[Federal Register Volume 62, Number 10 (Wednesday, January 15, 1997)]
[Notices]
[Pages 2162-2164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-921]


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FEDERAL TRADE COMMISSION
[File No. 961-0101]


General Mills, Inc.; Analysis to Aid Public Comment

agency: Federal Trade Commission.

action: Proposed Consent Agreement.

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summary: In settlement of alleged violations of federal law prohibiting 
unfair or deceptive acts or practices and unfair methods of 
competition, this consent agreement, accepted subject to final 
Commission approval, would require, among other things, the 
Minneapolis-based producer of ready-to-eat cereals to permit New 
Ralcorp Holdings, Inc. to transfer to any successor party, without any 
authorization or approval from General Mills, the right to manufacture 
and sell cereals identical to the Chex brand products. The order also 
bars General Mills from delaying production of the private label Chex 
rivals. The agreement settles allegations that General Mills' 
acquisition of Ralcorp's branded cold cereal business, including the 
Chex line of cereals, would boost General Mills' share of the U.S. 
ready-to-eat cereals market to 31 percent and that it would have 
restricted the entry of new private label cereal products to compete 
with the General Mills brands. The Commission had alleged that the 
acquisition could have resulted in higher prices for Chex brand 
cereals.

dates: Comments must be received on or before March 17, 1997.

addresses: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

for further information contact: William J. Baer, Federal Trade 
Commission, H-374, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580. 
(202) 326-2932.
    George S. Cary, Federal Trade Commission, H-374, 6th St. and Pa. 
Ave., N.W., Washington, D.C. 20580. (202) 326-3741.
    Phillip L. Broyles, Federal Trade Commission, S-2105, 6th St. and 
Pa. Ave., N.W., Washington, D.C. 20580. (202) 326-2805.

supplementary information: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of 
the Commission's Rules of Practice (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 sixty (60) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the accompanying complaint. An electronic copy of the 
full text of the consent agreement package can be obtained from the 
Commission Actions section of the FTC Home Page (for December 26, 
1996), on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' 
A paper copy can be obtained from the FTC Public Reference Room, Room 
H-130, Sixth Street and Pennsylvania Avenue, N.W., Washington, D.C. 
20580, either in person or by calling (202) 326-3627. Public comment is 
invited. Such comments or views will be considered by the Commission 
and will be available for inspection and copying at its principal 
office in accordance with Section 4.9(b)(6)(ii) of the Commission's 
Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis to Aid Public Comment on the Provisionally Accepted Consent 
Order

    The Federal Trade Commission has accepted for public comment from 
General Mills, Inc. (``General Mills''), an agreement containing a 
consent order. The Commission designed the agreement to remedy any 
anticompetitive effects stemming from General Mills's acquisition of 
the branded ready-to-eat (``RTE'') cereal business from Ralcorp 
Holdings, Inc. (``Ralcorp'').
    This agreement has been placed on the public record for sixty (60) 
days for reception of comments from interested persons. Comments 
received during this period will become part of the public record. 
After sixty (60) days, the Commission will again review the agreement 
and the comments received. The Commission will then decide whether it 
should withdraw from the agreement or make final the order contained in 
the agreement.
    The Commission's Complaint charges that on or about August 13, 
1996, General Mills agreed to acquire the branded RTE cereal and snack-
mix businesses owned by Ralcorp. Among the cereals that General Mills 
agreed to acquire are Corn CHEX, Rice CHEX, and Wheat CHEX. The 
Commission has reason to believe that the acquisition and the agreement 
to acquire Ralcorp may have anticompetitive effects and be in violation 
of Section 7 of the Clayton Act and Section 5 of the Federal Trade 
Commission Act.
    According to the Commission's Complaint, General Mills is the 
second largest producer of RTE cereals and Ralcorp is the fifth largest 
producer of branded RTE cereals. Ralcorp is also the largest producer 
of private label RTE cereals. In 1994, the Ralston Purina Company 
created Ralcorp by distributing shares of Ralcorp to Ralston's Purina's 
shareholders. General Mills will not acquire Ralcorp's private label 
RTE cereal business. Ralcorp will form a new entity, New Ralcorp 
Holdings, Inc. (``New Ralcorp''), which will continue producing RTE 
cereals.
    The Commission's investigation of this matter found potential 
anticompetitive problems arising from

