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decided: June 26, 1974.



Powell, J., delivered the opinion of the Court, in which Burger, C. J., and Stewart, Blackmun, and Rehnquist, JJ., joined. White, J., filed a dissenting opinion, in which Brennan and Marshall, JJ., joined, post, p. 642. Douglas, J., took no part in the decision of this case.

Author: Powell

[ 418 U.S. Page 605]

 MR. JUSTICE POWELL delivered the opinion of the Court.

The United States brought this civil antitrust action under § 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U. S. C. § 18, to challenge a proposed merger between two commercial banks. The acquiring bank is a large, nationally chartered bank based in Seattle, Washington, and the acquired bank is a medium-size, state-chartered bank located at the opposite end of the State in Spokane. The banks are not direct competitors to any significant degree in Spokane or any other part of the State. They have no banking offices in each other's home cities. The merger agreement would substitute the acquiring bank for the acquired bank in Spokane and would permit the former for the first time to operate as a direct participant in the Spokane market.

The proposed merger would have no effect on the number of banks in Spokane. The United States bases its case exclusively on the potential-competition doctrine under § 7 of the Clayton Act. It contends that if the merger is prohibited, the acquiring bank would find an alternative and more competitive means for entering the Spokane area and that the acquired bank would ultimately develop by internal expansion or mergers with smaller banks into an actual competitor of the acquiring bank and other large banks in sections of the State outside Spokane. The Government further submits that the merger would terminate the alleged procompetitive influence that the acquiring bank presently exerts over Spokane banks due to the potential for its entry into that market.

After a full trial, the District Court held against the Government on all aspects of the case. We affirm that court's judgment. We hold that in applying the potential-competition

[ 418 U.S. Page 606]

     doctrine to commercial banking, courts must take into account the extensive federal and state regulation of banks, particularly the legal restraints on entry unique to this line of commerce. The legal barriers to entry in the instant case, notably state-law prohibitions against de novo branching, against branching from a branch office, and against multibank holding companies, compel us to conclude that the challenged merger is not in violation of § 7.



A. Facts.

The acquiring bank, National Bank of Commerce (NBC), is a national banking association with its principal office in Seattle, Washington. Located in the northwest corner of the State, Seattle is the largest city in Washington. NBC is a wholly owned subsidiary of a registered bank holding company, Marine Bancorporation, Inc. (Marine), and in terms of assets, deposits, and loans is the second largest banking organization with headquarters in the State of Washington. At the end of 1971, NBC had total assets of $1.8 billion, total deposits of $1.6 billion, and total loans of $881.3 million.*fn1 It operates 107 branch banking offices within the State, 59 of which are located in the Seattle metropolitan area and 31 of which are in lesser developed sections of eastern Washington. In order of population, the four major

[ 418 U.S. Page 607]

     metropolitan areas in Washington are Seattle, Tacoma, Spokane, and Everett. NBC has no branch offices in the latter three areas.

The target bank, Washington Trust Bank (WTB), founded in 1902, is a state bank with headquarters in Spokane. Spokane is located in the extreme eastern part of the State, approximately 280 road miles from Seattle. It is the largest city in eastern Washington, with a population of 170,000 within the corporate limits and of approximately 200,000 in the overall metropolitan area. The city has a substantial commercial and industrial base. The surrounding region is sparsely populated and is devoted largely to agriculture, mining, and timber. Spokane serves as a trade center for this region. NBC, the acquiring bank, has had a longstanding interest in securing entry into Spokane.

WTB has seven branch offices, six in the city of Spokane and one in Opportunity, a Spokane suburb. WTB is the eighth largest banking organization with headquarters in Washington and the ninth largest banking organization in the State. At the end of 1971, it had assets of $112 million, total deposits of $95.6 million, and loans of $57.6 million. It controls 17.4% of the 46 commercial banking offices in the Spokane metropolitan area. It is one of 12 middle-size banks in Washington (i. e., banks with assets in the $30 million to $250 million range).

WTB is well managed and profitable. From December 31, 1966, to June 30, 1972, it increased its percentage of total deposits held by banking organizations in the Spokane metropolitan area from 16.6% to 18.6%. The amount of its total deposits grew by approximately 50% during that period, a somewhat higher rate of increase than exhibited by all banking organizations operating in Spokane at the same time.*fn2 Although WTB has exhibited

[ 418 U.S. Page 608]

     a pattern of moderate growth, at no time during its 70-year history has it expanded outside the Spokane metropolitan area.

