Reynolds American Inc. and Lorillard Inc.; Analysis of Proposed Consent Order To Aid Public Comment, 32374-32383 [2015-13861]

Download as PDF 32374 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices receivership for said institution. The FDIC was appointed receiver of Chipola Community Bank on April 19, 2013. The liquidation of the receivership assets has been completed. To the extent permitted by available funds and in accordance with law, the Receiver will be making a final dividend payment to proven creditors. Based upon the foregoing, the Receiver has determined that the continued existence of the receivership will serve no useful purpose. Consequently, notice is given that the receivership shall be terminated, to be effective no sooner than thirty days after the date of this Notice. If any person wishes to comment concerning the termination of the receivership, such comment must be made in writing and sent within thirty days of the date of this Notice to: Federal Deposit Insurance Corporation, Division of Resolutions and Receiverships, Attention: Receivership Oversight Department 34.6, 1601 Bryan Street, Dallas, TX 75201. No comments concerning the termination of this receivership will be considered which are not sent within this time frame. Dated: June 2, 2015. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. FEDERAL DEPOSIT INSURANCE CORPORATION mstockstill on DSK4VPTVN1PROD with NOTICES Notice to All Interested Parties of the Termination of the Receivership of 10087, Security Bank of Houston County, Perry, Georgia Notice is hereby given that the Federal Deposit Insurance Corporation (‘‘FDIC’’) as Receiver for Security Bank of Houston County, Perry, Georgia (‘‘the Receiver’’) intends to terminate its receivership for said institution. The FDIC was appointed receiver of Security Bank of Houston County on July 24, 2009. The liquidation of the receivership assets has been completed. To the extent permitted by available funds and in accordance with law, the Receiver will be making a final dividend payment to proven creditors. Based upon the foregoing, the Receiver has determined that the continued existence of the receivership will serve no useful purpose. Consequently, notice is given that the receivership shall be terminated, to be effective no sooner than thirty days after the date of this Notice. If any person Jkt 235001 [FR Doc. 2015–13802 Filed 6–5–15; 8:45 am] BILLING CODE 6714–01–P FEDERAL TRADE COMMISSION [File No. 141–0168] Reynolds American Inc. and Lorillard Inc.; Analysis of Proposed Consent Order To Aid Public Comment Federal Trade Commission. Proposed consent agreement. AGENCY: The consent agreement in this matter settles alleged violations of federal law prohibiting 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 June 25, 2015. ADDRESSES: Interested parties may file a comment at online or on paper, by following the instructions in the Request for Comment part of the SUPPLEMENTARY INFORMATION section below. Write ‘‘Reynolds American Inc. and Lorillard Inc.—Consent Agreement; File 141–0168’’ on your comment and file your comment online at https:// ftcpublic.commentworks.com/ftc/ reynoldslorillardconsent by following the instructions on the web-based form. If you prefer to file your comment on paper, write ‘‘Reynolds American Inc. and Lorillard Inc.—Consent Agreement; File 141–0168’’ on your comment and on the envelope, and mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW., Suite CC–5610 (Annex D), Washington, DC 20580, or deliver your comment to the following address: Federal Trade Commission, Office of the SUMMARY: BILLING CODE 6714–01–P 17:09 Jun 05, 2015 Dated: June 2, 2015. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. ACTION: [FR Doc. 2015–13833 Filed 6–5–15; 8:45 am] VerDate Sep<11>2014 wishes to comment concerning the termination of the receivership, such comment must be made in writing and sent within thirty days of the date of this Notice to: Federal Deposit Insurance Corporation, Division of Resolutions and Receiverships, Attention: Receivership Oversight Department 32.1, 1601 Bryan Street, Dallas, TX 75201. No comments concerning the termination of this receivership will be considered which are not sent within this time frame. PO 00000 Frm 00037 Fmt 4703 Sfmt 4703 Secretary, Constitution Center, 400 7th Street SW., 5th Floor, Suite 5610 (Annex D), Washington, DC 20024. FOR FURTHER INFORMATION CONTACT: Robert Tovsky, Bureau of Competition, (202–326–2634), 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 May 26, 2015), on the World Wide Web, at http://www.ftc.gov/ os/actions.shtm. You can file a comment online or on paper. For the Commission to consider your comment, we must receive it on or before June 25, 2015. Write ‘‘Reynolds American Inc. and Lorillard Inc.— Consent Agreement; File 141–0168’’ 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 http://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 E:\FR\FM\08JNN1.SGM 08JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices 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 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. 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/ reynoldslorillardconsent by following the instructions on the web-based form. If this Notice appears at http:// www.regulations.gov/#!home, you also may file a comment through that Web site. If you file your comment on paper, write ‘‘Reynolds American Inc. and Lorillard Inc.—Consent Agreement; File 141–0168’’ on your comment and on the envelope, and mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW., Suite CC–5610 (Annex D), Washington, DC 20580, or deliver your comment to the following address: Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW., 5th Floor, Suite 5610 (Annex D), Washington, DC 20024. If possible, submit your paper comment to the Commission by courier or overnight service. Visit the Commission Web site at http://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 June 25, 2015. For information on the Commission’s privacy policy, including routine uses permitted by the Privacy Act, see http://www.ftc.gov/ftc/ privacy.htm. 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). VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 Analysis of Agreement Containing Consent Order To Aid Public Comment The Federal Trade Commission (‘‘Commission’’) has accepted from Reynolds American Inc. (‘‘Reynolds’’) and Lorillard Inc. (‘‘Lorillard’’), subject to final approval, an Agreement Containing Consent Order (‘‘Consent Agreement’’) designed to remedy the anticompetitive effects resulting from Reynolds’s proposed acquisition of Lorillard. Reynolds’s July 2014 agreement to acquire Lorillard in a $27.4 billion transaction (‘‘the Acquisition’’) would combine the second- and third-largest cigarette producers in the United States. After the Acquisition, Reynolds and the largest U.S. cigarette producer, Altria Group, Inc. (‘‘Altria’’), would together control approximately 90% of all U.S. cigarette sales. The Commission’s Complaint alleges that the proposed Acquisition, if consummated, would violate 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, by substantially lessening competition in the market for traditional combustible cigarettes. Under the terms of the Consent Agreement, Reynolds must divest a substantial set of assets to Imperial Tobacco Group plc. (‘‘Imperial’’). These assets include four cigarette brands, Lorillard’s manufacturing facility and headquarters, and most of Lorillard’s current workforce. The Consent Agreement also requires Reynolds to provide Imperial with visible shelfspace at retail locations for a period of five months following the close of the transaction. This Consent Agreement provides Imperial’s U.S. operations with the nationally relevant brands, manufacturing facilities, and other tangible and intangible assets needed to effectively compete in the U.S. cigarette market. Reynolds must complete the divestiture on the same day it acquires Lorillard. The Consent Agreement has been placed on the public record for 30 days to solicit comments from interested persons. Comments received during this period will become part of the public record. After 30 days, the Commission will review the Consent Agreement, and comments received, to decide whether it should withdraw or modify the Consent Agreement, or make the Consent Agreement final. I. The Parties All parties to the proposed Acquisition and Consent Agreement are current competitors in the U.S. cigarette market. PO 00000 Frm 00038 Fmt 4703 Sfmt 4703 32375 Reynolds has the second-largest cigarette manufacturing and sales business in the United States. Its brands include two of the best-selling cigarettes in the country: Camel and Pall Mall. It also manages a number of smaller cigarette brands that it promotes less heavily. These include Winston, Kool, and Salem. Reynolds primarily sells its cigarettes in the United States. Lorillard has the third-largest cigarette manufacturing and sales business in the United States. Its flagship brand, Newport, is the best-selling menthol cigarette in the country, and the secondbest-selling cigarette brand overall. In addition to recently introduced nonmenthol styles of Newport, Lorillard manufactures and sells a few smaller discount-segment brands, such as Maverick. Like Reynolds, Lorillard competes primarily in the United States. Imperial is an international tobacco company operating in many countries including Australia, France, Germany, Greece, Italy, Turkey, Taiwan, the United Kingdom, and the United States. It sells tobacco products in the U.S. through its Commonwealth-Altadis subsidiary. Imperial’s U.S. cigarette portfolio consists of several smaller discount brands, including USA Gold, Sonoma, and Montclair. II. The Relevant Market and Market Structure The relevant line of commerce in which to analyze the effects of the Acquisition is traditional combustible cigarettes (‘‘cigarettes’’). Consumers do not consider alternative tobacco products to be close substitutes for cigarettes. Cigarette producers similarly view cigarettes and other tobacco products as separate product categories, and cigarette prices are not significantly constrained by other tobacco products. The United States is the relevant geographic market in which to analyze the effects of the Acquisition on the cigarette market. Both Reynolds and Lorillard sell cigarettes primarily in this country. U.S. consumers are in practice limited to the set of current U.S. producers when seeking to buy cigarettes. The U.S. cigarette market has experienced declining demand since 1981. Total shipments fell by approximately 3.2% in 2014, with similar annual declines expected in the future. The market includes three large producers—Altria, Reynolds, and Lorillard—who together account for roughly 90% of all cigarette sales. Two smaller producers—Liggett and Imperial—have roughly 3% market shares apiece. All other producers have individual market shares of 1% or less. E:\FR\FM\08JNN1.SGM 08JNN1 32376 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices Competition in the U.S. cigarette market involves brand positioning, customer loyalty management, product promotion, and retail presence. Cigarette advertising is severely restricted in the United States: Various forms of advertising and marketing are prohibited by law, by regulation, and by the terms of settlement agreements between major cigarette producers and the individual States. The predominant form of promotion remaining for U.S. cigarette producers is retail price reduction. III. Entry Entry or expansion in the U.S. cigarette market is unlikely to deter or counteract any anticompetitive effects of the proposed Acquisition. New entry in the cigarette market is difficult because of falling demand and the potentially slow and costly process of obtaining Food and Drug Administration clearance for new cigarette products. Expansion by new or existing cigarette producers is further obstructed by legal restrictions on advertising, limited retail product-visibility for fringe cigarette brands, and existing retail marketing contracts. mstockstill on DSK4VPTVN1PROD with NOTICES IV. Effects of the Acquisition The proposed Acquisition is likely to substantially lessen competition in the U.S. cigarette market. It would eliminate current and emerging head-to-head competition between Reynolds and Lorillard, particularly for menthol cigarette sales, which is an increasingly important segment of the market. The Acquisition would also increase the likelihood that the merged firm will unilaterally exercise market power. Finally, the Acquisition will increase the likelihood of coordinated interaction between the remaining participants in the cigarette market. V. The Consent Agreement The purpose of the Consent Agreement is to mitigate the anticompetitive threat of the proposed acquisition. The Consent Agreement allows Reynolds to complete its acquisition of Lorillard, but requires Reynolds to divest several of its postacquisition assets to Imperial. Among other terms, the Consent Agreement requires Reynolds to sell Imperial four of its post-acquisition cigarette brands: Winton, Kool, Salem, and Maverick. These brands have a combined share of approximately 7% of the total U.S. cigarette market. Reynolds must also sell Lorillard’s manufacturing facility and headquarters to Imperial, give Imperial employment rights for most of Lorillard’s current staff and VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 salesforce, and guarantee Imperial visible retail shelf-space for a period of five months following the close of the transaction. Finally, Reynolds must also provide Imperial with certain transition services. This divestiture package, including the nationally recognized Winston and Kool brands, provides Imperial an opportunity to rapidly increase its competitive significance in the U.S. market. Imperial will shift immediately from being a small regional producer with limited competitive influence on the larger firms to become a national competitor with the third-largest cigarette business in the market. While Imperial’s plans call for it to reposition the acquired brands, which have lost market share as part of the Reynolds portfolio, Imperial has successfully executed similar turnarounds with brands in other international markets. Imperial will have greater opportunity and incentive to promote and grow sales of the divested brands because, unlike Reynolds, incremental sales of these brands are unlikely to cannibalize sales from more profitable cigarette brands in its portfolio. Imperial’s incentive to reduce the price of the divestiture brands, in order to grow their market share, is a procompetitive offset to the reduction in competition that will result from the consolidation of Reynolds and Lorillard. Imperial’s incentive to reduce prices and promote products in new areas likewise reduces the threat of anticompetitive coordination following the merger—as coordination on price increases and other aspects of competition may be relatively difficult given Imperial’s contrary incentives. Ultimately, the divestiture package provides Imperial with a robust opportunity to undertake procompetitive actions to grow its market share in the U.S. cigarette market, and address the competitive concerns raised by the merger. IV. Opportunity for Public Comment By accepting the Consent Agreement, subject to final approval, the Commission anticipates that the competitive problems alleged in its Complaint will be resolved. The purpose of this analysis is to invite and facilitate public comment concerning the Consent Agreement to aid the Commission in determining whether it should make the Consent Agreement final. This analysis is not an official interpretation of the Consent Agreement, and does not modify its terms in any way. PO 00000 Frm 00039 Fmt 4703 Sfmt 4703 By direction of the Commission, Commissioners Brill and Wright dissenting. Donald S. Clark, Secretary. Statement of the Federal Trade Commission In the Matter of Reynolds American, Inc. and Lorillard Inc. The Federal Trade Commission has voted to accept for public comment a settlement with Reynolds American, Inc. (‘‘Reynolds’’) to resolve the likely anticompetitive effects of Reynolds’ proposed acquisition of Lorillard Inc. (‘‘Lorillard’’).1 The settlement will allow the acquisition to move forward, subject to large divestitures by the parties to another major competitor in the tobacco industry. The merging parties chose to present this acquisition to the Commission with a proposed divestiture aimed solely at securing our approval of the acquisition.2 As proposed, Reynolds will purchase Lorillard for $27.4 billion and then immediately divest certain assets from both Reynolds and Lorillard to Imperial Tobacco Group plc (‘‘Imperial’’) in a second $7.1 billion transaction. At the end of both transactions, Reynolds will own Lorillard’s Newport brand and Imperial will own three former Reynolds’ brands, Winston, Kool and Salem, as well as Lorillard’s Maverick and e-cigarette Blu brands, and Lorillard’s corporate infrastructure and manufacturing facility. As we explain below, we have reason to believe that Reynolds’ proposed acquisition of Lorillard is likely to substantially lessen competition in the market for combustible cigarettes in the United States. We conclude, however, that the parties’ proposed post-merger divestitures to Imperial would be effective in restoring competition in this market, and we therefore approve the divestitures as part of a consent order. I. Reynolds’ Acquisition of Lorillard Is Likely to Substantially Lessen Competition in the Combustible Cigarette Market Today, the market for combustible cigarettes in the United States contains three major players and several additional smaller competitors. Philip Morris USA, a division of Altria Group, Inc. (‘‘Altria’’), is the largest, with a share of about 51%, roughly twice the 1 This statement reflects the views of Chairwoman Ramirez, Commissioner Ohlhausen, and Commissioner McSweeny. 