text:
    N. Mark ABRAHAM, Richard E. Ellis, William O. Flowers, Robert Giurintano and Billy J. Walker, Plaintiffs-Appellants, v. EXXON CORPORATION d/b/a Exxon Company USA, Benefit Plan of Exxon Corporation and Participating Affiliates, Defendants-Appellees.
    No. 95-30704.
    United States Court of Appeals, Fifth Circuit.
    June 10, 1996.

      Michael Thomas Tusa, Jr., David E. Walker, Metairie, LA, Philip Bohrer, Ramsey, Koederitz & Bohrer, Baton Rouge, LA, for plaintiffs-appellants.
    Howard Shapiro, Heather G. Magier, Taryn S. Southon, McCalla, Thompson, Pybum, Hymowitz & Shapiro, New Orleans, LA, for defendants-appellees.
    Douglas Bernard Neagli, Exxon Company USA, Houston, TX, for Exxon Corp.
    Before POLITZ, Chief Judge, and HIGGINBOTHAM and SMITH, Circuit Judges.
   JERRY E. SMITH, Circuit Judge:

Plaintiffs N. Mark Abraham and others (collectively “Abraham”) appeal a summary judgment in favor of Exxon Corporation and the Benefit Plan of Exxon Corporation (collectively “Exxon”) on their ERISA claims. We affirm in part and vacate and remand in part.

I.

The plaintiffs are “leased” or “special agreement” employees of Exxon who work at Exxon facilities. They are similar to ordinary Exxon employees in many ways: They report to Exxon supervisors, have Exxon business cards, and play on the Exxon softball team. Exxon is not their direct employer, however. Instead, the plaintiffs are nominally employed by unaffiliated firms that lease their services to Exxon.

Exxon maintains an ERISA plan (“the plan” or “the Exxon plan”), for the benefit of its own employees, that specifically excludes leased and special agreement employees such as the plaintiffs. The plan vests “discretionary and final authority” to determine eligibility in the plan administrator, currently J.J. Rouse.

The plaintiffs applied to Rouse for benefits and certain plan information. He determined that the plan excluded the plaintiffs from participation, denied them benefits, and failed to provide the requested information. The plaintiffs filed this ERISA suit, seeking both a determination that they were entitled to benefits from the plan and statutory penalties for Rouse’s failure to provide them the requested information.

Exxon moved for summary judgment. It conceded for purposes of summary judgment that the plaintiffs were “common law employees” of Exxon under the criteria set forth in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992), but maintained that they were not entitled to relief. The district court agreed and granted summary judgment.

II.

As a threshold matter, we must determine whether Abraham has standing. Only a “participant or beneficiary” of an ERISA plan has standing to bring a civil action under ERISA. 29 U.S.C. § 1132(a)(1). Abraham claims only to be a “participant” in the Exxon plan, so we need not consider whether he is a “beneficiary.”

Whether an employee has standing as a “participant” depends, not on whether he is actually entitled to benefits, but on whether he has a colorable claim that he will prevail in a suit for benefits. ERISA itself defines a “participant” as an employee “who is or may become eligible to receive a benefit of any type from an employee benefit plan.” Id. at § 1002(7). Those who “may become eligible” to receive benefits include anyone who “ha[s] a colorable claim that ... he or she will prevail in a suit for benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117, 109 S.Ct. 948, 958, 103 L.Ed.2d 80 (1989). Thus, Abraham may have ERISA standing even if he is ultimately not entitled to receive benefits under the plan. See Kennedy v. Connecticut Gen. Life Ins. Co., 924 F.2d 698 (7th Cir.1991) (“[A]s Firestone held, jurisdiction depends on an arguable claim, not on success.”).

We believe that Abraham did have standing because, ex ante, he had a colorable claim that he would prevail in this suit. Firestone made standing turn on a claimant’s likelihood of success in a lawsuit. Abraham had a colorable chance of success because his argument rested squarely on Renda v. Adam Meldrum & Anderson Co., 806 F.Supp. 1071 (W.D.N.Y.1992). No other court has addressed the issues raised by Renda; Abraham could argue that the only federal court to address his argument had bought it. And Renda is not bizarre or unreasoned. Although we ultimately reject Renda, we do so only after devoting a considerable amount of time to explaining why it is wrong. We recognize that a claim is not colorable merely because a federal court has approved it, but we believe Abraham’s reliance on Renda in this instance gave him a colorable claim that he would prevail in this lawsuit. That is enough for ERISA standing. Cf. Panaras v. Liquid Carbonic Indus. Corp., 74 F.3d 786, 790 (7th Cir.1996) (“The requirement of a colorable claim is not a stringent one.”).

III.

Abraham argues that the district court erred by refusing to apply structural defect analysis to the plan. Structural defect analysis originated in the Ninth Circuit’s TaftHartley Act jurisprudence. Under the Act, money paid by an employer to a trust fund established by an employee representative must be used “for the sole and exclusive benefit of the employees of such employer.” 29 U.S.C. § 186(c)(5). The Ninth Circuit has enforced this provision through structural defect analysis: “A pension plan is structurally deficient when it arbitrarily and unreasonably excludes a large number of participants from receiving benefits, thus failing to satisfy the ‘sole and exclusive benefit’ of all employees.” Phillips v. Alaska Hotel & Restaurant Employees Pension Fund, 944 F.2d 509, 515 (9th Cir.1991), cert. denied, 504 U.S. 911, 112 S.Ct. 1942, 118 L.Ed.2d 548 (1992).

Similarly to Taft-Hartley, ERISA mandates that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries....” 29 U.S.C. § 1104(a)(l)(A)(i). Borrowing from its Taft-Hartley jurisprudence, the Ninth Circuit has enforced § 1104 through structural defect analysis. See Siles v. ILGWU Nat’l Retirement Fund, 783 F.2d 923, 929 (9th Cir.1986); Harm v. Bay Area Pipe Trades Pension Plan Trust Fund, 701 F.2d 1301 (9th Cir.1983). Although we have never applied structural defect analysis to either TaftHartley or ERISA Abraham would have us apply such analysis to ERISA now.

Even if structural defect analysis is the appropriate way to enforce § 1104, however, § 1104 explicitly creates a duty only for fiduciaries, and we have held that an employer does not act as a fiduciary when designing an ERISA plan. See Izzarelli v. Rexene Prods. Co., 24 F.3d 1506, 1524 (5th Cir.1994) (“[A]n employer that decides to terminate, amend, or renegotiate a plan does not act as a fiduciary, and thus cannot violate its fiduciary duty....”); see also Hines v. Massachusetts Mut. Life Ins. Co., 43 F.3d 207, 210 (5th Cir.1995). In contrast, the Ninth Circuit cases Abraham cites as applying structural defect analysis under § 1104 have involved suits against plan administrators acting in a fiduciary capacity. See Siles, 783 F.2d at 929; Harm, 701 F.2d at 1305. Because Abraham complains only that Exxon designed the plan improperly, structural defect analysis is inappropriate.

rv.

Abraham contends that the exclusion of leased employees from the plan is discriminatory and contrary to the minimum participation and minimum coverage requirements of ERISA and various Treasury regulations. He relies entirely on Renda v. Adam Meldrum & Anderson Co., 806 F.Supp. 1071 (W.D.N.Y.1992). We find Renda unpersuasive and reject Abraham’s argument.

Renda held that 29 U.S.C. § 1052(a)(1)(A) forbids employers to discriminate against leased employees when designing an ERISA plan. That provision reads as follows:

No pension plan may require, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates—
(i) the date on which the employee attains the age of 21; or
(ii) the date on which he completes 1 year of service.

Although the plain language of § 1052(a) makes no mention- of leased employees, Renda asserts that “[sjection 1052(a) effectively prohibits participation requirements which discriminate against certain employees such as leased employees.” 806 F.Supp. at 1081.

We disagree. Section 1052(a) does nothing more than forbid employers to deny participation in an ERISA plan to an employee on the basis of age or length of service if he is at least twenty-one years of age and has completed at least one year of service. Section 1052(a) does not prevent employers from denying participation in an ERISA plan if the employer does so on a basis other than age or length of service.

Renda incorrectly relies on Fernandez v. Brock, 840 F.2d 622 (9th Cir.1988). Fernandez does state in dicta that “ERISA requires that an employee must be eligible to participate in a plan after ‘he completes 1 year of service....’ Similarly, ERISA requires that an employee accrue benefits after a ‘year of participation’....” This statement appears in the portion of the opinion setting forth the facts of the case, however, and plays no role in the holding. The statement is best read to mean that an employee is eligible to participate in a plan after completing a year of service and attaining the age of twenty-one only if he is not otherwise disqualified for a reason other than age or length of service. To the extent that Fernandez’s dicta does support Renda, we reject it.

