- On September 4, 2019, the US Department of Justice’s Antitrust Division (DOJ) sued to block Novelis Inc.’s proposed $2.6 billion acquisition of Aleris Corporation.
- DOJ alleged that the transaction would combine two of only four North American producers of aluminum auto body sheet (ABS). DOJ further alleged that Aleris was a new and disruptive rival supplier of aluminum ABS whose expansion into the North American market immediately impacted pricing.
- Prior to DOJ’s suit to block the transaction, the merging parties and DOJ agreed that the dispute boiled down to a single dispositive issue: whether aluminum ABS constitutes a relevant product market, and specifically, whether the market for aluminum ABS also includes steel ABS.
- DOJ and the merging parties agreed to refer this product market issue to arbitration pursuant to the Administrative Dispute Resolution Act of 1996 (5 U.S.C. § 571 et seq.) and the Antitrust Division’s implementing regulations (61 Fed. Reg. 36,896 (July 15, 1996).
- In a filing in federal court the DOJ explained that it decided to arbitrate rather than litigate the merger in federal court because all sides agreed that the case turned on the single question of product market definition and referring the matter to arbitration would lessen the burden on the Court and reduce litigation costs to the merging parties and to the United States.
- DOJ and the merging parties agreed that the arbitration hearing will take place within 120 days of the merging parties’ filing an answer to DOJ’s complaint giving both sides the opportunity to issue discovery requests to each other and third parties specifically related to market definition. The hearing will last no more than 21 days, and that the arbitrator must then issue a decision within 14 days of the hearing along with a brief explanation.
- Both DOJ and the merging parties will have a say in selecting the arbitrator.
- If the arbitrator determines that the relevant market is broader than aluminum ABS, DOJ will dismiss its complaint and permit the parties to close. If the arbitrator determines that aluminum ABS is the relevant market, the merging parties agree to make certain divestitures.
WHAT THIS MEANS:
- This case marks the first time DOJ’s Antitrust Division has used its arbitration authority to resolve any issue. In a press release, Assistant Attorney General Makan Delrahim stated that “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.” AAG Delrahim also stated in a speech at George Washington Law School shortly after DOJ’s filing of the complaint that “[w]hile antitrust legal standards have embraced efficiency, antitrust legal processes still have a long way to go.”
- DOJ’s embrace of arbitration to resolve a merger challenge is consistent with AAG Delrahim’s broader efforts to “moderniz[e] the merger review process,” which have included the release of a new Model Timing Agreement in December 2018. The new model timing agreement requires fewer custodians and depositions and commits DOJ to an overall shorter review period.
- AAG Delrahim’s position signals a shift in DOJ’s attitude on the appropriateness of arbitration to resolve merger challenges. In its 1996 policy statement on arbitration (61 Fed. Reg. 36,896 (July 15, 1996)), DOJ stated that alternative dispute resolution techniques such as arbitration “will likely be difficult to apply during the course of merger investigations.” In contrast, AAG Delrahim has now stated that “[b]oth merger and conduct cases may be ripe for arbitration.”
- DOJ’s embrace of arbitration to resolve merger investigations more efficiently is a positive development for merging parties. Arbitration may provide merging parties the benefit of having their case decided by an industry expert rather than a generalist district court judge. However, merging parties should note that arbitration likely means giving up a right to appeal. Parties must also ensure that their arbitration agreement grants access to any evidence DOJ has obtained from third parties during its investigation, and allows for litigation-like pre-arbitration discovery.
- It is unclear how many other parties will receive the benefit of arbitration in merger investigations. The Federal Trade Commission has yet to adopt a similar policy embracing arbitration in merger cases. In addition, Novelis may be a unique case because the parties agreed in advance with DOJ on an acceptable divestiture remedy. The parties and DOJ also agreed that whether this divestiture was necessary depended on the resolution of a single issue—product market definition. Mergers challenged by the government frequently involve a broader range of issues, including geographic market definition, potential anticompetitive effects, ease of entry, and merger-specific efficiencies.