2 The only transaction before the Commission for purposes of Hart-Scott-Rodino review was the Reynolds-Lorillard transaction. E:\FR\FM\08JNN1.SGM 08JNN1 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices size of its nearest competitor. Reynolds and Lorillard are the second- and thirdlargest firms, with shares of approximately 26% and 15%, respectively. Other players in the market include Liggett and Imperial, each with about 3% of the market, and roughly 50 other small players focused mainly on discount or regional business. In light of their size and relative positions in the market, if Reynolds and Lorillard were attempting their transaction without any divestitures, the acquisition would likely substantially lessen competition, with the postacquisition Reynolds controlling 41% of the market and Reynolds and Altria together holding 92% of the market. In particular, we have reason to believe that the transaction would eliminate competition between Reynolds’ Camel brand and Lorillard’s Newport brand. For example, we found evidence that Camel has been seeking to gain market share from Newport. There is also evidence of discounting by Newport in response to Camel. In addition, our econometric analysis showed likely price effects resulting from the combination of Camel and Newport.3 Having concluded that Reynolds’ acquisition of Lorillard is likely to result in anticompetitive effects, we explain next why we believe the parties’ proposed divestitures to Imperial are sufficient to restore competition. mstockstill on DSK4VPTVN1PROD with NOTICES II. The Divestitures to Imperial Will Offset the Competition Lost From the Reynolds-Lorillard Merger Imperial is an international tobacco company with operations in 160 countries and global revenues of roughly $11.8 billion. Today, Imperial is a relatively small player in the United States with a 3% share of the market.4 Through the divestitures, Imperial is 3 While our main concern is with the transaction’s likely unilateral effects, there is also evidence that the transaction would increase the likelihood of coordination by creating greater symmetry between Reynolds and Altria in terms of their market shares, portfolio of brands, and geographic strength in the United States. When the Commission last publicly evaluated this market in the context of the 2004 R.J. Reynolds Tobacco Holdings, Inc. (‘‘RJR’’)/British American Tobacco p.l.c. (‘‘BAT’’) transaction, we noted in our statement that conditions in the cigarette market at the time would make coordination difficult. The market has changed considerably over the last decade, perhaps most importantly in that the RJR/ BAT transaction left the market with three major players relying on complex, differentiated product placement and pricing strategies. Unlike the combination of Reynolds/Lorillard, which would leave only two symmetric players with major national brands competing directly, the RJR/BAT transaction and market environment in 2004 presented a less pronounced coordination issue. 4 Imperial entered the United States market through its acquisition of Commonwealth’s cigarette brands in April 2007. VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 purchasing a collection of assets from both Reynolds and Lorillard. In addition to buying several prominent brands from both companies, Imperial is receiving an intact American manufacturing and sales operation from Lorillard, including Lorillard’s offices, production facilities, and 2,900 employees. Lorillard’s national sales force, which will be moving to Imperial, is an experienced team with knowledge of brands and customers. We believe that these divestitures to Imperial will address the competitive concerns arising out of the ReynoldsLorillard combination. Following the divestitures, Imperial will immediately become the third-largest cigarette maker in the country, with a 10% market share.5 Imperial has a clearly defined strategy for the United States, and it will have both the capability and incentives to become an effective U.S. competitor. Winston is the number two cigarette brand in the world and will be the main focus of Imperial’s strategy in the United States. Imperial’s consumer research strongly indicates that Winston could see increased brand recognition and acceptance in the United States. Imperial plans to reposition Winston as a premium-value brand and invest in the growth of the brand through added visibility and significant discounting. Imperial also plans to refocus and invest in Kool through discounting on a stateby-state basis. The evidence shows that Imperial can grow the market share of these brands through discounting and other promotional activity. In her dissent, Commissioner Brill questions Imperial’s ability to restore the competition lost due to the Reynolds-Lorillard transaction, noting that the Winston and Kool brands have been declining for years.6 In our view, however, Reynolds’ track record with these two brands is not indicative of their potential with Imperial. As Commissioner Brill acknowledges, Reynolds made a conscious decision to promote Camel and Pall Mall aggressively as growth brands, and to put limited marketing support behind Winston and Kool. Going forward, Imperial will have greater incentives to promote Winston and Kool than Reynolds did because, unlike Reynolds, Imperial does not risk cannibalizing other brands in its portfolio. Moreover, Imperial is also acquiring Lorillard’s Maverick, a value brand that competes well with Reynolds’ Pall Mall. 5 After the divestitures to Imperial, Reynolds will have a 34% market share in the United States. 6 Dissenting Statement of Commissioner Julie Brill at 6–7. PO 00000 Frm 00040 Fmt 4703 Sfmt 4703 32377 Imperial has a successful record of repositioning cigarette brands in other jurisdictions and growing the market share of those brands. Although it has had a relatively small presence in this country, Imperial is acquiring an experienced, national sales force from Lorillard that will help it to grow the acquired brands and more effectively compete against Reynolds and Altria. Imperial has agreements in place with Reynolds to ensure continuity of supply of the acquired brands and to ensure their visibility at the point of sale. The agreements will enable Imperial to have immediate access to retail shelf space and give Imperial time to negotiate contracts with retailers. Following the divestitures, Imperial’s business in the United States will account for 24% of its worldwide tobacco net revenues, thus making it important for Imperial to succeed in the United States. The acquisition will enable Imperial to be a national competitor, give it a portfolio of brands across different price points, and make its business more important to retailers, thereby enabling it to obtain visible shelf space and build stronger retailer relationships. We are therefore satisfied that Imperial is positioned to be a sufficiently robust and aggressive competitor against a merged ReynoldsLorillard and Altria, and to offset the competitive concerns arising from Reynolds’ acquisition of Lorillard. Indeed, Imperial’s incentives will stand in contrast to those of the pre-merger Lorillard, which has not been a particularly aggressive competitor in this market, having instead been generally content to rely on Newport’s strong brand equity to drive most of its sales. We believe that Imperial will behave differently. For these reasons, we are allowing the merger of Reynolds and Lorillard to go forward and accepting a consent decree to ensure that the divestitures to Imperial occur on a timely and effective basis.7 7 Although he agrees that the merger of Reynolds and Lorillard is likely to substantially lessen competition and that a consent order increases the likelihood that the divestitures to Imperial are properly and promptly effectuated, Commissioner Wright believes a consent order is unwarranted and on that basis dissents. We respectfully disagree with Commissioner Wright’s suggestion that our action is improper under these circumstances. Our obligation under the Hart-Scott-Rodino Act is to take appropriate steps to ensure that any competitive issues with a proposed transaction are addressed effectively and that is precisely what we have done here. Indeed, we believe that our responsibility would not be fully discharged if we did not guard against the risks that Commissioner Wright himself acknowledges exist in the absence of a consent order. E:\FR\FM\08JNN1.SGM 08JNN1 32378 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices notwithstanding the divestitures to Imperial. In the Matter of Reynolds American, Inc. and Lorillard Inc. mstockstill on DSK4VPTVN1PROD with NOTICES Dissenting Statement of Commissioner Julie Brill Coordinated Effects Under a coordinated effects theory, as set forth in the 2010 Horizontal Merger Guidelines, the Commission is likely to challenge a merger if the following three conditions are met: ‘‘(1) The merger would significantly increase concentration and lead to a moderately or highly concentrated market; (2) that market shows signs of vulnerability to coordinated conduct [ ]; and (3) the [Commission has] a credible basis on which to conclude that the merger may enhance that vulnerability.’’ 3 Importantly, the Guidelines explain ‘‘the risk that a merger will induce adverse coordinated effects may not be susceptible to quantification or detailed proof . . .’’.4 The Guidelines also instruct that ‘‘[p]ursuant to the Clayton Act’s incipiency standard, the Agencies may challenge mergers that in their judgment pose a real danger of harm through coordinated effects, even without specific evidence showing precisely how the coordination likely would take place.’’ 5 I have reason to believe that the facts in this case demonstrate a substantial risk of coordinated interaction because all three conditions for coordinated interaction spelled out in the Horizontal Merger Guidelines are satisfied. The first condition is easily satisfied. After the dust settles on the merger and divestitures, Reynolds and market leader Altria/Philip Morris will have over 80 percent of the U.S. market for traditional combustible cigarettes.6 The second condition is also easily satisfied. The Guidelines identify a number of market characteristics that are generally considered to make a market more vulnerable to coordination.7 These include (1) evidence of past express collusion affecting the relevant market; (2) firms’ ability to monitor rivals’ behavior and detect cheating with relative ease; (3) availability of rapid and effective forms of punishment for cheating; (4) difficulties associated with attempting to gain significant market share from aggressive price cutting; and (5) low elasticity of demand. The cigarette A majority of the Commission has voted to accept a consent to resolve competitive concerns stemming from Reynolds American, Inc.’s $27.4 billion acquisition of Lorillard Tobacco Company, a transaction combining the second and third largest cigarette manufacturers in the United States. Under the terms of the consent, Reynolds will divest some of its weaker non-growth brands—Winston, Kool, and Salem—as well as Lorillard’s brand Maverick to Imperial Tobacco Group plc, a British firm that currently operates as Commonwealth here in the United States.1 The Commission will allow Reynolds to retain its sought-after growth brands, Camel and Pall Mall, as well as Lorillard’s flagship brand Newport. I respectfully dissent because I am not convinced that the remedy accepted by the Commission fully resolves the competitive concerns arising from this transaction. By accepting the parties’ proposed divestitures and allowing the merger to proceed, the Commission is betting on Imperial’s ability and incentive to compete vigorously with a set of weak and declining brands. For the reasons explained below, Imperial’s ability to do so is at best uncertain. I thus have reason to believe that Reynolds’ acquisition of Lorillard, even after the divestitures to Imperial, is likely to substantially lessen competition in the U.S. cigarette market. As a result of the Commission’s failure to take meaningful action against this merger, the remaining two major cigarette manufacturers—Altria/Philip Morris and Reynolds—will likely be able to impose higher cigarette prices on consumers. I have reason to believe this merger increases both the likelihood of coordinated interaction between the remaining participants in the cigarette market, and the likelihood that the merged firm will unilaterally exercise market power. While both theories are presented in the Commission’s Complaint,2 I describe below additional facts and evidence not included in the Complaint that I believe illustrate why the transaction remains anticompetitive, 1 Reynolds will also sell Lorillard’s e-cigarette Blu to Imperial; that sale is not part of the Commission’s proposed order. 2 Complaint, ¶ 8, In the Matter of Reynolds American Inc. and Lorillard Inc., File No. 141– 0168, (May 26, 2015). VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 3 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES § 7.1 (2010) [hereinafter Guidelines]. 4 Id. 5 Id. 6 As the majority notes, the relevant market is combustible cigarettes in the United States. Statement of the F.T.C., In the Matter of Reynolds American Inc. and Lorillard Inc., File No. 141– 0168, May 26, 2015, at 1 [hereinafter Majority Statement]. 7 Guidelines, supra note 3,. at § 7.2. PO 00000 Frm 00041 Fmt 4703 Sfmt 4703 market has many of these characteristics. First, for the last decade, the cigarette market in the United States has been dominated by three firms—Reynolds, Lorillard, and Altria/Philip Morris— which together represent over 90 percent of the market. Over the same 10year period, these ‘‘Big Three’’ tobacco firms have made lock-step cigarette list price increases unrelated to any change in costs or market fundamentals.8 Second, there is a high degree of pricing transparency at the wholesale and retail levels in the cigarette market, giving cigarette manufacturers the ability to monitor each other’s prices and engage in disciplinary action necessary to maintain coordination. The major manufacturers all receive detailed wholesale volume information from firms collecting data. Reynolds and Lorillard also receive numerous analyst reports that track manufacturers’ pricing behavior and project whether the industry will enjoy a stable or aggressive competitive environment as a result. These conditions will allow the new ‘‘Big Two’’ cigarette manufacturers to quickly detect volume shifts due to price cuts and other competitive activity, allowing them to monitor each other’s prices, detect cheating, and quickly discipline each other—or threaten to do so. Third, many U.S. smokers are addicted to tobacco, resulting in fairly inelastic market demand, and rendering successful coordination more profitable for industry members. As the Guidelines 8 In this context, it is worth noting that, in 2006, U.S. District Judge Kessler held Reynolds, Lorillard, Philip Morris, and a number of other cigarette manufacturers liable under the Racketeer Influenced and Corrupt Organizations Act (RICO). United States v. Philip Morris, 449 F. Supp 2d 1 (D.D.C. 2006), aff’d 566 F.3d 1095 (D.C. Cir. 2009). In a lengthy decision containing over 4000 paragraphs of findings of fact, the district court highlighted the coordinated nature of the defendants’ activities in furtherance of the racketeering scheme. The conduct involved was indirectly related to price, as the overarching purpose behind the scheme was to maximize the competing cigarette firms’ profits. The district court explained that ‘‘[t]he central shared objective of Defendants has been to maximize the profits of the cigarette company Defendants by acting in concert to preserve and enhance the market for cigarettes through an overarching scheme to defraud existing and potential smokers. . . .’’ (Philip Morris, 449 F. Supp 2d at 869). The court also found that ‘‘[t]here is overwhelming evidence demonstrating Defendants’ recognition that their economic interests would best be served by pursuing a united front on smoking and health issues and by a global coordination of their activities to protect and enhance their market positions in their respective countries.’’ (Id. at 119). I find this evidence troubling when viewed in conjunction with the evidence in this case showing the U.S. cigarette market’s vulnerability to coordinated interaction relating to prices. E:\FR\FM\08JNN1.SGM 08JNN1 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES describe, coordination is more likely the more participants stand to gain from it. Apart from the market characteristics identified in the Guidelines that make a market more vulnerable to coordination, it is important to consider that the cigarette market in the United States has experienced an ongoing decline in volume for over 20 years. This creates pressure on manufacturers to increase prices to offset volume losses, potentially easing the difficulties associated with formation of coordinating arrangements by making price increases a focal strategy. In 2004, the Commission elected not to challenge the merger of Reynolds and Brown & Williamson in part because it found that the cigarette market was not vulnerable to coordinated interaction. However, three key market dynamics have changed since then. These three changes have limited the market significance of the discount fringe and its ability to constrain cigarette prices, and increased entry barriers—both of which make the market more vulnerable to coordination. First, Reynolds’ Every Day Low Price (EDLP) program, substantially modified in 2008 to reposition and grow Pall Mall as the EDLP brand, requires participating retailers to maintain Pall Mall as the lowest price brand sold in the store, creating an effective price floor that discount manufacturers are not allowed to undercut. Second, the vast majority of states that signed the Tobacco Master Settlement Agreement (‘‘MSA’’) have enacted Non-Participating Manufacturer Legislation and Allocable Share Legislation, further diminishing the impact of discount brands.9 Under this 9 The Tobacco Master Settlement Agreement (‘‘MSA’’) was entered in November 1998, originally between the four largest U.S. tobacco companies— Philip Morris Inc., R.J. Reynolds, Brown & Williamson and Lorillard—the original participating manufacturers (‘‘OPMs’’), and the attorneys general of 46 states, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Marianas. The MSA resolved over 40 lawsuits brought by the states against tobacco manufacturers to recover billions of dollars in costs incurred by the states to treat smoking related illnesses and to obtain other relief. The OPMs agreed (1) to make multi-billion dollar payments, annually and in perpetuity, to the states and (2) to significantly restrict the way they market and advertise their tobacco products, including a prohibition on the use of cartoons in cigarette advertising or any other method that targets youth. In exchange, the states agreed to release the OPMs, and any other tobacco company that became a signatory to the MSA, from past and future liability arising from the health care costs caused by smoking. All MSA states subsequently enacted legislation requiring non-participating manufacturers (‘‘NPMs’’) to make certain payments based on the number of cigarettes sold into the state. These payments are placed in an escrow account to ensure that funds are available to satisfy state claims against NPMs. Although all MSA states enacted this legislation, many NPMs were not VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 legislation, companies that do not participate in the MSA—typically the discount cigarette manufacturers—are required to pay an escrow fee to approximate the costs incurred by the participating cigarette companies, thereby eliminating much of the cost advantage that discounters had previously enjoyed. Third, the FDA’s 2010 regulations,10 implementing the 2009 Family Smoking Prevention and Tobacco Control Act,11 restrict tobacco advertising and promotion in the United States. Thus the 2010 FDA regulation limits the ability of new firms to enter the market, and limits the ability of existing fringe market participants to grow through aggressive advertising. The combined effect of these three, relatively new market dynamics has been a reduction in the competitive significance of the fringe discount brand manufacturers. Indeed, the number of discount brand manufacturers has fallen from over 100 in 2005, to around 50 today, now representing just two percent of the market. The third and final condition identified in the Guidelines as leading the Commission to challenge a proposed merger based on a theory of coordination—that the Commission has a credible basis to conclude that the merger may enhance the market’s vulnerability to coordination—is also satisfied in this case. Prior to the transaction, a large percentage of Reynolds’ portfolio consisted of nongrowth brands (including Winston, Kool, and Salem), and overall Reynolds’ volumes were declining. In the years leading up to this transaction Reynolds also had a noticeable portfolio gap, as it lacked a strong premium menthol brand. Reynolds initiated new competition in the menthol segment with the introduction of Camel Crush and Camel Menthol, but Reynolds was still playing catch-up. Seeking to stop further volume loss to its competitors’ menthol brands—Lorillard’s Newport and Altria/Philip Morris’ Marlboro— Reynolds implemented a strategy of aggressive promotion of Camel and Pall making the required payments, or were exploiting a loophole by withdrawing their escrow deposits in a way that conflicted with the legislation’s intent. To address those issues, many states adopted additional legislation to provide enforcement tools to ensure that NPMs make the required escrow payments (‘‘complementary enforcement legislation’’), as well as legislation to close a loophole in the state escrow statutes by preventing NPMs from withdrawing escrow payments in a way that was never contemplated when those statutes were enacted (‘‘Allocable Share Legislation’’). 10 Regulations Restricting the Sale and Distribution of Cigarettes and Smokeless Tobacco to Protect Children and Adolescents, 75 FR 13225 (March 19, 2010). 11 21 U.S.C. 301 (2009). PO 00000 Frm 00042 Fmt 4703 Sfmt 4703 32379 Mall. The proposed merger eliminates many of Reynolds’ incentives to continue these strategies. With Newport added to its portfolio, Reynolds will no longer face a gap in menthol and will not be subject to the same level of volume losses. Post-transaction, there will be greater symmetry between Altria/Philip Morris and Reynolds, bringing Reynolds’ incentives into closer alignment with Altria/Philip Morris to place greater emphasis on profitability over market share growth. This increase in symmetry between Reynolds and Altria/Philip Morris thus enhances the market’s vulnerability to coordination.12 Unilateral Effects This transaction also raises concerns about unilateral anticompetitive effects, because it eliminates the growing headto-head competition between Reynolds and Lorillard. The Guidelines explain that ‘‘[t]he elimination of competition between two firms that results from their merger may alone constitute a substantial lessening of competition.’’ 13 As the majority explains, the Commission’s econometric modeling showed likely price effects from the combination of the parties’ cigarette portfolios.14 The econometric analysis supports the substantial qualitative evidence of unilateral anticompetitive effects. For years, Lorillard’s Newport brand has been able to rely on strong brand equity and brand loyalty to sustain its high market share and high prices for its menthol product line. As noted above, Reynolds, on the other hand, has been lagging behind Altria/Philip Morris and Lorillard in terms of profitability and pricing, with no comparably strong menthol product. As a result, in recent years Reynolds has been making efforts to challenge Newport’s established leadership position and increase its share in menthol through increased 12 See Statement of the F.T.C., In the Matter of ZF Friedrichshafen AG and TRW Automotive Holdings Corp., File No. 141–0235, May 8, 2015, available at https://www.ftc.gov/system/files/document/cases/ 150515zffrn.pdf. See also Marc Ivaldi, et al., The Economics of Tacit Collusion 66 & 67, Final Report for DG Competition, European Commission (2003), available at http://ec.europa.eu/competition/ mergers/studies_reports/the_economics_of_tacit_ collusion_en.pdf. (‘‘By eliminating a competitor, a merger reduces the number of participants and thereby tends to facilitate collusion. This effect is likely to be the higher, the smaller the number of participants already left in the market.’’) (‘‘[I]t is easier to collude among equals, that is, among firms that have similar cost structures, similar production capacities, or offer similar ranges of products. This is a factor that is typically affected by a merger. Mergers that tend to restore symmetry can facilitate collusion.’’). 13 Guidelines, supra note 3, at § 6. 14 Majority Statement, supra note 6, at 2. E:\FR\FM\08JNN1.SGM 08JNN1 32380 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices promotional activity. Reynolds also engaged in the first innovation in this industry in many years with the introduction of Camel Crush,15 which has generated strong sales growth for a new brand. Post-merger, with Newport in its hands, Reynolds will no longer need to innovate or increase its promotional activity to increase its share in menthol. * * * * * In sum, I have reason to believe that this merger poses a real danger of anticompetitive harm through coordinated effects and unilateral exercise of market power in the U.S. cigarette market. mstockstill on DSK4VPTVN1PROD with NOTICES Adequacy of Divestitures To Imperial To Restore Competition As the Supreme Court has stated, restoring competition is the ‘‘key to the whole question of an antitrust remedy.’’ 16 Both Supreme Court precedent and Commission guidance makes clear that any remedy to a transaction found to be in violation of Section 7 of the Clayton Act must fully restore the competition lost from the transaction,17 and a remedy that restores only some of the competition lost does not suffice.18 Because Clayton Act merger enforcement is predictive, it is hard to define what will precisely fully restore lost competition in any given case. The agency has on occasion allowed for remedies that are not an exact replica of the pre-merger market, usually when there is evidence that the buyer can have a strong competitive impact with the divested assets. Yet the focus of the inquiry is always on 15 Camel Crush allows consumers to change the cigarette from non-menthol to menthol or from menthol to stronger menthol by crushing a menthol capsule inside the filter. 16 United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961). 17 Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972) (‘‘The relief in an antitrust case must be ‘effective to redress the violations’ and ‘to restore competition.’ . . . Complete divestiture is particularly appropriate where asset or stock acquisitions violate the antitrust laws.’’). 18 See F.T.C. Frequently Asked Questions About Merger Consent Order Provisions, available at https://www.ftc.gov/tips-advice/competitionguidance/guide-antitrust-laws/mergers/merger-faq. (‘‘There have been instances in which the divestiture of one firm’s entire business in a relevant market was not sufficient to maintain or restore competition in that relevant market and thus was not an acceptable divestiture package. To assure effective relief, the Commission may thus order the inclusion of additional assets beyond those operating in the relevant market . . . In all cases, the objective is to effectuate a divestiture most likely to maintain or restore competition in the relevant market . . . At all times, the burden is on the parties to provide concrete and convincing evidence indicating that the asset package is sufficient to allow the proposed buyer to operate in a manner that maintains or restores competition in the relevant market.’’). VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 whether the proposed divestitures are sufficient to maintain or restore competition in the relevant market that existed prior to the transaction.19 Under these well-grounded principles, I have serious concerns about whether the divestiture remedy in this case is sufficient to restore competition in the U.S. cigarette market. As a preliminary matter, it is worth noting that, post-transaction, Imperial will be less than one-third the size of the combined Reynolds/Lorillard, with a 10 percent market share compared to the combined Reynolds/Lorillard’s 34 percent market share. Prior to the transaction, Reynolds and Lorillard were more comparable in size to each other—Reynolds with a 26 percent market share and Lorillard with a 15 percent market share. And despite the divestitures, the HHI will increase 331 points to 3,809. Moreover, there is nothing dynamic about the cigarette market by any measure that could plausibly make these measures less useful in analyzing the likelihood of the divestiture to fully restore the competition lost from this transaction. Beyond the resulting increased concentration, the question is whether Imperial can nonetheless maintain or restore competition in the market with the divested brands due to its own business acumen and incentives postdivestiture. I have reason to believe Imperial will not be up to the job. Indeed, I believe Imperial’s postdivestiture market share may overstate its competitive significance. Through this transaction, Reynolds will obtain the second largest selling brand in the country (Newport), and keep the third largest selling brand (Camel). Imperial, on the other hand, will continue to have no strong brands in its portfolio. Reynolds’ Winston, Kool, and Salem are declining and unsuccessful. Their combined market share has gone from approximately 14 percent in 2010 to 8 percent in 2013 (a 6 percent decline), and they are still losing share. It is no surprise that Reynolds would want to unload these weak brands, and refuse to provide a meaningful divestiture package that would replace the 19 Id. (‘‘Every order in a merger case has the same goal: To preserve fully the existing competition in the relevant market or markets . . . An acceptable divestiture package is one that maintains or restores competition in the relevant market . . .’’). See also Statement of the F.T.C.’s Bureau of Competition on Negotiating Merger Remedies, at 4, January 2012, available at https://www.ftc.gov/system/files/ attachments/negotiating-merger-remedies/mergerremediesstmt.pdf. (‘‘If the Commission concludes that a proposed settlement will remedy the merger’s anticompetitive effects, it will likely accept that settlement and not seek to prevent the proposed merger or unwind the consummated merger.’’). PO 00000 Frm 00043 Fmt 4703 Sfmt 4703 competition lost through its merger with Lorillard. I am not convinced that Imperial will have any greater ability to grow these declining brands. Indeed, I have reason to believe that Winston, Kool, and Salem, as well as Maverick, will languish even further outside the hands of Reynolds and Lorillard. There is no doubt that Imperial hopes to make these brands successful and will make every attempt to do so. Imperial’s strong global financial position will help. The Commission cannot rely on hopes and aspirations alone, however. We must base our decision on facts and demonstrated performance in the market. And it is by this measure that Imperial, with the added weak brands from Reynolds, comes up short. Imperial has a poor track record of growing acquired brands in the U.S. Imperial entered the U.S. market in 2007 by acquiring Commonwealth.20 At that time Imperial also aspired to increase share. However, Imperial was not successful. Commonwealth’s market share has declined since it was acquired by Imperial, and stands at less than three percent today. While in FY 2014 Imperial may have achieved modest growth with one of its other brands, USA Gold, that growth was only focused on limited geographic markets, and doesn’t give me confidence that Imperial can implement a national campaign growth strategy. Reynolds, with much greater experience in the U.S. market, made numerous efforts to reinvigorate Winston, Kool, and Salem, but failed.21 In light of Imperial’s much worse track record here in the U.S., I am unconvinced that it will have more luck in making its wishful plans a reality. The majority notes that, outside the United States, Winston is the number two cigarette brand, and Imperial plans to make Winston the main focus of its strategy in the United States posttransaction.22 But Winston’s dichotomous position—a strong brand outside the United States and a weak brand in the United States—has held for many years. And Reynolds’ multiple 20 In 1996 Commonwealth acquired brands required by the Commission to be divested to resolve competitive concerns stemming from B.A.T. Industries p.l.c.’s $1 billion acquisition of The American Tobacco Company. B.A.T. Industries p.l.c., et al, 119 F.T.C. 532 (1995). 21 The majority interprets the evidence before us as showing that Reynolds emphasized Camel and Pall Mall but only put ‘‘limited marketing support behind Winston and Kool.’’ See Majority Statement, supra note 6, at 3. In contradistinction to the majority, I believe the evidence before us demonstrates that on numerous occasions Reynolds sought—valiantly but without success—to grow Winston and Kool, even while emphasizing Camel and Pall Mall. 22 Majority Statement, supra note 6, at 2. E:\FR\FM\08JNN1.SGM 08JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices efforts to reposition Winston in light of its strong global position have not had any effect on slowing the dramatic decline of Winston in the United States. Indeed, by placing Winston at the center of its U.S. strategy, Imperial is demonstrating the same tone-deafness to the unique dynamics of the U.S. market that has caused Imperial to lose market share since it entered the U.S. market in 2007. My concerns about Imperial’s ability to succeed where Reynolds has failed is heightened by the fact that Imperial will have no ‘‘anchor’’ brand to gain traction with retailers, and as a result will have limited shelf space available to it. The divestitures of Maverick from Lorillard and Winston, Kool, and Salem from Reynolds effectively de-couple each divested brand from a strong anchor brand. These anchor brands—Newport and Camel, the second and third bestselling brands in the country—gave Maverick, Winston, Kool, and Salem increased shelf space and promotional spending, helping to drive the limited sales they had. Maverick in particular benefits from Newport’s brand success: Lorillard gives it a portion of Newport’s shelf space, and when Lorillard advertises Newport, it advertises Maverick too. In Imperial’s hands, the divested brands will not have the same shelf space or the benefit of strong advertising that comes with their anchor brands. I believe that the decoupling of the divested brands from Camel and Newport will serve to further exacerbate their decline. Recognizing Imperial’s shelf space disadvantage, the proposed Consent requires Reynolds to make some short term accommodations in an attempt to give Imperial a fighting chance in its effort to gain some shelf space in stores. First, the Consent envisions Reynolds entering into a Route to Market (‘‘RTM’’) agreement with Imperial, whereby Reynolds agrees to provide Imperial a portion of its post-acquisition retail shelf space for a period of five months following the close of the transaction. Imperial will pay Reynolds $7 million for this agreement. Under the terms of the RTM agreement, Reynolds commits for a period of five months to continue placing Winston, Kool, and Salem on retail fixtures according to historic business practices, and to assign Imperial a defined portion of Lorillard’s current retail shelf-space allotments to use as it sees fit. Second, Reynolds is also undertaking a 12-month commitment to remove provisions in new retail marketing contracts that would otherwise require some retailers to provide it shelf space in proportion to its national market share, where VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 Reynolds national market share is higher than its local market share. The intent of this commitment is to increase Imperial’s ability to obtain shelf space at least proportional to its local market share in many retail outlets for a period of 12 months. I have reason to believe that these provisions are insufficient to make up for Imperial’s significant shelf space disadvantage. The five-month RTM Agreement and 12-month commitment pertaining to Reynolds’ allocation of shelf space according to its local market share are too short. While Imperial may be optimistic that it can establish sufficient shelf space in this limited time frame, nothing in the RTM Agreement and 12-month local market share commitment will alter retailers’ incentives to allocate their shelf space to popular products that sell well when those time periods expire. Even if Imperial offers better terms and uses former Lorillard salespeople who have preexisting relationships with retailers to push for greater shelf space, it likely will still be in retailers’ economic interest to allocate shelf space to the strong Reynolds and Altria/Philp Morris brands, not to Imperial’s collection of weak and declining brands.23 And at the end of Reynolds’ 12-month local market share commitment, Reynolds will be able to squeeze Imperial’s shelf space by requiring many retailers to provide it shelf space in proportion to its higherthan-local national market share. While Imperial may attempt to maintain its retail visibility by offering stores lucrative merchandising contracts, Reynolds and Altria/Philip Morris will no doubt counter those efforts with their own lucrative contracts. In the short run, arguably this may be beneficial for competition, but in the long run, Imperial’s market presence will diminish and the market will in all likelihood become a stable duopoly.24 23 The majority places its bet on Imperial in part based on the transfer to Imperial of ‘‘an experienced, national sales force from Lorillard.’’ Majority Statement, supra note 6, at 2. I do not believe the transfer of some of Lorillard’s sales staff to Imperial will transform Imperial into a significant competitor in the U.S. market. Lorillard’s transferred sales staff will not be able to overcome the significant market dynamics described herein. Moreover, Lorillard’s sales staff likely will be unable to fundamentally transform Imperial’s lackluster competitive performance in the U.S. market because, as the majority itself acknowledges, ‘‘pre-merger Lorillard . . . has not been a particularly aggressive competitor in this market, having instead been generally content to rely on Newport’s strong brand equity to drive most of its sales.’’ Majority Statement, supra note 6, at 3. 24 The majority relies on the fact that Imperial will have more favorable incentives as compared with those of the pre-merger Lorillard, since Lorillard was not a particularly aggressive PO 00000 Frm 00044 Fmt 4703 Sfmt 4703 32381 Conclusion There is a great deal of discussion among academia, industry and other stakeholders about the negative impact on the market stemming from over enforcement of the antitrust laws.25 There is consensus that over enforcement, also known as ‘‘Type 1 errors’’ or ‘‘false positives’’, can harm businesses and consumers by preventing what could otherwise be procompetitive conduct; many commentators believe Type 1 errors can also have a chilling effect on future procompetitive conduct.26 However, failing to bring antitrust enforcement actions can also cause significant harms to consumers. As has been recently demonstrated by an in-depth study of merger retrospectives, harm from under enforcement, also known as ‘‘Type 2 errors’’ or ‘‘false negatives’’, can come in the form of significant price increases.27 The Commission has always been very careful not to take enforcement action that turns out not to be warranted, an approach I fully support. This Commission also normally pays close attention when we are presented with insufficient divestitures or other remedies, to avoid under enforcement errors that can cause significant harm to consumers. Unfortunately, the majority has failed to do so in this case. For all of these reasons, I respectfully dissent. competitor. Majority Statement, supra note 6, at 3. But that comparison does not capture the full picture of the competitive harm from this transaction. Reynolds, not Lorillard, was the firm injecting some competition into the market. And as described herein, once Reynolds adds Lorillard’s flagship Newport brand to its portfolio, Reynolds will have a portfolio of brands that is symmetrical to Altria/Philip Morris, resulting in a significant change in its incentives post-merger. In considering whether Imperial will fully restore the competition lost from this transaction, the majority seems to omit from its analysis Reynolds’ changed incentives post-merger, and the effect that these changed incentives will have to substantially lessen competition in the U.S. market. 25 See, e.g., Christine A. Varney & Jonathan J. Clark, Chicago and Georgetown: An Essay in Honor of Robert Pitofsky, 101 Geo. L.J. 1565 (2013); Bruce H. Kobayashi and Timothy J. Muris, Chicago, PostChicago, and Beyond: Time to Let Go of the 20th Century, 78 Antitrust L. J. 147 (2012); Alan Devlin and Michael Jacobs, Antitrust Error, 52 Wm. & Mary L. Rev. 75 (2010); Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004); Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 15–16 (1984). 26 Id. 27 John Kwoka, Mergers, Merger Control, and Remedies, A Retrospective Analysis of U.S. Policy, 2015. E:\FR\FM\08JNN1.SGM 08JNN1 32382 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Dissenting Statement of Commissioner Joshua D. Wright In the Matter of Reynolds American Inc. and Lorillard Inc. The Commission has voted to issue a Complaint and Decision & Order against Reynolds American Inc. (‘‘Reynolds’’) to remedy the allegedly anticompetitive effects of Reynolds’ proposed acquisition of Lorillard Inc. (‘‘Lorillard’’). I respectfully dissent because the evidence is insufficient to provide reason to believe the three-way transaction between Reynolds, Lorillard, and Imperial Tobacco Group, plc (‘‘Imperial’’) will substantially lessen competition for combustible cigarettes sold in the United States. In particular, I believe the Commission has not met its burden to show that an order is required to remedy any competitive harm arising from the original three-way transaction. This is because the Imperial transaction is both highly likely to occur and is sufficient to extinguish any competitive concerns arising from Reynolds’ proposed acquisition of Lorillard. This combination of facts necessarily implies the Commission should close the investigation of the three-way transaction before it and allow the parties to complete the proposed threeway transaction without imposing an order. In July 2014, Reynolds, Lorillard, and Imperial struck a deal where, as the Commission states, ‘‘Reynolds will own Lorillard’s Newport brand and Imperial will own three former Reynolds’ brands, Winston, Kool and Salem, as well as Lorillard’s Maverick and e-cigarette Blu brands, and Lorillard’s corporate infrastructure and manufacturing facility.’’ 1 Thus, this deal came to us as a three-way transaction. As a matter of principle, when the Commission is presented with a three (or more) way transaction, an order is unnecessary if the transaction—taken as a whole—does not give reason to believe competition will be substantially lessened. The fact that a component of a multi-part transaction is likely anticompetitive when analyzed in isolation does not imply that the transaction when examined as a whole is also likely to substantially lessen competition. When presented with a three-way transaction, the Commission should begin with the following question: If the three-way deal is completed, is there reason to believe competition will be substantially lessened? If there is reason to believe the three-way deal will 1 See Statement of the Federal Trade Commission 1, Reynolds American Inc., FTC File No. 141–0168 (May 26, 2015). VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 substantially lessen competition, then the Commission should pursue the appropriate remedy, either through litigation or a consent decree. If the deal examined as a whole does not substantially lessen competition, the default approach should be to close the investigation. An exception to the default approach, and a corresponding remedy, may be appropriate if there is substantial evidence that the three-way deal will not be completed as proposed. In such a case, the Commission must ask: What is the likelihood of only a portion of the deal being completed while the other portion, which is responsible for ameliorating the competitive concerns, is not completed? In this case, this second inquiry amounts to an assessment of the likelihood that Reynolds’ proposed acquisition of Lorillard would be completed but the Imperial transaction would not be. I agree with the Commission majority that the first question should be answered in the negative because the proposed transfer of brands to Imperial makes it unlikely that there will be a substantial lessening of competition from either unilateral or coordinated effects.2 I also agree with the Commission majority that if Reynolds and Lorillard were attempting a transaction without the involvement of Imperial, the acquisition would likely substantially lessen competition.3 Thus, taken as a whole, I do not find the threeway transaction to be in violation of Section 7 of the Clayton Act. The next question to consider is whether there is any evidence that the Imperial portion of the transaction will not be completed absent an order. In theory, if the probability of the Imperial portion of the transaction coming to completion in a manner that ameliorates the competitive concerns arising from just the Reynolds-Lorillard portion of the transaction were sufficiently low, 2 Statement of the Federal Trade Commission, supra note 1, at 3. 3 Statement of the Federal Trade Commission, supra note 1, at 1. While I agree with the Commission’s ultimate conclusion that Reynolds’ proposed acquisition of Lorillard would substantially lessen competition, I do not agree with the Commission’s reasoning. In particular, I do not believe the assertion that higher concentration resulting from the transaction renders coordinated effects likely. Specifically, I have no reason to believe that the market is vulnerable to coordination or that there is a credible basis to conclude the combination of Reynolds and Lorillard would enhance that vulnerability. For further discussion of why, as a general matter, the Commission should not in my view rely upon increases in concentration to create a presumption of competitive harm or the likelihood of coordinated effects, see Statement of Commissioner Joshua D. Wright, Holcim Ltd., FTC File No. 141– 0129 (May 8, 2015). PO 00000 Frm 00045 Fmt 4703 Sfmt 4703 then one could argue the overall transaction is likely to substantially lessen competition. I have seen no evidence that, absent an order, Reynolds and Lorillard would not complete its transfer of assets and brands to Imperial. While there are no guarantees and the probability that the Imperial portion of the transaction will be completed is something less than 100 percent, I have no reason to believe it is close to or less than 50 percent.4 I fully accept that a consent and order will increase the likelihood that the Imperial portion of the transaction will be completed. Putting firms under order with threat of contempt tends to have that effect. I also accept the view that a consent and order may mitigate some, but perhaps not all, potential moral hazard issues regarding the transfer of assets and brands from ReynoldsLorillard to Imperial. Specifically, the concern is that, post-merger, ReynoldsLorillard would complete the Imperial portion of the transaction but more in form but not in function and artificially raise the cost for Imperial. Higher costs for Imperial, such as undue delays in obtaining critical assets, would certainly materially impact Imperial’s ability to compete effectively. Given this possibility, a consent and order, including the use a monitor, would make such behavior easier to detect, and consequently would provide some deterrence from these potential moral hazard issues. It is also true, however, that a monitor in numerous other circumstances would make anticompetitive behavior easier to detect and consequently deter that behavior from occurring in the first place. Based upon this reasoning, the Commission could try as a prophylactic effort to impose a monitor in all oligopoly markets in the United States. This would no doubt detect (and deter) much price fixing. Such a broad effort would be unprecedented, and of course, plainly unlawful. The Commission’s authority to impose a remedy in any context depends upon its finding a law violation. Here, because the parties originally presented the three-way transaction to ameliorate competitive concerns about a Reynolds-Lorillardonly deal, and they did so successfully, there is no reason to believe the threeway transaction will substantially lessen competition; therefore, there is no legal wrongdoing to remedy. The Commission understandably would like to hold the parties to a 4 I would find a likelihood that the Imperial portion of the transaction would be completed less than 50 percent to be a sufficient basis to challenge the three-way transaction or enter into a consent decree. E:\FR\FM\08JNN1.SGM 08JNN1 Federal Register / Vol. 80, No. 109 / Monday, June 8, 2015 / Notices consent order that requires them to make the deal along with a handful of other changes. But that is not our role. There is no legal authority for the proposition that the Commission can prophylactically impose remedies without an underlying violation of the antitrust laws. And there is no legal authority to support the view that the Commission can isolate selected components of a three-way transaction to find such a violation. In the absence of such authority, the appropriate course is to evaluate the three-way transaction presented to the agency as a whole. Because I conclude, as apparently does the Commission, that the three-way transaction does not substantially lessen competition, there is no competitive harm to correct and any remedy is unnecessary and unwarranted.5 Entering into consents is appropriate only when the transaction at issue—in this case the three-way transaction—is likely to substantially lessen competition. This one does not. [FR Doc. 2015–13861 Filed 6–5–15; 8:45 am] BILLING CODE 6750–01–P DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Disease Control and Prevention Please note: All public comment should be submitted through the Federal eRulemaking portal (Regulations.gov) or by U.S. mail to the address listed above. [60Day–15–0856; Docket No. CDC–2015– 0041] Proposed Data Collection Submitted for Public Comment and Recommendations FOR FURTHER INFORMATION CONTACT: Centers for Disease Control and Prevention (CDC), Department of Health and Human Services (HHS). ACTION: Notice with comment period. AGENCY: The Centers for Disease Control and Prevention (CDC), as part of its continuing efforts to reduce public burden and maximize the utility of government information, invites the general public and other Federal agencies to take this opportunity to comment on proposed and/or mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: 5 The Commission points to the HSR Act as providing the legal basis for the FTC to enter into consent orders ‘‘to ensure that any competitive issues with a proposed transaction are addressed effectively.’’ Statement of the Federal Trade Commission, supra note 1, at 4 n.7. When a proposed transaction or set of transactions would not substantially lessen competition, as is the case with the three way transaction originally proposed here, there are no competitive issues with the proposed transaction to be addressed, and the belief that a consent order may even further mitigate concerns regarding the transfer of assets is not material to our analysis under the Clayton Act. The HSR Act is not in conflict with the Clayton Act and does not change this result. VerDate Sep<11>2014 17:09 Jun 05, 2015 Jkt 235001 continuing information collections, as required by the Paperwork Reduction Act of 1995. This notice invites comment on the proposed revision of the National Quitline Data Warehouse (NQDW) information collection. The NQDW is a repository of information about callers who have received services from state quitlines and a quarterly summary of services provided by each quitline. DATES: Written comments must be received on or before August 7, 2015. ADDRESSES: You may submit comments, identified by Docket No. CDC–2015– 0041 by any of the following methods: Federal eRulemaking Portal: Regulation.gov. Follow the instructions for submitting comments. Mail: Leroy A. Richardson, Information Collection Review Office, Centers for Disease Control and Prevention, 1600 Clifton Road NE., MS– D74, Atlanta, Georgia 30329. Instructions: All submissions received must include the agency name and Docket Number. All relevant comments received will be posted without change to Regulations.gov, including any personal information provided. For access to the docket to read background documents or comments received, go to Regulations.gov. To request more information on the proposed project or to obtain a copy of the information collection plan and instruments, contact the Information Collection Review Office, Centers for Disease Control and Prevention, 1600 Clifton Road NE., MS–D74, Atlanta, Georgia 30329; phone: 404–639–7570; Email: omb@cdc.gov. SUPPLEMENTARY INFORMATION: Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501–3520), Federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. In addition, the PRA also requires Federal agencies to provide a 60-day notice in the Federal Register concerning each proposed collection of information, including each new proposed collection, each proposed extension of existing collection of information, and each reinstatement of previously approved information collection before submitting the collection to OMB for approval. To comply with this requirement, we are publishing this notice of a proposed data collection as described below. PO 00000 Frm 00046 Fmt 4703 Sfmt 4703 32383 Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. Burden means the total time, effort, or financial resources expended by persons to generate, maintain, retain, disclose or provide information to or for a Federal agency. This includes the time needed to review instructions; to develop, acquire, install and utilize technology and systems for the purpose of collecting, validating and verifying information, processing and maintaining information, and disclosing and providing information; to train personnel and to be able to respond to a collection of information, to search data sources, to complete and review the collection of information; and to transmit or otherwise disclose the information. Proposed Project National Quitline Data Warehouse (NQDW) (OMB No. 0920–0856, exp. 10/ 31/2015)—Revision—National Center for Chronic Disease and Health Promotion (NCCDPHP), Centers for Disease Control and Prevention (CDC). Background and Brief Description Despite the high level of public knowledge about the adverse effects of smoking, tobacco use remains the leading preventable cause of disease and death in the United States. Smoking results in approximately 480,000 deaths annually (USDHHS, 2014). This total includes approximately 41,000 annual deaths in nonsmoking U.S. adults caused by secondhand smoke exposure (USDHHS, 2014). Although the prevalence of current smoking among adults has been decreasing, substantial disparities in smoking prevalence continue to exist among individuals of low socioeconomic status, persons with mental health and substance abuse conditions, and certain racial/ethnic populations, among other groups. Quitlines are telephone-based tobacco cessation services that help tobacco users quit through a variety of services, E:\FR\FM\08JNN1.SGM 08JNN1