Renda also relied on Treasury regulations in finding improper the discrimination against leased employees. Title 26 C.F.R. § 1.410(b)—(4)(c)(3) sets forth factors the Secretary must consider when determining whether a plan is nondiscriminatory, and Renda found these factors “useful for extracting subtler shades of meaning necessary to paint a more detailed portrait of an individual’s substantive rights under ERISA.” 806 F.Supp. at 1083. Looking to those factors, Renda found the exclusion of a leased employee to be improper under ERISA.

We read the function of Treasury regulations more narrowly. The regulations purport to do • no more than determine whether a plan is a qualified tax plan. Failure to meet the requirements of those regulations results in the loss of a beneficial tax status; it does not permit a court to rewrite the plan to include additional employees. The Treasury regulations do not create substantive rights under ERISA that would permit the relief Abraham requests. It is true that ERISA does incorporate portions of the Internal Revenue Code and Treasury regulations, in some instances, but on those occasions it does so explicitly. See 29 U.S.C. § 1202(c) (expressly incorporating Treasury regulations promulgated under 26 U.S.C. §§ 410(a), 411, & 412).

Nor do we find persuasive Renda’s reliance on Crouch v. Mo-Kan Iron Workers Welfare Fund, 740 F.2d 805 (10th Cir.1984). Crouch did find that an employee was entitled to participate in an ERISA plan because her exclusion would cause the plan to fail Treasury regulations. Unlike the Exxon plan or the Renda plan, however, the ERISA plan in Crouch contained an explicit provision declaring that it was to be construed to meet the requirements of an ERISA plan. Absent such a requirement in the plan itself, a court is not entitled to look to Treasury regulations to determine employee eligibility for participation in an ERISA plan. We therefore reject Renda and Abraham’s argument.

V.

Abraham next claims that the district court erred by deferring to the administrator’s interpretation of the plan. The plan vests the administrator with “discretionary and final authority to determine eligibility ... [and] to interpret this ... Plan.” When a plan vests such discretionary authority in an administrator, we review his decisions for abuse of discretion. Pickrom v. Belger Cartage Serv., 57 F.3d 468, 471 (5th Cir.1995); see also Firestone, 489 U.S. at 115, 109 S.Ct. at 956-57.

Our inquiry proceeds in two parts. First, we must determine whether the administrator’s interpretation is legally correct. If it is not, we determine whether the decision constituted an abuse of discretion. Pickrom, 57 F.3d at 471. In deciding whether an interpretation is legally correct, we look to (1) whether the administrator has given the plan a uniform construction, (2) whether the interpretation is consistent with a fair reading of the plan, and (3) any unanticipated costs resulting from different interpretations of the plan. Wildbur v. ARCO Chem. Co., 974 F.2d 631, 638 (5th Cir.), clarified, 979 F.2d 1013 (5th Cir.1992).

The district court properly applied the law in this instance. Looking to the Wildbur factors, it is apparent that the administrator construed the plan uniformly in a manner consistent with a fair reading of the plan. Furthermore, Abraham’s interpretation of the plan will create unanticipated costs, as Exxon would have to provide benefits to 16,000 additional persons. Having determined that the administrator’s interpretation was legally correct, the district court did not need to look further.

VI.

Abraham contends that the plan is either ambiguous or includes him. We find no merits to his arguments, which rest on tortured constructions of the plan, defying rules of grammar and logic.

VII.

Besides a claim for benefits, a plaintiff may also file suit under ERISA for penalties when a plan administrator “refuses to comply with a request for any information which such administrator is required ... to furnish to a participant or beneficiary.” 29 U.S.C. § 1132(c)(1)(B). ERISA provides that an administrator who fails to provide such information “may in the court’s discretion be personally liable to such participant or beneficiary in the amount of up to $100 a day from the date of such failure or refusal.” Id. at § 1132(c)(1). In his complaint, Abraham alleges that the plan administrator, Rouse, refused to comply with his request for information.

The district court did not specifically address the claim for statutory penalties. The only portion of the opinion that seems to address that claim is the portion concluding that Abraham is not a “participant or beneficiary” because he lacks a colorable claim to benefits. We must therefore assume that the district court granted summary judgment on this claim because it believed the Abraham was not a “participant” within the meaning of ERISA and was therefore not entitled to the information he requested.

This was not a proper basis for summary judgment. Abraham was a “participant” under ERISA because he had a color-able claim that he would prevail in this suit. In Firestone, the Court held that ERISA’s definition of “participant,” 29 U.S.C. § 1002(7), includes anyone with a colorable claim that he will prevail in a suit for benefits, and it explained that the definition applied to claims for statutory penalties under § 1132(c)(1). 489 U.S. at 117-18, 109 S.Ct. at 957-58. For the reasons we discussed in part II, supra, Abraham was a participant under this standard and had standing to seek penalties under ERISA because the administrator failed to provide him with information. We therefore vacate summary judgment on Abraham’s claim for statutory penalties and remand so that the district court, in its discretion, may determine whether to award penalties.

We recognize that this result may appear harsh: We conclude that the Exxon plan unambiguously excludes Abraham, yet we find that the administrator may be liable for failing to provide Abraham with plan information. We note, however, that a claimant is not entitled to penalties merely because he is a “participant.”

Status as a participant is simply a threshold requirement a plaintiff must meet before he can request penalties. The district court has the discretion to grant or deny such a request. In making its decision, the district court may — and often should — take into consideration the administrator’s reasons for refusing to provide information.

In this case, for example, the district court might note that the terms of the plan excluded Abraham, that Abraham has standing because he relies on Renda, and that the administrator was probably unaware of Renda, a district court decision from a distant district. From all this, the district court could conclude that the administrator acted in good faith when he refused to provide information and could decline to award penalties. Of course, we note this only by way of example; we express no opinion as to what the district court should actually do in this case.

VIII.

Summary judgment on all claims except the claim for statutory penalties is AFFIRMED. Summary judgment on statutory penalties is VACATED and REMANDED.

      . Employee Retirement Income Security Act of 1974.

      . It is not evident whether the district court meant to address the standing issue. The court did determine that Abraham lacked a colorable claim to benefits, which should have been enough to deprive him of standing. It did not, however, dismiss his claim for lack of standing, but granted summary judgment instead. We therefore treat the judgment as one on the merits.

      . Firestone does not distinguish between a plaintiff who claims he has been wrongly excluded under the terms of the plan as written and a plaintiff who claims the plan was improperly written to exclude him. Firestone itself involved plaintiffs of the former sort—plaintiffs who claimed they were wrongly denied benefits under the plan as written—while Abraham is of the latter type—he argues that the plan as written wrongly excludes him. But Firestone gives us no basis for distinguishing between the two. The test is whether the plaintiff has a "colorable claim that ... he or she will prevail in a suit for benefits,” regardless of the type of claim he presents.


source: Caselaw Access Project

author: DeMOSS, Circuit Judge: EMILIO M. GARZA, Circuit Judge,

license: Public Domain

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Edid PATINO-CARDENAS, Defendant-Appellant.
    No. 94-20914.
    United States Court of Appeals, Fifth Circuit.
    June 10, 1996.
    Jerome Godinich (Court Appointed), Houston, TX, for Appellant.
    Alice Ann Burns, Katherine L. Haden and James L. Powers, Asst. U.S. Attys., Paula C. Offenhauser and Gaynelle Griffin Jones, U.S. Attys., Houston, TX, for Appellant.

      Before POLITZ, Chief Judge, and EMILIO M. GARZA and DeMOSS, Circuit Judges.
   DeMOSS, Circuit Judge:

Edid Patino-Cardenas (Patino) pleaded guilty in federal district court to transporting an alien within the United States, in violation of 8 U.S.C. § 1324(a)(l)(A)(ii). He appeals his sentence only, challenging: (1) the district court’s failure to adjust downward two-points for acceptance of responsibility, and (2) the district court’s two-point enhancement based on Patino’s role in the offense. We affirm in part, reverse in part, and remand for resentencing.

FACTS

On July 18, 1994, Arkansas-based INS agent John Stansel received a call from a confidential informant (Cl) who informed him that ten illegal aliens, including the Cl’s brother Cesar, had been smuggled to Houston. The smuggler wanted $700 to release Cesar. Agent Stansel gave the Cl an undercover telephone number to pass along to Cesar.

