Antitrust Lawyer Blog Commentary on Current Developments

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On June 27, 2108, the Department of Justice’s Antitrust Division announced that The Walt Disney Company (“Disney”) agreed to divest 22 regional sports networks (“RSNs”) to resolve antitrust concerns with its approximately $71 billion acquisition of certain assets from Twenty First Century Fox (“21CF”).

Speedy Antitrust Approval

DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues.  Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests.  The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.

On February 21, 2018, Judge Leon ruled against AT&T Inc.’s (“AT&T”) ability to discover evidence that would support its selective enforcement defense.

Background

On November 21, 2017, the U.S. Department of Justice’s (“DOJ”) Antitrust Division filed a complaint in federal court block AT&T’s acquisition of Time Warner Inc. (“Time Warner”).

On February 12, 2018, the Federal Trade Commission (“FTC”) filed an administrative complaint against Benco, Henry Schein, and Patterson, the three largest national full service dental supply distributors in the United States for allegedly conspiring to refuse to provide discounts to or otherwise serve buying groups representing dentists and against Benco for inviting a fourth competing distributor to take part in the illegal conspiracy.  As is typical with FTC conduct cases, the complaint was brought under Section 5 of the FTC Act.

The FTC alleges that three distributors agreed to boycott buying groups, which sought discounts and lower prices for dental supplies and equipment on behalf of solo and small-group dental practices.  The FTC further alleges that the agreement deprived solo and small-group dental practices from the benefits of participating in buying groups.

Benco and Henry Schein allegedly entered into an agreement whereby both distributors would refuse to provide discounts to or compete for the business of buying groups.  The complaint details email, phone, and text communications between executives of the two companies evidencing the agreement, as well as attempts to monitor and ensure compliance with the agreement.  On Oct. 1, 2013, a Benco executive called his counterpart at Henry Schein and “reaffirmed Benco’s commitment against buying groups.” After the call, neither distributor bid on a buying group contract.  The FTC’s complaint also alleges that Patterson joined the illegal agreement.

Antitrust enforcement has become front and center in the American political economic debate.  The Democratic Platform included a plank for greater antitrust enforcement for the first time since 1968.  There is increasing evidence that large mega-mergers have cost consumers dearly in the pocket book, increased economic inequality and dampened economic opportunity.  In a recent speech Senator Elizabeth Warren highlighted the perils to industries in which companies have grown so large and markets become so concentrated that monopolists can crush their competitors and lock out new entrants.

The beer industry readily falls into this category, with the United States market dominated by two players, Anheuser-Busch InBev (ABI), and MillerCoors, a joint venture between South African controlled SABMiller and Molson Coors.  The pending merger between ABI the largest global beer company, and SABMiller, the second largest global beer company, will truly leave ABI in a position in which it can crush its competitors and stifle new entry.  The Justice Department has been examining the merger but only tough comprehensive action by DOJ can prevent the significant threat of Brazilian owned ABI becoming the kingpin of the market.

Using the best lawyers, economists and lobbyists money can buy, ABI has tried to engage in a slight of hand with Congress and the DOJ.  It claims that there are simply no competitive issues from this merger because it plans to divest all of SABMiller’s U.S. operations, which are held by the MillerCoors joint venture, to Molson Coors. And, while that may appear to be correct at first glance, one doesn’t have to dig too deep to pierce this façade and see major competitive problems looming in the future for the beer industry.

Andre P. Barlow
Few missions are as important to the U.S. Department of Justice’s Antitrust Division as preventing anti-competitive mergers or permitting them with adequate conditions to prevent competitive harm. After all, a merger is forever — fixing it after the fact is too messy.

The DOJ is currently investigating Anheuser-Busch InBev SA/NV’s (“ABI”) acquisition of SABMiller PLC, the largest beer merger in history, as well as its proposed divestiture of SABMiller’s interest in the MillerCoors LLC Joint Venture to Molson Coors Brewing Company. These proposed transactions lock in place the two largest beer competitors in the United States while fundamentally changing the dynamics in the beer industry for smaller brewers, distributors, wholesalers and retailers. While ABI maintains that the proposed transactions do not change the competitive landscape, the DOJ knows better.

Indeed, the DOJ’s recent approach in approving Charter Communications Inc.’s acquisition of Time Warner Cable Inc. (“TWC”) and its related acquisition of Bright House Networks LLC to create New Charter, the merged firm, is instructive. Despite no geographic overlap in any local market, the DOJ required comprehensive behavioral conditions to prevent New Charter from engaging in future anti-competitive conduct against its smaller rivals. The DOJ should take the same tough and sophisticated approach to protecting consumers from the much larger ABI/SABMiller merger and the new ownership by Molson Coors, which will create two beer giants that will dwarf its rivals.

On April 25, 2016, the DOJ entered into settlement agreement approving Charter Communications, Inc.’s (“Charter”) acquisition of Time Warner Cable Inc. (“TWC”) and its related acquisition of Bright House Networks, LLC to create New Charter as long as the parties agreed to certain behavioral conditions.

DOJ’s Vertical Concerns Related to the Creation of New Charter

New Charter became the second largest cable company and third largest Multichannel Video Programming Distributor (“MVPD”).  MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon.

Corona’s advertising slogan encourages consumers to find their beach, but consumers may soon have trouble finding Corona.

In 2013, the U.S.Department of Justice required Anheuser-Busch InBev (ABI) to grant a perpetual and exclusive U.S. license to some of its Grupo Modelo Mexican beer brands that were at the time competing in the U.S. market, including Corona Extra, Modelo Especial and other popular brands, to Constellation Brand Inc.[1] In addition to the sale, the DOJ put a number of conditions on ABI to ensure that the Grupo Modelo Mexican beer brands, including Corona, remained competitive in the U.S. market, including critical protections to make sure distribution was open and independent. This summer will be the third anniversary of the sale of the Modelo American portfolio to Constellation and the lapse of important protections could leave many Corona consumers scrambling to find their beer of choice.

Prominent among the conditions the DOJ required in its consent decree was the sale of the Piedras Negras Brewery in Nava, Coahuila, Mexico to Constellation. The sale was required so Constellation can brew the Modelo brands itself for importation into the United States, and not rely on its chief competitor, ABI. Accompanying the sale of Piedras Negras was a condition that Constellation obtain its supply of necessary materials from ABI for a three-year period. That provision is about to lapse.

A couple of months ago, ABI and Constellation agreed to extend their supply agreement by another year, making Constellation dependent on ABI for necessary inputs through June 2017. However, this reliance on its chief rival for inputs with no extension of other important protections will be a recipe for disaster, as Constellation is still in the transition of becoming a fully independent brewer. Reliance on ABI has not entirely helped it in its transition, and Constellation is still in a very precarious position. For example, there have been two recalls of Corona due to defective glass bottles in less than two years.

In addition to the supply agreement, the DOJ required protections for independent ABI beer distributors carrying the Modelo American portfolio brands, which have been pivotal to the success of Constellation’s stewardship of the Modelo American portfolio brands. In its review of the ABI/Modelo deal, the DOJ stated that “[e]ffective distribution is important for a brewer to be competitive in the beer industry.” Recognizing that independent distribution is the artery that spurs consumer choice and the explosion of craft beer, the DOJ prohibited ABI from adversely affecting a distributor’s ability to carry the Modelo American portfolio brands, including Corona, for a three-year period.

ABI is known to offer incentives and other tactics to exclude craft and other non-ABI brands from independent distributors’ brand portfolios. In fact, ABI’s current distributor incentive program already encourages the exclusion of non-ABI brands in exchange for marketing payments and favored position. ABI will soon be able to use these incentives and tactics against the Modelo American portfolio brands, including Corona. Accordingly, there is substantial concern that ABI will attempt to ice Corona out of many distributors’ portfolios once this protection provision expires this summer.

Indeed, ABI has strategically timed the roll out of its Mexican beer brand Estrella Jalisco (also under the Modelo brand, which is controlled by ABI outside of the United States), designed to compete with Corona in the U.S. market, to roughly coincide with the lapse of these protection provisions as well as the important Cinco de Mayo and kick-off of summer sales seasons. ABI will undoubtedly push its independent distributors to shift focus away from the Modelo American portfolio brands, including Corona, to Estrella Jalisco once the DOJ protections expire in June.

The DOJ’s consent decree and the protections put in place for distributors of the Modelo American portfolio brands have undoubtedly allowed it to flourish over the last few years in the United States. Hence, Constellation’s growth has exploded since the acquisition of the U.S. rights to the Modelo American portfolio brands, and its growth has far outpaced the overall growth of the U.S. beer market.

To keep the U.S. beer markets competitive, the DOJ needs to act to extend the consent decree and the protection of Constellation through independent distributors or risk losing this important source of competition that gives consumers choice and keeps prices down. The marketplace will be able to “find their beach” if ABI is prevented from pushing out the competition.

[1] Final Judgment, U.S. v. Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B. de C.V., No. 13-cv-00127-RWR (D.D.C. Oct. 24, 2013), ECF No. 48.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

 

In an indirect way, today’s craft beer renaissance in the United States was made possible by prohibition.  The Eighteenth Amendment to the Constitution, normally referred to as prohibition, was in part a reaction to the system of “tied houses” that dominated the alcohol retail market.  Brewers at the time exerted tremendous exclusive control over retailers and used that control to pressure sales without concern for the safety of customers or the general public.  When prohibition was repealed, the states were tasked with putting in place systems that would prevent a repeat of this harmful state of affairs.  The answer was simple, they created a three-tiered system where independent distributors stand between brewers and independent retailers.

The three-tiered system was put in place to prevent brewers from having too much control over what consumers purchase.  Truly independent distributors and retailers want to sell beer driven by consumer demand, and do not want to be beholden to one or two powerful brewers.  Consumers can seek out whatever beer tastes the best, and retailers can get a diverse array of brands from their independent distributor.

However, large beer brewers are actively working to reverse the benefits of a three-tiered system by exerting control over distribution.  To be sure, craft brewers are raising alarm bells over Anheuser-Busch InBev (ABI) incentive programs that significantly reward distributors whose ABI sales reach 98% of their total volume.  Besides employing its incentive programs, ABI has become the largest and fastest growing distributor in the United States.  ABI is also adding retailer locations at a fast clip so it is involved in all three tiers in various locations around the country.  Recently, ABI has employed a strategy of actually purchasing craft brewers in an effort to destroy the craft brews that do not sell out.  Indeed, ABI recently announced purchases of Four Peaks Brewing and Breckenridge Brewery.  ABI’s purchases of craft brewers harm the remaining independent craft brewers in a round about way.  Distributors carry craft brews to meet retailers and its consumers demand for craft brews, but with these craft brew purchases, ABI can replace independent craft brands currently carried by a distributor for ABI owned craft brands.  ABI’s move into craft brews allows distributors to meet the demand for craft beer while also hitting ABI incentive targets.  Accordingly, distributors will likely carry fewer independent craft brews in the future.

In one of the most famous scenes in the Star Wars franchise, Obi-Wan Kenobi used a Jedi mind trick to tell a Stormtrooper that “these aren’t the droids you are looking for” and that they can “move along.” The Stormtrooper ignored what was right in front of him and complied. Tomorrow, the CEO of the largest beer company in the world will be trying a Jedi mind trick of his own.

On Tuesday, the heads of Anheuser-Busch InBev (“ABI”) and Molson Coors testify before the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights in a hearing aptly titled “Ensuring Competition Remains on Tap: The AB InBev/SABMiller merger and the State of Competition in the Beer Industry.”  Like Obi Wan they will try to create an illusion and tell the senators that there is no reason to worry about the merger of the two largest beer companies in the world, which will account for over 1/3rd of all global beer production.

This is an illusion the senators should treat with extreme skepticism.

On December 3, 2015, the Department of Justice announced that Thai Union Group P.C.L., owner of Tri-Union Seafoods LLC, doing business as Chicken of the Sea International, and Bumble Bee Foods LLC abandoned their deal after the DOJ informed the companies it had serious concerns that the proposed transaction would harm competition.

The DOJ said that Thai Union’s proposed acquisition of Bumble Bee would have combined the second and third largest sellers of shelf-stable tuna in the United States in a market long dominated by three major brands, as well as combined the first and second largest domestic sellers of other shelf-stable seafood products.

Bill Baer, head of the Antitrust Division, had some strong words saying that “consumers are better off without this deal.” He added that “our investigation convinced us – and the parties knew or should have known from the get go – that the market is not functioning competitively today, and further consolidation would only make things worse.”