Antitrust Lawyer Blog Commentary on Current Developments

Articles Posted in DOJ Antitrust Highlights

On April 25, 2018, the DOJ announced that it will require Martin Marietta Materials, Inc. (“Martin Marietta”) to divest quarries in Georgia and Maryland in order to proceed with its proposed $1.625 billion acquisition of Bluegrass Materials Company, LLC (“Bluegrass”) from LG Panadero, L.P. of Panadero Corp. and Panadero Aggregates Holdings, LLC.

According to the DOJ’s complaint, Martin Marietta and Bluegrass produce and sell aggregate, an essential input in asphalt and ready mix concrete that is used in road building and other types of construction.  The complaint alleges that, for a significant number of customers in and immediately around Forsyth and north Fulton County, Georgia, and in the Washington County, Maryland area, Martin Marietta and Bluegrass are two of only three competitive sources of aggregate qualified by the respective states’ Departments of Transportation.  According to the complaint, the loss of competition between Martin Marietta and Bluegrass would likely result in higher prices and poorer customer service for aggregate customers in these areas.

Under the terms of the proposed settlement, Martin Marietta must divest Bluegrass’s Beaver Creek quarry in Hagerstown, Maryland, and all of the quarry’s assets to an acquirer approved by the United States, in consultation with the State of Maryland.  Martin Marietta must also divest the lease to its Forsyth quarry in Suwanee, Georgia, and all of the quarry’s assets to Midsouth Paving, Inc., or an alternate acquirer approved by the United States.

On April 19, 2018, Makan Delrahim, Assistant Attorney General of DOJ’s Antitrust Division delivered the keynote address at the at the University of Chicago’s Antitrust and Competition Conference. The focus of his remarks was “evidence-based enforcement.” He said that “an evidence-based approach requires enforcement built on credible evidence that a practice harms competition and the American consumer, or in the case of merger enforcement, that it creates an unacceptable risk of doing so.”

Delrahim noted that outside of flat out price fixing and naked restraints of trade, which are clearly illegal, “antitrust demands evidence of harm or likely harm to competition, often weighed against efficiencies or procompetitive justifications.”  He added that “taking an evidence-based approach to antitrust law should not be mistaken for an unwillingness to bring enforcement actions.” He said that if there is clear evidence of harm, the antitrust enforcers should vigorously prosecute the antitrust laws. He noted that antitrust enforcers that failed to take action when they had credible evidence and accepted behavioral “band-aid” fixes to anticompetitive mergers should accept some blame.  Delrahim noted that “the Microsoft case proved that an evidence-based antitrust enforcement approach can be flexible in its application to new types of assets and markets—in that case, the computer code and software markets.”

His message was that the U.S. and international antitrust agencies should not simply go to war with digital platform companies rather a more effective approach would be grounded in evidence.  He added that “in certain platform markets involving network effects, there may be barriers to entry or a tendency toward a single firm emerging as the sole winner” and in those situations, “antitrust enforcers may need to take a close look to see whether competition is suffering and consumers are losing out on new innovations as a result of misdeeds by a monopoly incumbent.”

On March 15, Judge Richard Leon said “Fake News” to a report that the trial will start on Wednesday, the 21st.  It will start on Monday at 10:30.  The first couple of days will be devoted to evidentiary objections.  Opening arguments will be on Wednesday and the Judge thinks the trial will take 6-8 weeks.

On March 13, 2018, Judge Leon denied the DOJ’s motion to limit the defendants from presenting evidence regarding Time Warner’s irrevocable offer to distributors that it would go into “baseball-style” arbitration in any carriage disputes over Turner networks and promise not to engage in any blackout of channels during arbitration for a period of 7 years.  AT&T simply had the better of the arguments with respect to the commitment.  Of course it is relevant and the DOJ had sufficient notice – it was in the Answer – and has had the opportunity to conduct discovery related to the commitment.  The time for the DOJ to make this argument was early on before discovery started.

AT&T made a good case that Professor Shapiro’s failure to account for this commitment in his models may have been tied with the DOJ’s motion to have the Arbitration Offer removed from consideration.  Apparently, Shapiro acknowledged that the commitment would benefit distributors in negotiations and that his bargaining model does not account for this market reality in deposition testimony.  A major limitation of the DOJ’s otherwise very good pre-trial brief is that its arguments are theoretical and not based on the facts.  It is somewhat difficult to get a handle on the strength of the DOJ’s arguments in its pre-trial briefs because many passages and key quotations are redacted.  On the whole, AT&T’s pre-trial brief is stronger.  It certainly appears that AT&T is poised to punch holes in the DOJ’s experts’ theories and bargaining model.

On March 5, 2018, Sparton Corporation (“Sparton”) announced the termination by Sparton and Ultra Electronics Holdings plc (“Ultra”) of their July 7, 2017 merger agreement.

According to Sparton, during the review of the proposed merger by the United States Department of Justice (“DOJ”), the United States Navy (“Navy”) expressed the view that instead of the parties proceeding with the merger, each of Sparton and Ultra should enhance its ability to independently develop, produce and sell sonobuoys and over time work toward the elimination of their use of the companies’ ERAPSCO joint venture for such activities. DOJ staff then informed Sparton and Ultra that it intended to recommend that the DOJ block the merger. The parties expected the DOJ would follow this recommendation and seek an injunction in court to block the merger. As a result of the view of the Navy and the DOJ’s position, Ultra and Sparton determined it was in the best interests of the parties to proceed to terminate the merger agreement.