Agencies

[Federal Register Volume 80, Number 109 (Monday, June 8, 2015)]
[Notices]
[Pages 32374-32383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-13861]


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FEDERAL TRADE COMMISSION

[File No. 141-0168]


Reynolds American Inc. and Lorillard Inc.; Analysis of Proposed 
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 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 June 25, 2015.

ADDRESSES: Interested parties may file a comment at online or on paper, 
by following the instructions in the Request for Comment part of the 
SUPPLEMENTARY INFORMATION section below. Write ``Reynolds American Inc. 
and Lorillard Inc.--Consent Agreement; File 141-0168'' on your comment 
and file your comment online at https://ftcpublic.commentworks.com/ftc/reynoldslorillardconsent by following the instructions on the web-based 
form. If you prefer to file your comment on paper, write ``Reynolds 
American Inc. and Lorillard Inc.--Consent Agreement; File 141-0168'' on 
your comment and on the envelope, and mail your comment to the 
following address: Federal Trade Commission, Office of the Secretary, 
600 Pennsylvania Avenue NW., Suite CC-5610 (Annex D), Washington, DC 
20580, or deliver your comment to the following address: Federal Trade 
Commission, Office of the Secretary, Constitution Center, 400 7th 
Street SW., 5th Floor, Suite 5610 (Annex D), Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Robert Tovsky, Bureau of Competition, 
(202-326-2634), 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 May 26, 2015), on the World Wide Web, at 
http://www.ftc.gov/os/actions.shtm.
    You can file a comment online or on paper. For the Commission to 
consider your comment, we must receive it on or before June 25, 2015. 
Write ``Reynolds American Inc. and Lorillard Inc.--Consent Agreement; 
File 141-0168'' 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 http://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

[[Page 32375]]

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 
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/reynoldslorillardconsent by following the instructions on the web-
based form. If this Notice appears at http://www.regulations.gov/#!home, you also may file a comment through that Web site.
    If you file your comment on paper, write ``Reynolds American Inc. 
and Lorillard Inc.--Consent Agreement; File 141-0168'' on your comment 
and on the envelope, and mail your comment to the following address: 
Federal Trade Commission, Office of the Secretary, 600 Pennsylvania 
Avenue NW., Suite CC-5610 (Annex D), Washington, DC 20580, or deliver 
your comment to the following address: Federal Trade Commission, Office 
of the Secretary, Constitution Center, 400 7th Street SW., 5th Floor, 
Suite 5610 (Annex D), Washington, DC 20024. If possible, submit your 
paper comment to the Commission by courier or overnight service.
    Visit the Commission Web site at http://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 June 25, 2015. For information on the 
Commission's privacy policy, including routine uses permitted by the 
Privacy Act, see http://www.ftc.gov/ftc/privacy.htm.

Analysis of Agreement Containing Consent Order To Aid Public Comment

    The Federal Trade Commission (``Commission'') has accepted from 
Reynolds American Inc. (``Reynolds'') and Lorillard Inc. 
(``Lorillard''), subject to final approval, an Agreement Containing 
Consent Order (``Consent Agreement'') designed to remedy the 
anticompetitive effects resulting from Reynolds's proposed acquisition 
of Lorillard.
    Reynolds's July 2014 agreement to acquire Lorillard in a $27.4 
billion transaction (``the Acquisition'') would combine the second- and 
third-largest cigarette producers in the United States. After the 
Acquisition, Reynolds and the largest U.S. cigarette producer, Altria 
Group, Inc. (``Altria''), would together control approximately 90% of 
all U.S. cigarette sales. The Commission's Complaint alleges that the 
proposed Acquisition, if consummated, would violate 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, by substantially 
lessening competition in the market for traditional combustible 
cigarettes.
    Under the terms of the Consent Agreement, Reynolds must divest a 
substantial set of assets to Imperial Tobacco Group plc. 
(``Imperial''). These assets include four cigarette brands, Lorillard's 
manufacturing facility and headquarters, and most of Lorillard's 
current workforce. The Consent Agreement also requires Reynolds to 
provide Imperial with visible shelf-space at retail locations for a 
period of five months following the close of the transaction. This 
Consent Agreement provides Imperial's U.S. operations with the 
nationally relevant brands, manufacturing facilities, and other 
tangible and intangible assets needed to effectively compete in the 
U.S. cigarette market. Reynolds must complete the divestiture on the 
same day it acquires Lorillard.
    The Consent Agreement has been placed on the public record for 30 
days to solicit comments from interested persons. Comments received 
during this period will become part of the public record. After 30 
days, the Commission will review the Consent Agreement, and comments 
received, to decide whether it should withdraw or modify the Consent 
Agreement, or make the Consent Agreement final.

I. The Parties

    All parties to the proposed Acquisition and Consent Agreement are 
current competitors in the U.S. cigarette market.
    Reynolds has the second-largest cigarette manufacturing and sales 
business in the United States. Its brands include two of the best-
selling cigarettes in the country: Camel and Pall Mall. It also manages 
a number of smaller cigarette brands that it promotes less heavily. 
These include Winston, Kool, and Salem. Reynolds primarily sells its 
cigarettes in the United States.
    Lorillard has the third-largest cigarette manufacturing and sales 
business in the United States. Its flagship brand, Newport, is the 
best-selling menthol cigarette in the country, and the second-best-
selling cigarette brand overall. In addition to recently introduced 
non-menthol styles of Newport, Lorillard manufactures and sells a few 
smaller discount-segment brands, such as Maverick. Like Reynolds, 
Lorillard competes primarily in the United States.
    Imperial is an international tobacco company operating in many 
countries including Australia, France, Germany, Greece, Italy, Turkey, 
Taiwan, the United Kingdom, and the United States. It sells tobacco 
products in the U.S. through its Commonwealth-Altadis subsidiary. 
Imperial's U.S. cigarette portfolio consists of several smaller 
discount brands, including USA Gold, Sonoma, and Montclair.

II. The Relevant Market and Market Structure

    The relevant line of commerce in which to analyze the effects of 
the Acquisition is traditional combustible cigarettes (``cigarettes''). 
Consumers do not consider alternative tobacco products to be close 
substitutes for cigarettes. Cigarette producers similarly view 
cigarettes and other tobacco products as separate product categories, 
and cigarette prices are not significantly constrained by other tobacco 
products.
    The United States is the relevant geographic market in which to 
analyze the effects of the Acquisition on the cigarette market. Both 
Reynolds and Lorillard sell cigarettes primarily in this country. U.S. 
consumers are in practice limited to the set of current U.S. producers 
when seeking to buy cigarettes.
    The U.S. cigarette market has experienced declining demand since 
1981. Total shipments fell by approximately 3.2% in 2014, with similar 
annual declines expected in the future. The market includes three large 
producers--Altria, Reynolds, and Lorillard--who together account for 
roughly 90% of all cigarette sales. Two smaller producers--Liggett and 
Imperial--have roughly 3% market shares apiece. All other producers 
have individual market shares of 1% or less.

[[Page 32376]]

    Competition in the U.S. cigarette market involves brand 
positioning, customer loyalty management, product promotion, and retail 
presence. Cigarette advertising is severely restricted in the United 
States: Various forms of advertising and marketing are prohibited by 
law, by regulation, and by the terms of settlement agreements between 
major cigarette producers and the individual States. The predominant 
form of promotion remaining for U.S. cigarette producers is retail 
price reduction.

III. Entry

    Entry or expansion in the U.S. cigarette market is unlikely to 
deter or counteract any anticompetitive effects of the proposed 
Acquisition. New entry in the cigarette market is difficult because of 
falling demand and the potentially slow and costly process of obtaining 
Food and Drug Administration clearance for new cigarette products. 
Expansion by new or existing cigarette producers is further obstructed 
by legal restrictions on advertising, limited retail product-visibility 
for fringe cigarette brands, and existing retail marketing contracts.

IV. Effects of the Acquisition

    The proposed Acquisition is likely to substantially lessen 
competition in the U.S. cigarette market. It would eliminate current 
and emerging head-to-head competition between Reynolds and Lorillard, 
particularly for menthol cigarette sales, which is an increasingly 
important segment of the market. The Acquisition would also increase 
the likelihood that the merged firm will unilaterally exercise market 
power. Finally, the Acquisition will increase the likelihood of 
coordinated interaction between the remaining participants in the 
cigarette market.

V. The Consent Agreement

    The purpose of the Consent Agreement is to mitigate the 
anticompetitive threat of the proposed acquisition. The Consent 
Agreement allows Reynolds to complete its acquisition of Lorillard, but 
requires Reynolds to divest several of its post-acquisition assets to 
Imperial.
    Among other terms, the Consent Agreement requires Reynolds to sell 
Imperial four of its post-acquisition cigarette brands: Winton, Kool, 
Salem, and Maverick. These brands have a combined share of 
approximately 7% of the total U.S. cigarette market. Reynolds must also 
sell Lorillard's manufacturing facility and headquarters to Imperial, 
give Imperial employment rights for most of Lorillard's current staff 
and salesforce, and guarantee Imperial visible retail shelf-space for a 
period of five months following the close of the transaction. Finally, 
Reynolds must also provide Imperial with certain transition services.
    This divestiture package, including the nationally recognized 
Winston and Kool brands, provides Imperial an opportunity to rapidly 
increase its competitive significance in the U.S. market. Imperial will 
shift immediately from being a small regional producer with limited 
competitive influence on the larger firms to become a national 
competitor with the third-largest cigarette business in the market. 
While Imperial's plans call for it to reposition the acquired brands, 
which have lost market share as part of the Reynolds portfolio, 
Imperial has successfully executed similar turnarounds with brands in 
other international markets.
    Imperial will have greater opportunity and incentive to promote and 
grow sales of the divested brands because, unlike Reynolds, incremental 
sales of these brands are unlikely to cannibalize sales from more 
profitable cigarette brands in its portfolio. Imperial's incentive to 
reduce the price of the divestiture brands, in order to grow their 
market share, is a procompetitive offset to the reduction in 
competition that will result from the consolidation of Reynolds and 
Lorillard. Imperial's incentive to reduce prices and promote products 
in new areas likewise reduces the threat of anticompetitive 
coordination following the merger--as coordination on price increases 
and other aspects of competition may be relatively difficult given 
Imperial's contrary incentives. Ultimately, the divestiture package 
provides Imperial with a robust opportunity to undertake procompetitive 
actions to grow its market share in the U.S. cigarette market, and 
address the competitive concerns raised by the merger.

IV. Opportunity for Public Comment

    By accepting the Consent Agreement, subject to final approval, the 
Commission anticipates that the competitive problems alleged in its 
Complaint will be resolved. The purpose of this analysis is to invite 
and facilitate public comment concerning the Consent Agreement to aid 
the Commission in determining whether it should make the Consent 
Agreement final. This analysis is not an official interpretation of the 
Consent Agreement, and does not modify its terms in any way.

    By direction of the Commission, Commissioners Brill and Wright 
dissenting.
Donald S. Clark,
Secretary.

Statement of the Federal Trade Commission

In the Matter of Reynolds American, Inc. and Lorillard Inc.

    The Federal Trade Commission has voted to accept for public comment 
a settlement with Reynolds American, Inc. (``Reynolds'') to resolve the 
likely anticompetitive effects of Reynolds' proposed acquisition of 
Lorillard Inc. (``Lorillard'').\1\ The settlement will allow the 
acquisition to move forward, subject to large divestitures by the 
parties to another major competitor in the tobacco industry.
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    \1\ This statement reflects the views of Chairwoman Ramirez, 
Commissioner Ohlhausen, and Commissioner McSweeny.
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    The merging parties chose to present this acquisition to the 
Commission with a proposed divestiture aimed solely at securing our 
approval of the acquisition.\2\ As proposed, Reynolds will purchase 
Lorillard for $27.4 billion and then immediately divest certain assets 
from both Reynolds and Lorillard to Imperial Tobacco Group plc 
(``Imperial'') in a second $7.1 billion transaction. At the end of both 
transactions, Reynolds will own Lorillard's Newport brand and Imperial 
will own three former Reynolds' brands, Winston, Kool and Salem, as 
well as Lorillard's Maverick and e-cigarette Blu brands, and 
Lorillard's corporate infrastructure and manufacturing facility.
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    \2\ The only transaction before the Commission for purposes of 
Hart-Scott-Rodino review was the Reynolds-Lorillard transaction.
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    As we explain below, we have reason to believe that Reynolds' 
proposed acquisition of Lorillard is likely to substantially lessen 
competition in the market for combustible cigarettes in the United 
States. We conclude, however, that the parties' proposed post-merger 
divestitures to Imperial would be effective in restoring competition in 
this market, and we therefore approve the divestitures as part of a 
consent order.
I. Reynolds' Acquisition of Lorillard Is Likely to Substantially Lessen 
Competition in the Combustible Cigarette Market
    Today, the market for combustible cigarettes in the United States 
contains three major players and several additional smaller 
competitors. Philip Morris USA, a division of Altria Group, Inc. 
(``Altria''), is the largest, with a share of about 51%, roughly twice 
the