Three days later, Roberto Valtierra-Acevedo (Valtierra-Aeevedo) called Agent Stansel at the undercover number and asked to speak with the Cl. Agent Stansel responded that the Cl was out of town and asked Valtierra-Acevedo to take Cesar to Little Rock, Arkansas. Valtierra-Aeevedo refused to deliver Cesar to Arkansas, requested $700 for Cesar’s release, and left his Houston telephone number with Stansel.

Stansel passed the information on to the INS in Houston. Thereafter, INS Agent Balentin called Valtierra-Acevedo’s Houston number, claiming to be the Cl’s ftiend. Patino answered the telephone and told Balentin that he was the person Balentin needed to speak with about Cesar’s release. Patino instructed Balentin to go to a designated gas station and then to call back. Patino also told Balentin that two other aliens were being held.

When Balentin called from a location near the gas station, Patino instructed Balentin to meet him in front of a department store at that location. Patino stated he would arrive in a red truck with Mexican plates. Shortly thereafter, Patino, co-defendant Eriban Cardenas-Aguirre (Cardenas-Aguirre), and Cesar arrived in a red truck. Patino got out, introduced himself (using an alias) and pointed to Cesar, who was still seated in the truck with Cardenas-Aguirre. Cardenas-Aguirre got out of the truck and was introduced as a friend of Patino’s. After Balentin gave the prearranged signal, all three men were arrested.

INS officers then proceeded to a Houston residence (the Leedale house), where Patino’s sister, co-defendant Hermelinda PatinoCardenas, answered the door and consented to a search of the house. Although she claimed that there were no aliens in the house, INS agents discovered two aliens hiding in one of the rooms and took those individuals into custody. The next day Hermelinda Patino-Cardenas and Roberto Valtierra-Aeevedo were also arrested.

INS interviews with the three smuggled aliens revealed that they, along with several other aliens, paid “recruiters” in Neuvo Laredo, who put them in contact with a smuggler. The smuggler arranged their crossing of the Rio Grande River into Laredo, Texas. Next the aliens rode in a blue pickup for about an hour, followed by a long walk through brush, followed by another two hour ride in the same blue pickup. Along Highway 59 heading east, the blue pickup stopped and two of the aliens (but not Cesar) were transferred to Patino’s red pickup. All three aliens identified Patino as the man who drove the red pickup. Both trucks then drove to the Leedale house in Houston.

The next day, the aliens witnessed Patino receiving a large sum of money for the release of five of the aliens in their group. Patino told the remaining aliens that they would be returned to Mexico if they could not pay $500 each for their release. All three aliens claimed that both Patino and Robert attempted to contact people to arrange for the aliens’ release. One of the aliens stated that seven other aliens smuggled in their group had been “paid for and delivered” before the INS arrived.

PROCEDURAL HISTORY

Patino was charged in count 1 of a four count indictment with transporting aliens within the United States, in violation of 8 U.S.C. § 1324(a)(l)(A)(ii). Patino pleaded guilty without the benefit of a plea bargain on September 19,1994.

A presentence Investigation report (PSR) was filed, and Patino filed timely objections based on the PSR’s failure to adjust downward two levels for acceptance of responsibility, and to a two level increase for Patino’s role in the offense. The probation department then filed an addendum to the PSR, stating that Patino had not admitted all of the conduct comprising the offense charged in count 1.

When Patino appeared for sentencing, the district court judge overruled Patino’s objections and imposed a sentence in accordance with the PSR, which recommended an adjusted offense level of 13 and a criminal history category of IV. Accordingly, Patino was sentenced to 27 months incarceration and a $2500 fine, to be followed by a term of three years supervised release. This appeal followed.

ACCEPTANCE OF RESPONSIBILITY

Patino argues that the district court erred by denying him a two-level downward adjustment for acceptance of responsibility because he pleaded guilty and admitted all of the conduct comprising the offense charged. Patino is not entitled to a downward adjustment simply because he pleaded guilty. U.S.S.G. § 3E1.1 (1994). Patino’s entitlement to an adjustment for acceptance of responsibility depends upon whether he effectively (1) admitted the conduct comprising the offense of conviction and (2) admitted or did not falsely deny additional relevant conduct, for which he was accountable. United States v. Vital, 68 F.3d 114, 120 (5th Cir.1995); United States v. Smith, 13 F.3d 860, 866 (5th Cir.1994), cert. denied, — U.S. -, 114 S.Ct. 2151, 128 L.Ed.2d 877 (1994); see also U.S.S.G. § 3E1.1, comment, n. 1(a) (1994); § 1B1.7 (1994) (failure to follow guideline commentary can constitute an incorrect application of the guidelines requiring reversal on appeal). Patino was not required to volunteer or affirmatively admit relevant conduct beyond the conviction offense. A defendant can “remain silent with respect to relevant conduct beyond the offense of conviction without affecting his ability to obtain a reduction.” Id. Patino could not, however, falsely deny or frivolously contest relevant conduct that the court determined to be true. Id.

During the presentence investigation, Patino submitted the following statement through counsel:

I have consulted with my attorney and understand the importance of this statement. I committed the offense as alleged in Count 1 of my indictment.
On or about July 21,1994,1 transported Cesar Ramirex-Alvarez who was in this country illegally from the residence at 6426 Leedale in Houston, Texas to the parking lot in front of the Weiners store at 11703 Eastex Freeway at Houston, Texas using a red GMC pickup truck.
I understand the crime I committed and my actions are sinful. I have caused great pain and embarrassment to my family. I wish I could go back in time and not have committed this crime. I miss my family and wish I could be with them. Yet, I understand that I must be punished. .

The PSR recommended no adjustment for acceptance of responsibility and Patino objected. In those objections, Patino further admitted that he “drove two of the aliens into Houston and attempted to collect money obviously due to other individuals” for the aliens’ release. The probation department responded with an addendum to the PSR, arguing that Patino was not entitled to an adjustment because Patino had not admitted all of the conduct comprising the offense. Specifically, the probation department claimed that Patino failed to admit that he negotiated for and received fees for the release of some of the aliens.

At sentencing, the probation department expressed the opinion that § 1324 offenses “typically” involve the receipt of fees by one or more people. Based on that observation alone, the probation department concluded that Patino had not accepted responsibility “for the conduct comprising the offense of conviction.” Without further discussion, the district court adopted the PSR, denying Patino an adjustment for acceptance of responsibility.

The government’s position is that Patino failed to admit or falsely denied that he (1) transported aliens to Houston; (2) negotiated for Cesar’s release; and (3) collected fees for the release of other aliens. Count 1 of the indictment alleges that Patino transported Cesar “within the United States ... to the parking lot in front of the Weiner’s store located at 11703 Eastex Freeway in Houston, Texas in a pickup truck.” The indictment does not charge Patino with transporting the other two aliens to Houston or with accepting fees for the release of any aliens. Therefore, the acts identified by the government constitute additional conduct relevant to the offense, rather than conduct comprising the offense charged.

Patino admitted that he drove the truck to Houston and that he attempted to collect fees for the release of the aliens. Patino did not deny that he actually received those fees. Further, Patino’s statement that any money he collected would have been for the benefit of other individuals, which was offered in response to the probation department’s position that Patino played an leadership role in the offense, does not amount to a false or frivolous denial of additional conduct relevant to Patino’s § 1324 offense.

For the first time on appeal, the government also argues that Patino was not entitled to an adjustment for acceptance of responsibility because he falsely denied additional relevant conduct relating to his leadership role in the offense. Patino had no duty to affirmatively admit those facts. § 3E1.1 comment, n. 1(a). Further, Patino did not frivolously deny those facts in his objections to the PSR. Patino objected to the legal characterization (leadership role) given his actions; he did not, in that document or at sentencing, deny any facts stated in the PSR concerning his role. Further, Patino’s failure to acknowledge his leadership role was not offered as a justification for denying an acceptance of responsibility adjustment, either in the PSR or at sentencing. The government cannot now raise Patino’s responses, which were offered to controvert the probation department’s position that he played a leadership role and which are not inconsistent with the facts stated in the PSR, to justify the district court’s refusal to adjust for acceptance of responsibility.

The determination of the sentencing judge on acceptance of responsibility is entitled to great deference on review. U.S.G.G. § 3E1.1 comment, n. 5; see also United States v. Vital, 68 F.3d 114, 120 (5th Cir.1995). Nonetheless, failure to depart downward for acceptance of responsibility constitutes reversible error when that decision is made without any foundation. United States v. Calverley, 11 F.3d 505, 514 (5th Cir.1993), opinion reinstated and adopted on reh’g, 37 F.3d 160 (5th Cir.1994), cert. denied, — U.S. -, 115 S.Ct. 1266, 131 L.Ed.2d 145 (1995). Patino adequately admitted the conduct comprising the offense and either admitted or did not falsely deny the additional relevant conduct identified by the government. There was, therefore, no foundation for the district court’s refusal to grant a two-level adjustment for acceptance of responsibility and Patino must be resentenced.