Also according to Sparton, the parties understand that the DOJ intends to open an investigation to evaluate their ERAPSCO joint venture. Sparton said that based on historical practice, the company anticipates the Navy will assist in funding Sparton’s transition to independently develop, produce and sell sonobuoys.

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 14, 2018, it was reported that AT&T Inc. (“AT&T”) identified as a potential witness for trial, Makan Delrahim, the head of the U.S. Department of Justice’s (“DOJ”) Antitrust Division. AT&T’s request for the antitrust chief to testify is highly unusual, but would appear necessary given that AT&T is claiming as a defense that the DOJ’s action to block the deal is an “improper selective enforcement of the antitrust laws.”

It is common practice in the early stages of litigation to be overly inclusive when identifying witnesses for trial, and just because Delrahim is named does not necessarily mean that he will testify. However, when alleging selective enforcement as a defense, AT&T will necessarily need to put on proof of the improper discrimination behind the DOJ’s decision to block its deal with Time Warner, and presumably no one would be in a better position to testify as to the DOJ’s decision than the actual decision maker: Delrahim.

In addition to its witness list, AT&T has also requested internal communications between Delrahim’s office and Attorney General Jeff Sessions, including emails, phone calls and other communications between the White House and officials at the DOJ.

On January 26, 2018, the head of the Antitrust Division, Makan Delrahim delivered remarks to the NY State Bar where he discussed his views on behavioral remedies and consent decrees.

He noted that the Division’s recent consent decrees reflect several provisions designed to ensure the Division can meaningfully enforce them.  Delrahim stated that the DOJ’s approach will be to enter into consent decrees only when the DOJ can effectively enforce them, and when the DOJ enters into consent decrees, to enforce them effectively.

Consent decrees should be used consistent with a view of the Antitrust Division as a law enforcement agency, not a regulatory one. Faced with a violation, the Antitrust Division has an obligation to the public to ensure any settlement contains meaningful relief and that the settling parties obey its terms.  He said that “filing a consent decree that would be difficult to enforce certainly minimizes litigation risk and provides for a quick win in the press, but it goes without saying that the unenforceable decree provisions would not vindicate the Division’s duty to protect competition.”

Historically, the FTC and DOJ have sought to unwind consummated mergers that are deemed to be anticompetitive.  During Trump’s first year in office, the FTC and DOJ have demonstrated their willingness to unwind anticompetitive mergers that somehow sneaked by the regulators.

FTC Seeks to Unwind Merger of Prosthetic Knee Manufacturers

On December 20, 2017, the FTC filed an administrative complaint to unwind the merger of Otto Bock HealthCare North America, Inc., (“Otto Bock”) and FIH Group Holdings, LLC (“Freedom”), two manufacturers of prosthetic knees equipped with microprocessors that adapt the joint to surface conditions and walking rhythm.  In September 2017, the parties simultaneously signed a merger agreement and consummated the merger without the FTC having an opportunity to review the deal.  Apparently, the merger was not HSR reportable.  According to the FTC, the merger eliminated direct and substantial competition between head to head competitors that engaged in intense price and innovation competition.  While the litigation is ongoing, the parties agreed to a Hold Separate and Asset Maintenance Agreement, which prevents them from continuing the integration of the two businesses.  The FTC did not allege any violation of the HSR ACT.

On December 6, 2017, Senator Elizabeth Warren sharply criticized the state of antitrust enforcement in a speech at the Open Markets Institute.

She said that antitrust enforcers adopted the Chicago School principles, which narrowed the scope of the antitrust laws and allowed mega-mergers to proceed resulting in many concentrated industries.  She believes that antitrust enforcers already have the tools to reduce concentrated markets and that they simply must start enforcing the law again.

Senator Warren’s recommendations included stronger merger enforcement, cracking down on anticompetitive conduct and increasing agency involvement in defending competition.

On November 21, 2017, the U.S. Department of Justice (“DOJ”) filed a lawsuit to block AT&T Inc.’s acquisition of Time Warner Inc. The vertical merger, which combines AT&T’s video distribution platform with Time Warner’s programming, could be the first such deal litigated in almost 40 years.

According to the DOJ, the proposed acquisition will result in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals. At present, Time Warner negotiates with an MVPD to reach a price that depends on each party’s willingness to walk away. But the transaction would change the bargaining leverage such that AT&T/Time Warner would have less to lose from walking away. Or so the DOJ alleges. According to this reasoning, post-merger, if the merged firm and an MVPD are unable to reach an agreement, some customers would switch from their current MVPD to AT&T/DirecTV in order to obtain the sought-after Time Warner content. In addition, the DOJ alleges that AT&T/DirecTV has approximately 25 million subscribers and that there are 18 Designated Marketing Areas (“DMAs”) – out of 210, nationwide – where AT&T/DirecTV has approximately 40% share of the local MVPD market.

However, AT&T’s response indicates that the DOJ’s complaint is a misguided effort to block a pro-competitive deal that poses no real threat to consumers. The DOJ’s theory betrays a lack of understanding of the current and rapidly evolving market for content and distribution. The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible. Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to cut off rival video distributors. After all, such a strategy is risky because AT&T might lose more than it gains with only the possibility that a small number of subscribers would switch to AT&T/DirecTV. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive. And the lines between MVPDs, virtual MVPDs and SVODs are blurring as Amazon Prime recently carried the Titans/Steelers game live. AT&T called out the DOJ for not providing any market analysis or empirical evidence to support its theory that consumers would be harmed.