral remedies are not justified 
simply because structural remedies are unavailable, and that an 
agency should weigh the economic costs and benefits of each non-
structural alternative, including doing nothing).
    \6\ U.S. Dep't of Justice Antitrust Div., Antitrust Division 
Policy Guide to Merger Remedies, at 7 n.12 (June 2011), available at 
https://www.justice.gov/atr/public/guidelines/272350.pdf; see also, 
Heyer, supra note 2, at 27-28 (``[A]mong the most important 
considerations in devising a behavioral remedy is that there be a 
close nexus between the remedy imposed and the theory of harm 
motivating its use.'').
    \7\ In fact, efficiencies justifications for exclusive dealing 
contracts apply, and some even more strongly, when a firm has market 
power.
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    With this analytical framework in mind, I support those remedies in 
the Order that seek to restore pre-merger competition by imposing 
restrictions closely linked to the evidence of anticompetitive harm in 
this case. For instance, staff uncovered evidence Graco threatened 
distributors that considered carrying fast-set equipment sold by 
competing manufacturers, and that these threats actually led to 
distributors not purchasing the competing products. Staff also learned 
that distributors refused to purchase fast-set equipment from Gama/PMC, 
one of the few fringe competitors remaining after Graco's acquisitions, 
because of the uncertainty resulting from Graco's lawsuit against Gama/
PMC. The Order thus appropriately prohibits Graco from retaliating 
against distributors that consider purchasing fast-set equipment from 
other manufacturers \8\ and requires Graco to settle its lawsuit 
against Gama/PMC.
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    \8\ Such retaliatory conduct alone is outside the normal 
competitive process and has no plausible procompetitive benefit. Its 
proscription therefore is unlikely to harm consumers. Of course, a 
decision by Graco to refuse to sell to distributors who do not enter 
into an exclusive contract should not itself be proscribed as 
illegitimate retaliation.
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    In contrast, and as is discussed in more detail below, there is 
insufficient evidence linking the remedial provisions in the Order 
prohibiting exclusive dealing contracts and regulating loyalty 
discounts to the anticompetitive harm in this case.

II. Prohibitions on Exclusive Dealing

    It is widely accepted that exclusive dealing and de facto exclusive 
contracts--while generally efficiency enhancing--can lead to 
anticompetitive results when certain conditions are satisfied. The 
primary competitive concern is that exclusive dealing may be used by a 
monopolist to raise rivals' costs of distribution by depriving them the 
opportunity to compete for distribution sufficient to achieve efficient 
scale, and ultimately harm consumers by putting competitors out of 
business.\9\ On the other hand, the economic literature is replete with 
procompetitive justifications for exclusive dealing, including aligning 
the incentives of manufacturers and distributors, preventing free-
riding, and facilitating relationship-specific investments.\10\ In 
fact, the empirical evidence substantially supports the view that 
exclusive dealing arrangements are much more likely to be 
procompetitive than anticompetitive.\11\
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    \9\ See e.g., Alden F. Abbott & Joshua D. Wright, Antitrust 
Analysis of Tying Arrangements and Exclusive Dealing, in Antitrust 
Law and Economics 183, 194-96 (Keith N. Hylton ed., 2d ed. 2010). 
There also are novel theories of anticompetitive harm, including 
models exploring the possibility that certain types of discount 
programs effectively impose a tax upon distributors' choice to 
expand rivals' sales and thereby potentially prevent rivals from 
acquiring a sufficient number of retailers to cover the fixed costs 
of entry. See e.g., Joe Farrell, et al., Economics at the FTC: 
Mergers, Dominant-Firm Conduct, and Consumer Behavior, 37 (4) Rev. 
Indus. Org. 263 (2010).
    \10\ See e.g., Abbott & Wright, supra note 6, at 200-01; 
Francine Lafontaine & Margaret Slade, Exclusive Contracts and 
Vertical Restraints: Empirical Evidence and Public Policy, in 
Handbook of Antitrust Economics, 393-94 (Paolo Buccirossi, ed., 
2008); Benjamin Klein & Kevin Murphy, Exclusive Dealing Intensifies 
Competition for Distribution, 75 Antitrust L. J. 433, 465 (2008).
    \11\ See e.g., Abbott & Wright, supra note 6, at 200-01; 
Lafontaine & Slade, supra note 7, at 393-94.
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    Because exclusive dealing contracts typically are procompetitive 
and a part of the normal competitive process, the Commission should 
only restrict the use of such arrangements when there is sufficient 
evidence that they have or are likely to decrease consumer welfare. 
This ensures consumers the merger remedy does not deprive them the 
fruits of the competitive process. The evidence in this case is 
insufficient to conclude that Graco has used, or intends to use, 
exclusive dealing or de facto exclusive contracts to foreclose rivals 
and ultimately harm consumers. To the contrary, the Commission's 
Complaint describes the fast-set equipment market as one particularly 
well suited for exclusive arrangements. Specifically, the Complaint 
acknowledges the sale of fast-set equipment demands specialized third 
party distributors that possess the technical expertise to teach 
consumers how to use and maintain the manufacturer's equipment.\12\ One 
could therefore easily imagine that manufacturers might only be willing 
to provide training to distributors if they have some assurance that 
current or future competitors will be unable to free ride on their 
investments in the distributors' technical expertise. Exclusive dealing 
arrangements with distributors are one well-known and common method of 
preventing such free riding.
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    \12\ Complaint ] 24, Graco, Inc., FTC File No.101-0215, (April 
17, 2013).
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    The provisions in the Order prohibiting exclusive contracts 
therefore may needlessly harm consumers by deterring potentially 
procompetitive arrangements. For that reason, I do not believe that 
provision is in the public interest.