[[Page 32377]]

size of its nearest competitor. Reynolds and Lorillard are the second- 
and third-largest firms, with shares of approximately 26% and 15%, 
respectively. Other players in the market include Liggett and Imperial, 
each with about 3% of the market, and roughly 50 other small players 
focused mainly on discount or regional business.
    In light of their size and relative positions in the market, if 
Reynolds and Lorillard were attempting their transaction without any 
divestitures, the acquisition would likely substantially lessen 
competition, with the post-acquisition Reynolds controlling 41% of the 
market and Reynolds and Altria together holding 92% of the market. In 
particular, we have reason to believe that the transaction would 
eliminate competition between Reynolds' Camel brand and Lorillard's 
Newport brand. For example, we found evidence that Camel has been 
seeking to gain market share from Newport. There is also evidence of 
discounting by Newport in response to Camel. In addition, our 
econometric analysis showed likely price effects resulting from the 
combination of Camel and Newport.\3\
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    \3\ While our main concern is with the transaction's likely 
unilateral effects, there is also evidence that the transaction 
would increase the likelihood of coordination by creating greater 
symmetry between Reynolds and Altria in terms of their market 
shares, portfolio of brands, and geographic strength in the United 
States. When the Commission last publicly evaluated this market in 
the context of the 2004 R.J. Reynolds Tobacco Holdings, Inc. 
(``RJR'')/British American Tobacco p.l.c. (``BAT'') transaction, we 
noted in our statement that conditions in the cigarette market at 
the time would make coordination difficult. The market has changed 
considerably over the last decade, perhaps most importantly in that 
the RJR/BAT transaction left the market with three major players 
relying on complex, differentiated product placement and pricing 
strategies. Unlike the combination of Reynolds/Lorillard, which 
would leave only two symmetric players with major national brands 
competing directly, the RJR/BAT transaction and market environment 
in 2004 presented a less pronounced coordination issue.
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    Having concluded that Reynolds' acquisition of Lorillard is likely 
to result in anticompetitive effects, we explain next why we believe 
the parties' proposed divestitures to Imperial are sufficient to 
restore competition.
II. The Divestitures to Imperial Will Offset the Competition Lost From 
the Reynolds-Lorillard Merger
    Imperial is an international tobacco company with operations in 160 
countries and global revenues of roughly $11.8 billion. Today, Imperial 
is a relatively small player in the United States with a 3% share of 
the market.\4\ Through the divestitures, Imperial is purchasing a 
collection of assets from both Reynolds and Lorillard. In addition to 
buying several prominent brands from both companies, Imperial is 
receiving an intact American manufacturing and sales operation from 
Lorillard, including Lorillard's offices, production facilities, and 
2,900 employees. Lorillard's national sales force, which will be moving 
to Imperial, is an experienced team with knowledge of brands and 
customers.
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    \4\ Imperial entered the United States market through its 
acquisition of Commonwealth's cigarette brands in April 2007.
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    We believe that these divestitures to Imperial will address the 
competitive concerns arising out of the Reynolds-Lorillard combination. 
Following the divestitures, Imperial will immediately become the third-
largest cigarette maker in the country, with a 10% market share.\5\ 
Imperial has a clearly defined strategy for the United States, and it 
will have both the capability and incentives to become an effective 
U.S. competitor.
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    \5\ After the divestitures to Imperial, Reynolds will have a 34% 
market share in the United States.
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    Winston is the number two cigarette brand in the world and will be 
the main focus of Imperial's strategy in the United States. Imperial's 
consumer research strongly indicates that Winston could see increased 
brand recognition and acceptance in the United States. Imperial plans 
to reposition Winston as a premium-value brand and invest in the growth 
of the brand through added visibility and significant discounting. 
Imperial also plans to refocus and invest in Kool through discounting 
on a state-by-state basis. The evidence shows that Imperial can grow 
the market share of these brands through discounting and other 
promotional activity.
    In her dissent, Commissioner Brill questions Imperial's ability to 
restore the competition lost due to the Reynolds-Lorillard transaction, 
noting that the Winston and Kool brands have been declining for 
years.\6\ In our view, however, Reynolds' track record with these two 
brands is not indicative of their potential with Imperial. As 
Commissioner Brill acknowledges, Reynolds made a conscious decision to 
promote Camel and Pall Mall aggressively as growth brands, and to put 
limited marketing support behind Winston and Kool. Going forward, 
Imperial will have greater incentives to promote Winston and Kool than 
Reynolds did because, unlike Reynolds, Imperial does not risk 
cannibalizing other brands in its portfolio. Moreover, Imperial is also 
acquiring Lorillard's Maverick, a value brand that competes well with 
Reynolds' Pall Mall.
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    \6\ Dissenting Statement of Commissioner Julie Brill at 6-7.
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    Imperial has a successful record of repositioning cigarette brands 
in other jurisdictions and growing the market share of those brands. 
Although it has had a relatively small presence in this country, 
Imperial is acquiring an experienced, national sales force from 
Lorillard that will help it to grow the acquired brands and more 
effectively compete against Reynolds and Altria. Imperial has 
agreements in place with Reynolds to ensure continuity of supply of the 
acquired brands and to ensure their visibility at the point of sale. 
The agreements will enable Imperial to have immediate access to retail 
shelf space and give Imperial time to negotiate contracts with 
retailers.
    Following the divestitures, Imperial's business in the United 
States will account for 24% of its worldwide tobacco net revenues, thus 
making it important for Imperial to succeed in the United States. The 
acquisition will enable Imperial to be a national competitor, give it a 
portfolio of brands across different price points, and make its 
business more important to retailers, thereby enabling it to obtain 
visible shelf space and build stronger retailer relationships.
    We are therefore satisfied that Imperial is positioned to be a 
sufficiently robust and aggressive competitor against a merged 
Reynolds-Lorillard and Altria, and to offset the competitive concerns 
arising from Reynolds' acquisition of Lorillard. Indeed, Imperial's 
incentives will stand in contrast to those of the pre-merger Lorillard, 
which has not been a particularly aggressive competitor in this market, 
having instead been generally content to rely on Newport's strong brand 
equity to drive most of its sales. We believe that Imperial will behave 
differently.
    For these reasons, we are allowing the merger of Reynolds and 
Lorillard to go forward and accepting a consent decree to ensure that 
the divestitures to Imperial occur on a timely and effective basis.\7\
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    \7\ Although he agrees that the merger of Reynolds and Lorillard 
is likely to substantially lessen competition and that a consent 
order increases the likelihood that the divestitures to Imperial are 
properly and promptly effectuated, Commissioner Wright believes a 
consent order is unwarranted and on that basis dissents. We 
respectfully disagree with Commissioner Wright's suggestion that our 
action is improper under these circumstances. Our obligation under 
the Hart-Scott-Rodino Act is to take appropriate steps to ensure 
that any competitive issues with a proposed transaction are 
addressed effectively and that is precisely what we have done here. 
Indeed, we believe that our responsibility would not be fully 
discharged if we did not guard against the risks that Commissioner 
Wright himself acknowledges exist in the absence of a consent order.

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[[Page 32378]]

Dissenting Statement of Commissioner Julie Brill

In the Matter of Reynolds American, Inc. and Lorillard Inc.

    A majority of the Commission has voted to accept a consent to 
resolve competitive concerns stemming from Reynolds American, Inc.'s 
$27.4 billion acquisition of Lorillard Tobacco Company, a transaction 
combining the second and third largest cigarette manufacturers in the 
United States. Under the terms of the consent, Reynolds will divest 
some of its weaker non-growth brands--Winston, Kool, and Salem--as well 
as Lorillard's brand Maverick to Imperial Tobacco Group plc, a British 
firm that currently operates as Commonwealth here in the United 
States.\1\ The Commission will allow Reynolds to retain its sought-
after growth brands, Camel and Pall Mall, as well as Lorillard's 
flagship brand Newport. I respectfully dissent because I am not 
convinced that the remedy accepted by the Commission fully resolves the 
competitive concerns arising from this transaction. By accepting the 
parties' proposed divestitures and allowing the merger to proceed, the 
Commission is betting on Imperial's ability and incentive to compete 
vigorously with a set of weak and declining brands. For the reasons 
explained below, Imperial's ability to do so is at best uncertain. I 
thus have reason to believe that Reynolds' acquisition of Lorillard, 
even after the divestitures to Imperial, is likely to substantially 
lessen competition in the U.S. cigarette market. As a result of the 
Commission's failure to take meaningful action against this merger, the 
remaining two major cigarette manufacturers--Altria/Philip Morris and 
Reynolds--will likely be able to impose higher cigarette prices on 
consumers.
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    \1\ Reynolds will also sell Lorillard's e-cigarette Blu to 
Imperial; that sale is not part of the Commission's proposed order.
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    I have reason to believe this merger increases both the likelihood 
of coordinated interaction between the remaining participants in the 
cigarette market, and the likelihood that the merged firm will 
unilaterally exercise market power. While both theories are presented 
in the Commission's Complaint,\2\ I describe below additional facts and 
evidence not included in the Complaint that I believe illustrate why 
the transaction remains anticompetitive, notwithstanding the 
divestitures to Imperial.
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    \2\ Complaint, ] 8, In the Matter of Reynolds American Inc. and 
Lorillard Inc., File No. 141-0168, (May 26, 2015).
---------------------------------------------------------------------------

Coordinated Effects
    Under a coordinated effects theory, as set forth in the 2010 
Horizontal Merger Guidelines, the Commission is likely to challenge a 
merger if the following three conditions are met: ``(1) The merger 
would significantly increase concentration and lead to a moderately or 
highly concentrated market; (2) that market shows signs of 
vulnerability to coordinated conduct [ ]; and (3) the [Commission has] 
a credible basis on which to conclude that the merger may enhance that 
vulnerability.'' \3\ Importantly, the Guidelines explain ``the risk 
that a merger will induce adverse coordinated effects may not be 
susceptible to quantification or detailed proof . . .''.\4\ The 
Guidelines also instruct that ``[p]ursuant to the Clayton Act's 
incipiency standard, the Agencies may challenge mergers that in their 
judgment pose a real danger of harm through coordinated effects, even 
without specific evidence showing precisely how the coordination likely 
would take place.'' \5\
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    \3\ U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER 
GUIDELINES Sec.  7.1 (2010) [hereinafter Guidelines].
    \4\ Id.
    \5\ Id.
---------------------------------------------------------------------------

    I have reason to believe that the facts in this case demonstrate a 
substantial risk of coordinated interaction because all three 
conditions for coordinated interaction spelled out in the Horizontal 
Merger Guidelines are satisfied.
    The first condition is easily satisfied. After the dust settles on 
the merger and divestitures, Reynolds and market leader Altria/Philip 
Morris will have over 80 percent of the U.S. market for traditional 
combustible cigarettes.\6\
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    \6\ As the majority notes, the relevant market is combustible 
cigarettes in the United States. Statement of the F.T.C., In the 
Matter of Reynolds American Inc. and Lorillard Inc., File No. 141-
0168, May 26, 2015, at 1 [hereinafter Majority Statement].
---------------------------------------------------------------------------

    The second condition is also easily satisfied. The Guidelines 
identify a number of market characteristics that are generally 
considered to make a market more vulnerable to coordination.\7\ These 
include (1) evidence of past express collusion affecting the relevant 
market; (2) firms' ability to monitor rivals' behavior and detect 
cheating with relative ease; (3) availability of rapid and effective 
forms of punishment for cheating; (4) difficulties associated with 
attempting to gain significant market share from aggressive price 
cutting; and (5) low elasticity of demand. The cigarette market has 
many of these characteristics.
---------------------------------------------------------------------------

    \7\ Guidelines, supra note 3,. at Sec.  7.2.
---------------------------------------------------------------------------

    First, for the last decade, the cigarette market in the United 
States has been dominated by three firms--Reynolds, Lorillard, and 
Altria/Philip Morris--which together represent over 90 percent of the 
market. Over the same 10-year period, these ``Big Three'' tobacco firms 
have made lock-step cigarette list price increases unrelated to any 
change in costs or market fundamentals.\8\
---------------------------------------------------------------------------

    \8\ In this context, it is worth noting that, in 2006, U.S. 
District Judge Kessler held Reynolds, Lorillard, Philip Morris, and 
a number of other cigarette manufacturers liable under the Racketeer 
Influenced and Corrupt Organizations Act (RICO). United States v. 
Philip Morris, 449 F. Supp 2d 1 (D.D.C. 2006), aff'd 566 F.3d 1095 
(D.C. Cir. 2009). In a lengthy decision containing over 4000 
paragraphs of findings of fact, the district court highlighted the 
coordinated nature of the defendants' activities in furtherance of 
the racketeering scheme. The conduct involved was indirectly related 
to price, as the overarching purpose behind the scheme was to 
maximize the competing cigarette firms' profits. The district court 
explained that ``[t]he central shared objective of Defendants has 
been to maximize the profits of the cigarette company Defendants by 
acting in concert to preserve and enhance the market for cigarettes 
through an overarching scheme to defraud existing and potential 
smokers. . . .'' (Philip Morris, 449 F. Supp 2d at 869). The court 
also found that ``[t]here is overwhelming evidence demonstrating 
Defendants' recognition that their economic interests would best be 
served by pursuing a united front on smoking and health issues and 
by a global coordination of their activities to protect and enhance 
their market positions in their respective countries.'' (Id. at 
119). I find this evidence troubling when viewed in conjunction with 
the evidence in this case showing the U.S. cigarette market's 
vulnerability to coordinated interaction relating to prices.
---------------------------------------------------------------------------

    Second, there is a high degree of pricing transparency at the 
wholesale and retail levels in the cigarette market, giving cigarette 
manufacturers the ability to monitor each other's prices and engage in 
disciplinary action necessary to maintain coordination. The major 
manufacturers all receive detailed wholesale volume information from 
firms collecting data. Reynolds and Lorillard also receive numerous 
analyst reports that track manufacturers' pricing behavior and project 
whether the industry will enjoy a stable or aggressive competitive 
environment as a result. These conditions will allow the new ``Big 
Two'' cigarette manufacturers to quickly detect volume shifts due to 
price cuts and other competitive activity, allowing them to monitor 
each other's prices, detect cheating, and quickly discipline each 
other--or threaten to do so. Third, many U.S. smokers are addicted to 
tobacco, resulting in fairly inelastic market demand, and rendering 
successful coordination more profitable for industry members. As the 
Guidelines

[[Page 32379]]

describe, coordination is more likely the more participants stand to 
gain from it.
    Apart from the market characteristics identified in the Guidelines 
that make a market more vulnerable to coordination, it is important to 
consider that the cigarette market in the United States has experienced 
an ongoing decline in volume for over 20 years. This creates pressure 
on manufacturers to increase prices to offset volume losses, 
potentially easing the difficulties associated with formation of 
coordinating arrangements by making price increases a focal strategy.
    In 2004, the Commission elected not to challenge the merger of 
Reynolds and Brown & Williamson in part because it found that the 
cigarette market was not vulnerable to coordinated interaction. 
However, three key market dynamics have changed since then. These three 
changes have limited the market significance of the discount fringe and 
its ability to constrain cigarette prices, and increased entry 
barriers--both of which make the market more vulnerable to 
coordination. First, Reynolds' Every Day Low Price (EDLP) program, 
substantially modified in 2008 to reposition and grow Pall Mall as the 
EDLP brand, requires participating retailers to maintain Pall Mall as 
the lowest price brand sold in the store, creating an effective price 
floor that discount manufacturers are not allowed to undercut. Second, 
the vast majority of states that signed the Tobacco Master Settlement 
Agreement (``MSA'') have enacted Non-Participating Manufacturer 
Legislation and Allocable Share Legislation, further diminishing the 
impact of discount brands.\9\ Under this legislation, companies that do 
not participate in the MSA--typically the discount cigarette 
manufacturers--are required to pay an escrow fee to approximate the 
costs incurred by the participating cigarette companies, thereby 
eliminating much of the cost advantage that discounters had previously 
enjoyed. Third, the FDA's 2010 regulations,\10\ implementing the 2009 
Family Smoking Prevention and Tobacco Control Act,\11\ restrict tobacco 
advertising and promotion in the United States. Thus the 2010 FDA 
regulation limits the ability of new firms to enter the market, and 
limits the ability of existing fringe market participants to grow 
through aggressive advertising. The combined effect of these three, 
relatively new market dynamics has been a reduction in the competitive 
significance of the fringe discount brand manufacturers. Indeed, the 
number of discount brand manufacturers has fallen from over 100 in 
2005, to around 50 today, now representing just two percent of the 
market.
---------------------------------------------------------------------------

