St Luke's issued a news release and blog post regarding the FTC's lawsuit. St Luke's believes that the FTC and Idaho do not "understand hospital-physician relationships and do not have a good understanding of accountable care." St. Luke’s also stated that it would continue operating normally, including continuing with its integration of Saltzer into the St. Luke’s system.
The Affordable Care Act seeks to improve the quality and reduce the costs of health care services in the United States by, among other things, encouraging physicians, hospitals, and other health care providers to become accountable for a patient population through integrated health care delivery systems. While the Affordable Care Act allows for collaborations and integration, any collaboration must comply with the antitrust laws. Thus, the DOJ and FTC have jurisdiction to conduct an investigation to evaluate any collaboration or acquisition that may lead to anticompetitive effects.
News stories suggest that the FTC and the Idaho AG asked St Luke's to hold off on consummating the transaction in order to give the federal and state governments time to complete their investigations, however, St Luke's refused to cooperate with the government investigations.
Two of St. Luke’s competitors, St. Alphonsus and Treasure Valley Hospital Limited Partnership, have already filed a private antitrust lawsuit to challenge the acquisition in U.S. District Court for the District of Idaho. The district court, however, refused to grant a preliminary injunction to block the merger. The private case is scheduled to begin on July 29, 2013. The FTC and the Idaho Attorney General will ask the court to consolidate its action and the private cases for discovery and trial.
This case is noteworthy for at least three reasons. First, the FTC continues to demonstrate its willingness to challenge transactions that raise the costs of healthcare to employers and their employees. Moreover, the Affordable Care Act may encourage hospitals to develop accountable care strategies, such as acquiring physicians to become more efficient with patient care, but it does not allow hospitals to ignore the antitrust laws. Second, this action demonstrates that the FTC will challenge a transaction where the parties invite litigation. Rather than cooperating with the FTC's and Idaho's investigation of the transaction, St Luke's appears to have ignored them. This type of strategy is risky. While the costs of a government investigation is expensive, the costs of litigation against the government may be even higher. Third, this action demonstrates that the FTC is willing to cooperate with state attorneys general and private parties in challenging anticompetitive transactions in federal court. Here, the government's theory may not be the same as the private litigants' theory, but apparently, the FTC is willing to join the private suit.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
The DOJ’s investigation of this transaction began shortly after the deal was consummated. The transaction was not reported to the U.S. antitrust agencies under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”). Apparently, the transaction was not reportable because the transaction did not satisfy the applicable size of person test.
Complaint Supported By “Hot Docs”
Interestingly, no market shares or HHIs are alleged in the DOJ’s complaint. Rather, the evidence that the DOJ cites in its complaint relates to damaging internal business records known as "hot docs." The Antitrust Division’s complaint relies on numerous internal company documents including faxes, emails, and memos between employees and executives that indicate that the purpose of Bazaarvoice’s acquisition of PowerReviews was to essentially monopolize a very narrow relevant product market defined as “product rating and review platforms used to collect and display consumer-generated product ratings and reviews online”.
The key allegation in the complaint is that PowerReviews, the target company, “was routinely the only significant competitive threat that Bazaarvoice faced in U.S.-based sales opportunities.” The complaint goes on to say that “[a]s a result of the transaction, Bazaarvoice will be able to profitably impose price increases on retailers and manufacturers based in the United States.” The complaint quotes internal company documents from the co-founder of Bazaarvoice as well as the current and previous CEOs that claim that post-merger, there will be virtually no significant competition in the market for Bazaarvoice.
Moreover, the DOJ cites numerous comments from executives that suggest the intention of the transaction was to eliminate a competitor:
(1) the transaction would “[e]liminate[e] [Bazaarvoice’s] primary competitor”;
(2) the acquisition is “an opportunity to ‘take out Bazaarvoices’s only competitor, who . . . suppressed Bazaarvoice price points by as much as 15%’”;
3) the transaction “ would enable the combined company to ‘avoid margin erosion’ caused by ‘tactical knife fighting’ over competitive deals.”; and,
4) the acquisition “would (1) ‘eliminate feature driven one-upmanship and tactical competition,’ (2) ‘create significant competitive barriers to entry” (3) ‘eliminate the cost in time and money to take PowerReviews’ accounts,’ and (4) reduce Bazaarvoice’s risk of account losses as PowerReviews competed for survival.’”
Facts Versus Documents
While the DOJ’s complaint cites a number of internal company documents, it is still largely in the air whether there is any substance to the complaint. There are no market shares or HHIs alleged in the complaint, but the DOJ staff may believe that it was unnecessary to include any shares when there are “literally, no other competitors” in the market. That being said, the companies believe that the DOJ’s complaint fails to take into account the reality of the market place.
Bazaarvoice states that there are a number of problems with the DOJ's complaint including the Antitrust Division’s overly narrow definition of the product market. There is no single market for "product ratings and review platforms." Bazaarvoice claims that ratings and reviews are but one of many tools that brands and retailers can use to engage with their customers as part of an overall social commerce strategy to increase awareness of their products. Other prominent tools include Facebook, Twitter, question and answer, and community forums, and many others. Even assuming the validity of the DOJ's product market definition, Bazaarvoice believes there is still robust competition for ratings and reviews all over the social commerce landscape. Therefore, the relevant product market is much larger and more nuanced than the DOJ appreciates.
As we have learned from other merger challenges, courts may overlook hot docs that support the antitrust agencies’ theories and instead focus on merging parties’ economic experts. At its very core, Bazaarvoice’s product is a program that relays product reviews and ratings to their producers and sellers in a manner that is conducive to statistical analysis and scrutiny. Given that software code allows for numerous distinct ways to accomplish a single task, it is not difficult, and in fact can be relatively easy, for any firm with a coding professional to devise and implement a system that is similar to that of Bazaarvoice. In this way, there are few, if any technological barriers to entry for this kind of software. Fears of Bazaarvoice having control of pricing in this particular market could possibly be mitigated by the relative ease of entry. If Bazaarvoice were to set its prices exceptionally high, a startup firm with a new equivalent product could just as easily set its prices lower and thereby restore any lost competition.