PATINO’S ROLE IN THE OFFENSE

Patino also claims that the district court erred by increasing his base offense level two points for his aggravating role in the offense pursuant to guideline § 3Bl.l(c) (providing for two level increase if defendant was an organizer, leader, manager or supervisor in any criminal activity involving fewer than 5 participants). The district court’s factual determination that Patino played a leadership role in the offense is reviewed for clear error. United States v. Narvaez, 38 F.3d 162, 166 (5th Cir.1994), cert. denied, — U.S. -, 115 S.Ct. 1803, 131 L.Ed.2d 729 (1995).

Relative to the offense charged, that of transporting Cesar to the department store, the PSR states that Patino answered the INS agent’s telephone call, identified himself as the person to talk with, arranged for the rendezvous with the INS agent at the department store, drove the truck transporting Cesar to the rendezvous point to arrange Cesar’s release, and then exited the truck and approached the agent first.

Relevant conduct beyond the charged offense may also be considered for purposes of determining whether an enhancement on the basis of the defendant’s role is appropriate. § 3B1.1 (1994) intro, comment. The PSR establishes that Patino was the party identified as responsible, along with ValtierraAcevedo, for contacting the friends and relatives of aliens about their release. Patino transported aliens, from a point outside Houston, to the Leedale house. Patino also collected fees from third parties for the release of smuggled aliens.

Patino argues that other co-defendants were equally involved in the offense. As to the charged offense, there are no facts suggesting that Patino’s only co-defendant in count 1 was similarly involved in the offense. The record clearly supports the district court’s determination that Patino played a leadership role in the charged offense and the district court’s two-level enhancement is affirmed.

CONCLUSION

The district court’s determination that Patino played a leadership role in the offense, which justified a two-level enhancement is AFFIRMED.

The district court’s determination that Patino failed to accept responsibility, which justified its refusal to adjust downward two levels is REVERSED, Patino’s sentence is VACATED, and the case is REMANDED for resentencing.

EMILIO M. GARZA, Circuit Judge,

specially concurring:

I concur in the result reached by the majority opinion. I write separately to make explicit the degree to which recent amendments to § 3E1.1 of the sentencing guidelines, concerning reductions for acceptance of responsibility, stand in conflict with the general theory of punishment underlying the guidelines.

The original drafters of the guidelines expressed a preference for a “real offense” punishment system, under which sentences would be based on “the actual conduct in which the defendant engaged regardless of the charges for which he was indicted or convicted.” U.S.S.G. Ch. 1, Pt. A, intro, comment. 4(a). Although a “pure” real offense system proved too difficult to codify, sentence calculations under the current guidelines are based on a multitude of factors, beyond the conduct charged, to better reflect a defendant’s culpability. See id. (“[T]he guidelines take account of a number of important, commonly occurring real offense elements such as the role in the offense, the presence of a gun, or the amount of money actually taken, through alternative base offense levels, specific offense characteristics, cross references, and adjustments.”). Accordingly, § 1B1.3 of the guidelines, concerning “relevant conduct,” allows the sentencing court to consider conduct beyond the conduct charged in the indictment. See U.S.S.G. § 1B1.3, comment, (backg’d.) (“Conduct that is not formally charged or is not an element of the offense of conviction may enter into the determination of the applicable guideline sentencing range.”).

The guidelines provide for an adjustment for a defendant’s acceptance of responsibility: “If the defendant clearly demonstrates acceptance of responsibility for his offense, decrease the offense level by 2 levels.” U.S.S.G. § 3El.l(a). Prior to 1992, the application of § 3E1.1 squared nicely with the policy concerns underlying the guidelines as a whole. In determining a defendant’s acceptance of responsibility, sentencing courts were free to consider all conduct that was “related” to the offense. Application note 3 read:

Entry of a plea of guilty prior to the commencement of trial combined with truthful admission of involvement in the offense and related conduct will constitute significant evidence of acceptance of responsibility for the purposes of this section.

Appendix C, Amendment 351 (emphasis added). We interpreted this language to mean that “before a defendant is entitled to a reduction for acceptance of responsibility, he must first accept responsibility for all of his relevant conduct.” United States v. Kleinebreil, 966 F.2d 945, 953 (5th Cir.1992) (internal quotation marks omitted).

In 1992, the sentencing commission amended application note 3 to remove the language requiring truthful admission of “related conduct”:

Entry of a plea of guilty prior to the commencement of trial combined with truthfully admitting the conduct comprising the offense of conviction, and truthfully admitting or not falsely denying any additional relevant conduct for which he is accountable under § 1B1.3 (Relevant Conduct) ... will constitute significant evidence of acceptance of responsibility for the purposes of subsection (a). However, this evidence may be outweighed by conduct of the defendant that is inconsistent with such acceptance of responsibility.

Appendix C, Amendment 459 (emphasis added). Today, we for the first time interpret this language to require reversal of a sentencing court’s denial of a reduction for acceptance of responsibility, when that denial is based on a defendant’s failure to admit to conduct not charged in the indictment.

In holding that a defendant need not admit § IB 1.3 relevant conduct, beyond that comprising the offense of conviction, to be eligible for a reduction for acceptance of responsibility, we join the other circuit courts of appeals that have addressed the issue. I concur in the holding of the majority opinion because I find that the text of § 3E1.1 and application note 3 allows no other result. However, I do so reluctantly because not only does our interpretation effectively make conduct beyond the offense of conviction irrelevant to a defendant’s acceptance of responsibility; our interpretation also removes most if not all of the sentencing court’s traditional discretion to determine whether a defendant has accepted responsibility for Ms crime.

Both the guidelines and our case law provide that a sentencing court’s determination as to a defendant’s acceptance of responsibility is entitled to great deference. See U.S.S.G. § 3E1.1 comment, (n. 5) (“The sentencing judge is in a unique position to evaluate a defendant’s acceptance of responsibility. For this reason, the determination of the sentencing judge is entitled to great deference on review.”); United States v. Vital, 68 F.3d 114, 120-21 (5th Cir.1995) (“In light of tWs commentary, we hold that the correct standard of review to apply to a district court’s refusal to credit a defendant’s acceptance of responsibility is the ‘great deference’ standard.”). I find these statements inconsistent with the interpretation we offer today, wMch creates a mechanistic checklist by which a defendant may acMeve a two-level reduction. A defendant who pleads guilty, who mechanically reads and admits to the conduct alleged in the indictment, and who then offers “no comment” to questions about other relevant conduct establishes “significant evidence” of acceptance of responsibility, under application note 3, wMch in effect establishes a presumption that he has “clearly established” acceptance of responsibility, under § 3El.l(a). On such facts, the sentencing court can deny an acceptance-of-responsibility reduction only by finding significant “conduct of the defendant that is inconsistent with such acceptance of responsibility,” U.S.S.G. § 3E1.1, comment, (n. 3). See United States v. Vance, 62 F.3d 1152, 1159-60 (9th Cir.1995) (holding, under the amended § 3E1.1, that “[¿Insignificant evidence cannot outweigh a plea of guilty before trial, truthful admission of the elements of the offense, and absence of a false denial of technically relevant conduct”). I find it hard to believe that the drafters of the guidelines intended that a sentencing court, supposedly deserving of “great deference,” would have no discretion to deny a reduction for acceptance of responsibility to a defendant who pleaded guilty, admitted the facts alleged in the indictment, and then, throughout the rest of the court’s questions, stood in stony silence.

      . The PSR refers to Agent "Valentin.” The record clarifies that the Agent’s correct name is "Balentin.”

      . Cardenas-Aguirre, who went with Patino to deliver Cesar, was also charged in count 1. Counts 2, 3 and 4 charged Roberto ValtierraAcevedo and Hermelinda Patino-Cardenas with violations of 8 U.S.C. § 1324(a)(1)(c) for harboring the three aliens at the Leedale house.

      . Patino’s primary argument was that because co-defendants engaged in factually similar conduct, he did not play a leadership role.

      . Application note 1(a) now explicitly allows a defendant to remain silent concerning relevant conduct without losing his eligibility for a reduction for acceptance of responsibility. See U.S.S.G. § 3E1.1 comment (n. 1(a)).