[[Page 2163]]

this acquisition. The Complaint alleges that concentration is high in 
the RTE cereal market and entry is difficult and unlikely. Although 
this transaction does not reduce the number of established substantial 
firms in the RTE cereals market, it does increase General Mills' market 
share by approximately 3 percent and thus increases overall 
concentration in the market. Of particular concern is that the 
acquisition agreement restricts New Ralcorp's freedom to produce and 
sell private label CHEX products as well as its ability to transfer the 
rights to manufacture and sell private label CHEX products to a third 
party without permission from General Mills.
    Under the terms of the proposed order, General Mills must, before 
consummating the merger, include in its agreements with Ralcorp and New 
Ralcorp provisions that will permit the transfer to any successor party 
of the right to manufacture and sell private label CHEX in the United 
States. These provisions will permit the successor party to sell these 
private label cereals without further authorization or approval from 
General Mills or Ralston Purina Company. The proposed order also 
prohibits General Mills from taking any action to prevent or delay New 
Ralcorp's sale of private label CHEX products in the United States. 
Finally, the proposed order prohibits General Mills from enforcing any 
agreement that would prevent the transfer to a successor party of the 
right to manufacture and sell private label CHEX in the United States.
    Presently, neither Ralcorp nor any other person produces private 
label CHEX products. The proposed order will increase the likelihood 
that someone will produce and sell private label CHEX in competition 
with General Mills' branded CHEX products.
    To reduce the possibility of competitive harm before the 
Commission's entry of a final order, the interim agreement binds 
General Mills to the terms of the order, as if it were final. The 
interim agreement became effective on the date General Mills signed the 
consent agreement.
    The purpose of this analysis is to invite public comment concerning 
the consent order. The Commission does not intend this analysis to be 
an official interpretation of the agreement and order or to modify 
their terms in any way.
Donald S. Clark,
Secretary.

Statement of Commissioner Mary L. Azcuenaga Concurring in Part and 
Dissenting in Part in General Mills, Inc., File No. 961-0101

    The Commission today issues for public comment a consent order 
based on a complaint alleging that the acquisition by General Mills, 
Inc., of the branded ready-to-eat cereal business of Ralcorp Holdings, 
Inc., violates Section 7 of the Clayton Act. The order is narrow, but I 
would narrow it even further. In particular, I would delete Paragraph 
II(B) of the proposed order, which requires elimination of a noncompete 
clause that would have prevented Ralcorp for a period of eighteen 
months from introducing a new private label cereal identical or similar 
to the CHEX-brand cereals being sold to General Mills.
    Paragraph 14 of the complaint alleges that the noncompete clause 
described in paragraph 8 would have the anticompetitive effect of 
``restricting the entry of new private label cereal products into 
competition with General Mills.'' That effect, of course, is precisely 
the purpose of this (and every other) noncompete clause.\1\ Although 
the complaint might be read as alleging that noncompete clauses are per 
se anticompetitive, that interpretation would be inconsistent with the 
Commission's decision a few days ago to accept for public comment an 
order that in paragraph VI imposed an affirmative prohibition on 
competition for six years between the merged firm and the acquirer of 
certain animal health assets to be divested under the order. ``Ciba 
Geigy Limited,'' (File No. 961-0055, December 17, 1996). The Ciba Geigy 
decision recognizes the efficiency potential of noncompete clauses, 
which, among other benefits, may facilitate an orderly transfer of 
ownership and provide a brief transition period for new owners to 
establish themselves in the business.
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    \1\ The noncompete clause described in paragraph 8 of the 
complaint prohibits Ralcorp from entering the market with a private 
label, CHEX-type cereal product for eighteen months. As indicated in 
the Department of Justice and Federal Trade Commission Horizontal 
Merger Guidelines (April 2, 1992), a merger is unlikely to create or 
enhance market power if entry is ``timely, likely and sufficient,'' 
and entry is deemed ``timely'' if it can be achieved within two 
years. Under this standard, the noncompete clause is unlikely to 
create or enhance market power.
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    Although the appropriate duration of a noncompete clause may vary 
depending on the circumstances of the industry and the acquisition, 
using a noncompete clause for a short period to smooth a transition may 
be procompetitive. I do not find reason to believe that this short-term 
noncompete clause is anticompetitive, and I dissent from the order 
requirement to eliminate it.

