Recently, a federal district court in California granted partial summary judgment for the US Federal Trade Commission (FTC) in an important intellectual property and antitrust case involving standard essential patents (SEP). The court’s decision requires an SEP holder to license its SEPs for cellular communication standards to all applicants willing to pay a fair, reasonable and non-discriminatory (FRAND) rate, regardless of whether the applicant supplies components or end-devices. The decision represents a significant victory for the FTC in enforcing its views of an SEP holder’s commitments to license patents on FRAND terms.
Lisa A. Peterson focuses her practice on antitrust, regulatory and litigation matters. She assists clients across a variety of industries and has represented numerous clients in the health care, pharmaceutical, and biotechnology industries. Lisa advises clients on mergers and acquisitions, including obtaining clearance from the Federal Trade Commission (FTC) and Department of Justice (DOJ), as well as counsels clients on issues regarding antitrust compliance, pricing, and distribution. She also counsels clients on cartel prosecutions and defenses, including government investigations and the initiation and defense of civil class action litigation. Read Lisa Peterson's full bio.
Dealmakers know that a critical part of the merger process is obtaining antitrust clearance from government enforcers. But, even if the antitrust enforcers review and clear a transaction, a third-party can file a private suit alleging the transaction violated the antitrust laws. Recently, an aggrieved customer did just that—it won a substantial jury verdict and is also seeking a court order to unwind the transaction nearly six years after the transaction was announced.
- On February 15, 2018, almost six years after Jeld-Wen announced an acquisition of Craftmaster Manufacturing, Inc. (CMI) in 2012, a federal jury awarded a customer, Steves and Sons (Steves), $58.6 million for antitrust damages and lost profits stemming from the acquisition. Additionally, Steves is seeking to unwind the 2012 Jeld-Wen/CMI transaction through a court order that would force Jeld-Wen to divest of assets sufficient to re-create a competitor as significant as CMI at the time of the acquisition in the doorskin market—that is, restoring competition to pre-transaction levels.
- The Department of Justice (DOJ) reviewed, but did not challenge, Jeld-Wen’s acquisition of CMI, which reduced the number of doorskin suppliers from three to two. Interestingly, the 2012 transaction involved CMI, a company that entered the doorskin market in 2002, when it acquired divested assets because of DOJ concerns about a doorskin merger at that time.
- One of the factors that led to DOJ clearance is that customers did not complain about the transaction. Prior to Jeld-Wen and CMI completing the transaction in 2012, Steves, entered into a long term supply agreement with Jeld-Wen.
- After the transaction, Steves became dissatisfied with Jeld-Wen’s treatment and alleged that it received less favorable price terms, reduced product quality and output, and worse service.
- As a result, in 2016—four years after closing—the customer filed a complaint alleging that Jeld-Wen’s acquisition of CMI violated the antitrust laws.
WHAT THIS MEANS
- Business leaders must understand that even if antitrust enforcers clear a merger, not only can they revisit that decision, but third parties can also sue for damages or to unwind the transaction.
- Steves did not complain about the merger until years after the transaction and yet still won a substantial verdict. This case is a reminder that business leaders must independently weigh the merits of their customer’s position (regardless of the antitrust enforcers’ posture regarding the same case) and manage the business appropriately after close to avoid a customer lawsuit.
- Secondarily, business leaders must realize that customer lawsuits can also create significant operational issues that distract from the company’s business objectives. For example, not only may company personnel be distracted from running the business while assisting with the defense of the litigation, the company may also face significant legal costs, as well as invasive discovery. Further, a complaint filed by one private litigant could spur follow-on litigation from other aggrieved customers or third parties. Buyers should be cognizant of those risks and should consider whether mollifying any aggrieved customers or suppliers would avoid litigation.
Manufacturers of optical disk drives defeated electronics companies’, retailers’ and indirect purchaser plaintiffs’ conspiracy claims after seven years of litigation. On December 18, 2017, the US District Court for the Northern District of California issued simultaneous orders that granted summary judgment in favor of defendants after finding that the electronics companies, retailers and indirect purchasers failed to demonstrate evidence of injury and causation.