    \9\ The Tobacco Master Settlement Agreement (``MSA'') was 
entered in November 1998, originally between the four largest U.S. 
tobacco companies--Philip Morris Inc., R.J. Reynolds, Brown & 
Williamson and Lorillard--the original participating manufacturers 
(``OPMs''), and the attorneys general of 46 states, the District of 
Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa, and 
the Northern Marianas. The MSA resolved over 40 lawsuits brought by 
the states against tobacco manufacturers to recover billions of 
dollars in costs incurred by the states to treat smoking related 
illnesses and to obtain other relief. The OPMs agreed (1) to make 
multi-billion dollar payments, annually and in perpetuity, to the 
states and (2) to significantly restrict the way they market and 
advertise their tobacco products, including a prohibition on the use 
of cartoons in cigarette advertising or any other method that 
targets youth. In exchange, the states agreed to release the OPMs, 
and any other tobacco company that became a signatory to the MSA, 
from past and future liability arising from the health care costs 
caused by smoking. All MSA states subsequently enacted legislation 
requiring non-participating manufacturers (``NPMs'') to make certain 
payments based on the number of cigarettes sold into the state. 
These payments are placed in an escrow account to ensure that funds 
are available to satisfy state claims against NPMs. Although all MSA 
states enacted this legislation, many NPMs were not making the 
required payments, or were exploiting a loophole by withdrawing 
their escrow deposits in a way that conflicted with the 
legislation's intent. To address those issues, many states adopted 
additional legislation to provide enforcement tools to ensure that 
NPMs make the required escrow payments (``complementary enforcement 
legislation''), as well as legislation to close a loophole in the 
state escrow statutes by preventing NPMs from withdrawing escrow 
payments in a way that was never contemplated when those statutes 
were enacted (``Allocable Share Legislation'').
    \10\ Regulations Restricting the Sale and Distribution of 
Cigarettes and Smokeless Tobacco to Protect Children and 
Adolescents, 75 FR 13225 (March 19, 2010).
    \11\ 21 U.S.C. 301 (2009).
---------------------------------------------------------------------------

    The third and final condition identified in the Guidelines as 
leading the Commission to challenge a proposed merger based on a theory 
of coordination--that the Commission has a credible basis to conclude 
that the merger may enhance the market's vulnerability to 
coordination--is also satisfied in this case. Prior to the transaction, 
a large percentage of Reynolds' portfolio consisted of non-growth 
brands (including Winston, Kool, and Salem), and overall Reynolds' 
volumes were declining. In the years leading up to this transaction 
Reynolds also had a noticeable portfolio gap, as it lacked a strong 
premium menthol brand. Reynolds initiated new competition in the 
menthol segment with the introduction of Camel Crush and Camel Menthol, 
but Reynolds was still playing catch-up. Seeking to stop further volume 
loss to its competitors' menthol brands--Lorillard's Newport and 
Altria/Philip Morris' Marlboro--Reynolds implemented a strategy of 
aggressive promotion of Camel and Pall Mall. The proposed merger 
eliminates many of Reynolds' incentives to continue these strategies. 
With Newport added to its portfolio, Reynolds will no longer face a gap 
in menthol and will not be subject to the same level of volume losses. 
Post-transaction, there will be greater symmetry between Altria/Philip 
Morris and Reynolds, bringing Reynolds' incentives into closer 
alignment with Altria/Philip Morris to place greater emphasis on 
profitability over market share growth. This increase in symmetry 
between Reynolds and Altria/Philip Morris thus enhances the market's 
vulnerability to coordination.\12\
---------------------------------------------------------------------------

    \12\ See Statement of the F.T.C., In the Matter of ZF 
Friedrichshafen AG and TRW Automotive Holdings Corp., File No. 141-
0235, May 8, 2015, available at https://www.ftc.gov/system/files/document/cases/150515zffrn.pdf. See also Marc Ivaldi, et al., The 
Economics of Tacit Collusion 66 & 67, Final Report for DG 
Competition, European Commission (2003), available at http://ec.europa.eu/competition/mergers/studies_reports/the_economics_of_tacit_collusion_en.pdf. (``By eliminating a 
competitor, a merger reduces the number of participants and thereby 
tends to facilitate collusion. This effect is likely to be the 
higher, the smaller the number of participants already left in the 
market.'') (``[I]t is easier to collude among equals, that is, among 
firms that have similar cost structures, similar production 
capacities, or offer similar ranges of products. This is a factor 
that is typically affected by a merger. Mergers that tend to restore 
symmetry can facilitate collusion.'').
---------------------------------------------------------------------------

Unilateral Effects
    This transaction also raises concerns about unilateral 
anticompetitive effects, because it eliminates the growing head-to-head 
competition between Reynolds and Lorillard. The Guidelines explain that 
``[t]he elimination of competition between two firms that results from 
their merger may alone constitute a substantial lessening of 
competition.'' \13\ As the majority explains, the Commission's 
econometric modeling showed likely price effects from the combination 
of the parties' cigarette portfolios.\14\
---------------------------------------------------------------------------

    \13\ Guidelines, supra note 3, at Sec.  6.
    \14\ Majority Statement, supra note 6, at 2.
---------------------------------------------------------------------------

    The econometric analysis supports the substantial qualitative 
evidence of unilateral anticompetitive effects. For years, Lorillard's 
Newport brand has been able to rely on strong brand equity and brand 
loyalty to sustain its high market share and high prices for its 
menthol product line. As noted above, Reynolds, on the other hand, has 
been lagging behind Altria/Philip Morris and Lorillard in terms of 
profitability and pricing, with no comparably strong menthol product. 
As a result, in recent years Reynolds has been making efforts to 
challenge Newport's established leadership position and increase its 
share in menthol through increased

[[Page 32380]]

promotional activity. Reynolds also engaged in the first innovation in 
this industry in many years with the introduction of Camel Crush,\15\ 
which has generated strong sales growth for a new brand. Post-merger, 
with Newport in its hands, Reynolds will no longer need to innovate or 
increase its promotional activity to increase its share in menthol.
---------------------------------------------------------------------------

    \15\ Camel Crush allows consumers to change the cigarette from 
non-menthol to menthol or from menthol to stronger menthol by 
crushing a menthol capsule inside the filter.
---------------------------------------------------------------------------

* * * * *
    In sum, I have reason to believe that this merger poses a real 
danger of anticompetitive harm through coordinated effects and 
unilateral exercise of market power in the U.S. cigarette market.
Adequacy of Divestitures To Imperial To Restore Competition
    As the Supreme Court has stated, restoring competition is the ``key 
to the whole question of an antitrust remedy.'' \16\ Both Supreme Court 
precedent and Commission guidance makes clear that any remedy to a 
transaction found to be in violation of Section 7 of the Clayton Act 
must fully restore the competition lost from the transaction,\17\ and a 
remedy that restores only some of the competition lost does not 
suffice.\18\ Because Clayton Act merger enforcement is predictive, it 
is hard to define what will precisely fully restore lost competition in 
any given case. The agency has on occasion allowed for remedies that 
are not an exact replica of the pre-merger market, usually when there 
is evidence that the buyer can have a strong competitive impact with 
the divested assets. Yet the focus of the inquiry is always on whether 
the proposed divestitures are sufficient to maintain or restore 
competition in the relevant market that existed prior to the 
transaction.\19\
---------------------------------------------------------------------------

    \16\ United States v. E.I. du Pont de Nemours & Co., 366 U.S. 
316, 326 (1961).
    \17\ Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972) 
(``The relief in an antitrust case must be `effective to redress the 
violations' and `to restore competition.' . . . Complete divestiture 
is particularly appropriate where asset or stock acquisitions 
violate the antitrust laws.'').
    \18\ See F.T.C. Frequently Asked Questions About Merger Consent 
Order Provisions, available at https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/merger-faq. 
(``There have been instances in which the divestiture of one firm's 
entire business in a relevant market was not sufficient to maintain 
or restore competition in that relevant market and thus was not an 
acceptable divestiture package. To assure effective relief, the 
Commission may thus order the inclusion of additional assets beyond 
those operating in the relevant market . . . In all cases, the 
objective is to effectuate a divestiture most likely to maintain or 
restore competition in the relevant market . . . At all times, the 
burden is on the parties to provide concrete and convincing evidence 
indicating that the asset package is sufficient to allow the 
proposed buyer to operate in a manner that maintains or restores 
competition in the relevant market.'').
    \19\ Id. (``Every order in a merger case has the same goal: To 
preserve fully the existing competition in the relevant market or 
markets . . . An acceptable divestiture package is one that 
maintains or restores competition in the relevant market . . .''). 
See also Statement of the F.T.C.'s Bureau of Competition on 
Negotiating Merger Remedies, at 4, January 2012, available at 
https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf. (``If the Commission concludes 
that a proposed settlement will remedy the merger's anticompetitive 
effects, it will likely accept that settlement and not seek to 
prevent the proposed merger or unwind the consummated merger.'').
---------------------------------------------------------------------------

    Under these well-grounded principles, I have serious concerns about 
whether the divestiture remedy in this case is sufficient to restore 
competition in the U.S. cigarette market. As a preliminary matter, it 
is worth noting that, post-transaction, Imperial will be less than one-
third the size of the combined Reynolds/Lorillard, with a 10 percent 
market share compared to the combined Reynolds/Lorillard's 34 percent 
market share. Prior to the transaction, Reynolds and Lorillard were 
more comparable in size to each other--Reynolds with a 26 percent 
market share and Lorillard with a 15 percent market share. And despite 
the divestitures, the HHI will increase 331 points to 3,809. Moreover, 
there is nothing dynamic about the cigarette market by any measure that 
could plausibly make these measures less useful in analyzing the 
likelihood of the divestiture to fully restore the competition lost 
from this transaction.
    Beyond the resulting increased concentration, the question is 
whether Imperial can nonetheless maintain or restore competition in the 
market with the divested brands due to its own business acumen and 
incentives post-divestiture. I have reason to believe Imperial will not 
be up to the job. Indeed, I believe Imperial's post-divestiture market 
share may overstate its competitive significance. Through this 
transaction, Reynolds will obtain the second largest selling brand in 
the country (Newport), and keep the third largest selling brand 
(Camel). Imperial, on the other hand, will continue to have no strong 
brands in its portfolio. Reynolds' Winston, Kool, and Salem are 
declining and unsuccessful. Their combined market share has gone from 
approximately 14 percent in 2010 to 8 percent in 2013 (a 6 percent 
decline), and they are still losing share. It is no surprise that 
Reynolds would want to unload these weak brands, and refuse to provide 
a meaningful divestiture package that would replace the competition 
lost through its merger with Lorillard. I am not convinced that 
Imperial will have any greater ability to grow these declining brands. 
Indeed, I have reason to believe that Winston, Kool, and Salem, as well 
as Maverick, will languish even further outside the hands of Reynolds 
and Lorillard.
    There is no doubt that Imperial hopes to make these brands 
successful and will make every attempt to do so. Imperial's strong 
global financial position will help. The Commission cannot rely on 
hopes and aspirations alone, however. We must base our decision on 
facts and demonstrated performance in the market. And it is by this 
measure that Imperial, with the added weak brands from Reynolds, comes 
up short. Imperial has a poor track record of growing acquired brands 
in the U.S. Imperial entered the U.S. market in 2007 by acquiring 
Commonwealth.\20\ At that time Imperial also aspired to increase share. 
However, Imperial was not successful. Commonwealth's market share has 
declined since it was acquired by Imperial, and stands at less than 
three percent today. While in FY 2014 Imperial may have achieved modest 
growth with one of its other brands, USA Gold, that growth was only 
focused on limited geographic markets, and doesn't give me confidence 
that Imperial can implement a national campaign growth strategy. 
Reynolds, with much greater experience in the U.S. market, made 
numerous efforts to reinvigorate Winston, Kool, and Salem, but 
failed.\21\ In light of Imperial's much worse track record here in the 
U.S., I am unconvinced that it will have more luck in making its 
wishful plans a reality.
---------------------------------------------------------------------------

    \20\ In 1996 Commonwealth acquired brands required by the 
Commission to be divested to resolve competitive concerns stemming 
from B.A.T. Industries p.l.c.'s $1 billion acquisition of The 
American Tobacco Company. B.A.T. Industries p.l.c., et al, 119 
F.T.C. 532 (1995).
    \21\ The majority interprets the evidence before us as showing 
that Reynolds emphasized Camel and Pall Mall but only put ``limited 
marketing support behind Winston and Kool.'' See Majority Statement, 
supra note 6, at 3. In contradistinction to the majority, I believe 
the evidence before us demonstrates that on numerous occasions 
Reynolds sought--valiantly but without success--to grow Winston and 
Kool, even while emphasizing Camel and Pall Mall.
---------------------------------------------------------------------------

    The majority notes that, outside the United States, Winston is the 
number two cigarette brand, and Imperial plans to make Winston the main 
focus of its strategy in the United States post-transaction.\22\ But 
Winston's dichotomous position--a strong brand outside the United 
States and a weak brand in the United States--has held for many years. 
And Reynolds' multiple

[[Page 32381]]

efforts to reposition Winston in light of its strong global position 
have not had any effect on slowing the dramatic decline of Winston in 
the United States. Indeed, by placing Winston at the center of its U.S. 
strategy, Imperial is demonstrating the same tone-deafness to the 
unique dynamics of the U.S. market that has caused Imperial to lose 
market share since it entered the U.S. market in 2007.
---------------------------------------------------------------------------

    \22\ Majority Statement, supra note 6, at 2.
---------------------------------------------------------------------------