Nevertheless, the documents will haunt the merging parties. The memos, business plans and other corporate records cited in the complaint will be used to bolster the DOJ’s theory. It puts the merging firms in an enormous disadvantage because they are now in the position of having to argue to a court that it must believe what they are saying now, rather than what they were saying internally, only a year or two ago. The key for Bazaarvoice will be to focus the judge away from what it will describe as a series of dated documents. Bazaarvoice will argue that the Antitrust Division ignored its recent ordinary course documents and the substantial economic evidence that contradicts many of the hot docs. Bazaarvoice is now in the position of arguing that the Antitrust Division’s use of its internal company documents in the complaint paint an inaccurate picture of the marketplace.
Lessons Learned
The Antitrust Division's challenge is noteworthy for several reasons. First, the challenge reiterates that the internal company documents are an essential part of every merger investigation. Hot docs can influence the DOJ’s investigation and its decision to challenge a transaction. Corporate executives should be aware that careless and inappropriate language in company documents can have an extremely negative effect. Ambiguity or exaggeration in memoranda, marketing presentations, or board presentations may convey the erroneous impression that the acquisition will injure competition. All internal company documents should be written clearly and carefully in order to avoid misinterpretation. Documents that contain careless language may make a perfectly legal merger appear anticompetitive. Second, the challenge indicates that the DOJ is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Third, the fact that a deal is not HSR reportable does not mean that no antitrust concerns exist with the combination.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
Tom Chao
(202) 589-1834
tchao@dbmlawgroup.com
The FTC alleged that the manufacture and sale of air conditioning recycling, recovery, and recharge (“ACRRR”) devices for motor vehicle air conditioning systems are a relevant product market. ACRRRs are stand-alone pieces of equipment used by automotive technicians to remove refrigerant from a vehicle’s air conditioning system, store the refrigerant while the air conditioning system is being serviced, recycle the refrigerant back into the system, and recharge the air conditioning system. ACRRRs prevent refrigerant gas from leaking into the atmosphere during the repair process. Devices that only extract refrigerant from air conditioning systems but do not recycle or recharge them are not cost-effective alternatives because they do not store or dispose of extracted refrigerant as required by EPA regulations.
Bosch acquired RTI Technologies, Inc. in 2010. The Bosch and RTI brands account for about 10% of ACRRR sales, while SPX’s sales amount to approximately 80% of all ACRRR sales in the United States. With a combined 90% market share, the FTC alleged that Bosch would have a virtual monopoly in ACRRR devices if the transaction were approved without conditions.
Besides the obvious horizontal overlap, the FTC was concerned about SPX’s pre-transaction conduct that allegedly harmed competition under Section 5 of the FTC Act. The FTC claims that it uncovered evidence that SPX holds certain potentially standard-essential patents (“SEPs”) necessary for implementing two SAE International ACRRR industry standards. Evidently, SAE International adopted the two standards while SPX was a member of a committee responsible for developing the standards. SAE International’s rules required working group members to disclose any patents that would be essential to the practice of a standard being developed, and to offer a license to such patents on either royalty-free or fair, reasonable, and non-discriminatory (“FRAND”) terms. After the standards were adopted, SPX acknowledged that it held patents that were potentially essential to both standards and committed to license them under FRAND terms. The FTC alleged that SPX violated its commitment to license key SEPs on FRAND terms to its licensees by continuing to seek injunctions against licensees of those SEPs. The FTC believes that SPX’s violation of its contractual obligation harmed competition in the manufacture of ACRRRs and should be considered an unfair method of competition under Section 5 of the FTC Act.
Settlement Agreement
After a ten month investigation, the FTC and Bosch agreed to a settlement that would allow the transaction to proceed. Under the settlement agreement, Bosch must sell the RTI Brand to Mahle Clevitte, Inc. along with all the assets necessary to operate Bosch’s current U.S. ACRRR business, including RTI’s operations, manufacturing plant, contracts, employees, confidential business information and inventory. In addition, Bosch is required to license, royalty-free, certain SPX patents that may be essential to the practice of two industry standards, to Mahle Clevitte.
To resolve the Section 5 violation, the settlement agreement requires Bosch to grant licenses of key patents to competing manufacturers that need the use of the SEPs to manufacture ACRRR devices. Bosch also agrees to abandon SPX’s lawsuits for injunctive relief against SPX’s licensees. In addition to the SEP concern, the FTC required Bosch to stop its restrictive exclusive dealing arrangements with wholesale distributors and independent service technicians, and to agree not to enter into such agreements for the next 10 years. The provision prohibiting exclusive arrangements will allow entry and existing competitors to have access to wholesalers and service providers to assemble repair networks that ACRRR customers can use as alternatives in the future. The commissioners approved the controversial settlement agreement by a 3-2 vote.
Dissenting Commissioner Statement
While Commissioner Rosch was silent as to why he dissented, Commissioner Olhausen provided a dissenting statement. Commissioner Ohlhausen is in favor of the merger remedy; however, she disagrees with the use of Section 5 of the FTC Act to justify the portion of the settlement agreement that relates to what she describes as a breach of an implied contract term. Commissioner Olhausen believes that even if SPX breached its licensing commitment, SPX’s conduct does not amount to unfair competition under Section 5 of the FTC Act. Moreover, Commissioner Olhausen indicates that the FTC should have a little more “regulatory humility” given that the ITC and federal courts are considering these same issues related to SEPs. Finally, Commissioner Olhausen criticizes this enforcement action because she does not believe that it provides guidance to the business community on what business conduct may constitute an unfair method of competition under Section 5 of the FTC Act.