On November 29, 2017, a Japanese auto parts manufacturer and its US subsidiary defeated the US Department of Justice’s claims that the companies conspired with others to fix prices and rig bids for automotive body sealing products. The case involved a rare trial involving criminal antitrust charges. After 13 days of trial, a jury returned a not-guilty verdict for Tokai Kogyo Co. Ltd. and its subsidiary, Green Tokai Co. Ltd. Continue Reading.
- On Thursday, November 16, 2017, newly confirmed Assistant Attorney General for Antitrust Makan Delrahim, speaking at the American Bar Association Section of Antitrust Law’s Fall Forum, explained where antitrust enforcement fits in the broader Trump administration effort to reduce federal regulations.
- Delrahim remarked that “antitrust is law enforcement, it’s not regulation.” Antitrust enforcement “supports reducing regulation, by encouraging competitive markets that, as a result, require less government intervention.” Delrahim explained that “[v]igorous antitrust enforcement plays an important role in building a less regulated economy in which innovation and business can thrive, and ultimately the American consumer can benefit.” As a result, the government can minimize regulation related to price, quality, and investment.
- Delrahim announced that the Antitrust Division of the US Department of Justice (DOJ) would seek to reduce the number of long-term consent decrees and “return to the preferred focus on structural relief to remedy mergers that violate the law,” thereby limiting the use of behavioral remedies in consent decrees particularly in vertical transactions, where such remedies have historically been common. According to Delrahim, “a behavioral remedy supplants competition with regulation; it replaces disaggregated decision making with central planning.” Delrahim also expressed concern that behavioral remedies simply delay the exercise of otherwise anticompetitive market power.
- Mentioning by name several consent decrees in vertical transactions containing behavioral provisions in merger cases brought by the Obama administration, Delrahim expressed concern that these remedies “entangle the [Antitrust] Division and the courts in the operation of a market on an on-going basis.” Delrahim cautioned that the lack of enforceability and reliability of behavioral remedies diminish the effectiveness of antitrust enforcement, a risk that consumers should not have to bear.
WHAT THIS MEANS:
- Delrahim’s stance on behavioral remedies starkly contrasts with previous DOJ policies, followed under both Democratic and Republican administrations. Prior administrations strongly preferred structural remedies, but recognized that behavioral remedies could be appropriate particularly for vertical transactions that presented pro-competitive benefits. The DOJ’s most recent policy paper on remedies (issued by the Obama administration) exemplifies this view, stating: “conduct remedies often can effectively address anticompetitive issues raised by vertical mergers.”
- Despite the new administration’s disfavored view of behavioral remedies for a vertical merger, such remedies are not off the table. To secure a DOJ consent decree with behavioral remedies for a vertical merger, parties will likely have to show that the transaction “generates significant efficiencies that cannot be achieved without the merger or through a structural remedy.” Delrahim unambiguously stated that this is “a high standard to meet.”
- Delrahim’s speech appeared aimed at several high profile vertical transactions that are currently under review by the DOJ, likely seeking to explain why the DOJ will insist on structural remedies in transactions where most outside observers thought a behavioral remedy may suffice.
- It is possible that Joe Simons, President Trump’s unconfirmed appointee for Chairman of the Federal Trade Commission, may take a differing stance on behavioral remedies, following prior policy statements. This could result in a slight difference in policies between the Federal Trade Commission and the DOJ in merger enforcement.
On September 14, 2017, Senator Amy Klobuchar (D-MN), introduced new legislation to curtail market concentration and enhance antitrust scrutiny of mergers and acquisitions. As the Ranking Member of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, Klobuchar is the leading Senate Democrat for antitrust issues.
