OAKES, Circuit Judge:
The legal theory involved in this petition to review lies on the frontiers of antitrust law. See FTC v. Atlantic Richfield Co., No. 76-2250, 549 F.2d 289 at 293 (4th Cir. 1977). The Supreme Court has twice declined, United States v. Marine Bancorporation, Inc., 418 U.S. 602, 639, 94 S.Ct. 2856, 41 L.Ed.2d 978 (1974) [hereinafter Marine Bancorp.]; United States v. Falstaff Brewing Corp., 410 U.S. 526, 537, 93 S.Ct. 1096, 35 L.Ed.2d 475 (1973) [hereinafter Falstaff], to pass on the validity of the theory that has come to be known as the "actual potential entrant" doctrine, Falstaff, supra, 410 U.S. at 560, 93 S.Ct. 1096 (Marshall, J., concurring). This doctrine would proscribe as violative of Section 7 of the Clayton Act, 15 U.S.C. § 18, a company's acquisition of a large firm in an oligopolistic market if the acquiring company at some future date is expected to enter the market de novo or through a "toehold" acquisition of a firm lacking a significant share of the market. See Falstaff, supra, 410 U.S. at 537, 93 S.Ct. 1096. According to the theory, the effect of such an acquisition "may be substantially to lessen competition." Clayton Act § 7, 15 U.S.C. § 18.
The validity of this type of acquisition is a question squarely presented by the order of the Federal Trade Commission (FTC) under review here. Like the Supreme Court in Marine Bancorp., 418 U.S. at 639, 94 S.Ct. 2856, however, we have concluded that a fundamental "precondition" to application of the doctrine has not been established on the record before us. We accordingly set aside the Commission's order and "leave for another day," Falstaff, 410 U.S. at 537, 93 S.Ct. 1096, the issue of the doctrine's basic validity.
BOC International Limited (BOC), formerly known as the British Oxygen Company, has petitioned this court, pursuant to 15 U.S.C. § 21(c), to set aside an FTC order directing BOC, inter alia, to divest itself of its controlling stock interest in Airco, Inc.
Two months later, the FTC issued a complaint alleging that the acquisition violated the antitrust laws. Id. at 2. Shortly thereafter the Commission obtained a preliminary injunction, pursuant to 15 U.S.C. § 53(b), requiring BOC, inter alia, to maintain Airco as a separate company during the pendency of expedited administrative proceedings. FTC v. British Oxygen Co., 1974-1 Trade Cas. ¶ 75,004 (D.Del.1974), vacated in part on other grounds, 529 F.2d 196 (3d Cir. 1976) (en banc). Following some six weeks of hearings, an administrative law judge (ALJ) issued an "initial decision" holding, inter alia, that the BOC acquisition of Airco violated Clayton Act § 7. In re British Oxygen Co., No. 8955 (FTC ALJ Oct. 18, 1974). This holding was affirmed by the FTC in December, 1975, at which time divestiture was ordered. Apparently no effort has been made to enforce the FTC's order during the pendency of proceedings in this court.
The theory on which the FTC based its holding in this case, the actual potential entrant theory, must be distinguished at the outset from the closely related theory, not here involved, addressed to the problem of the "perceived" or "recognized" potential entrant. This latter theory is concerned with a present effect that a company not in an oligopolistic market is having on companies which are in that market. Because the insiders view the outsider as a likely entrant (a competitor "waiting in the wings"), they keep prices and profit margins lower than they would if there were no threat of the outsider entering the market either de novo or via a toehold acquisition of a small firm, a threat that might be realized if prices and profits were higher. When the outsider acquires a large firm in the market, it no longer poses a threat, the "in the wings" effect on prices disappears, and competition is thereby lessened. See Falstaff, supra, 410 U.S. at 559-60, 93 S.Ct. 1096 (Marshall, J., concurring); Robinson, Antitrust Developments: 1973, 74 Colum.L.Rev. 163, 186 (1974); Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 Harv.L.Rev. 1313, 1362-79 (1965). Reliance on this theory to block acquisitions under Section 7 has been approved by the Supreme Court. Marine Bancorp., supra, 418 U.S. at 625, 94 S.Ct. 2856; Falstaff, supra, 410 U.S. at 532-33, 93 S.Ct. 1096.