III. Restrictions on Loyalty Discounts

    The primary anticompetitive concerns with loyalty discounts are 
analytically similar to those associated with exclusive dealing and de 
facto exclusive

[[Page 24206]]

contracts.\13\ As with exclusive dealing, the economic literature also 
supports the view that loyalty discounts more often than not are 
procompetitive.\14\ The Commission's competition mission therefore is 
best served by an approach that counsels against imposing restrictions 
on loyalty discounts unless there is sufficient evidence to establish 
that such arrangements have or are likely to harm competition and 
consumers.
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    \13\ See generally Bruce H. Kobayashi, The Economics of Loyalty 
Discount and Antitrust Law in the United States, 1 Comp. Pol'y Int'l 
115 (2005).
    \14\ Id.
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    The Order permits Graco to enter into certain loyalty discount 
agreements that require distributors to meet annual purchase and 
inventory thresholds to qualify for discounted prices.\15\ The Order, 
however, restricts the scope of these loyalty discounts by prescribing 
the maximum threshold levels Graco may set in 2013 and by only allowing 
those maximums to increase by 5 percent year to year. Although there is 
evidence that Graco in some instances increased the inventory and 
purchase thresholds it required distributors to meet to receive 
discounts on fast-set equipment following its acquisitions, I have not 
seen evidence sufficient to link these increases to the anticompetitive 
effects of the mergers alleged in the Commission's Complaint. For 
example, I have seen no evidence that a distributor dropped Gama/PMC or 
any other fringe competitor in response to Graco's increased 
thresholds. Further, although there appears to be evidence that at 
least some distributors are unable to both meet the thresholds 
necessary to receive Graco's discounts and carry competing 
manufacturers' products, there is nothing barring these distributors 
from forgoing those discounts in order to carry multiple products 
lines. It has been several years since Graco increased the thresholds. 
In the absence of evidence this change harmed competition, the fact 
that some distributors prefer to take the discounts is not a sufficient 
reason to believe that prohibiting these contracts will protect 
consumers. Moreover, it is unlikely that the Commission is best 
positioned to gauge what the appropriate threshold should be for each 
distributor over time and as market conditions change.
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    \15\ Decision & Order Sec.  III(6)(c), Graco, Inc., FTC File 
No.101-0215, (April 17, 2013).
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    As a result, based upon the available evidence, I am concerned the 
restrictions on loyalty discounts in the Order ultimately may reduce 
consumer welfare rather than protect competition. Thus, I do not 
believe this aspect of the Order is in the public interest.
* * * * *
    For these reasons, I voted in favor of the Commission's Complaint 
and Order, but respectfully disagree with the Order provisions 
prohibiting exclusive contracts and restricting loyalty discounts. To 
the extent the majority believes Graco may use such arrangements to 
engage in anticompetitive conduct in the future, the Commission's 
willingness and ability to bring a monopolization claim where the 
evidence indicates it is appropriate would protect consumers against 
the competitive risks posed by these arrangements without depriving 
consumers of their potential benefits.

[FR Doc. 2013-09673 Filed 4-23-13; 8:45 am]
BILLING CODE 6750-01-P