Two bills were submitted to the Senate: the Consolidation Prevention and Competition Promotion Act (CPCPA) and the Merger Enforcement Improvement Act (MEIA). The CPCPA is co-sponsored by Senators Kirsten Gillibrand (D-NY), Richard Blumenthal (D-CT) and Ed Markey (D-MA). The MEIA is co-sponsored by Senators Blumenthal, Markey and Gillibrand, along with Senators Patrick Leahy (D-VT), Al Franken (D-MN), Cory Booker (D-NJ), Dick Durbin (D-IL), Mazie Hirono (D-HI) and Tammy Baldwin (D-WI). Both bills propose amendments to the Clayton Act. Earlier this year, Senate democrats announced these legislative proposals as part of their “A Better Deal” antitrust agenda.
WHAT DO THE BILLS PROPOSE:
- Notably, the CPCPA proposes to revise the Clayton Act so that in challenging an acquisition, the Federal Trade Commission (FTC) and Department of Justice (DOJ) would only have to show that the proposed transaction materially lessens competition rather than significantly lessens competition, which is the current standard. The legislation defines “materially lessens competition” to mean “more than a de minimis amount.” This change would reduce the burden of proof for the government in challenging an acquisition.
On Monday, September 11, Tri-Union Seafoods LLC, the US subsidiary of Thai Union Group, announced it blew the whistle on competitors in the US Department of Justice’s (DOJ) investigation of the packaged seafood industry. The “Chicken of the Sea” canned tuna manufacturer also said it received conditional leniency from DOJ in exchange for its cooperation.
- In 2015, DOJ began investigating the packaged seafood industry for anticompetitive conduct, including price fixing. DOJ’s investigation followed a failed merger between Thai Union and Bumble Bee Foods LLC.
- In May 2017, Bumble Bee pleaded guilty to violations of Sherman Act Section One. Bumble Bee agreed to fix the price of shelf-stable tuna fish from as early as the first quarter of 2011 through at least the fourth quarter of 2013. The company agreed to pay a $25 million fine, which was substantially reduced to protect the company from insolvency. Two Bumble Bee executives also pleaded guilty.
- In June 2017, a former StarKist Co. sales executive pleaded guilty to price fixing.
- Private plaintiffs filed class action complaints in October 2016 alleging antitrust violations in the packaged seafood industry. The private plaintiffs represent grocery retailers who sold packaged tuna to US consumers.
WHAT THIS MEANS:
- Despite the significant costs of participating in DOJ’s Corporate Leniency Program, leniency recipients continue to receive significant value for their cooperation. Conditional leniency recipients like Tri-Union and their employees will not face criminal fines, jail time or prosecution.
- Full cooperation with DOJ’s program will place heavy demands on leniency applicants, including gathering and translating foreign documents, bringing foreign witnesses to the United States for interviews and testimony, and providing several attorney proffers.
- It is critical to have a robust compliance program in place to detect any potential or actual violations of antitrust law. Such a program will allow a company to investigate any potential misconduct and, if necessary, report it to DOJ. Time is of the essence when seeking leniency with DOJ’s Corporate Leniency Program.
- Companies contemplating acquisitions should consider whether any problematic antitrust conduct could arise during the merger review and result in a subsequent criminal investigation.
For publicly traded companies, earnings calls are routine business events, as are press releases, speeches, investor conferences and trade association meetings. However, in the world of antitrust law, words uttered in these situations can provide fodder for plaintiffs to claim that instead of providing information for investors and the public, the communication’s purpose was to invite competitors to unlawfully collude. In the past several years, allegations that competitors used public statements to carry out a price-fixing agreement have been a common thread in antitrust class actions and multidistrict litigations.
Recently, a federal district court granted summary judgment in an antitrust case based on earnings calls in the airline industry. While the defendants ultimately prevailed, the case stands as a reminder to publicly traded companies to be mindful of antitrust considerations in earnings calls and other public communications.
Originally published in Law360.com, April 11, 2017.
On January 21, the U.S. Court of Appeals for the Fourth Circuit upheld Virginia’s Certificate of Need (CON) laws, ruling that the scheme does not illegally discriminate against out-of-state health care providers. See Colon Health Ctrs. v. Hazel, No. 14-2283 (4th Cir. Jan. 21, 2015).