      . We have previously applied the amended language of application note 3, but we have not yet applied this language to reverse a district court’s denial of an acceptance-of-responsibility reduction. See, e.g., United States v. Vital, 68 F.3d 114, 120-21 (5th Cir.1995) (upholding district court's denial of reduction for acceptance of responsibility because the defendant "had denied facts bearing on the offense of conviction and on relevant conduct”); United States v. Diaz, 39 F.3d 568, 570 (5th Cir.1994) (upholding district court’s denial of reduction for acceptance of responsibility because “the defendants had failed to acknowledge the full extent of the charged conspiracy”).

      . See United States v. Austin, 17 F.3d 27, 30-31 (2d Cir.1994) (holding that silence regarding "relevant conduct beyond the offense of conviction” could not be considered in assessing whether the defendant had demonstrated a genuine acceptance of responsibility); United States v. Fields, 39 F.3d 439, 447 (3d Cir.1994) (vacating defendant's sentence because in denying the defendant an adjustment for acceptance of responsibility, “it appears that the court may have incorrectly considered the defendant's refusal to admit conduct not comprising part of the offense of conviction"); United States v. Hammick, 36 F.3d 594, 598 (7th Cir.1994) (holding that under the amended version of § 3E1.1, a defendant can "invoke his right to remain silent concerning relevant conduct outside the scope of his offense without compromising his eligibility for a two-level reduction for acceptance of responsibility"); United States v. Cedano-Rojas, 999 F.2d 1175, 1182 (7th Cir.1993) (reading the amended language of § 3E1.1 to mean that the defendant “should not be required to come clean on relevant conduct in order to obtain the reduction”).


author: PATRICK E. HIGGINBOTHAM, Circuit Judge:

text:
    COCA-COLA BOTTLING COMPANY OF THE SOUTHWEST, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent.
    No. 94-41224.
    United States Court of Appeals, Fifth Circuit.
    June 10, 1996.

      Gregory, S.C. Huffman, David Sterling White, G. Luke Ashley, Thompson & Knight, Dallas, TX, for Petitioner.
    Philip D. Bartz, Kenneth W. Irvin, Morrison & Foerster, Washington, DC, for Amicus Curiae Dr Pepper/Seven-Up.
    Melvin H. Orlans, Donald S. Clark, Secretary FTC, Ernest Isenstadt, FTC, David C. Shonka, Washington, DC, for Respondent.
    Before REAVLEY, HIGGINBOTHAM and BARKSDALE, Circuit Judges.
   PATRICK E. HIGGINBOTHAM, Circuit Judge:

Today we review a divestiture order of the Federal Trade Commission. We must decide whether the Soft Drink Interbrand Competition Act of 1980, 15 U.S.C. § 3501-03, governs the antitrust legality of an exclusive territorial soft drink license previously held by a competing soft drink bottler that was a subsidiary of the licensor. The FTC seeks to undo a 1984 transaction in which the Dr Pepper Company, a manufacturer of soft drink concentrates and syrups, licensed the Coca-Cola Bottling Company of the Southwest, a Texas bottler, to distribute exclusively the Dr Pepper soft drink brand in a defined territory. The FTC found the Soft Drink Act inapplicable, ruling that the 1984 licensing of Coca-Cola Southwest and withdrawal of Dr Pepper from distribution was substantially likely to lessen competition in violation of § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and § 7 of the Clayton Act, 15 U.S.C. § 18.

We hold that the FTC used the wrong legal standard in finding that § 5 of the FTC Act prohibited this change in distribution. We vacate the FTC’s divestiture order and remand for a consideration of the transaction’s validity under the Soft Drink Act.

I.

Petitioner, Coca-Cola Bottling Company of the Southwest, is a regional bottler and fountain distributor of Coca-Cola, Dr Pepper, and other soft drink brands in South and Central Texas. Coca-Cola Southwest operates with trademark licenses from manufacturers of soft drink concentrates and syrups, the flavoring ingredients in retail soft drink beverages. A license creates an exclusive territorial franchise whereby the manufacturer supplies soft drink concentrates and syrups to its licensee, which bottles and sells the branded soft drinks in a defined geographic area.

The Dr Pepper Company is the nationwide manufacturer of concentrate and syrup for its Dr Pepper soft drink brand. At issue in this appeal is a 1984 transaction in which Dr Pepper Company licensed Coca-Cola Southwest to bottle and distribute Dr Pepper soft drinks in a ten-county territory around San Antonio, Texas. Until 1984, Dr Pepper Company was a publicly held corporation that did not distribute through an independent bottler in the San Antonio area. Rather, it carried its product to the consumer through its wholly owned bottling subsidiary, San Antonio Dr Pepper Bottling Company. Dr Pepper-San Antonio was also the exclusive bottler for other concentrate manufacturers, including Canada Dry, Big Red, Royal Crown, Crush, and Hires. Here began the events leading directly to the distribution changes attacked by the FTC.

In 1984, Forstmann Little acquired Dr Pepper Company in a leveraged buyout. After the buyout, Forstmann Little arranged for Dr Pepper Company to sell its company-owned bottling operations, including Dr Pepper-San Antonio, and to distribute through independent bottlers. Dr Pepper Company attempted to sell the San Antonio bottling operation as a whole, but was unable to do so. Coca-Cola Southwest was interested in the subsidiary’s Dr Pepper and Canada Dry licenses, but had no need for its main production facility. Unable to sell its entire bottling operation, Dr Pepper licensed Coca-Cola Southwest. Coca-Cola Southwest paid $14.5 million to Dr Pepper for a license to bottle and sell Dr Pepper and Canada Dry. Coca-Cola Southwest also purchased certain of Dr Pepper Company’s property used in distributing its product: a warehouse, 2150 used vending machines, and 40% of its used delivery and over-the-road trucks, for $2.5 million.

After the August 1984 transaction, Dr Pepper-San Antonio retained ownership of its bottling plant and its licenses for brands other than Dr Pepper and Canada Dry, and for a short while thereafter, Dr Pepper Company continued operating the subsidiary as a bottler and distributor for these other brands in its 28-county territory. Later that year, Dr Pepper Company sold Dr Pepper-San Antonio’s bottling plant and its other property and rights to a new entrant, Grant-Lydick Beverage Company. Thus, by the end of 1984, Dr Pepper Company had withdrawn from bottling and distribution in two separate transactions, involving Coca-Cola Southwest and then Grant-Lydick. Coca-Cola Southwest held the licenses for the Dr Pepper and Canada Dry brands, along with a handful of Dr Pepper-San Antonio’s assets, while Grant-Lydick had obtained the subsidiary’s remaining assets and rights, its bottling plant and other licenses, including Big Red, Royal Crown, Crush, and Hires.

On July 29, 1988, the FTC issued an administrative complaint challenging Coca-Cola Southwest’s 1984 receipt of the Dr Pepper and Canada Dry licenses. The complaint alleged that this acquisition substantially lessened competition in violation of § 5 of the FTC Act, 15 U.S.C. § 45, and § 7 of the Clayton Act, 15 U.S.C. § 18. It sought, inter alia, to require Coca-Cola Southwest to divest the Dr Pepper and Canada Dry licenses and assets acquired in 1984.

An administrative law judge held a thirteen-week hearing beginning on July 10, 1990. On June 14, 1991, the ALJ rendered his initial decision in favor of Coca-Cola Southwest, concluding that a reduction in competition was unlikely and ordering dismissal of the complaint. The FTC’s eomplaint counsel appealed to the full Commission. On August 31, 1994, the Commission entered a decision reversing the ALJ’s initial decision. The Commission declined to consider Coca-Cola Southwest’s 1984 receipt of the Dr Pepper and Canada Dry licenses under the Soft Drink Interbrand Competition Act of 1980,15 U.S.C. § 3501-03, and instead agreed with complaint counsel that Coca-Cola Southwest’s acquisition of the Dr Pepper franchise violated the FTC Act and the Clayton Act. For different reasons than those set forth by the ALJ, the Commission ruled that Coca-Cola Southwest’s receipt of the Canada Dry franchise did not violate the federal antitrust laws. Accordingly, the Commission entered a Final Order requiring Coca-Cola Southwest to divest the Dr Pepper license and to obtain prior approval from the Commission before acquiring any additional branded soft-drink assets in areas in which Coca-Cola Southwest was already doing business.

On October 7, 1994, Coca-Cola Southwest filed a motion for reconsideration and a stay before the Commission. The Commission, however, never acted on those motions. On November 22, 1994, Coca-Cola Southwest petitioned for review of the Commission’s decision.

II.