Lessons Learned
This enforcement action is noteworthy because the consent agreement not only includes a structural remedy that resolves the anticompetitive concerns related to the merger, but it also includes a conduct remedy related to a violation of Section 5 of the FTC Act. While the FTC’s requirement that Bosch sell off a business to allow its purchase of SPX is normal, the FTC’s requirement that Bosch stop SPX’s prior practice of suing for injunctions against other companies using SEPs that SPX agreed to license on FRAND terms is not. The majority of the FTC commissioners are sending a message to patent holders that seek injunctive relief against licensees of their FRAND-encumbered SEPs that the FTC can and will challenge that conduct as an unfair method of competition under Section 5 of the FTC Act. In addition to the SEP issue, the FTC also used the merger investigation to obtain another conduct remedy related to exclusive dealing arrangements. Therefore, this enforcement action can be interpreted as further evidence that the FTC is expanding its authority under Section 5 of the FTC Act and that the FTC may take action against alleged conduct violations during a merger review.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
The Antitrust Division alleges that the eBay and Intuit entered into an illegal agreement restricting eBay's ability to recruit Intuit employees and Intuit's ability to recruit eBay's employees. The complaint alleges that the agreement began no later than 2006, and lasting at least until 2009. Allegedly, Meg Whitman, then eBay’s CEO, and Scott Cook, Intuit’s founder and executive committee chair, were responsible for forming the anticompetitive agreement.
On September 24, 2010, the Antitrust Division filed a lawsuit and entered into a settlement that prohibits six high-tech companies - Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar - from entering into "no solicitation" or "no cold call" agreements for a period of five years. Because Intuit was part of that lawsuit and settlement, the Antitrust Division believed it was unnecessary to name Intuit in the eBay lawsuit. This eBay litigation grew out of the same investigation.
The Antitrust Division's enforcement action against eBay demonstrates its continued effort to challenge agreements between competitors to not solicit each others' employees without any pro-competitive justification. These types of agreements alleged in the complaint against eBay are considered per se illegal restraints of trade.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
She previously served in the Division as Chief of its Networks & Technology Enforcement Section and as an attorney in its Merger Task Force and Transportation, Energy & Agriculture Section.
Prior to her return to the Division, Ms. Hesse served as Senior Counsel to the Chairman for Transactions at the Federal Communications Commission, where she oversaw the Commission’s investigation of AT&T’s proposed acquisition of T-Mobile.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
After an FTC investigation that was on and off again for over two years, the FTC finally allowed Hertz to buy Dollar Thrifty. In April of 2010, Hertz offered Dollar Thrifty $41 per share. Avis Budget Group, Inc. (“Avis”), which operates the Avis and Budget brands, jumped into the fray and started a bidding war. Shortly after, the FTC issued second requests to both Hertz and Avis and began investigating the anticompetitive effects of both transactions. Hertz raised its bid to over $50 per share in late September 2010, but Dollar Thrifty shareholders rejected Hertz in favor of Avis’ higher bid. While Avis and Dollar Thrifty still had not inked a deal, the FTC continued to investigate the Avis/Dollar Thrifty combination. Avis and Dollar Thrifty had significant overlap in their airport businesses, but Avis would not commence an exchange offer until it could get comfortable with the antitrust review. In May of 2011, Hertz reentered the bidding for Dollar Thrifty with a bid for $72 per share. In August of 2011, the FTC issued another second request to Hertz for its new bid. In September of 2011, Avis walked away. Without a deal in place, Hertz continued to work with the FTC staff. On August 26, 2012, Hertz finally inked a deal with Dollar Thrifty for $87.50 per share along with an agreement to divest Advantage including 62 airport locations, some of which were operated by Dollar Thrifty, to Franchise Services of North America, Inc. (“FSNA”) and Macquarie Capital USA Inc. (“Macquarie”).
Within two and a half months of announcement of the transaction, the FTC approves a settlement agreement that allows Hertz to complete its transaction. The only difference in the consent package that was offered by Hertz at the announcement of the deal is a requirement to divest an additional 13 airport locations.
FTC Allegations
The FTC alleges that Hertz and Dollar Thrifty are close competitors in U.S. airport car rental markets. On a national level, Hertz’s and Dollar Thrifty’s combined market share of all airport car rentals is approximately 38 percent. The FTC alleges that Hertz, Dollar Thrifty, Avis, and Enterprise Holdings, Inc. (which operates the National, Alamo and Enterprise brands), are the only rental car providers with a national presence, large fleets, well-known brands, and the most convenient airport locations. According to the FTC allegations, these four firms account for approximately 98 percent of total airport car rentals in the United States.
However, the FTC was not concerned about the overall combined market share at airports rather the FTC alleged that competition at particular airports would be harmed.
By reducing the number of major competitors from four to three, the FTC alleges that competition would be reduced at 72 airports in the United States by making coordinated interaction among the remaining three national car rental firms more likely.
The FTC also alleges that the proposed acquisition would eliminate head-to-head competition between Hertz and Dollar Thrifty at these 72 airports. According to the FTC, Dollar Thrifty constrains Hertz’s ability to raise prices for car rentals. Without any conditions, the combined firm would be able to increase prices. This is an interesting allegation given that Avis and Enterprise brands are likely in these same airports.
In addition, the FTC alleges that entry into the car rental business at airports is difficult. In order to compete effectively across geographic markets, a new entrant must have concession contracts in place that allow it to operate at each individual airport, establish brand identity and reputation, and be of a size sufficient to achieve economies of scale. Apparently, existing fringe firms have had difficulty expanding beyond their regional footprints because of these entry barriers.