As of June 30, 1972, there were 91 national and state banking organizations in Washington. The five largest in the State held 74.3% of the State's total commercial

[ 418 U.S. Page 609]

     bank deposits and operated 61.3% of its banking offices. At that time, the two largest in the State, Seattle-First National Bank and NBC, held 51.3% of total deposits and operated 36.5% of the banking offices in Washington.*fn3 There are six banking organizations operating in the Spokane metropolitan area. One organization, Washington Bancshares, Inc., controls two separate banks and their respective branch offices. As of midyear 1972, this organization in the aggregate held 42.1% of total deposits in the area. Seattle-First National Bank, by comparison, held 31.6%. The target bank held 18.6% of total deposits at that time, placing it third in the Spokane area behind Washington Bancshares, Inc., and Seattle-First National Bank. Thus, taken together, Washington Bancshares, Seattle-First National Bank, and WTB hold approximately 92% of total deposits in the Spokane area. None of the remaining three commercial banks in Spokane holds a market share larger than 3.1%.*fn4 One of these banks, Farmers & Merchants Bank, has offices only in a Spokane suburb.

The degree of concentration of the commercial banking business in Spokane may well reflect the severity of Washington's statutory restraints on de novo geographic expansion by banks. Although Washington permits branching, the restrictions placed on that method of internal

[ 418 U.S. Page 610]

     growth are stringent. Subject to the approval of the state supervisor of banking, Washington banks with sufficient paid-in capital may open branches in the city or town in which their headquarters are located, the unincorporated areas of the county in which their headquarters are located, and incorporated communities which have no banking office. Wash. Rev. Code Ann. § 30.40.020 (Supp. 1973). But under state law, no state-chartered bank "shall establish or operate any branch . . . in any city or town outside the city or town in which its principal place of business is located in which any bank, trust company or national banking association regularly transacts a banking or trust business, except by taking over or acquiring an existing bank, trust company or national banking association . . . ." Ibid. Since federal law subjects nationally chartered banks to the branching limitations imposed on their state counterparts,*fn5 national and state banks in Washington are restricted to mergers or acquisitions in order to expand into cities and towns with pre-existing banking organizations.

The ability to acquire existing banks is also limited by a provision of state law requiring that banks incorporating in Washington include in their articles of incorporation a clause forbidding a new bank from merging with or permitting its assets to be acquired by another bank for a period of at least 10 years, without the consent of the state supervisor of banking. Wash. Rev. Code Ann. § 30.08.020 (7) (1961 and Supp. 1973).*fn6 In addition,

[ 418 U.S. Page 611]

     once a bank acquires or takes over one of the banks operating in a city or town other than the acquiring bank's principal place of business, it cannot branch from the acquired bank. Wash. Rev. Code Ann. § 30.40.020 (Supp. 1973). Thus, an acquiring bank that enters a new city or town containing banks other than the acquired bank is restricted to the number of bank offices obtained at the time of the acquisition. Moreover, multibank holding companies are prohibited in Washington. Wash. Rev. Code Ann. § 30.04.230 (Supp. 1973).*fn7 Under state law, no

[ 418 U.S. Page 612]

     corporation in Washington may own, hold, or control more than 25% of the capital stock of more than one bank. Ibid. Violations of the one-bank holding company statute are gross misdemeanors carrying a possible penalty of forfeiture of a corporate charter. Ibid. Accordingly, it is not possible in Washington to achieve the rough equivalent of free branching by aggregating a number of unit banks under a bank holding company.*fn8

B. The Proceedings.

In February 1971, Marine, NBC, and WTB agreed to merge the latter into NBC. NBC, as the surviving bank, would operate all eight banking offices of WTB as branches of NBC. In March 1971, NBC and WTB applied to the Comptroller of the Currency pursuant to the

[ 418 U.S. Page 613]

     Bank Merger Act of 1966 for approval of the merger.*fn9 As required by that Act, see 12 U. S. C. § 1828 (c)(4), the Comptroller requested "reports on the competitive factors involved" from the Attorney General, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. Each of these agencies submitted a negative report on the competitive effects of the merger. The Attorney General relied on the reasons advanced in the instant case. The latter two agencies based their conclusions primarily on the degree of concentration in commercial banking in Washington as a whole.

The Comptroller approved the merger in a report issued September 24, 1971. He concluded that state law precluded NBC from branching in Spokane and "effectively prevented" NBC from causing a new Spokane bank to be formed which could later be treated as a merger partner. He noted that state law prevented the only independent small bank with offices located within the city boundaries of Spokane from merging with NBC, since that bank was state chartered, had been founded in 1965, and was subject to the minimum 10-year restriction against sale of a new bank set out in Wash. Rev. Code Ann. § 30.08.020 (7)

[ 418 U.S. Page 614]

     (1961 and Supp. 1973). The Comptroller relied heavily on the view that the merger would contribute to the convenience and needs of bank customers in Spokane by bringing to them services not previously provided by WTB.