Coca-Cola Southwest challenges the Commission’s divestiture order on multiple grounds. Coca-Cola Southwest argues that the Commission erred in refusing to apply the Soft Drink Interbrand Competition Act; in defining the relevant product and geographic markets; in its findings of barriers to entry; in refusing to allow Coca-Cola Southwest to rebut certain documents admitted after the close of evidence; and in according insufficient weight to certain evidence that favored Coca-Cola Southwest.

Although this case does not yield an easy answer, we are persuaded that the FTC should have applied the Soft Drink Act in this instance. We decline to reach Coca-Cola Southwest’s remaining contentions.

A.

We review de novo the question whether the FTC erred in not applying the Soft Drink Act’s legal standard in this case.

The FTC’s administrative complaint against Coca-Cola Soúthwest charged that the effect of Coca-Cola Southwest’s 1984 acquisition of the exclusive Dr Pepper license for the San Antonio area may be substantially to lessen competition in soft drink products in that area in violation of § 5 of the FTC Act, 15 U.S.C. § 45, and § 7 of the Clayton Act, 15 U.S.C. § 18. Coca-Cola Southwest argues that the FTC erred in examining the 1984 transaction under the Clayton Act’s “effect-may-be-substantially-to-lessen-competition” standard. According to Coca-Cola Southwest, the Soft Drink Act supersedes the FTC and Clayton Acts and legitimizes its receipt and use of the Dr Pepper license for the San Antonio Area so long as the Dr Pepper brand “is in substantial and effective competition with other products of the same general class in the relevant market or markets.” 15 U.S.C. § 3501.

Congress enacted the Soft Drink Act in response to two cases from the 1970’s in which the FTC ruled that exclusive territories used by the Coca-Cola Company and PepsiCo were unlawful vertical restraints of trade in violation of § 5 of the FTC Act. H.R.Rep. No. 96-1118, 96th Cong., 2d Sess. 3^4 (1980), reprinted in 1980 U.S.C.C.A.N. 2373, 2375; S.Rep. No. 96-645, 96th Cong., 2d Sess. 6-9 (1980). Congress passed the Soft Drink Act to assure that territorial restrictions in soft drink licenses would be evaluated under the rule of reason analysis as articulated in Continental T.V. Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). To that end, the Soft Drink Act provides, in relevant part:

Nothing contained in any antitrust law shall render unlawful the inclusion and enforcement in any trademark licensing contract or agreement, pursuant to which the licensee engages in the manufacture (including manufacture by a sublicensee, agent, or subcontractor), distribution, and sale of a trademarked soft drink product, of provisions granting the licensee the sole and exclusive right to manufacture, distribute, and sell such product in a defined geographic area or limiting the licensee, directly or indirectly, to the manufacture, distribution, and sale of such product for ultimate resale to consumers within a defined geographic area: Provided, That such product is in substantial and effective competition with other products of the same general class in the relevant market or markets.

15 U.S.C. § 3501. The Soft Drink Act defines “antitrust law” to mean the Sherman Act, 15 U.S.C. 1 et seq., the Clayton Act, and the FTC Act, see 15 U.S.C. § 3503; its plain text thus establishes that the FTC and Clayton Acts cannot “render unlawful” an exclusive territorial restriction in a soft drink license so long as the licensed brand “is in substantial and effective competition” with comparable soft drink products in the relevant market. If the Soft Drink Act applies and the requisite “substantial and effective competition” exists, the FTC cannot enforce the FTC Act or Clayton Act in a manner that invalidates the exclusivity provisions in Coca-Cola Southwest’s Dr Pepper license for the San Antonio area.

The FTC contends that while the Soft Drink Act authorizes the use of territorial restrictions in soft drink licenses, it does not govern the legality of a horizontal combination of such licenses. Thus, the FTC insists that the Soft Drink Act is inapplicable here “[bjecause this case concerns only the validity of combining in one bottler the franchises of two competing brands, and in no way challenges the legality of exclusive territorial restrictions.” According to the FTC:

At issue in this proceeding is whether a combination of the Coca-Cola franchise with the Dr Pepper franchise in the San Antonio market may substantially lessen competition in violation of §§ 5 of the FTC Act and 7 of the Clayton Act. The Commission is not challenging the right of [Dr Pepper Company], or any other concentrate manufacturer, to grant an exclusive franchise for its brand, but only a bottler’s right to acquire a competing bottler’s franchise where competition in the relevant market may be adversely affected. The Commission has in no way attacked the legality of [Dr Pepper Company’s] exclusive territorial license, and “[n]othing in [the Soft Drink Act] is intended to protect ... any other practice or conduct of licensors or licensees ... from challenge under the antitrust laws.” S.Rep. 10. In other words, by merely legitimizing exclusive territories, the [Soft Drink Act] does not grant a bottler the unfettered right to acquire any license of its choice.

The FTC points out that there was a horizontal transfer of assets to Coca-Cola Southwest from a former competitor and thus views the 1984 transaction as “a ‘garden variety’ horizontal acquisition in which one competitor has purchased the assets of another.”

Coca-Cola Southwest disputes the FTC’s characterization and urges that Dr Pepper Company’s issuance of the Dr Pepper franchise to Coca-Cola Southwest was vertical, not horizontal. According to Coca-Cola Southwest:

The end result of the challenged 1984 transaction was to structure a vertical exclusive licensing arrangement between [Dr Pepper Company] and [Coca-Cola Southwest]. If [Dr Pepper Company] had had no prior presence in San Antonio and in 1984 had structured an exclusive licensing arrangement with [Coca-Cola Southwest], there could be no question that the [Soft Drink Act] standard would govern. .The policy considerations under the [Soft Drink Act] are no different when the soft drink concentrate manufacturer already has a presence in the territory and structures the exclusive licensing arrangement with the new licensee [Coca-Cola Southwest].

As the parties see it, this case pivots on dueling characterizations. On one hand, Coca-Cola Southwest insists that the Soft Drink Act governs here because its 1984 transaction was vertical in that Dr Pepper Company issued a new franchise to a downstream distributor, Coca-Cola Southwest. On the other hand, the FTC finds the Soft Drink Act inapplicable because the transaction was horizontal in that Coca-Cola Southwest gained market share by acquiring an additional exclusive license from a competing local bottler, Dr Pepper-San Antonio. In short, the parties’ framing of the inquiry suggests that the applicability of the Soft Drink Act turns on the question of whose characterization prevails: Coca-Cola Southwest wins if we say that the transaction was vertical, while the FTC wins if we see it as horizontal.

We do not find the applicability of the Act to be so easy. The transaction was neither purely vertical nor purely horizontal. The events culminating in the grant of the Dr Pepper license to Coca-Cola Southwest evinced both vertical and horizontal aspects. Of course, the horizontal features of the transaction are less than 15% of the deal, measured in dollars. The FTC does not dispute that Dr Pepper Company was considering its own interests when it chose to license Coca-Cola Southwest in connection with its effort to close down Dr Pepper-San Antonio and distribute instead through an independent bottler. Coca-Cola Southwest, in turn, does not dispute that its use and enforcement of the Dr Pepper franchise may have an impact on interbrand competition at the distributor level. In sum, even in the language of the parties the critical question is not whether the transaction was vertical or horizontal, but whether it was sufficiently vertical to come within the ambit of the Soft Drink Act. However framed, the ultimate inquiry must be into economic reality and function where vertical and horizontal are helpful signals but not controlling categories.

We are not prepared to say that the Soft Drink Act might not apply in some cases in which an existing bottler acquires either a competing independent bottler or an additional license from such a bottler. We are prepared to say that this is not one of those cases. In short, though Coca-Cola Southwest and Dr Pepper Company nominally structured parts of their 1984 transaction as a horizontal purchase, that is not dispositive of the question whether the Soft Drink Act applies in deciding whether Coca-Cola Southwest may use and enforce the Dr Pepper franchise. Rather, as we will explain, we conclude that the economic impact of Dr Pepper Company’s grant of the Dr Pepper license to Coca-Cola. Southwest was more like the economic impact of the territorial restraints and exclusivity provisions measured by the Soft Drink Act than the effects of concentration attending mergers and disappearing competitors.

The FTC’s contention must persuade us that a license by a manufacturer of a distributor handling competing brands is not covered by the Soft Drink Act, except in the introduction of new product. Its contention must accommodate the reality that any anti-competitive force of granting a license to a distributor handling competing lines would be drained by dropping the exclusivity feature of the license — a license provision explicitly treated by the Act.

B.