In the instant case, the FTC specifically found, overruling its ALJ, that there was no proof of any "wings" or "fringe" effect of BOC on the American industrial gases market or on prices therein. FTC Op. at 15 n.8. This finding, not challenged here, makes the instant case different from the typical one, in which there is both a perceived and an actual entrant concern, see FTC v. Atlantic Richfield Co., supra, slip op. at 9 n.6; Turner, supra, 78 Harv.L.Rev. at 1362. Here the FTC has in effect conceded that BOC as a potential entrant was having no present procompetitive effect on the relevant market; the Commission's order is instead grounded entirely on the belief that competition in the American industrial gases market would increase at some time in the future if BOC divests itself of Airco, see Falstaff, supra, 410 U.S. at 560-61, 93 S.Ct. 1096 (Marshall, J., concurring). All parties here are agreed that, had the acquisition not been blocked, competition in the American industrial gases market just after the acquisition would have been "exactly as it was [before the acquisition], neither hurt nor helped," id. at 537 (majority opinion).
In determining whether an alleged future effect on competition by itself justifies blocking a present corporate acquisition under the actual potential entrant doctrine, two distinct questions looking to the future must be answered. First, would the firm in question enter de novo or by toehold acquisition
In the instant case, with regard to the first of the two predictions, the FTC made a critical, and controverted, finding:
FTC Op. at 27. BOC challenges this finding on the factual ground that it is not supported by "substantial evidence," 15 U.S.C. § 21(c), and on the legal ground that the standard used—reasonable probability of eventual entry—places a lighter burden on the FTC than is justified by the statute and the purposes of the actual potential entrant doctrine. Because we agree with BOC on the legal question and accordingly set aside the FTC's order, we need not reach the question whether, if the legal standard used by the FTC had been appropriate, substantial evidence exists in the record to support the result reached.
In Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), the Supreme Court relied on legislative history in reaching the following conclusions about the intent of Congress when it enacted the 1950 amendments to Clayton Act § 7:
370 U.S. at 323, 82 S.Ct. at 1522 (footnote omitted).
There is no indication anywhere in the FTC opinion as to what it meant in using the words "eventual entry," nor does the record indicate how long a period of time might elapse before BOC could be expected to enter the American industrial gases market de novo or by toehold acquisition. The Commission cited evidence indicating a BOC interest in entering the market since early 1970, but conceded that no entry had been attempted prior to the late 1973 acquisition of Airco: "Simply because no entry had been effectuated at the time the Airco opportunity presented itself did not mean that BOC would not have eventually realized its `long-term objectives' of entering the U.S. market— by growth rather than by this major acquisition." FTC Op. at 27 (emphasis added). In its brief to this court, the FTC entirely ignored BOC's argument that "[t]he degree of uncertainty in any economic prediction becomes unacceptably high as it is projected farther and farther into the future." Brief for Petitioners at 82. And at oral argument counsel for the FTC all but conceded that the Commission's "eventually" standard contained no temporal estimate whatsoever, but rather involved "long range" considerations that might take "decades" to come to fruition. Transcript of Oral Argument at 38, 42, 43.
These FTC statements, combined with what the Commission omitted to state, together establish the wholly speculative nature of the "eventual entry" test. We hold that such uncabined speculation cannot be the basis of a finding that Section 7 has been violated. As the Supreme Court noted in Marine Bancorp. "the loss of competition `which is sufficiently probable and imminent' is the concern of § 7." 418 U.S. at 623 n.22, 94 S.Ct. at 2870 (emphasis added), quoting United States v. Continental Can Co., 378 U.S. 441, 458, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964).
We emphasize that we are not requiring any exact, precisely calibrated assessment of time of entry. See United States v. Penn-Olin Chemical Co., 378 U.S. 158, 171, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964). Such a requirement would be as inconsistent with Section 7's focus on "probabilities" as is the FTC's "eventual entry" standard. But here there was no finding regarding a reasonable probability of entry in the near future, nor is there any evidence in the record on which such a finding might be based. Since "`remote possibilities are not sufficient to satisfy the test set forth in § 7,'" Marine Bancorp., supra, 418 U.S. at 623 n.22, 94
In an entirely separate aspect of this case, the FTC held that BOC's acquisition of Airco would tend to lessen competition in three product lines of medical inhalation anesthetic equipment. BOC's subsidiaries and Airco sell such equipment in the United States, so that they are at present actual competitors. This aspect of the case thus has nothing to do with the potential competition doctrine, but instead involves the more widely used Section 7 proscription on "horizontal" mergers, see Brown Shoe Co. v. United States, supra, 370 U.S. at 334, 82 S.Ct. 1502.