    My concerns about Imperial's ability to succeed where Reynolds has 
failed is heightened by the fact that Imperial will have no ``anchor'' 
brand to gain traction with retailers, and as a result will have 
limited shelf space available to it. The divestitures of Maverick from 
Lorillard and Winston, Kool, and Salem from Reynolds effectively de-
couple each divested brand from a strong anchor brand. These anchor 
brands--Newport and Camel, the second and third best-selling brands in 
the country--gave Maverick, Winston, Kool, and Salem increased shelf 
space and promotional spending, helping to drive the limited sales they 
had. Maverick in particular benefits from Newport's brand success: 
Lorillard gives it a portion of Newport's shelf space, and when 
Lorillard advertises Newport, it advertises Maverick too. In Imperial's 
hands, the divested brands will not have the same shelf space or the 
benefit of strong advertising that comes with their anchor brands. I 
believe that the decoupling of the divested brands from Camel and 
Newport will serve to further exacerbate their decline.
    Recognizing Imperial's shelf space disadvantage, the proposed 
Consent requires Reynolds to make some short term accommodations in an 
attempt to give Imperial a fighting chance in its effort to gain some 
shelf space in stores. First, the Consent envisions Reynolds entering 
into a Route to Market (``RTM'') agreement with Imperial, whereby 
Reynolds agrees to provide Imperial a portion of its post-acquisition 
retail shelf space for a period of five months following the close of 
the transaction. Imperial will pay Reynolds $7 million for this 
agreement. Under the terms of the RTM agreement, Reynolds commits for a 
period of five months to continue placing Winston, Kool, and Salem on 
retail fixtures according to historic business practices, and to assign 
Imperial a defined portion of Lorillard's current retail shelf-space 
allotments to use as it sees fit. Second, Reynolds is also undertaking 
a 12-month commitment to remove provisions in new retail marketing 
contracts that would otherwise require some retailers to provide it 
shelf space in proportion to its national market share, where Reynolds 
national market share is higher than its local market share. The intent 
of this commitment is to increase Imperial's ability to obtain shelf 
space at least proportional to its local market share in many retail 
outlets for a period of 12 months.
    I have reason to believe that these provisions are insufficient to 
make up for Imperial's significant shelf space disadvantage. The five-
month RTM Agreement and 12-month commitment pertaining to Reynolds' 
allocation of shelf space according to its local market share are too 
short. While Imperial may be optimistic that it can establish 
sufficient shelf space in this limited time frame, nothing in the RTM 
Agreement and 12-month local market share commitment will alter 
retailers' incentives to allocate their shelf space to popular products 
that sell well when those time periods expire. Even if Imperial offers 
better terms and uses former Lorillard salespeople who have preexisting 
relationships with retailers to push for greater shelf space, it likely 
will still be in retailers' economic interest to allocate shelf space 
to the strong Reynolds and Altria/Philp Morris brands, not to 
Imperial's collection of weak and declining brands.\23\ And at the end 
of Reynolds' 12-month local market share commitment, Reynolds will be 
able to squeeze Imperial's shelf space by requiring many retailers to 
provide it shelf space in proportion to its higher-than-local national 
market share. While Imperial may attempt to maintain its retail 
visibility by offering stores lucrative merchandising contracts, 
Reynolds and Altria/Philip Morris will no doubt counter those efforts 
with their own lucrative contracts. In the short run, arguably this may 
be beneficial for competition, but in the long run, Imperial's market 
presence will diminish and the market will in all likelihood become a 
stable duopoly.\24\
---------------------------------------------------------------------------

    \23\ The majority places its bet on Imperial in part based on 
the transfer to Imperial of ``an experienced, national sales force 
from Lorillard.'' Majority Statement, supra note 6, at 2. I do not 
believe the transfer of some of Lorillard's sales staff to Imperial 
will transform Imperial into a significant competitor in the U.S. 
market. Lorillard's transferred sales staff will not be able to 
overcome the significant market dynamics described herein. Moreover, 
Lorillard's sales staff likely will be unable to fundamentally 
transform Imperial's lackluster competitive performance in the U.S. 
market because, as the majority itself acknowledges, ``pre-merger 
Lorillard . . . has not been a particularly aggressive competitor in 
this market, having instead been generally content to rely on 
Newport's strong brand equity to drive most of its sales.'' Majority 
Statement, supra note 6, at 3.
    \24\ The majority relies on the fact that Imperial will have 
more favorable incentives as compared with those of the pre-merger 
Lorillard, since Lorillard was not a particularly aggressive 
competitor. Majority Statement, supra note 6, at 3. But that 
comparison does not capture the full picture of the competitive harm 
from this transaction. Reynolds, not Lorillard, was the firm 
injecting some competition into the market. And as described herein, 
once Reynolds adds Lorillard's flagship Newport brand to its 
portfolio, Reynolds will have a portfolio of brands that is 
symmetrical to Altria/Philip Morris, resulting in a significant 
change in its incentives post-merger. In considering whether 
Imperial will fully restore the competition lost from this 
transaction, the majority seems to omit from its analysis Reynolds' 
changed incentives post-merger, and the effect that these changed 
incentives will have to substantially lessen competition in the U.S. 
market.
---------------------------------------------------------------------------

Conclusion
    There is a great deal of discussion among academia, industry and 
other stakeholders about the negative impact on the market stemming 
from over enforcement of the antitrust laws.\25\ There is consensus 
that over enforcement, also known as ``Type 1 errors'' or ``false 
positives'', can harm businesses and consumers by preventing what could 
otherwise be procompetitive conduct; many commentators believe Type 1 
errors can also have a chilling effect on future procompetitive 
conduct.\26\ However, failing to bring antitrust enforcement actions 
can also cause significant harms to consumers. As has been recently 
demonstrated by an in-depth study of merger retrospectives, harm from 
under enforcement, also known as ``Type 2 errors'' or ``false 
negatives'', can come in the form of significant price increases.\27\ 
The Commission has always been very careful not to take enforcement 
action that turns out not to be warranted, an approach I fully support. 
This Commission also normally pays close attention when we are 
presented with insufficient divestitures or other remedies, to avoid 
under enforcement errors that can cause significant harm to consumers. 
Unfortunately, the majority has failed to do so in this case.
---------------------------------------------------------------------------

    \25\ See, e.g., Christine A. Varney & Jonathan J. Clark, Chicago 
and Georgetown: An Essay in Honor of Robert Pitofsky, 101 Geo. L.J. 
1565 (2013); Bruce H. Kobayashi and Timothy J. Muris, Chicago, Post-
Chicago, and Beyond: Time to Let Go of the 20th Century, 78 
Antitrust L. J. 147 (2012); Alan Devlin and Michael Jacobs, 
Antitrust Error, 52 Wm. & Mary L. Rev. 75 (2010); Verizon Commc'ns, 
Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 
(2004); Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. 
Rev. 1, 15-16 (1984).
    \26\ Id.
    \27\ John Kwoka, Mergers, Merger Control, and Remedies, A 
Retrospective Analysis of U.S. Policy, 2015.
---------------------------------------------------------------------------

    For all of these reasons, I respectfully dissent.

[[Page 32382]]

Dissenting Statement of Commissioner Joshua D. Wright

In the Matter of Reynolds American Inc. and Lorillard Inc.

    The Commission has voted to issue a Complaint and Decision & Order 
against Reynolds American Inc. (``Reynolds'') to remedy the allegedly 
anticompetitive effects of Reynolds' proposed acquisition of Lorillard 
Inc. (``Lorillard''). I respectfully dissent because the evidence is 
insufficient to provide reason to believe the three-way transaction 
between Reynolds, Lorillard, and Imperial Tobacco Group, plc 
(``Imperial'') will substantially lessen competition for combustible 
cigarettes sold in the United States. In particular, I believe the 
Commission has not met its burden to show that an order is required to 
remedy any competitive harm arising from the original three-way 
transaction. This is because the Imperial transaction is both highly 
likely to occur and is sufficient to extinguish any competitive 
concerns arising from Reynolds' proposed acquisition of Lorillard. This 
combination of facts necessarily implies the Commission should close 
the investigation of the three-way transaction before it and allow the 
parties to complete the proposed three-way transaction without imposing 
an order.
    In July 2014, Reynolds, Lorillard, and Imperial struck a deal 
where, as the Commission states, ``Reynolds will own Lorillard's 
Newport brand and Imperial will own three former Reynolds' brands, 
Winston, Kool and Salem, as well as Lorillard's Maverick and e-
cigarette Blu brands, and Lorillard's corporate infrastructure and 
manufacturing facility.'' \1\ Thus, this deal came to us as a three-way 
transaction. As a matter of principle, when the Commission is presented 
with a three (or more) way transaction, an order is unnecessary if the 
transaction--taken as a whole--does not give reason to believe 
competition will be substantially lessened. The fact that a component 
of a multi-part transaction is likely anticompetitive when analyzed in 
isolation does not imply that the transaction when examined as a whole 
is also likely to substantially lessen competition.
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    \1\ See Statement of the Federal Trade Commission 1, Reynolds 
American Inc., FTC File No. 141-0168 (May 26, 2015).
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    When presented with a three-way transaction, the Commission should 
begin with the following question: If the three-way deal is completed, 
is there reason to believe competition will be substantially lessened? 
If there is reason to believe the three-way deal will substantially 
lessen competition, then the Commission should pursue the appropriate 
remedy, either through litigation or a consent decree. If the deal 
examined as a whole does not substantially lessen competition, the 
default approach should be to close the investigation. An exception to 
the default approach, and a corresponding remedy, may be appropriate if 
there is substantial evidence that the three-way deal will not be 
completed as proposed. In such a case, the Commission must ask: What is 
the likelihood of only a portion of the deal being completed while the 
other portion, which is responsible for ameliorating the competitive 
concerns, is not completed? In this case, this second inquiry amounts 
to an assessment of the likelihood that Reynolds' proposed acquisition 
of Lorillard would be completed but the Imperial transaction would not 
be.
    I agree with the Commission majority that the first question should 
be answered in the negative because the proposed transfer of brands to 
Imperial makes it unlikely that there will be a substantial lessening 
of competition from either unilateral or coordinated effects.\2\ I also 
agree with the Commission majority that if Reynolds and Lorillard were 
attempting a transaction without the involvement of Imperial, the 
acquisition would likely substantially lessen competition.\3\ Thus, 
taken as a whole, I do not find the three-way transaction to be in 
violation of Section 7 of the Clayton Act.
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    \2\ Statement of the Federal Trade Commission, supra note 1, at 
3.
    \3\ Statement of the Federal Trade Commission, supra note 1, at 
1. While I agree with the Commission's ultimate conclusion that 
Reynolds' proposed acquisition of Lorillard would substantially 
lessen competition, I do not agree with the Commission's reasoning. 
In particular, I do not believe the assertion that higher 
concentration resulting from the transaction renders coordinated 
effects likely. Specifically, I have no reason to believe that the 
market is vulnerable to coordination or that there is a credible 
basis to conclude the combination of Reynolds and Lorillard would 
enhance that vulnerability. For further discussion of why, as a 
general matter, the Commission should not in my view rely upon 
increases in concentration to create a presumption of competitive 
harm or the likelihood of coordinated effects, see Statement of 
Commissioner Joshua D. Wright, Holcim Ltd., FTC File No. 141-0129 
(May 8, 2015).
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    The next question to consider is whether there is any evidence that 
the Imperial portion of the transaction will not be completed absent an 
order. In theory, if the probability of the Imperial portion of the 
transaction coming to completion in a manner that ameliorates the 
competitive concerns arising from just the Reynolds-Lorillard portion 
of the transaction were sufficiently low, then one could argue the 
overall transaction is likely to substantially lessen competition. I 
have seen no evidence that, absent an order, Reynolds and Lorillard 
would not complete its transfer of assets and brands to Imperial. While 
there are no guarantees and the probability that the Imperial portion 
of the transaction will be completed is something less than 100 
percent, I have no reason to believe it is close to or less than 50 
percent.\4\
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    \4\ I would find a likelihood that the Imperial portion of the 
transaction would be completed less than 50 percent to be a 
sufficient basis to challenge the three-way transaction or enter 
into a consent decree.
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    I fully accept that a consent and order will increase the 
likelihood that the Imperial portion of the transaction will be 
completed. Putting firms under order with threat of contempt tends to 
have that effect. I also accept the view that a consent and order may 
mitigate some, but perhaps not all, potential moral hazard issues 
regarding the transfer of assets and brands from Reynolds-Lorillard to 
Imperial. Specifically, the concern is that, post-merger, Reynolds-
Lorillard would complete the Imperial portion of the transaction but 
more in form but not in function and artificially raise the cost for 
Imperial. Higher costs for Imperial, such as undue delays in obtaining 
critical assets, would certainly materially impact Imperial's ability 
to compete effectively. Given this possibility, a consent and order, 
including the use a monitor, would make such behavior easier to detect, 
and consequently would provide some deterrence from these potential 
moral hazard issues.
    It is also true, however, that a monitor in numerous other 
circumstances would make anticompetitive behavior easier to detect and 
consequently deter that behavior from occurring in the first place. 
Based upon this reasoning, the Commission could try as a prophylactic 
effort to impose a monitor in all oligopoly markets in the United 
States. This would no doubt detect (and deter) much price fixing. Such 
a broad effort would be unprecedented, and of course, plainly unlawful. 
The Commission's authority to impose a remedy in any context depends 
upon its finding a law violation. Here, because the parties originally 
presented the three-way transaction to ameliorate competitive concerns 
about a Reynolds-Lorillard-only deal, and they did so successfully, 
there is no reason to believe the three-way transaction will 
substantially lessen competition; therefore, there is no legal 
wrongdoing to remedy.
    The Commission understandably would like to hold the parties to a

[[Page 32383]]

consent order that requires them to make the deal along with a handful 
of other changes. But that is not our role. There is no legal authority 
for the proposition that the Commission can prophylactically impose 
remedies without an underlying violation of the antitrust laws. And 
there is no legal authority to support the view that the Commission can 
isolate selected components of a three-way transaction to find such a 
violation. In the absence of such authority, the appropriate course is 
to evaluate the three-way transaction presented to the agency as a 
whole. Because I conclude, as apparently does the Commission, that the 
three-way transaction does not substantially lessen competition, there 
is no competitive harm to correct and any remedy is unnecessary and 
unwarranted.\5\ Entering into consents is appropriate only when the 
transaction at issue--in this case the three-way transaction--is likely 
to substantially lessen competition. This one does not.
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    \5\ The Commission points to the HSR Act as providing the legal 
basis for the FTC to enter into consent orders ``to ensure that any 
competitive issues with a proposed transaction are addressed 
effectively.'' Statement of the Federal Trade Commission, supra note 
1, at 4 n.7. When a proposed transaction or set of transactions 
would not substantially lessen competition, as is the case with the 
three way transaction originally proposed here, there are no 
competitive issues with the proposed transaction to be addressed, 
and the belief that a consent order may even further mitigate 
concerns regarding the transfer of assets is not material to our 
analysis under the Clayton Act. The HSR Act is not in conflict with 
the Clayton Act and does not change this result.

[FR Doc. 2015-13861 Filed 6-5-15; 8:45 am]
 BILLING CODE 6750-01-P