Statement of Commissioner Roscoe B. Starek, III, Dissenting in General 
Mills, Inc., File No. 961-0101

    I respectfully dissent from the decision of the majority to accept 
for public comment a consent agreement with General Mills, Inc. 
relating to the proposed acquisition of the branded ready-to-eat 
(``RAE'') cereal and snack food businesses of Ralcorp Holdings, Inc. 
(``Ralcorp''). My dissent rests on two grounds.
    As noted in the Commission's proposed complaint, General Mills will 
not acquire the private label RTE cereal or snack food businesses of 
Ralcorp. Ralcorp instead will form a new entity, New Ralcorp Holdings, 
Inc. (``New Ralcorp''), to hold the private label cereal and snack food 
businesses that General Mills will not acquire. Under the acquisition 
agreement, New Ralcorp has the right to manufacture and sell a private 
label version of the Chex RTE cereal products, but is restricted from 
transferring this right to a third party without permission from 
General Mills. The acquisition agreement further provides that New 
Ralcorp may not produce private label Chex products for a period of 
eighteen months following consummation of the acquisition.
    My first reason for voting against acceptance of the proposed 
consent order is that the Commission lacks sufficient evidence to 
support the unilateral effects theory alleged in the complaint. Second, 
it is completely unnecessary--and in fact creates inefficiency--to bar 
enforcement of the parties' non-compete agreement. Whatever minimal 
competitive risks this transaction may raise are adequately addressed 
by eliminating the restrictions on Ralcorp's ability to transfer 
manufacturing and sales rights for private label Chex to a third party.
    General Mills' share of the RTE cereal market will increase by 
approximately three percent as a result of the proposed acquisition. 
The number of competitors in the RTE cereal industry will remain the 
same, and General Mills will remain the second largest RTE cereal 
producer in the United States.\1\ New Ralcorp will

[[Page 2164]]