Acting within the 30-day limitation period set out in the Bank Merger Act of 1966, 12 U. S. C. § 1828 (c)(7), the United States then commenced this action in the United States District Court for the Western District of Washington, challenging the legality of the merger under § 7 of the Clayton Act.*fn10 As a result, the merger was automatically stayed. 12 U. S. C. § 1828 (c)(7)(A). Pursuant to 12 U. S. C. § 1828 (c)(7)(D), the Comptroller intervened in support of the merger as a party defendant.

Prior to trial the United States dropped all allegations concerning actual competition between the merger partners.*fn11 The remainder of the complaint addressed the subject of potential competition. The United States

[ 418 U.S. Page 615]

     sought to establish that the merger "may . . . substantially . . . lessen competition" within the meaning of § 7 in three ways: by eliminating the prospect that NBC, absent acquisition of the market share represented by WTB, would enter Spokane de novo or through acquisition of a smaller bank and thus would assist in deconcentrating that market over the long run; by ending present procompetitive effects allegedly produced in Spokane by NBC's perceived presence on the fringe of the Spokane market; and by terminating the alleged probability that WTB as an independent entity would develop through internal growth or through mergers with other medium-size banks into a regional or ultimately statewide counterweight to the market power of the State's largest banks. The Government's first theory -- alleged likelihood of de novo or foothold entry by NBC if the challenged merger were blocked -- was the primary basis upon which this case was presented to the District Court.*fn12

At the close of final oral argument following a week-long trial, the District Judge ruled for the defendants from the bench. Two weeks later he adopted without change the defendants' proposed findings of facts and conclusions of law, the latter consisting of seven sentences. 1973-1 Trade Cas. para. 74,496, p. 94,244 (1973).*fn13

[ 418 U.S. Page 616]

     The court found that the merger would "substantially" increase competition in commercial banking in the Spokane metropolitan area and would have "no inherent anticompetitive effect . . . ." Ibid. In light of the legal and economic barriers to any other method of entry, the court further found "no reasonable probability" that, absent the challenged merger, NBC would enter the Spokane market in the "reasonably foreseeable future." Id., at 94,245.

According to the District Court, Washington law forbade NBC from establishing de novo branches in Spokane, and the Government had failed to establish that there was any existing bank in Spokane other than WTB "available for acquisition by NBC on any reasonably acceptable basis at any time in the foreseeable future, or at all." Ibid. Moreover, any attempt by NBC to enter de novo by assisting in the formation of and then acquiring a newly chartered bank in Spokane "even if it could be legally accomplished,"*fn14 or to undertake a foothold

[ 418 U.S. Page 617]

     acquisition, would not be economically feasible. Ibid. In addition to noting the past and projected slow growth of the Spokane area, the court found that the ability to branch in a metropolitan area was essential to effective competition in the banking business. Ibid. Under state law, NBC would be unable to open new branch offices in Spokane if it made a foothold acquisition or helped form and then acquired a new bank. These and other factors rendered "negative" the prospects for growth of a foothold acquisition or of a sponsored bank started from scratch. Ibid. This was confirmed by the experience of another large banking organization not based in Spokane that had entered the city through a foothold acquisition in 1964 and subsequently had been unable to expand the market share of the acquired bank. Id., at 94,245-94,246.

The court found no perceptible procompetitive effect deriving from NBC's premerger presence on the fringe of the Spokane market. Id., at 94,246. It also held that the Government had failed to carry its burden of proving a reasonable probability that WTB, absent the merger, would expand beyond the Spokane market by de novo growth or through combination with another medium-size bank. Ibid. It found no probability that NBC would be "entrenched as a dominant bank in the

[ 418 U.S. Page 618]

     Spokane metropolitan area" as a result of the merger, and it could find no likelihood that the merger would trigger a series of defensive mergers by other banks in the State. Id., at 94,246-94,247.*fn15

On the basis of its findings, the District Court dismissed the Government's complaint. The Government thereupon brought this direct appeal under the Expediting Act, 32 Stat. 823, as amended, 15 U. S. C. § 29. We noted probable jurisdiction. 414 U.S. 907 (1973).



