United States v. Philadelphia National Bank, 374 U.S. 321 (1963), also called the Philadelphia Bank case, was a 1963 decision of the United States Supreme Court that held Section 7 of the Clayton Act, as amended in 1950,15 U.S.C. § 15. applied to bank mergers. It was the first case in which the Supreme Court considered the application of antitrust laws to the commercial banking industry.374 U.S. at 324. In addition to holding the statute applicable to bank mergers,374 U.S. at 342. the Court established a presumption that mergers that covered at least 30 percent of the relevant market were presumptively unlawful.374 U.S. at 365.
Background
The defendant, Philadelphia National Bank (PNB), was a commercial bank, a unique type of financial institution because "they alone are permitted by law to accept demand deposits. This distinctive power gives commercial banking a key role in the national economy."374 U.S. at 326. In addition, commercial banks engage in the important services of "the creation of additional money and credit, the management of the checking account system, and the furnishing of short-term business loans."374 U.S. at 326-27.
PNB and Girard Trust Corn Exchange Bank, which were respectively the second- and the third-largest of the 42 commercial banks with head offices in the Philadelphia metropolitan area, proposed to merge. PNB had assets of over $1 billion, making it the 21st-largest bank in the nation. Girard had assets of about $750 million. If the two banks merged, the resulting bank would be the largest in the Philadelphia metropolitan area, with 36% of the area banks' total assets (nearly $2 billion), 36% of deposits, and 34% of net loans. It and the second-largest bank (First Pennsylvania Bank and Trust Company, now the largest) would have between them 59% of the total assets, 58% of deposits, and 58% of the net loans. After such a merger, the four-largest banks in the area would have 78% of total assets, 77% of deposits, and 78% of net loans.374 U.S. at 331.
Both merging banks owed their present size to previous mergers. A trend toward concentration was noticeable in the Philadelphia area generally: the number of commercial banks declined from 108 in 1947 to 42 in 1960. Since 1950, PNB acquired nine formerly-independent banks and Girard had acquired six. The acquisitions accounted for 59% and 85% of the respective banks' asset growth during the period, 63% and 91% of their deposit growth, and 12% and 37% of their loan growth. During that period, the seven largest banks in the Philadelphia area increased their combined share of the area's total commercial bank resources from about 61% to about 90%.374 U.S. at 331.
The Comptroller of Currency approved the merger, despite reports from two other banking agencies and the Attorney General that the proposed merger would have substantial anticompetitive effects in the Philadelphia metropolitan area.374 U.S. at 333-34. The Comptroller explained the basis for his decision to approve the merger:
Since there will remain an adequate number of alternative sources of banking service in Philadelphia, and in view of the beneficial effects of this consolidation upon international and national competition it was concluded that the over-all effect upon competition would not be unfavorable. ... [Also, the consolidated bank] would be far better able to serve the convenience and needs of its community by being of material assistance to its city and state in their efforts to attract new industry and to retain existing industry.374 U.S. at 334.
The US Justice Department's Antitrust Division then sued PNB to enjoin the merger, invoking Section 1 of the Sherman Act and Section 7 of the Clayton Act. The district court ruled for PNB and the government appealed to the Supreme Court.
Supreme Court ruling
The Supreme Court reversed the judgment below, in an opinion authored by Justice William J. Brennan, joined by four other members of the Court.Justices John M. Harlan and Potter Stewart dissented. Justice Byron R. White, who had been Deputy Attorney General when the case was brought, recused himself. Justice Arthur Goldberg filed a separate memorandum not dissenting from the judgment but disagreeing with the Court's interpretation of the Clayton Act.
Applicability of § 7 to bank mergers
The present § 7 reaches acquisitions of corporate stock or share capital by any corporation engaged in commerce, but it reaches acquisitions of corporate assets made only by corporations "subject to the jurisdiction of the Federal Trade Commission." The FTC has no jurisdiction over banks.See FTC Act § 5(a)(6), 15 U.S.C. § 45(a)(6). Therefore, if the proposed merger were considered an assets acquisition, it would not be within § 7. The Court said:
[A] merger fits neither category neatly. Since the literal terms of § 7 thus do not dispose of our question, we must determine whether a congressional design to embrace bank mergers is revealed in the history of the statute. The question appears to be one of first impression; we have been directed to no previous case in which a merger or consolidation was challenged under § 7 of the Clayton Act, as amended, where the acquiring corporation was not subject to the FTC's jurisdiction.374 U.S. at 336-37.