Settlement
Hertz agreed to sell its Advantage business as well as 16 Dollar Thrifty on-airport locations to FSNA. The sale of the Advantage business must completed within fifteen days of the closing. In addition to Hertz's initial offer, Hertz agreed to sell another 13 Dollar Thrifty on-airport locations to FSNA/Macquarie or another FTC approved buyer. The buyer must be submitted to the FTC within 60 days of the closing of the acquisition. The FTC appointed an interim monitor to oversee the sale of the assets.
The settlement also requires Hertz to provide FSNA/Macquarie with access to an initial rental car fleet and related support until FSNA/Macquarie can independently obtain its own fleet of cars.
Approval of Settlement
The FTC approved the settlement by a 4-1 vote. The FTC believes that requiring Hertz to sell its Advantage business, as well as 29 Dollar Thrifty non-airport locations resolves the loss of competition and eliminates the likelihood of coordinated interaction among the remaining competitors. The FTC also believes that the settlement will enable Advantage to become the fourth-largest car rental competitor in the United States, and allows it to compete effectively and immediately at airports. Moreover, the FTC explains that FSNA/Macquarie possesses the resources and capability to replace Dollar Thrifty as an effective competitor. The FTC further explains that FSNA has the technology infrastructure, relationships with online travel agencies, and experience needed to run a national airport car rental company.
Dissent
While four commissioners approved the settlement, Commissioner J. Thomas Rosch dissented. Commission Rosch dissented because he believes the settlement does not resolve competitive concerns at several dozen other airports. He indicated that he would have “voted to challenge the transaction because of the significant risk of post-merger coordinated interaction among the remaining competitors.”
Lessons Learned
This enforcement action is noteworthy for several reasons. First, the on again and off again investigation of the car rental industry lasted about 30 months. Reportedly, the FTC issued three second requests to Hertz over that time period. Obviously, this is a unique circumstance that required the FTC to continue to seek the most recent data and information available from the parties. Even though the FTC was very familiar with the industry and the Hertz/Dollar Thrifty overlaps in airport locations, the staff still needed additional information to complete its review after the acquisition was announced in August of 2012. Second, once a deal was actually announced and signed, the antitrust review was completed within two and a half months. While these circumstances were unusual, negotiating a consent package to resolve anticompetitive effects of a $2.3 billion acquisition in two and a half months is extremely fast. This demonstrates that the FTC is willing to work with merging parties in unique situations. Third, the FTC continues to approve 4-3 mergers without a strong consent package that remedies competitive concerns raised by the acquisition. While only Commissioner Rosch dissents, he believes that the consent decree does not resolve concerns at several dozen other airports. He suggests that the FTC did not seek enough divestitures, which seems to make sense if there is actually a coordinated effects problem that exists throughout airports in the United States. In addition, Hertz was allowed to in effect trade up by purchasing Dollar Thrifty, a much more significant brand than Advantage. Fourth, the consent decree requires an upfront buyer for the Advantage business and 16 Dollar Thrifty airport locations, but does not require an upfront buyer for 13 other Dollar Thrifty airport locations. Those sales will be made post-consummation. We understand that given the timing constraints of the investigation that the additional divestitures were added in the late stages of the FTC review. This approach indicates that the FTC can be very flexible in negotiating settlements. The FTC allows for FNSA or another potential buyer to negotiate the acquisition of 13 additional airport locations within sixty days of the closing. Rather than requiring the additional assets to be sold to FNSA, which would strengthen the viability of the new entrant, this provision allows Hertz to sell the 13 airport locations to the highest bidder so the assets are not guaranteed to go to FNSA. Fifth, continuing a trend of the antitrust agencies becoming more flexible in resolving competition problems and coming up with a remedy that works, the consent decree includes both structural and behavioral remedies. This consent decree includes a behavioral remedy that requires Hertz to provide FNSA with a fleet of rental cars and related support until FNSA can do it independently.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
Exelon entered into a consent decree with the Antitrust Division regarding its acquisition of Constellation Energy (“Constellation”) in December of 2011. The consent decree resolved the Antitrust Division’s concerns with the transaction by requiring the divestiture of three generating units. In connection with the settlement, the Antitrust Division also submitted a Hold Separate Stipulation and Order (“Hold Separate”), agreed to by Exelon and Constellation, which provided in part that Exelon would offer certain generating units into the PJM wholesale energy auction at or below cost from the time Exelon’s acquisition of Constellation closed until the time the three generating units were sold. In other words, the Hold Separate would protect competition during the time period in which Exelon would own the combined assets of both companies.
The Antitrust Division alleges that Exelon violated the district court’s Hold Separate and Final Judgment entered in United States v. Exelon Corp., Civil No. 1:11-cv- 02276, by submitting certain offers to sell electricity at prices higher than the cost-based limits required by the Hold Separate and by failing to take all steps necessary to comply with the Hold Separate.
Allegedly, Exelon inadvertently made above-cost offers and then took remedial steps, including notifying the Antitrust Division and market regulators of the offers, agreeing with market regulators to return any incremental revenues Exelon earned and to redress any harm. Exelon also implemented measures to ensure that no additional above-cost offers occurred. The settlement, which includes a $400,000 civil penalty, remedies the violation and unjust enrichment by depriving Exelon of ill-gotten gains. The $400,000 penalty is separate from any other payments that Exelon may have to pay to other regulators.
This enforcement action is noteworthy because it demonstrates that the Antitrust Division will not hesitate to bring actions to enforce consent decrees through the use of a civil contempt proceeding. While the $400,000 penalty may appear to be steep, the penalty amounts to a disgorgement of profits and a reimbursement to the Antitrust Division for the cost of its investigation. Executives should be aware that there are two types of contempt proceedings, civil and criminal, and either or both may be used. Civil contempt, which was used in this instance, has a remedial purpose. Criminal contempt, on the other hand, is not remedial. Its purpose is to punish the violator. In the past, the Antitrust Division has instituted a number of contempt proceedings both civil and criminal to enforce its judgments and will continue to do so where appropriate in the future. Here, Exelon was cooperative and alerted the Antitrust Division and regulators to the inadvertent mistake, therefore, a civil contempt proceeding was appropriate.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
From the FTC’s allegations and description of the relevant market, it appears to be an acquisition that reduces competition from four major competitors to only three significant competitors. The FTC alleges that Corning and Discovery Labware are the two leading supplier of tissue culture treated (“TCT) cell culture products and claims that the transaction, as proposed, would have eliminated Corning’s most significant competitor and that the combined firm would unilaterally have the ability to increase price.
Corning and Discovery Labware both make plastic lab ware, including TCT cell culture multi-well plates, dishes, and flasks. TCT cell culture plates are plastic containers that essentially are surfaces on which researchers grow cells. They are used primarily by researchers at drug companies, bio-tech firms, and universities in their cell culture work.
The FTC alleges that there are only two other significant competitors in the production and sale of TCT culture products: Thermo Fisher and Greiner bio One. The FTC explicitly states that no other suppliers have the size of the two merging parties and that the merger would eliminate Corning’s most significant competitor, allowing it to raise prices for lab ware products.
Consent Decree
To resolve the competition concerns, the Consent Agreement requires Corning to supply Sigma Aldrich, the new entrant, on an interim basis, with Corning-manufactured TCT cell culture products until Sigma Aldrich has developed independent manufacturing capabilities. This supply agreement will enable Sigma Aldrich to immediately sell TCT cell culture products under its own brand name. The Consent Agreement also requires that Corning provide in the future, at Sigma Aldrich’s request, technical assistance necessary to begin manufacturing TCT cell culture multiwell plates, flasks, and dishes in a manner substantially similar to the manner in which Corning manufactures these products today. The Commission voted 5-0 to accept the condsent order.
Lessons Learned
This enforcement action is noteworthy for several reasons. The Consent Agreement provides for behavioral remedies instead of a simple structural remedy to resolve a horizontal competition concern. Rather than requiring Corning to divest a competing manufacturing plant or a business, the FTC’s Consent Agreement is designed to remedy the anticompetitive effects of the acquisition by requiring Corning to supply Sigma Aldrich with the products so that it can immediately begin selling TCT cell culture products in competition with Corning. At the same time, Corning is required to provide Sigma Aldrich with certain manufacturing assets and the necessary technical assistance to begin manufacturing TCT cell culture multi-well plates, flasks, and dishes in a manner similar to how Corning currently makes them. This Consent Agreement continues a trend by the antitrust agencies to become more flexible in resolving horizontal competition problems in the merger context by coming up with a remedy that works instead of simply requiring a structural remedy.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
Reports indicated that Marathon’s natural gas fields are mature, meaning that they reached peak production and are seeing a decline in output. This has led many in Alaska to fear a shortage of natural gas over the course of the year, including residents in the Anchorage metropolitan area, for whom Marathon provides nearly all of their natural gas. The merger between Marathon and Hilcorp may help to alleviate this situation by consolidating the production of the two companies.
In response to these growing energy concerns, the Alaskan Attorney General negotiated a consent decree that called for the merger to proceed unimpeded, with provisions that mandate a five-year price cap for consumers.
Though the FTC has deferred the decision to the state government of Alaska, it states that a conclusion has yet to be reached about whether or not any anti-competition laws were violated in permitting the merger, and that it maintains the right to intervene in the future as public interests dictate.
Thomas Chao
(202) 589-1834
tchao@dbmlawgroup.com
China's Anti-Monopoly Law ("AML") took effect on August 1, 2008. Three agencies enforce the AML. The Ministry of Commerce (“MOFCOM”) reviews mergers and acquisitions. Non-merger cases are split between the National Development and Reform Commission (“NDRC”) and the State Administration for Industry and Commerce (“SAIC”). The NDRC handles price-related violations and SAIC the non-price related violations.
Under the AML, the standard of review for mergers is similar to the standard in the United States and Europe. The factors to consider when analyzing a combination include: market shares, ability to control the market, degree of market concentration, effects on market access and technological progress, and effects on consumers. One major difference from U.S. and European reviews, however, is that MOFCOM must also consider the effect of concentration on the development of the national economy and the “socialist market”. Moreover, MOFCOM reports to the State Council. Accordingly, China’s merger review has a political element as part of its framework for reviewing mergers.
That being said, China has taken a very cooperative approach to global merger reviews. The Chinese antitrust authorities signed Memoranda of Understandings (“MOU”) with both the UK Office of Fair Trading (January and March 2011) and with the U.S. Department of Justice (“DOJ”) and U.S. Federal Trade Commission ( “FTC”) (July 2011) with regard to developing competition policy and enforcement. The MOU with the U.S. antitrust agencies was followed up in November with guidelines for cooperation between MOFCOM/DOJ/FTC with respect to merger filings. Under the guidelines, information can be shared relating to the timing of their respective investigations, technical aspects such as market definition, evaluation of competitive effects, theories of competitive harm, economic analysis and remedies.
What is the procedure and timing of merger reviews?
Antitrust investigations in China have proven to be time-consuming. Some antitrust reviews take up to six months or more. The merger review process includes four phases. Like the EU’s pre-notification phase, MOFCOM has a pre-acceptance phase whereby it works with the merging parties for about a month before the parties actually file their notification forms. After acceptance, the statutory period for the initial review is 30 calendar days; second phase is 90 calendar days; and the third phase is an additional 60 days. The third phase which is an extension of up to 60 days is only if the parties consent, if the materials submitted by the parties are "inaccurate," or if there are significant changes of circumstances.
In practice, most transactions are not cleared in Phase 1 rather most are cleared in Phase 2 even when there are no significant competition issues. Transactions that present competitive problems may go into Phase 3. However, in situations where the deal is unlikely to be cleared in Phase 2, MOFCOM has encouraged some merger parties to withdraw their filings before the end of Phase 2 and then re-submit the filing. This pull and refile strategy is used to start the process all over again in an effort to avoid a Phase 3. Most transactions without competitive issues are completed within two to five months of the initial filing.