Our analysis proceeds in three steps. First, we start with the proposition that the Soft Drink Act governs when a national syrup manufacturer issues a new exclusive soft drink license to facilitate initial entry of a licensed brand in a regional market. This transaction is aptly characterized as vertical, since the manufacturer’s appointment of a downstream bottler is inspired by its effort to offer a soft drink brand not otherwise available in the local market. Second, we assume without deciding that the Soft Drink Act is inapplicable when an existing bottler acquires additional soft drink licenses for established brands from an independent competing bottler. Such an acquisition may be seen as horizontal for Clayton Act purposes insofar as it is impelled primarily by the interests of the acquiring bottler rather than of the national syrup manufacturer.

These two inquiries suggest that the applicability of the Soft Drink Act turns on whether the manufacturer is appointing a new distributor to facilitate its entry into the local market, or whether, instead, the receiving bottler acquires the new license from another existing competitor. Hence, our third step is to decide whether the 1984 transaction between Coca-Cola Southwest and Dr Pepper Company properly belongs in the first category or the second — i.e., whether it is vertically or horizontally inspired. On this third inquiry, we conclude that the Soft Drink Act does apply because the forces driving the 1984 transaction did not come from Coca-Cola Southwest’s pursuit of greater market share via the acquisition of an additional license. Rather, the impetus behind the transaction was Dr Pepper Company’s decision to cease its own distributing operations and to turn instead to an independent San Antonio bottler for the first time. This decision necessarily required that Dr Pepper license a new independently owned entity. It attempted to sell its subsidiary as a package but was unable to do so.

1.

It is undisputed that the Soft Drink Act supplies the proper standard for evaluating territorial and exclusivity restrictions in a soft drink license where the licensed bottler holds that soft drink license and no others. The difficult question is the extent to which the Soft Drink Act applies when the license increases the concentration of exclusive soft drink licenses in the hands of a single bottler. Our first step is to determine whether the Soft Drink Act ever applies when a single bottler holds multiple soft drink licenses.

As the FTC has acknowledged, national syrup manufacturers often gain entry into a regional market by licensing an existing regional bottler that already holds licenses from other syrup manufacturers. This practice is called “piggybacking” in the soft drink industry, and the FTC concedes that the Soft Drink Act was premised in part on congressional approval of piggybacking as a means for market entry:

The legislative history of [the Soft Drink Act] merely recognizes that piggybacking may facilitate new entry. By giving favorable antitrust treatment to exclusive territories, [the Soft Drink Act] allows the new entrant to promise a prospective bottler an exclusive territory for its brand, and thereby encourages bottlers to accept new brands.

Thus, in noting that the Soft Drink Act gives “favorable antitrust treatment to exclusive territories,” the FTC recognizes that some piggybacked soft drink licenses are to be scrutinized under the Soft Drink Act and upheld so long as the requisite substantial and effective competition exists.

If the Dr Pepper brand had never been distributed in the San Antonio area, the Soft Drink Act would have governed the validity of Dr Pepper Company’s grant of an exclusive Dr Pepper license to an existing San Antonio bottler such as Coca-Cola Southwest, even though that bottler already had other soft drink licenses. Coca-Cola Southwest’s receipt of the additional license from Dr Pepper Company concentrates product distribution. Nonetheless, the Soft Drink Act would preclude antitrust scrutiny of the piggybacked Dr Pepper license so long as the Dr Pepper brand faced substantial and effective competition in the relevant market.

2.

Having concluded that the Soft Drink Act governs the validity of a piggybacked soft drink license used to introduce a new brand, we turn to the FTC’s argument that the Soft Drink Act nevertheless becomes inapplicable when an existing bottler obtains additional licenses by acquiring them from an established competing bottler. According to the FTC, “nothing in the legislative history of [the Soft Drink Act], let alone the statutory text, suggests a new antitrust standard for evaluating combinations between established competing brands.” On this view, the Soft Drink Act does not purport to deprive the FTC of its statutory power to challenge a transaction that amounts to a garden-variety horizontal merger of soft drink licenses held by existing competitors. Since there is no reduction in competition for distribution of Dr Pepper (intrabrand competition) given the exclusivity provisions in the license, the FTC must be challenging a reduction of interbrand competition.

As we explained today, we assume that the FTC could employ the traditional measures of the FTC and Clayton Acts in challenging a transaction in which a bottler with a large market share obtains additional exclusive licenses for competing soft drink brands previously held by another independent bottler. This assumption points to a distinction between the grant of an exclusive license to facilitate vertical entry and the horizontal combination of licenses previously held by established independent bottlers. The Soft Drink Act applies in the former scenario, but not in the latter.

3.

We think that Dr Pepper’s licensing of Coca-Cola Southwest is best viewed as a predominantly vertical transaction consummated as part of Dr Pepper Company’s effort to end its direct distribution and enter the San Antonio area market through independent distributors. Dr Pepper Company withdrew from that competitive level. Three related factors lead us to this conclusion.

First, Dr Pepper Company initiated the 1984 events. Coca-Cola Southwest did not seek out the Dr Pepper franchise, and acquired it only after Dr Pepper Company offered it for sale. The 1984 transaction between. Coca-Cola Southwest and Dr Pepper Company is fueled by different economic impulses and hence different likely economic consequences, from a situation in which a bottler acquires additional licenses from another independent bottler; in the latter scenario, the manufacturer need not be involved, and is not departing and then re-entering. The FTC to be sure, urges that “the horizontal effects on interbrand competition are identical regardless of whether the bottler transferring the franchise is owned by a concentrate company or independently owned.” While that may be accurate, so also are the vertical effects unchanged. Such horizontal consequences do not change the reality that Dr Pepper Company entered into this transaction to extricate itself from the distribution business in San Antonio and then return through independent distributors.

Second, our characterization of the transaction as vertical rather than horizontal is consistent with the economic incentives implicated in Dr Pepper Company’s decision to undertake it. As Dr Pepper Company explains in its amicus brief:

The unique structure of this industry means that the more competitive the bottler, the better for the concentrate company, because the more soft drinks the bottler sells, the more concentrate the bottler purchases. As a result, the interests of concentrate companies are, as an economic matter, directly aligned with the interests of the ultimate soft drink consumer: both want the bottler to produce and sell soft drinks at the lowest possible cost and price.

We would not expect a manufacturer to accede to a bottler’s effort to acquire additional licenses for the purpose of gaining market share and exercising market power in the regional market, since that outcome would reduce the manufacturer’s profits. The dampening effects of horizontal cartelization and horizontally inspired concentration are not in the economic interests of the manufacturer. Hence, a transaction sought out by a manufacturer rather than a bottler is less likely motivated by a bottler’s quest for pricing power in the downstream market. It is true that intent is difficult to ascertain, but our primary litmus is the incentive for maximization of profits. Here, economic incentives at least provide corroborating indications that Dr Pepper Company was acting vertically when it selected Coca-Cola Southwest as its exclusively licensed San Antonio bottler.

Third, the form of the transaction involved cancellation of the license held by Dr Pepper Company’s former bottling subsidiary and the subsequent issuance of a new Dr Pepper license to Coca-Cola Southwest. Thus, the transaction consisted of the cessation of one vertical arrangement followed by the creation of a second one. We are mindful, to be sure, that the 1984 transaction was nominally framed as a purchase, listing Coca-Cola Southwest as the “buyer” and Dr Pepper Company as the “seller.” Nevertheless, the parties were able to consummate the deal only through a sequence of two vertical transactions — Dr Pepper Company ended its direct distribution and then appointed a new, independent bottler. Indeed, since the Dr Pepper licenses expressly provide that they are not transferable, Coca-Cola Southwest could not have acquired the licenses from Dr Pepper-San Antonio without Dr Pepper Company’s consent. Dr Pepper Company sought for the first time to appoint an independent bottler, and Coca-Cola Southwest answered the call. Their use of the rubric of a nominal purchase does not change the reality that the transaction effectuated Dr Pepper Company’s decision to pursue a vertical licensing agreement with a new distributor.

In sum, we find that the 1984 transaction between Coca-Cola Southwest and Dr Pepper Company was a vertically inspired event through which Dr Pepper Company issued an exclusive license to Coca-Cola Southwest as part of its effort to shift to independent distribution for the first time in the San Antonio area market. Hence, we conclude that the Soft Drink Act gives the appropriate standard for deciding whether Coca-Cola Southwest can continue to hold and enforce the Dr Pepper license.

C.

The FTC relies extensively on legislative history in urging that the Soft Drink Act is inapplicable here. As we are mindful of the FTC’s admonition against allowing the Soft Drink Act to swallow the other federal antitrust laws, we find it appropriate to respond directly to its concerns. We are satisfied that the Soft Drink Act’s legislative history is consistent with our view that the text of the Soft Drink Act mandates its application in this ease.