In Virginia, and the 35 other states with CON laws, health care facilities are required to obtain government approval before establishing or expanding certain medical facilities and undertaking major medical expenditures. CON laws require applicants to show sufficient public need for the expenditure in question and thereby attempt to reduce healthcare costs by preventing excess capacity and unnecessary duplication of services and equipment.
The plaintiff-appellants in the case were two out-of-state outpatient providers that sought to open facilities to provide medical imaging services in Virginia. Their request for a CON for new CT scanners and MRI machines was denied. The plaintiff-appellants subsequently challenged the laws as putting an undue burden on interstate commerce in violation of the dormant commerce clause. The Fourth Circuit affirmed the district court’s ruling that the CON requirement neither discriminated against nor placed an undue burden on interstate commerce because both in-state and out-of-state providers were required to abide by the CON requirement.
Previously, in October 2015, the Federal Trade Commission (FTC) and U.S. Department of Justice’s Antitrust Division (DOJ) issued a joint statement urging Virginia to consider changes to its CON laws. Both agencies argued that CON requirements create significant competitive concerns by suppressing supply and misallocating resources. Moreover, FTC and DOJ said the requirements have not been shown to lower costs or improve the quality of care for consumers. The agencies said that CON requirements can hinder “the efficient functioning of health care markets” by allowing an existing provider to file challenges to prevent or delay competition from a rival. Additionally, they may enable anticompetitive agreements among providers to pursue CON approval for separate services. The Fourth Circuit’s recent opinion may lessen the likelihood that the FTC or DOJ would separately challenge Virginia’s CON laws, but the agencies are likely to remain active in speaking out against CON requirements in Virginia and elsewhere.
The Federal Trade Commission (FTC) and Pennsylvania Attorney General (AG) have challenged the proposed combination of The Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) in Harrisburg, Pennsylvania. The FTC complaint alleges that the combination would create a dominant provider, reduce the number of competing health systems in the area from three to two, and result in a 64 percent share of the market for general acute care inpatient hospital services.
Hospitals and health systems pursuing mergers with a competitor should be mindful of the antitrust enforcement climate in health care and incorporate antitrust due diligence into their early transaction planning. Moreover, this case highlights that providers seeking to proactively alleviate the potential anticompetitive effects of a transaction should anticipate continued skepticism by the FTC of claims of procompetitive efficiencies and its dismissal of the merging parties’ newly negotiated, post-closing pricing agreements with payors.
Summary of Administrative Complaint
Parties and Transaction
Hershey is a nonprofit healthcare system headquartered in Hershey, Pennsylvania, about 15 miles west of Harrisburg. The system has two hospitals in the Harrisburg area: the Milton S. Hershey Medical Center, an academic medical center affiliated with the Pennsylvania State University College of Medicine, and the Penn State Hershey Children’s Hospital, the only children’s hospital in the Harrisburg area. Hershey has 551 licensed beds and employs 804 physicians offering the full range of general acute care services. In its 2014 fiscal year, Hersey generated $1.4 billion in revenue and discharged approximately 29,000 patients.
Pinnacle is nonprofit healthcare system headquartered in Harrisburg. Pinnacle’s system includes three hospitals in the Harrisburg area: PinnacleHealth Harrisburg Hospital, PinnacleHealth Community General Osteopathic Hospital, and PinnacleHealth West Shore Hospital. The system has 662 licensed beds divided among the three hospitals. In its 2014 fiscal year, Pinnacle generated $850 million in revenue and discharged more than 35,000 patients.
Pursuant to a letter of intent executed in June 2014, the parties would create a new legal entity to become the sole member of both health systems. The parties would have equal representation on the board of directors of the new entity.
The FTC complaint alleges that the appropriate scope within which to evaluate the proposed transaction is the market for general acute care (GAC) inpatient hospital services in a four-county area around Harrisburg. This alleged product market encompasses a broad cluster of medical and surgical diagnostic and treatment services that require an overnight in-hospital stay. Although the effect on competition could be analyzed for each affected medical procedure or treatment, the FTC considered the cluster of services as a whole because it considers the services to be “offered to patients under similar competitive conditions, by similar market participants.”