This aspect of the case is also of much less overall significance than the industrial gases aspect. Whereas industrial gases account for substantial proportions of both BOC's and Airco's total sales, their sales of the three medical product lines at issue amount to less than one per cent of each of their total sales. Compare FTC Op. at 3 with id. at 42. However, their presence in each of these product lines is significant. According to the FTC's market share data (which are vigorously challenged by BOC), Airco and BOC are the two largest American manufacturers of anesthesia machines and vaporizers, and Airco has an 88% share of the anesthesia face mask market. Id. at 42-43.
In addition to challenging the FTC's market share data, its use of this data, and its definition of relevant product markets, BOC raises two other points that have significance apart from the intrinsic validity or non-validity of the medical equipment holding. First, it alleges that the FTC's analysis in terms of three equipment submarkets violated an express understanding, agreed to by FTC complaint counsel, to the effect that inhalation anesthetic equipment would be treated as one large market, and that BOC shaped its defense strategy with this understanding in mind. Second, BOC argues that the Commission did not intend for its finding of a Section 7 violation in the medical equipment lines by itself to justify its order to BOC to divest itself of Airco and that accordingly, if we overturn the industrial gases holding, as we have, a modified order requiring BOC to divest itself of its subsidiaries involved in the relevant product lines would meet all of the FTC's remaining concerns, assuming relief were warranted.
We believe that both of these points deserve careful attention; the FTC has apparently not yet had an opportunity to address either one. We have previously held that the FTC lacks authority to consider an issue not litigated before its ALJ. Stanley Works v. FTC, 469 F.2d 498, 508-09 n.24 (2d Cir. 1972), cert. denied, 412 U.S. 928, 93 S.Ct. 2750, 37 L.Ed.2d 155 (1973); see id. at 520-21 (dissenting opinion agreeing with majority on this question). See also Administrative Procedure Act § 5, 5 U.S.C. § 554(b), (c). With regard to the second point, BOC's statements about the FTC's intentions and the workability of a modified order seem reasonable, but we have neither findings nor evidence on these questions, since of course the Commission did not anticipate that we would overturn its holding on the industrial gases aspect of the case. Hence a remand to the FTC is necessary to allow the Commission to reconsider its medical equipment decision in light of BOC's allegations and our industrial gases holding.
In a third and final aspect of this case, the FTC ruled that Airco had "technically" violated the Federal Trade Commission Act, 15 U.S.C. § 45, by "facilitat[ing] an acquisition of stock [by BOC] that violated Section 7 of the Clayton Act." FTC Op. at 45. It accordingly ordered Airco to take certain actions "to restore [its] independence from BOC control." Id. This directive is entirely dependent upon the validity of the requirement
Order set aside and cause remanded to the Federal Trade Commission for reconsideration of its medical inhalation anesthetic equipment holding in light of BOC's allegations and the setting aside of the Commission's industrial gases holding.
When there is no evidence of a past or present fringe effect, it would seem the height of speculation to consider a future fringe effect as a factor independent of the likelihood that the firm in question would actually enter the market. The entirely speculative nature of such a factor is apparent on the face of the Commission's opinion here:
FTC Op. at 16 (emphasis added). No evidence was cited by the Commission as to the likelihood of any of the key variables becoming reality in the future. Accordingly, we will not consider the possibility of a future fringe effect as an independent reason for blocking this acquisition.
78 Harv.L.Rev. at 1383. The Supreme Court's apparent emphasis on the procompetitive effects factor in Marine Bancorp., 418 U.S. at 633, 94 S.Ct. 2856, must be read in the context of the unique facts of that case, in which banking industry regulation of branch banks hindered the acquiring firm's ability to enter or expand, id. at 638, 94 S.Ct. 2856. See L. Sullivan Handbook of the Law of Antitrust 640 (1977); The Supreme Court, 1973 Term, 88 Harv.L.Rev. 41, 256-58 (1974).
370 U.S. at 323 n.39, 82 S.Ct. at 1522.
Id. at 660, 84 S.Ct. at 1049. The context makes clear that in El Paso the Court was referring to proximity both in time and place. Id. at 660-61, 84 S.Ct. 1044. Since there a geographic market, and a regulated one at that, was involved, considerations of proximity in place were relevant; here that is not the case.