Congress explained that the purpose of the Soft Drink Act was “to clarify the circumstances under which territorial provisions and licenses to manufacture, distribute, and sell trademarked soft drink products are unlawful under the antitrust laws.” S.Rep. No. 645, 96 Cong.2d Sess. 1 (1980); H.R.Rep. No. 118, 96 Cong.2d Sess. 1 (1980), reprinted in 1980 U.S.C.C.A.N. at 4391. The FTC insists that the “the sole purpose of the Act is to legitimize the use of exclusive territorial limitations in soft drink trademark licensing agreements when the requirements of the statute have been met.” The FTC emphasizes the Senate Report’s caveat that “[n]othing in this bill is intended to protect any other provisions in such trademark licenses, or any other practice or conduct of licensors or licensees of trademarked soft drink products, from challenge under the antitrust laws.” S.Rep. 10, U.S.Code Cong. & Admin.News p. 2381. Likewise, the FTC points to the following statement in the House Report: “The Committee intends that [the Soft Drink Act] provide necessary relief without granting antitrust immunity and without establishing any precedent that would weaken our beleaguered antitrust laws.” H.R.Rep. 7, U.S.Code Cong. & Admin.News p. 2378. Thus, according to the FTC, this legislative history indicates that the Soft Drink Act legitimizes only the use of exclusive territorial restrictions in soft drink franchises but does not limit the reach of other antitrust laws with respect to the actions of the regional bottlers that actually operate with the exclusive licenses.

The legislative history, however, suggests that the authors of the Soft Drink Act were concerned primarily about preserving the vitality of prohibitions on horizontal price fixing and other per se violations. Thus, to that end, Section 3 of the Soft Drink Act declares that the Act does not insulate conduct that is otherwise per se illegal:

Nothing in this chapter shall be construed to legalize the enforcement of provisions described in section 3501 of this title in trademark licensing contracts or agreements described in that section by means of price fixing agreements, horizontal restraints of trade, or group boycotts, if such agreements, restraints, or boycotts would otherwise be unlawful.

15 U.S.C. § 8502. This inclusion of § 3 in the Soft Drink Act is significant. It suggests that congressional concerns about not vitiating other antitrust laws found expression in this provision limiting the applicability of the Soft Drink Act, not in an implied limitation on the applicability of § 2. As explained in the House Report:

Section 2 provides that the antitrust laws will continue to apply with full force where there is not substantial and effective competition in the relevant markets. Nor is there any intent to exempt conduct that constitutes a per se violation of the antitrust laws. Underlining this concern, Section 3 of the bill, added by the Committee amendment, ensures that traditional per se violations will not be exempted under the guise of attempts to enforce otherwise lawful territorial restraints.

H.Rep. at 4, U.S.Code Cong. & Admin.News p. 2375. In short, we think that the § 3 of the Soft Drink Act itself gives the best indication of what the Congress meant in expressing concern about not weakening our “beleaguered antitrust laws.” Congress, in explaining that the Soft Drink Act does not “protect any other provisions in such trademark licenses, or any other practice or conduct of licensors or licensees of trademarked soft drink products, from challenge under the antitrust laws,” was simply describing the content of § 3 of the Soft Drink Act rather than the expressing the inapplicability of § 2.

We are mindful of the FTC concern that “[a]cceptance of [Coca-Cola Southwest’s] novel views regarding the applicability of the [Soft Drink Act] would effectively shield from antitrust scrutiny any transfer of a franchise from one bottler to another.” As we have explained, however, our decision today is sufficiently narrow and does not extend a shield to all franchise transfers. We hold only that the Soft Drink Act applies in a case such as this one in which the manufacturer sells its wholly-owned bottling subsidiary and then enters the downstream market by licensing an independent distributor for the first time. We leave open the possibility that the FTC may challenge a bottler’s acquisition of licenses held by a competing independent bottler, particularly where such a transfer did not flow from a manufacturer’s independent desire to appoint a new distributor.

III.

In sum, we agree with Coca-Cola Southwest that the FTC should have applied the Soft Drink Act in examining Coca-Cola Southwest’s 1984 receipt of the Dr Pepper license and asked whether there was “substantial and effective competition” in the San Antonio area among soft drink products that compete with the Dr Pepper brand. Coca-Cola Southwest asks that we render judgment in its favor under the Soft Drink Act, arguing that the findings below establish that the Dr Pepper brand does face the requisite substantial and effective competition. While Coca-Cola Southwest’s argument is strong, we decline its invitation to render judgment at this time. Instead, we think it appropriate to remand this case so that the FTC can have the first opportunity to define and apply the Soft Drink Act. Since the meaning of “substantial and effective competition” for purposes of the Soft Drink Act is unsettled, we prefer to give to the FTC the opportunity to first consider these terms.

VACATED and REMANDED.

      . Coca-Cola Southwest initially bid $5 million for both the Dr Pepper and Canada Dry franchises, but subsequently increased its offer to $14.5 million.

      . At the time of the August 1984 transaction, there were a total of five competing soft-drink bottlers operating in San Antonio, including Coca-Cola Southwest and Dr Pepper-San Antonio.

      . After 1984, Coca-Cola Southwest was involved in two additional transactions resulting in its receipt of new licenses from the Dr Pepper Company. First, in December 1986, Texas Bottling Group, Inc. purchased Coca-Cola Southwest; the FTC and the Dr Pepper Company were notified of the transaction, after which Dr Pepper Company issued new Dr Pepper licenses to Coca-Cola Southwest. Texas Bottling Group is still the sole shareholder of Coca-Cola Southwest. Second, in April 1987, Coca-Cola Southwest acquired the assets of the bottler of Dr Pepper and Coca-Cola soft drink products in Corpus Christi; again, as part of that transaction, the Dr Pepper Company issued new Dr Pepper licenses [to Coca-Cola Southwest] for the adjacent Corpus Christi territory.

      . The FTC explains that it did not find out about the 1984 transaction until after it was completed, noting that Coca-Cola Southwest's purchase of the Dr Pepper assets was broken into two contracts (the $14.5 million acquisition and a $2.5 million sales agreement), each of which was below the Hart-Scott-Rodino Act’s reporting threshold of $15 million.

      . The ALJ determined that (1) the relevant product market included all carbonated soft drinks and other similar non-carbonated soft drinks; (2) the relevant geographic market was broader than the ten-county San Antonio area pled by Complaint Counsel; (3) entry was easy; (4) competition had been fierce; (5) no customer had complained about the situation; and (6) there was no likelihood of anticompetitive effects from Coca-Cola Southwest’s receipt of the 1984 Dr Pepper licenses.

      . Three Commissioners participated in the decision; one filed a concurring and dissenting opinion, and the author of the main opinion also filed a separate concurring opinion.

      . The FTC found that Coca-Cola Southwest’s receipt of the "Dr Pepper” and “Canada Dry” franchises increased its share of the relevant market from 44.7% to 54.5%.

      . The divestiture order is automatically stayed pending this appeal. 15 U.S.C.A. § 45(g)(4).

      . Section 7 of the Clayton Act provides: “No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. § 18. Section 5 of the FTC Act empowers the FTC with authority to attack transactions that are unlawful under § 7 of the Clayton Act: “Unfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce, are declared unlawful.” 15 U.S.C. § 45(a)(1). The FTC may enter an "order requiring such person, partnership, or corporation to cease and desist from using such method of competition or such act or practice.” 15 U.S.C. § 45(b).

      . See The Coca-Cola Co., 91 F.T.C. 517 (1978), rev'd and remanded, 642 F.2d 1387 (D.C.Cir.1981); Pepsico, Inc., 91 F.T.C. 680 (1978), rev’d and remanded, 642 F.2d 1387 (D.C.Cir.1981).

      . The Commission was persuaded, stating:
      In reaching this conclusion, we reject [Coca-Cola Southwest's] efforts to characterize the horizontal acquisition of assets (e.g., franchise agreements) from a competing bottler as a vertical transaction merely because licenses from concentrate companies are involved. If this argument were accepted, it would immunize virtually all acquisitions by bottlers, including the acquisition of a major competitor, from antitrust scrutiny.

      . It bears emphasis that application of the Soft Drink Act does not result in immunity from federal antitrust laws; rather, the Act gives a different standard for evaluating soft drink licenses. As explained in the House Report:
      The [Soft Drink Act’s] clarification eliminates uncertainty in the law that has plagued the industry, particularly smaller bottlers, during the last decade. It does not grant antitrust immunities. Indeed, the legislation will apply only in situations in which there is 'substantial and effective competition’ among soft drink bottlers and among their syrup manufacturers in the relevant product and geographic markets.
      H.Rep. 2 (emphasis added).