Courts, prior to 1950, held that § 7 did not reach mergers, even though that device had supplanted stock acquisitions for corporate amalgamation. Therefore, Congress in 1950 amended § 7 to include an assets-acquisition provision.Act of December 29, 1950 (Celler-Kefauver Antimerger Act), c. 1184, 64 Stat. 1125-1126, 15 U.S.C. § 18. The legislative history mentions Congress's intent to cover asset acquisitions but fails to mention mergers. Nonetheless, the Court said, Congress intended to reach substantially all corporate amalgamations:
In other words, Congress contemplated that the 1950 amendment would give § 7 a reach which would bring the entire range of corporate amalgamations, from pure stock acquisitions to pure assets acquisitions, within the scope of § 7. Thus, the stock-acquisition and assets-acquisition provisions, read together, reach mergers, which fit neither category perfectly but lie somewhere between the two ends of the spectrum.374 U.S. at 341-42.
The Court noted that "after the passage of the amendment, some members of Congress, and for a time the Justice Department, voiced the view that bank mergers were still beyond the reach of the section." But this was just their misunderstanding of the scope of § 7, the Court said.374 U.S. at 348-49. The Court also held that the Bank Merger Act of 1960 was not intended to displace the Clayton Act: "Congress plainly did not intend the 1960 Act to extinguish other sources of federal restraint of bank acquisitions having anticompetitive effects."374 U.S. at 349, 354.
Application of § 7
Relevant market
The Court began by defining the relevant market: "the 'line of commerce' (relevant product or services market) and 'section of the country' (relevant geographical market) in which to appraise the probable competitive effects of appellees' proposed merger." It found the cluster of services and financial products termed commercial banking to be the appropriate line of commerce—they "are so distinctive that they are entirely free of effective competition from products or services of other financial institutions."374 U.S. at 357.
The district court erred, the Court said, in defining the geographic market as the whole Northeastern US: "The proper question to be asked in this case is not where the parties to the merger do business or even where they compete, but where, within the area of competitive overlap, the effect of the merger on competition will be direct and immediate."374 U.S. at 357. Quoting the Tampa Electric case, the Court explained that "area of effective competition in the known line of commerce must be charted by careful selection of the market area in which the seller operates, and to which the purchaser can practicably turn for supplies."374 U.S. at 360 (quoting Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961)). The Court said purchasers could practically turn only to banks in the Philadelphia Metropolitan Area, even if PNB and other banks might be able to complete in the larger Northeastern US area.374 U.S. at 358-62.
Likely competitive impact
Having determined the relevant market, the Court turned to "the ultimate question under § 7: whether the effect of the merger 'may be substantially to lessen competition' in the relevant market."374 U.S. at 362. Citing the Standard Stations case, the Court warned that "we must be alert to the danger of subverting congressional intent by permitting a too-broad economic investigation."374 U.S. at 362 (citing Standard Oil Co. v. United States, 337 U.S. 293, 313 (1949). Therefore, "in any case in which it is possible, without doing violence to the congressional objective embodied in § 7, to simplify the test of illegality, the courts ought to do so in the interest of sound and practical judicial administration."374 U.S. at 362.
The Court pointed to the fact pattern of the PNB-Girard merger:
The merger . . . will result in a single bank's controlling at least 30% of the commercial banking business in the four-county Philadelphia metropolitan area. Without attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat. Further, whereas presently the two largest banks in the area (First Pennsylvania and PNB) control between them approximately 44% of the area's commercial banking business, the two largest after the merger (PNB-Girard and First Pennsylvania) will control 59%. Plainly, we think, this increase of more than 33% in concentration must be regarded as significant.374 U.S. at 365.
The Court justified its inference from market percentages by pointing to language in the legislative history "that the tests of illegality under amended § 7 'are intended to be similar to those which the courts have applied in interpreting the same language as used in other sections of the Clayton Act.'" The Court therefore looked to § 3 of the Clayton Act and the Standard Stations case. In that case, "the defendant company, which accounted for 23% of the sales in the relevant market and, together with six other firms, accounted for 65% of such sales, maintained control over outlets through which approximately 7% of the sales were made." The Court also cited another exclusive dealing case, FTC v. Motion Picture Adv. Serv. Co.,344 U.S. 392 (1953). in which "the four major firms in the industry had foreclosed 75% of the relevant market; the respondent's market share, evidently, was 20%."374 U.S. at 366 (citing Friedrich Kessler and Richard H. Stern, Competition, Contract, and Vertical Integration, 69 L.J. 1, 53 n.231 (1959)). The Court compared these market shares to those of the present case, in which "the four largest banks after the merger will foreclose 78% of the relevant market."374 U.S. at 366. The market share data from the exclusive-dealing, contract-integration cases was valid support, the Court concluded, for "the inference we draw in the instant case from the figures disclosed by the record."374 U.S. at 366.
The Court did not say that the presumption of unlawfulness was conclusive. It next looked to the record to ascertain whether any facts rebutted the presumption that the 30% and 78% market shares created, but "nothing in the record of this case [] rebut[s] the inherently anticompetitive tendency manifested by these percentages.374 U.S. at 366.
That some alternatives still existed for dissatisfied customers among the remaining small banks in the area did not rebut the inference: