On April 2, 2013, the Federal Trade Commission (“FTC”) and Charlotte Pipe and Foundry, (“Charlotte Pipe”), a leading producer and seller of cast iron soil pipes (“CISP”) used for sewage and drainage in the United States, entered into a settlement agreement to resolve the FTC's concerns related to Charlotte Pipe's acquisition of its competitor, Star Pipe Products, Inc. (“Star Pipe”) in 2010.
The FTC alleges that Charlotte Pipe's acquisition of Star Pipe harmed competition in the highly concentrated CISP market. CISP products are important components of pipeline systems used to transport wastewater from commercial, industrial, and multi-story buildings to municipal sewage systems, to vent plumbing systems, and to transport rainwater to storm drains. Construction firms, plumbers, and developers throughout the United States use CISP products.
In 2010, upwards of ninety percent of all CISP sales were made through one of two companies: Charlotte Pipe or McWane, Inc. When Star Pipe first entered into the market in 2007, it was able to make a foothold in face of stiff competition from the two larger players through aggressive pricing strategies. Star Pipe's tactics led to healthy competition and ultimately lower prices for consumers. With Charlotte Pipe's acquisition of Star Pipe, Charlotte Pipe and McWane were able to operate without a third aggressive competitor.
According to the FTC's complaint, Charlotte Pipe purchased Star Pipe's CISP business, customer lists, and assets for $19 million. The acquisition was kept secret from Star Pipe's customers as Star Pipe agreed to send letters to its customers informing them that Star Pipe exited the business, rather than informing the customers that Charlotte Pipe acquired Star Pipe. In addition, the purchase agreement included a “Confidentiality and Non-compete” clause, which effectively removed Star Pipe's key employees and executives from the domestic CISP market for a period of six years. Furthermore, Charlotte Pipe allegedly destroyed Star's CISP production equipment after acquiring the assets.
Under the current settlement, Charlotte Pipe must release Star Pipe and its employees from its non-compete clause and Charlotte Pipe's Chief Executive Officer must send letters to its customers explaining to them that it secretly acquired Star Pipe as well as other competitors and required the acquired firms to send letters to their customers stating that they were exiting the business rather than publicly disclosing that Charlotte Pipe had acquired them. Charlotte Pipe is also required to maintain a link on its website relating to the Star Pipe acquisition and Charlotte Pipe's other non-reportable transactions. Star Pipe to resume its business as a separate, competitive company. In addition, the settlement also contains provisions that require Charlotte Pipe to notify the FTC of all future acquisitions it makes in the U.S. CISP market.
This challenge is another demonstration of the FTC's stance on small consummated transactions that harm competition. Ultimately, even if the deal is small and flies under the HSR threshold, the FTC has the authority and the capability of taking action against behavior that it deems anticompetitive. This challenge reiterates that the FTC is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. 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 $19 million. The FTC has a particular interest in post-acquisition competitive effects of consummated mergers. This consent agreement is also noteworthy because Charlotte Pipe is required to send a letter to its customers to inform them of its acquisitions in the industry.
Therefore, parties to small consummated transactions that raise significant competition issues and initially avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct. Corporate and private counsel should be aware of the likely consequences and the risks of consummating transactions that raise significant competitive issues. Here, the conduct by the parties was particular troubling because the parties kept the acquisition secret from all customers that were harmed by the anticompetitive effects of the transaction. The risks of entering into an anticompetitive transaction 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.