What is China’s merger enforcement record?
While MOFCOM investigations may be burdensome and time consuming for the merging parties, the good news for deal makers is that the Chinese government has not unreasonably blocked mergers. MOFCOM has reviewed over 392 merger filings and only one transaction has been blocked. In most cases, mergers are cleared without conditions. China has cleared thirteen transactions with conditions since it started reviewing mergers in 2008. Notably, all of the transactions that resulted in settlements involved foreign companies.
In 2012, Google/Motorola Mobility, Western Digital/Hitachi’s HDD business, UTC/Goodrich; Wal-Mart/Niuhai Holding, and Henkel Hong Kong/Tiande JV were cleared with conditions. Through August of 2012, no transactions have been blocked.
In 2011, one hundred sixty (160) transactions were notified and investigated. No transactions were blocked, however, four of those transactions were cleared with conditions. The transactions that were cleared with conditions included Seagate/Samsung’s HDD business, GE/Shenhua JV, Alpha V/Savio, and Uralkali/Silvinit.
In 2010, one hundred twenty seven (127) transactions were notified. Of those transactions, none were blocked and one was cleared with conditions. The transaction conditionally cleared was Novartis’ acquisition of Alcon.
In 2009, eighty (80) transactions were notified, four transactions were cleared with conditions, and one transactions was blocked. The four transactions conditionally cleared were Panasonic/Sanyo, Pfizer/Wyeth, General Motors/Delphi Car Parts business, and Mitsubishi Rayon/Lucite. In March of 2009, MOFCOM blocked Coca-Cola’s acquisition of Huiyaun.
In 2008, twenty five (25) transactions were notified and no transactions were blocked. InBev’s acquisition of Busch was conditionally cleared.
The bottom line is that China has only blocked one deal and has only required conditions in thirteen out of approximately 400 transactions.
Why did MOFCOM block Coca-Cola’s proposed acquisition of Huiyuan?
In March of 2009, China blocked Coca-Cola’s proposed acquisition of a famous Chinese juice manufacturer, China Huiyuan Juice Group Limited (“Huiyuan”), after conducting a seven month review. MOFCOM concluded after its investigation that the transaction would have an adverse effect on competition. Reportedly, Coca-Cola proposed remedies to address MOFCOM's concerns, but MOFCOM concluded that the remedies were insufficient to address its concerns. News reports indicated that MOFCOM sought the divesture of the famous "Huiyuan" brand and Coca-Cola refused. MOFCOM outlined three reasons for blocking the transaction. First, it concluded that the Huiyuan acquisition would enable Coca-Cola to leverage its dominance in the carbonated soft drinks market into the juice beverage market. Second, MOFCOM found that Coca-Cola's control over the juice beverage market would be strengthened by controlling two well-known juice brands, the "Minute Maid" brand already owned by Coca-Cola and "Huiyuan." MOFCOM basically took the view that the combination would raise barriers against any potential competitor seeking to enter the juice beverage market. Third, MOFCOM determined that the transaction would squeeze out smaller juice manufacturers in China, restrain local manufacturers from participating in the juice beverage market, and diminish their innovation, which would harm competition in the Chinese juice beverage market.
What were some of the circumstances that led to clearances w1ith conditions?
Most recently, MOFCOM conditionally approved Google’s acquisition of Motorola Mobility, Western Digital’s acquisition of Hitachi’s HDD business, and Seagate’s acquisition of Samsung’s HDD business in 2011. The Google and Samsung clearances are noteworthy because the U.S. antitrust agencies and the EU cleared the transactions without any conditions. All three clearances included behavioral remedies.
Even though the market may be global, MOFCOM will focus on the impact on the Chinese market, allowing it to protect industries such as the automobile, agriculture and computer sectors. As such, MOFCOM has set conditions specific to the Chinese market, for example, by requiring an auto parts supplier to continue to supply other customers in the Chinese market (GM/Delphi merger); by requiring Russian potash producers to continue to sell to Chinese customers just as they had pre-transaction (Uralkali/Silvinit merger); and more recently, by not allowing the purchaser to exercise control over the target for a period of time (Seagate/Samsung and Western Digital/Hitachi).
In the Seagate/Samsung merger, MOFCOM required Seagate to establish an independent subsidiary to produce, price and market Samsung products and to build a firewall to prevent information from being exchanged between Seagate and the Samsung subsidiary. A waiver can be requested after a year. In the Western Digital/Hitachi merger, MOFCOM required the parties to maintain Hitachi’s subsidiary as an independent competitor that would market and develop the products and to build a firewall to prevent the exchange of information between the two parties. Western Digital could request a waiver of this requirement after two years, depending on the competitive conditions. MOFCOM imposed these requirements despite the fact that the U.S. and EU authorities had already cleared the Seagate/Samsung merger without conditions and cleared the Western Digital/Hitachi merger with structural remedies. MOFCOM’s concern was that China had the greatest number of consumers who bought computers and it was these end-users who suffered the most from price increases of the components. The rationale for the requirements is that the current state of the market is preserved. Essentially, MOFCOM wanted to maintain the five players in the global HDD market (Seagate, Western Digital, Hitachi, Toshiba and Samsung). The conditions are noteworthy because they require the parties to maintain their independent, pre-merger situation for a given period of time until the conditions could be removed at some future time.