The FTC limited the geographic market to an area which includes Dauphin, Cumberland, Perry and Lebanon Counties. These four counties, according to the FTC, are “the area in which consumers can practicably find alternative providers of [GAC services].” Consequently, hospitals located outside of this area are not meaningful competitors to Hershey and Pinnacle. The FTC’s theory relies on the fact that patients prefer to seek care relatively close to their home or workplace, especially when seeking emergency hospital services. In support of its alleged geographic market, the complaint asserts: (1) that a large percentage of the patients in the four county area seek GAC services within these four counties; (2) that hospitals located outside the four counties do not draw many patients from within the four county area; and (3) that health plans could not effectively market a network to employers and patients in the Harrisburg area that did not include a hospital in these four counties.
Market Share and Anti-Competitive Effects
According to the FTC’s complaint, the combined entity would be the largest general acute care system in the relevant market with a 64 percent market share. Pinnacle and Hershey currently represent 38 percent and 25 percent of the market, respectively. The FTC alleges that only one other hospital—Holy Spirit Health System with 15 percent of the market—is a meaningful competitor to the merging parties. The FTC explains that while there are two other hospitals in the Harrisburg area, both are community hospitals located outside of Harrisburg that draw relatively small shares (approximately 6 percent and 5 percent) from the overall area. As a result, the FTC characterizes the transaction as a reduction in competitors from three to two, and argues that the merger is presumptively unlawful under the FTC’s Merger Guidelines and the established case law.
The FTC alleges that Pinnacle and Hershey are close substitutes for each other and that both systems compete vigorously for inclusion in commercial health plan networks and for a health plan’s patients. The complaint cites various sources of evidence, including econometric analysis of patient draw data, the parties’ ordinary course documents, testimony and information from health plans. Reduced competition resulting from the proposed merger would have anticompetitive effects on both price and non-price features in the market, according to the FTC. The elimination of close competition between the two hospitals would increase the combined entity’s bargaining leverage with health plans, thereby leading to higher negotiated rates for consumers in either traditional fee-for-service arrangements or new reimbursement models. Health plans would no longer be able to play Pinnacle off of Hershey to obtain lower rates.
Further, with only one meaningful competitor left in the market, the FTC alleges that the combined entity would have less incentive to compete for a health plan’s patients by offering increased quality of care, patient satisfaction, improved facilities, better amenities, state-of-the-art technology and enhanced access. The FTC supported its allegations by referencing Pinnacle’s recent facility enhancements, patient satisfaction and quality of care initiatives aimed at attracting patients from Hershey to Pinnacle.
The lack of competition between Pinnacle and Hershey due to the merger would especially impact price and non-price competition for high-end tertiary and quaternary services that smaller competitors in the market do not provide. As support, the FTC noted that Pinnacle had expanded its service offerings to better compete with Hershey and that both entities had expanded the availability of specialized service lines in new geographic areas to attract patients—the proposed merger would eliminate this competition and the creation of alternative service providers for patients in the market. Additionally, in some key geographic areas, the proposed merger would leave health plans and patients for only one choice for emergent care.
In order to mitigate the potential anticompetitive effects of the transaction, Hershey and Pinnacle negotiated new agreements with payors that appear to have been intended to forestall payor opposition to the transaction and limit the merged system’s ability to leverage any additional bargaining power gained through the transaction, possibly by locking in premerger reimbursement rates for a set period of time.
The FTC complaint cites four reasons why it believes that those new agreements would not prevent competitive harm. First, the FTC believes these agreements were designed to prevent payors from opposing the merger and, therefore, are better characterized as strong evidence that payors believe the merger would result in anticompetitive harm. Second, the agreements do not address the change in bargaining leverage that would also apply to any new arrangements with payors, including risk-sharing or population health measures. In the negotiation of any new arrangements, the combined entity would still be capable of leveraging its increased bargaining power to the detriment of the health plans and their members. Third, these pricing agreements do nothing to preserve the non-price competition between the parties that has benefited patients through improved quality and increased service offerings. Finally, when these agreements terminate, nothing prevents the combined entity from leveraging its increased bargaining power to raise rates.
