Papercraft Corporation Petitioner, v. Federal Trade Commission, Respondent, 472 F.2d 927 (7th Cir. 1973)

Papercraft Corporation petitions for review of a Federal Trade Commission order directing divestiture of assets acquired from CPS Industries, Inc., pursuant to an exchange of shares in December, 1967. The petition does not challenge the conclusion that the acquisition violated Sec. 7 of the Clayton Act.¹  Papercraft contends: (1) that the Hearing Examiner's refusal to subpoena sales data from 551 companies allegedly engaged in the relevant line of commerce deprived it of a fair hearing, and (2) that the Commission abused its authority by restraining Papercraft from selling to customers of CPS for a three-year period.

Prior to the acquisition, Papercraft and CPS were leading firms in the gift wrap industry. The term "gift wrap," though somewhat vague, encompasses wrapping paper and foil, ribbons, and various related items such as gift boxes and bows. CPS, an older firm, sold primarily high quality specialized merchandise; Papercraft, a younger and more aggressive company, concentrated on promotion of less expensive lines. Before the Commission, Papercraft argued (a) that CPS was a failing company, cf. International Shoe Co. v. F.T.C., 280 U.S. 291, 299-303, 50 S. Ct. 89, 74 L. Ed. 431; (b) that since CPS and Papercraft sold largely in different submarkets, they were not in substantial competition with each other, cf. International Shoe, supra at 295-299, 50 S. Ct. 89; and (c) that if Papercraft's request for 551 subpoenas had been granted, it might have proved that the relevant market was as much as twice as large as indicated by the evidence presented by complaint counsel. Only the third argument is pressed on appeal; there is no claim that the information sought by the requested subpoenas was relevant to the other two defenses.

Papercraft made two requests, the first listing 230 companies believed to be sellers of gift wrap paper and ribbons; each requested subpoena called for documents showing the company's total shipments of gift wrapping paper and ribbon during the year 1967. The second request was for 321 subpoenas duces tecum seeking comparable data from companies believed to be in the gift box business.

The two requests were opposed for a variety of reasons, some of which were plainly insufficient. Thus, for example, complaint counsel contended that the requests were untimely,²  and the Hearing Examiner rejected the subpoena request directed to gift box companies on the ground that gift boxes were not part of the relevant product market.³ 

Papercraft did not seek an interlocutory appeal to the full Commission from the Examiner's order denying the application for subpoenas. The issue was therefore first presented to the full Commission as one of the contentions urged on appeal from the Examiner's initial decision after the evidentiary record had been completed. In its opinion the Commission set forth reasons, which we consider adequate, for refusing to disturb the Hearing Examiner's rejection of the subpoena requests.

The Commission first held that subpoenas duces tecum should not be issued to 550 companies if other reasonable means of developing necessary industry data are available.⁴  We agree with this holding because the service of so many subpoenas, and the processing of the responses, would inevitably tend to delay the proceedings and might unnecessarily require the disclosure of confidential data. Cf. F.T.C. v. American Tobacco Co., 264 U.S. 298, 305-306, 44 S. Ct. 336, 68 L. Ed. 696.

The Commission opinion identified various sources of industry data which the Commission found to be reasonably reliable.⁵  Since it does not appear that Papercraft made any serious attempt to develop additional evidence from such sources, or to demonstrate that they were substantially inaccurate,⁶  it did not satisfy the Commission's requirement for the issuance of such a large group of subpoenas.

Papercraft argues, however, that the Commission's analysis, though it might justify denial of a wholesale request for 551 subpoenas, does not justify the denial of a more limited number which might have demonstrated error in aspects of the prima facie case. This argument is valid. Papercraft, however, cannot properly complain of denial of a request that it never made. Its failure to pray in the alternative for a lesser number of subpoenas in the event-which certainly was not unforeseeable-that the Examiner might consider the wholesale request excessive, forecloses its contention here that something less should have been ordered by the Examiner.⁷  Cf. F.T.C. v. American Tobacco Co., 264 U.S. 298, 307, 44 S. Ct. 336, 68 L. Ed. 696.

Much of the argument before us related to the reliability of complaint counsel's evidence defining the size of the relevant market and the respective shares represented by Papercraft and CPS prior to the acquisition. Our holding is not predicated on the theory, which seems to underlie much of the Commission's argument, that its prima facie evidence was so convincing that it is inconceivable that any material contradiction could have been developed in respondent's case. On the contrary, we merely hold that the Commission may properly require a showing of need, which Papercraft failed to make in this case, before it will issue 551 subpoenas duces tecum for the purpose of establishing the precise contours of the relevant market in a Sec. 7 case.⁸  Papercraft failed to make an adequate demonstration of the need for its exceptional request.

In his discussion of the remedy, the Hearing Examiner concluded: "Effective competition can be restored only by reestablishing CPS as a full-line company in the production and sale of gift wrap products, as it was prior to its acquisition.⁹  He rejected Papercraft's proposal that divestiture be limited to the CPS product lines which were directly competitive with Papercraft products. His recommended order directed complete divestiture within six months, required prior approval by the Commission of the plan or agreement of divestiture, and prohibited future acquisitions by Papercraft without the Commission's approval for a ten-year period. Papercraft does not object to these aspects of the order. However, the remedial order also provided in paragraph IX that Papercraft could not sell any decorative gift wrap products to certain customers or former customers of CPS for a period of three years from the date of divestiture. It is that paragraph, as modified by the Commission, which Papercraft challenges here.

