On December 20, 2017, the FTC issued an administrative complaint seeking to unwind a merger between prosthetic knee manufacturers Otto Bock HealthCare North America, Inc. (“Otto Bock”) and FIH Group Holdings, LLC (“Freedom”).
On September 22, 2017, Otto Bock and Freedom simultaneously executed a merger agreement and consummated their merger. Within four days of the acquisition, Otto Bock publicized to the world in its September 26, 2017 press release that “Otto Bock strengthens the leading position in prosethetics” and that the deal combined the #1 and #3 players in the field of prosethetics in the United States. It further went on to state that the acquisition expands its market share and “antitrust issues have already been clarified” so they closed the merger and Otto Bock then took steps to integrate Freedom’s business, including personnel, intellectual property, know-how, and other critical assets.
Within three months of the closing, the FTC filed a complaint to unwind the deal. According to the FTC’s administrative complaint, the merging parties are head-to-head competitors in the manufacture of prosthetic knees with microprocessors that adapt the joint to surface conditions and walking rhythm. Specifically, the FTC alleges that Otto Bock and Freedom engaged in intense price competition as well as offered dueling improvements in innovation. The deal eliminated head-to-head competition between the two companies, removed a significant and disruptive competitor, and entrenched Otto Bock’s position as the dominant supplier.
Microprocessor knees, which use microprocessors to adjust the stiffness and positioning of the joint in response to variations in walking rhythm and ground conditions, provide a stable platform for amputees. Prosthetists and doctors typically prescribe microprocessor knees to patients with above-the-knee amputations who have a relatively high degree of mobility. Compared to other products, microprocessor prosthetic knees reduce the risk of falling, cause less pain, and promote the health and function of the sound limb.
New entry or expansion by other manufacturers of microprocessor knees is not likely to be timely or sufficient to offset the anticompetitive effects of the merger. The complaint notes that it routinely takes firms more than two years just to develop a microprocessor knee, even when they are building on existing microprocessor knee technology.
The FTC’s administrative complaint serves as a reminder to corporate executives that antitrust risks do not end once a deal closes, and that a transaction is not free of antitrust risks simply because the transaction is not reportable under the HSR Act. The complaint also demonstrates the risks of closing a deal that presents antitrust concerns and makes clear that such challenges will be pursued by the FTC. The parties to the deal now are involved in costly litigation. Accordingly, corporate and private counsel must be aware of the likely consequences and risks of consummating deals that raise significant antitrust concerns but for one reason or another avoided an antitrust review. In strategic transactions, corporate counsel must reach out to experienced antitrust counsel for an antitrust assessment.