Entry & Efficiencies
The FTC complaint alleges that new hospital entry in the Harrisburg area would not be likely, timely or sufficient to offset the transaction’s likely anticompetitive effects. In support, the FTC cites the expense and the length of time needed to construct a new hospital facility, and the fact that the parties were the only ones to construct new hospital facilities in the area in the past decade.
The FTC complaint alleges that the parties’ efficiency claims are not cognizable on the basis that they are overstated, speculative, unverifiable and not merger-specific. Further, the FTC alleges that one of the parties’ efficiency claims—that the transaction will enable the parties to transfer patients at Hershey Medical Center, which is near capacity, to Pinnacle, which has available capacity—would result in competitive harm. The FTC alleges that would force patients to go to a different hospital than the one they chose, and would reduce output, capacity and service since Hershey Medical Center would avoid constructing a new inpatient bed tower to address capacity issues.
The FTC filed an administrative complaint as well as motions for temporary and preliminary injunctions in federal district court. The AG joined the federal district court proceeding. U.S. District Judge John E. Jones III granted the antitrust enforcement agencies’ request for a temporary restraining order. The motion for a preliminary injunction is pending. The parallel administrative trial is scheduled to commence in May 2016.
The FTC’s challenge of the Hershey/Pinnacle transaction reinforces recent enforcement trends that hospitals and health systems contemplating transactions should consider. First, the FTC is likely to carefully scrutinize, and potentially challenge, a transaction that involves: (1) two nearby hospitals, (2) in the same small to mid-size metropolitan area, (3) who serve as close competitors to each other for both payors and patients, (4) and serve a majority of the commercially-insured patient base. This result stems from the FTC’s continued reliance on a traditional structural analysis of the market—market definition, market share computation, market concentration calculation—to allege that a transaction that violates the FTC’s 2010 Merger Guidelines is presumptively unlawful.
Second, once a transaction is declared presumptively unlawful, the FTC shifts the burden to the parties to prove offsetting procompetitive benefits. However, this challenge also demonstrates that proving procompetitive benefits is becoming more difficult for parties in hospital mergers because the FTC continues to discount claimed efficiencies as speculative, overstated and unsubstantiated. The FTC’s claims are supported by its recent physician practice merger challenge in Nampa, Idaho, as well as its challenges of hospital merger challenges in Toledo, Ohio and Rockford, Illinois.
Third, it is noteworthy that the recently negotiated contracts between the parties with large commercial payors did not insulate the transaction from allegations of anticompetitive harm. The FTC perceives these contracts as evidence that the payors view the transaction as likely to generate anticompetitive harm. While the FTC may acknowledge that these agreements prevent rates from rising for a particular period of time, it perceives those agreements to be insufficient to counter the increased bargaining leverage of the combined entity that will impact any new agreements with payors and will impact negotiations after the recently negotiated agreements expire. The FTC’s position on this issue is consistent with its longstanding rejection of conduct-oriented settlements of potentially anticompetitive mergers of healthcare providers.
Fourth, the Hershey/Pinnacle challenge represents a continuation of the FTC’s historical approach to assessing anticompetitive effects in hospital mergers. The FTC continues to utilize a “two-dimensional” articulation of the competition: first assessing competition among hospitals to be selected as in-network providers for commercial health plans and, second, investigating competition among hospitals in the network on the basis of non-price features to attract patients.
Finally, a critical component of the FTC’s investigation continues to be ordinary course business documents created by the parties describing the competitive landscape. As in recent cases, the FTC’s complaint in this case cites and quotes from documents created by the parties in support of the allegations that the transaction will reduce competition and harm consumers.
In sum, this most recent FTC enforcement initiative is a reminder that when hospitals and health systems first contemplate a transaction, they should evaluate its competitive implications in light of the FTC’s heightened scrutiny of mergers involving healthcare competitors.