On May 19, 2012, MOFCOM approved Google’s acquisition of Motorola Mobility with conditions. MOFCOM identified several reasons for concern including Android’s dominance in China; the resultant dependence of Original Equipment Manufacturers (“OEMs”), developers of Android-compatible software (i.e., “apps”) and end-users on Android’s ecosystem; high barriers to entry into the market; and (4) the likelihood that Android will retain its market dominance for the foreseeable future. MOFCOM was concerned that Google would favor Motorola devices over other smart mobile device OEMs by providing it with advance access to Android software updates; and (2) licensing Motorola-owned patents to competitors on unfair terms. While neither the DOJ nor the EC reached these conclusions, MOFCOM required Google to: continue to license Android in a free and open source manner (does not apply to apps); treat all OEMs in a nondiscriminatory manner (this condition does not apply to apps or to OEMs that modify the Android platform); honor Motorola’s existing current fair, reasonable and nondiscriminatory (“FRAND”) obligations with respect Motorola’s patents; and appoint an independent trustee charged with monitoring adherence to the above conditions, and submit reports every six months to the trustee and MOFCOM. Conditions 1, 2 and 4 apply for five years, though Google may request that 1 and 2 be modified or rescinded if market conditions change.
Lessons Learned
First, merging parties involved in a global transaction that requires MOFCOM approval must pay particular attention to the Chinese antitrust review even if the relevant markets are global, the merging parties are both U.S. based companies, and the United States or European antitrust agencies do not require any conditions. At least three times, MOFCOM required conditions on transactions (GM/Delphi, Seagate/Samsung, and Google/Motorola) that were unconditionally approved by U.S. and EU antitrust regulators. MOFCOM imposed more stringent conditions on these transactions. Second, MOFCOM merger reviews are taking longer in the pre-acceptance phase and many deals that do not raise antitrust issues are going into Phase 2. Third, behavioral remedies are very common. Fourth, MOFCOM is cooperative with other antitrust authorities. While some of MOFCOM’s behavioral conditions diverge from other jurisdictions’ decisions, MOFCOM continues to consult other jurisdictions and its competitive analysis and decisions have not completely departed from U.S. and EU decisions.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
The FTC was concerned the proposed merger would substantially lessen competition and create a monopoly in the market for magnesium plate production.
To resolve the FTC’s concerns, Magnesium agreed to sell intellectual property and technical know-how used to manufacture the magnesium plates to Universal Engraving Inc.
Lessons Learned
The challenge is noteworthy for several reasons. First, the challenge reiterates that the FTC is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Second, it demonstrates that completed deals that slip beneath the FTC’s radar screen initially are fair game even if the FTC learns about them several years later. Third, the fact that a deal is not HSR reportable does not mean that no antitrust issues exist with the combination. Here, the acquisition was for only $15 million. Fourth, the FTC can and will challenge consummated deals if it determines that the deals are anticompetitive. Fifth, the FTC has a particular interest in post-acquisition competitive effects of consummated mergers.
Therefore, parties to a consummated transactions that raise significant competition issues and avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct. Moreover, corporate and private counsel should be aware of the likely consequences and the risks of consummating transactions that raise significant competitive issues. The risks may include: defending against costly and lengthy government investigations; reorganizing because of the FTC’s demands to divest even after integration has taken place; disgorging profits gained form the alleged anticompetitive merger; and reorganizing because of the FTC’s demands to suspend non-compete agreements that would allow important employees of the business to obtain other employment.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
On June 3, 2012, UHS agreed to acquire Ascend in a deal valued at approximately $517 million. UHS owns or operates 25 general acute care hospitals and 198 behavioral health facilities in 36 states, Washington, D.C., Puerto Rico, and the United States. Ascend owns or operates nine behavioral health facilities in Arizona, Oregon, Texas, Utah, and Washington State, including seven acute inpatient psychiatric hospitals, a substance abuse residential treatment center, and an addiction treatment center.
The FTC reached a settlement with UNH within four months of signing the merger agreement so the investigation and settlement was handled very quickly. Along with the settlement agreement, the FTC filed a complaint which identifies the relevant product and geographic markets as well as the competitive problem posed by the transaction.
FTC Allegations
The FTC’s complaint alleges that the transaction as originally proposed would have been a merger to monopoly in the El Paso/Santa Teresa geographic market, within a product market consisting of acute inpatient psychiatric services provided to commercially insured patients. Acute inpatient psychiatric services are those services provided for the diagnosis, treatment, and care of patients deemed to be a threat to themselves or others or unable to perform basic life functions, due to an acute psychiatric condition. Excluded from this alleged market are other psychiatric services such as partial hospitalization, intensive outpatient programs, outpatient care, and residential treatment. The FTC also found that other, less intensive, psychiatric services are not substitutes for acute inpatient psychiatric services.
The FTC also found that the acute inpatient psychiatric services market is local in nature. The staff analyzed patient flow data and evidence gathered from market participants indicating that patients and their families prefer to find care as close to where they live as possible and to stay within the city where they live or work. The data demonstrated that most residents of El Paso and Santa Teresa obtain acute inpatient psychiatric services from providers located in El Paso or Santa Teresa. Moreover, the FTC discovered that health plans have internal guidelines or regulatory “geo-access” standards requiring that services be made available within a certain distance from their members. Therefore, the FTC staff concluded that the geographic market is limited to the El Paso/Santa Teresa market.
The FTC alleged to uncover evidence of close head to head competition between the UHS and Ascend owned facilities that would have been eliminated by the proposed merger.
No Upfront Buyer Required
Notably, the FTC’s decision and order does not designate a buyer that the agency already has approved so there is no upfront buyer. Historically, the FTC has required merging parties to identify buyers of assets to be divested before the agency will accept a consent agreement. The FTC, in many cases, requires the acquiring firm to execute a divestiture agreement and all ancillary agreements with a divestiture buyer before the parties formally present that buyer to the FTC for approval. The FTC staff then reviews the qualifications of the upfront buyer and the definitive divestiture agreement and, once satisfied, the FTC approves the divestiture package. Generally, the FTC's investigation delays the closing of the transaction until the Commission approves the package. The reason the FTC has traditionally used this practice of requiring upfront buyers is because it minimizes the risk that a remedy will fail to preserve competition. In any event, the order continues a trend in FTC merger enforcement that allows for a speedier process as merging parties can eliminate the delay associated with locating and entering into a divestiture agreement with an upfront buyer. Here, the FTC reached a settlement with UNH within four months of UNH signing the merger agreement with Ascend.