immediately assume Ralcorp's position as the largest private label 
cereal producer in the United States. Moreover, General Mills' post-
merger share of the RTE cereal market will be between 25 and 31 percent 
(depending on whether share is measured in pounds or sales dollars), 
well below levels suggested by the Horizontal Merger Guidelines as the 
minimum threshold at which the Commission might reasonably presume 
market power.\2\ It is hard to understand under these simple facts how 
the majority determined that the proposed acquisition will enable 
General Mills unilaterally to exercise market power.
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    \1\ General Mills' share of branded cereals will of course 
increase as a result of the transaction, but the complaint does not 
allege a relevant market consisting of ``branded RTE cereal.'' 
Indeed, the provisions of the proposed order (which affect the 
disposition of assets used in the production of nonbranded cereals) 
make sense only in the context of an ``all RTE cereal'' product 
market.
    \2\ See U.S. Department of Justice and Federal Trade Commission, 
Horizontal Merger Guidelines Sec. 2.211, 4 Trade Reg. Rep. (CCH) 
para. 13,104, at 20573-9.
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    Unable to presume market power, the Commission instead relies upon 
a ``close substitutes'' theory of unilateral harm, notwithstanding a 
paucity of empirical evidence demonstrating that Ralcorp's branded Chex 
products are the closest substitutes to the branded cereals of General 
Mills. Although Chex products clearly compete with the branded General 
Mills RTE cereal products, consumers have a preference for variety when 
they choose RTE cereals and frequently choose among the many branded 
and private label cereals produced by RTE cereal manufacturers in the 
United States. Not surprisingly, Judge Wood reached this conclusion in 
her opinion explaining why she refused to block the acquisition of the 
Nabisco RTE cereal assets by Kraft General Foods in early 1993.\3\ In 
Kraft General Foods, an empirical analysis of cereal purchasing 
patterns suggested--as it does in the present matter--that consumers 
have many attractive alternatives from which to choose in the event 
that one RTE cereal producer tries to raise prices above competitive 
levels. Overall, the empirical evidence does not support the 
Commission's claim, under either a ``close substitutes'' or a dominant 
firm theory, that General Mills would be able unilaterally to raise the 
prices of its branded RTE cereals after the acquisition.
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    \3\ State of New York v. Kraft General Foods, Inc., 1995-1 Trade 
Cas. (CCH) para. 70,911, at 74,039, 74,066 (S.D.N.Y. 1995).
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    Even if I agreed with the majority that this consent agreement 
rests upon an empirically sound theory of competitive harm, the 
proposed order would bar General Mills from enforcing an arguably 
procompetitive non-compete agreement that is properly limited in scope 
and duration. Covenants not to compete are often included in contracts 
for the sale of a business, and generally are enforceable when 
ancillary to an enforceable agreement and reasonable in geographic 
coverage, scope of activity, and duration. Lektro-Vend Corp. v. Vendo 
Co., 660 F.2d 255, 265 (7th Cir. 1981) (``The recognized benefits of 
reasonably enforced non-competition covenants are now beyond 
question.''), cert. denied, 455 U.S. 921 (1982); United States v. 
Addyston Pipe & Steel Co., 85 F. 271, 281-82 (6th Cir. 1898), aff'd as 
modified, 175 U.S. 211 (1899).\4\ Judicial inquiry into non-compete 
provisions generally focuses on whether the restriction is reasonably 
necessary to protect the legitimate business interests of the party 
seeking to enforce the provision. United States v. Empire Gas Corp., 
537 F.2d 296, 307 (8th Cir. 1976), cert. denied, 429 U.S. 1122 (1977); 
Sound Ship Bldg. Corp. v. Bethlehem Steel Corp., 387 F. Supp. 252, 255 
(D.N.J. 1975), aff'd, 533 F.2d 96 (3d Cir.), cert. denied, 429 U.S. 680 
(1976).
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    \4\ See also Business Elecs. Corp. v. Sharp Elecs. Corp., 485 
U.S. 717, 729 n.3 (``The classic `ancillary' restraint is an 
agreement by the seller of a business not to compete within the 
market.'').
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    The Commission has often recognized that competitive benefits can 
flow from a non-compete clause in the context of the sale of a 
business. The Commission's recent acceptance for public comment of a 
consent agreement in Ciba-Geigy, Ltd., et al., File No. 961 0055 
(consent agreement accepted for public comment, Dec. 16, 1996), is 
illustrative. In Ciba-Geigy, the Commission imposed an affirmative 
obligation on the newly merged entity, Novartis AG, not to compete in 
the United States and Canada for six years in the sale of animal flea 
control products.\5\ As the Ciba-Geigy order indicates, the Commission 
clearly recognizes that non-compete clauses--even when long in duration 
and broad in scope--can serve legitimate procompetitive purposes in 
some circumstances by allowing an acquiring entity a brief period to 
re-deploy the acquired assets in a manner that increases competition in 
the marketplace. I am therefore puzzled why the Commission so hastily 
condemns a non-compete provision here that is only eighteen months in 
duration, limited to the manufacture and sale of private label Chex 
products, and arguably necessary to protect the legitimate interests of 
the contracting parties.\6\
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    \5\ See Paragraph VI of the proposed order in Ciba-Geigy.
    \6\ Barring enforcement of the non-compete agreement might 
undermine adherence by the parties to the supply agreement, an 
element of the acquisition agreement found acceptable by the 
majority.
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    Because I find that the facts do not support the Commission's 
theory of unilateral competitive harm in this instance, and because in 
any event I disagree with the Commission's decision to bar enforcement 
of the non-compete provision contained in the parties' acquisition 
agreement, I have voted to reject the consent agreement.

[FR Doc. 97-921 Filed 1-14-97; 8:45 am]
BILLING CODE 6750-01-M