Determination of the relevant product and geographic markets is "a necessary predicate" to deciding whether a merger contravenes the Clayton Act. United States v. Du Pont & Co., 353 U.S. 586, 593 (1957); Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962). The District Court found that the relevant product market "within which the competitive effect of the merger is to be judged" is the "business of commercial banking (and the cluster of products and services denoted thereby) . . . ." 1973-1 Trade Cas. para. 74,496, p. 94,243. The parties do

[ 418 U.S. Page 619]

     not dispute this finding, and in any event it is in full accord with our precedents.*fn16

The District Court found that the relevant geographic market is the Spokane metropolitan area, "consisting of the City of Spokane and the populated areas immediately adjacent thereto, including the area extending easterly through the suburb of Opportunity toward the Idaho border . . . ." Id., at 94,244. This area extends approximately five miles to the west and south and 10 miles to the north and east of the center of the city. It is wholly within and considerably smaller than Spokane County and is surrounded by a sparsely populated region, with no nearby major metropolitan centers. It contains all eight of the target bank's offices. On the basis of the record, we have no reason to doubt that it constitutes a reasonable approximation of the "localized" banking market in which Spokane banks offer the major part of their services and to which local consumers can practicably turn for alternatives. E. g., United States v. Phillipsburg National Bank, 399 U.S. 350, 362-365 (1970). It is also the area where "the effect of the merger on competition will be direct and immediate . . . ," which as this Court has held is the appropriate "section of the country" for purposes of § 7. United States v. Philadelphia National Bank, 374 U.S. 321, 357 (1963). Accordingly, we affirm the District Court's holding that the Spokane metropolitan area is the appropriate geographic market for determining the legality of the merger.

Prior to trial the Government stipulated that the Spokane area is a relevant geographic market in the instant

[ 418 U.S. Page 620]

     case, and there is no dispute that it is the only banking market in which WTB is a significant participant. Nevertheless, the Government contends that the entire State is also an appropriate "section of the country" in this case. It is conceded that the State is not a banking market. But the Government asserts that the State is an economically differentiated region, because its boundaries delineate an area within which Washington banks are insulated from most forms of competition by out-of-state banking organizations. The Government further argues that this merger, and others it allegedly will trigger, may lead eventually to the domination of all banking in the State by a few large banks, facing each other in a network of local, oligopolistic banking markets. This assumed eventual statewide linkage of local markets, it is argued, will enhance statewide the possibility of parallel, standardized, anticompetitive behavior. This concern for the possible statewide consequences of geographic market extension mergers by commercial banks appears to be an important reason for the Government's recent efforts to block such mergers through an application of the potential-competition doctrine under § 7.*fn17

The Government's proposed reading of the "any section of the country" phrase of § 7 is at variance with this Court's § 7 cases, and we reject it. Without exception the Court has treated "section of the country" and "relevant geographic market" as identical,*fn18 and it has defined

[ 418 U.S. Page 621]

     the latter concept as the area in which the goods or services at issue are marketed to a significant degree by the acquired firm. E. g., Philadelphia National Bank, supra, at 357-362.*fn19 In cases in which the acquired firm markets its products or services on a local, regional, and national basis, the Court has acknowledged the existence of more than one relevant geographic market.*fn20 But in no previous § 7 case has the Court determined the legality of a merger by measuring its effects on areas where the acquired firm is not a direct competitor. In

[ 418 U.S. Page 622]

     urging that the legality of this merger be gauged on a statewide basis, the Government is suggesting that we take precisely that step, because, as it concedes, the section of the country in which WTB markets by far the greatest portion of its services, due to the predominantly localized character of commercial banking, is the Spokane metropolitan area.*fn21 Under the precedents, we decline the Government's invitation. We hold that in a potential-competition case like this one, the relevant geographic market or appropriate section of the country is the area in which the acquired firm is an actual, direct competitor.

Apart from the fact that the Government's statewide approach is not supported by the precedents, it is simply too speculative on this record. There has been no persuasive showing that the effect of the merger on a statewide basis "may be substantially to lessen competition" within the meaning of § 7. To be sure, § 7 was designed to arrest mergers "at a time when the trend to a lessening of competition in a line of commerce [is] still in its incipiency." Brown Shoe Co., 370 U.S., at 317. See, e. g., United States v. Von's Grocery Co., 384 U.S. 270, 277 (1966). Moreover, the proscription expressed in § 7 against mergers "when a 'tendency' toward monopoly or [a] 'reasonable likelihood' of a substantial lessening of competition in the relevant market is shown," United States v. Penn-Olin Chemical Co., 378 U.S. 158, 171 (1964), applies alike to actual- and potential-competition cases. Ibid. But it is to be remembered that § 7 deals

[ 418 U.S. Page 623]

     in "probabilities," not "ephemeral possibilities." Brown Shoe Co., supra, at 323.*fn22 The Government's underlying concern for a linkage or network of statewide oligopolistic banking markets is, on this record at least, considerably closer to "ephemeral possibilities" than to "probabilities." To assume, on the basis of essentially no evidence, that the challenged merger will tend to produce a statewide linkage of oligopolies is to espouse a per se rule against geographic market extension mergers like the one at issue here. No § 7 case from this Court has gone that far,*fn23 and we do not do so ...

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