The FTC entered into a settlement agreement with UNH requiring it to sell its Peak Behavioral Health Services facility within six months. The FTC added a clause that if the six-month deadline is not met, a second facility located outside the geographic market must also be divested if ordered by the Commission. The FTC justified the penalty provision to ensure that UNH tries to find an acceptable buyer in a timely manner.
Lesson Learned
The case is noteworthy because it further demonstrates that the FTC is willing to enter into consent decrees that do not require upfront buyers to resolve a competitive problem when stand alone businesses can be sold and the stand alone business is easily saleable meaning that the assets are expected to attract interest from several purchasers. It also demonstrates that the FTC and merging parties can work out a settlement agreement very quickly if the merging parties cooperate with the FTC’s investigation. Here, the FTC and the merging parties were able to identify the competitive problem and work out a remedy within four months of signing the merger agreement.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
The plaintiffs allege in their seven-page complaint that the present conspiracy was “born” in October of 1988 when the Committee on Presidential Debates was organized for the purpose of hosting the 1988 presidential and vice presidential debates. Since October 1988, this 24-year conspiracy has raged and to this day the Democrats and Republicans “continue to secretly meet and have secretly met, in Washington, D.C., and in other places throughout the country, to devise rules for the presidential and vice presidential debates” and to exclude competing candidates and rival third parties.
In 2012, Governor Johnson and Judge Gray allege that the Democrats, Republicans and the Presidential Commission acted in “concert and agreement one with the other” to establish “rules for the forthcoming debates that will exclude the plaintiffs from participating in these debates.” National polling data are the key components to implementation and maintenance of this long running conspiracy. Working in a concerted and bipartisan manner, mutually agreed upon specific debate rules were passed by both Democrats and Republicans that limit participation in the debates to those candidates with a “level of support of at least 15% (fifteen percent) of the national electorate as determined by five selected national public opinion polling organizations, using the average of those organizations’ most recently publicly-reported results at the time of the determination.” By agreeing to these exclusionary rules, the plaintiffs are denied an opportunity to participate in the debates and the “defendants are conspiring and contracting to restrain plaintiffs form participating in the electoral process.”
To show the required impact on interstate commerce, plaintiffs allege that the office of the president pays a yearly salary of $400,000 and the office of the vice president pays a yearly salary of $230,000. Plaintiffs further allege that the “services to be rendered by the candidates elected to these offices, for money, is ‘commerce’ within the reach of the Sherman Act, 15 U.S.C. Sec. 1, and actions to conspire or contract to prevent plaintiffs from election by excluding them from the debates is actionable ‘restraint of trade’….” Further, plaintiffs allege the “powers of the presidency both directly and indirectly most profoundly impact interstate commerce.” Indeed, the President appoints the Secretary of Commerce whose actions directly impact interstate commerce and the President has the power to veto any such act of congress that may regulate any aspect of interstate commerce, or alternately, to sign such acts that impact commerce into law.
Plaintiffs, Governor Johnson and Judge Gray, seek a TRO, preliminary injunction and permanent injunction halting all debates in order to “restore competition and a level and honest playing field amongst those persons seeking the presidency.” Plaintiffs also want the costs of their lawsuit.
Stay tuned for the first debate scheduled for October 3 to see if the plaintiffs prevail.
Robert W. Doyle, Jr.
(202) 589-1834
rdoyle@dbmlawgroup.com
The Hart-Scott-Rodino (“HSR”) Act requires that parties notify the FTC and the Department of Justice (“DOJ”) of transactions that exceed $68.2 million. After submitting the notification form, parties must observe a waiting period before closing their transaction while the two agencies determine whether the transaction may harm competition.
Allegations
On September 25, the DOJ filed a complaint on behalf of the FTC in the U.S. District Court for the District of Columbia. According to the DOJ’s complaint, in May and June 2011, Biglari Holdings acquired voting securities of Cracker Barrel. On June 8, 2011, Biglari Holdings exceeded the then-$66 million threshold for HSR filings, and continued to acquire additional voting securities through June 13, 2011. The complaint alleges that, at the time of its acquisitions, Biglari Holdings intended to actively participate in the management of Cracker Barrel, including seeking a seat on the company’s board of directors.
Investment Intent
Biglari Holdings released a statement indicating that the FTC mischaracterizes Biglari Holdings’ investment intent. The statement indicates that Biglari Holdings has made clear in all of its public filings that it has no intention of becoming actively involved in day- to-day management or in seeking control of the Board of Cracker Barrel. At the same time, however, Biglari Holdings has been trying to gain a seat on Cracker Barrel’s board of directors. Reportedly, Biglari Holdings will nominate Chairman Sardar Biglari and the company’s vice chairman, Philip L. Cooley, for Cracker Barrel’s board at the company’s annual meeting November 15, 2012.
Lessons Learned
The enforcement action sends a strong message to corporate executives and lawyers to take HSR reporting requirements seriously. The HSR Act's investment exemption is limited to acquisitions that are "solely" for the purpose of a passive investment and does not apply if a corporation or individual intends on participating in the business of the company being acquired. The exemption applies to voting securities acquisitions of 10% or less. In alleging that the exemption did not apply, the complaint stated that shortly after the 2011 acquisition Biglari sought Cracker Barrel board representation and proposed business changes to Cracker Barrel’s top management. The antitrust agencies have construed the exemption narrowly and the agencies have made it abundantly clear that they will prosecute those that rely on aggressively broad interpretations of HSR exemptions.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com