As recommended by the Hearing Examiner, paragraph IX would have prohibited Papercraft from selling to any former customer of CPS unless Papercraft had made sales to that account prior to December 27, 1967, the acquisition date.¹⁰  The Commission initially adopted paragraph IX in this form without any comment on the need or justification for such a provision.

Papercraft then filed a petition for reconsideration or reopening, contending that paragraph IX was unprecedented, unsupported by findings or evidence, and would restrain rather than restore competition. The petition pointed out that the CPS business had been operated separately since the acquisition and that the CPS product lines and marketing practices had been preserved. The record indicates that CPS sales and profits had increased materially under Papercraft ownership.

The Commission modified paragraph IX by limiting the prohibition to accounts "which at any time during the two (2) years preceding December 27, 1967, and until divestiture is effected hereunder" had been sold any gift wrap by CPS.¹¹  The order contained no other comment on paragraph IX.

Paragraph IX is by no means a standard remedial provision. Other divestiture orders have included special provisions designed to insure the survival of the divested business, but in each such instance the supporting findings demonstrated the need for a special protective provision.¹²  Such findings are essential for two important reasons: courts cannot properly perform their reviewing function unless the basis for administrative action is adequately explained. S.E.C. v. Chenery Corp., 318 U.S. 80, 84, 63 S. Ct. 454, 87 L. Ed. 626; F.T.C. v. Crowther, 139 U.S.App.DC. 137, 430 F.2d 510, 514 (1970); and since the purpose of the statute is to preserve competition, novel provisions which create artificial market barriers should not be accepted as routine without careful analysis.

Unquestionably, a wholesome purpose may be served by a limited restraint on competition in certain situations.¹³  Conceivably, no buyer would purchase the CPS business without the protection afforded by the former owner's covenant not to compete for certain accounts, in certain areas, or in certain product lines for a limited period of time.¹⁴  However, neither Commission counsel nor the findings suggest any such justification for paragraph IX. Instead, taking a position somewhat inconsistent with the Commission's rejection of the defense that CPS was a "failing company" at the time of acquisition, Commission counsel argue that paragraph IX was included "so that CPS can reestablish itself as a viable competitor in the marketplace."¹⁵ 

The findings indicate, however, that CPS is fully capable of survival as a "viable competitor" without paragraph IX; certainly they do not remotely suggest that the company's ability to survive is dependent on such a provision.

The findings describe CPS as the largest as well as the oldest significant firm in the industry. They do indicate that CPS suffered losses in 1964 and 1965 as a result of non-recurring costs associated with the relocation of its major plant, and in 1967 as the result of the post-acquisition accounting determination that the value of its inventory should be "written down." The findings also recognize that CPS had a management problem during the mid and late 1960s. They conclude, however, that with proper executive leadership, pretax earnings of $1,900,000 on sales of $19,000,000 could be anticipated.

The Papercraft executives provided CPS with effective management, and, accordingly, CPS has prospered since the acquisition. Upon divestiture, presumably, the key executives would remain with Papercraft, and the new owner of CPS would face the problem of providing effective new leadership for the company. Nothing in the findings or the evidence suggests that competent executive talent is unavailable, or that potential new executives' willingness to join CPS is somehow dependent on the existence of a limited protection against competition from Papercraft. Paragraph IX cannot be rationalized as a solution for the CPS management problem.¹⁶ 

If the management problem is put to one side, there is nothing in the findings to suggest that CPS will be less able to maintain its position as market leader than if the acquisition had never taken place. Indeed, the evidence implies that CPS will be a stronger company following divestiture than it was in 1967. As in the past, it will face competition from about 20 significant producers and many more small concerns, but the Commission has failed to demonstrate that its survival may depend on the imposition of special restraints against just one of those rivals.

The restriction imposed on Papercraft by paragraph IX is not "narrowly drawn," as appellate counsel for the Commission contend. As already noted, Papercraft is a relatively young company, many of whose lines are not competitive with any products sold by CPS. Under paragraph IX, Papercraft could not even sell noncompetitive items to a new customer who had made a single purchase from CPS at some time after December 9, 1965. The restriction would apply even if CPS had received no business from the account since 1966. Moreover, even if such an account had been obtained by Papercraft in 1968 and regularly supplied thereafter with items not handled by CPS, the customer would be required to go elsewhere for such merchandise. In such a case, the restraint would harm the customer and Papercraft, be of no benefit to CPS, and provide a gratuitous competitive advantage to other companies seeking that business.

Perhaps the posited case is purely theoretical, or so improbable as to be insignificant in a fair overall assessment of the impact of the order on the competitive market. Our problem is that we simply cannot tell from the findings, or the portions of the record discussed in the argument, whether the adverse impact on competition which paragraph IX will certainly produce is outweighed by the risk that the market leader will suddenly collapse without this interim protection.

We are conscious of the deference to be accorded to the expertise of the administrative agency, particularly in the fashioning of appropriate remedies.¹⁷  But when it selects an untried and blunt instrument which will certainly cause some impairment of statutory objectives, we require a more careful exposition of its justification before we will sanction it as a proper remedial tool. The Commission failed to make an adequate demonstration of the need for its exceptional remedy.

The order will be modified by the deletion of paragraph IX. As so modified, it is

Affirmed.