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Ryan Leske focuses his practice on defending mergers and acquisitions before the Federal Trade Commission, Department of Justice, state antitrust authorities and foreign competition authorities. His practice also includes complex antitrust litigation and government investigations. Ryan has experience in a variety of industries, including health care, aerospace and defense, agribusiness, alcohol beverages, oil and gas, and metals. Read Ryan Leske's full bio.

WHAT HAPPENED:

  • 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 August 31, 2017, the Attorney General of Washington filed a complaint in the United States District Court for the Western District of Washington alleging that two transactions harmed competition for healthcare on the Kitsap Peninsula.

WHAT HAPPENED:

  • In July 2016, CHI Franciscan Health System (Franciscan) acquired WestSound Orthopedics (WestSound), a physician practice of seven orthopedists based in Silverdale, Washington.
  • In September 2016, Franciscan entered into a set of agreements which allowed The Doctors Clinic (TDC), a 54 physician multispecialty practice also based in Silverdale, to use Franciscan’s reimbursement rates with payors in exchange for certain ancillary services.
  • While the publicly stated rationale for the transactions included “enhanced patient access and efficiency,” the Attorney General’s complaint alleged that the “true motivation” for the deals was to “charge higher rates for physician services, and to collectively gain negotiating clout over healthcare payers by removing head-to-head competition.”
  • The complaint also alleges that the TDC agreements would enable Franciscan to effectively shut down TDC’s facilities providing ancillary surgical, imaging, and laboratory services, and shift these outpatient procedures to Franciscan’s nearby inpatient hospital, where it could charge higher, hospital-based rates for the same services.

WHAT THIS MEANS:

  • Even without involvement from the Federal Trade Commission (FTC), state attorneys general can and do independently challenge transactions they consider anticompetitive and continue to be aggressive in pursuing enforcement actions where health systems either acquire physician practices or use other agreements to charge higher rates for physician and ancillary services
  • Health systems should consider that even unreportable transactions may trigger a challenge from either the FTC or state attorneys general to unwind them and, if a transaction has been consummated, any profits resulting from an unlawful transaction may be subject to disgorgement.
  • Since internal emails and documents discussing a transaction, even one that does not meet the Hart-Scott-Rodino Act’s reporting threshold, may eventually surface in an antitrust investigation, this illustrates how “bad documents” can undermine obtaining clearance for a transaction.

The FTC’s recent consent agreement addressing concerns regarding Emerson Electric Co.’s (Emerson) acquisition of Pentair Plc (Pentair) demonstrates a continued focus on whether transactions will reduce the incentive for merging parties to develop new, innovative products in the future. This is the latest in a string of cases which show that when the antitrust regulators raise innovation concerns, the merging parties need to propose a remedy that will involve the necessary research and development resources for the products at issue.

WHAT HAPPENED:

  • The FTC alleged that the acquisition combines the two largest suppliers of switchboxes, which monitor and control certain valves that regulate the follow of liquids through pipes in industrial applications.
  • The FTC found that switchbox customers have a distinct preference for Pentair’s and Emerson’s switchbox brands, which account for approximately 60 percent of the switchbox market in the United States.
  • The FTC was concerned that the transaction would reduce innovation in the switchbox industry.
  • The parties reached a consent agreement whereby Emerson would divest Pentair’s switchbox manufacturer subsidiary, including all facilities, personnel, and intellectual property associated with Pentair’s design and manufacturing of switchboxes.

WHAT THIS MEANS:

  • The Emerson/Pentair transaction is the latest in a string of transactions where regulators in the US and the EU have raised concerns that a transaction would lead to less innovation in the relevant market.
    • In 2015, Applied Materials abandoned its acquisition of Tokyo Electron after the DOJ raised concerns that the transaction would lessen competition for products in the merging parties’ pipelines and decrease the incentive for innovation generally.
    • The DOJ’s 2016 complaint to block the Halliburton/Baker Hughes transaction emphasized that the merging parties “possess unrivaled product portfolios, research and innovation capabilities, and the scope and scale necessary to address the most difficult technological challenges facing the oil and gas industry they serve.”
    • In March of this year, the European Commission cleared the merger of Dow and DuPont on the condition that the merging parties would divest DuPont’s global pesticide research and development division due to concerns that the transaction would have reduced the number of players that “are globally active throughout the entire research and development (R&D) process.”
  • These cases show two significant trends:
    • First, the agencies are likely to investigate not only reductions in competition among existing products, but also whether potential transactions combine competing innovation sources in an industry.
    • Second, regulators with innovation concerns will seek remedies that divest stand-alone business units that deal with the products at issue, including any necessary research and development resources. Merging parties that are structured with separate research and development departments that address multiple product lines may need to develop a creative solution that alleviates a regulator’s concerns about future innovation.

On January 13, 2017, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) issued updated Antitrust Guidelines for the Licensing of Intellectual Property (the Guidelines). The revised Guidelines follow nearly half a year of consideration and public commentary. According to the FTC, the updates were “intended to modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing or expanding the IP Licensing Guidelines to address other topics.” In that vein, the modest updates to the Guidelines affirm that the antitrust agencies still believe that IP issues do not require an altered analysis and that the licensing of intellectual property is generally procompetitive.”

Read the full article here.

President-elect Donald Trump has called for a dramatic increase in defense spending including purchases of new ships and warplanes as well as the addition of tens of thousands of new troops. This increase in spending generally bodes well for the aerospace and defense industry and potentially signals a new era of growth for companies in this space. This article examines how M&A transactions are likely to be reviewed in a Trump administration, with particular focus on “vertical” transactions.

Read “Trump Administration—Potential for Increased Antitrust Leniency for Vertical Transactions in the Defense Industry”

In the last two years, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) brought, and won, several litigated merger cases by establishing narrow markets comprised of a subset of customers for a product. This narrow market theory, known as price discrimination market definition, allowed the agencies to allege markets in which the merging parties faced few rivals and, therefore, estimate high post-merger market shares. By their nature, price discrimination markets can lead to a challenge of a high-value deal where only a small number of the merging parties’ customers are allegedly harmed. Given the increased usage by the agencies and now judicial acceptance of the theory, counsel for merging parties must consider the potential for price discrimination market definition in assessing the antitrust risks for transactions.

Read the full article here.

On July 14, 2016, the US Department of Justice (DOJ) announced that the restructuring of a planned $1.5 billion transaction between Tullett Prebon Group Ltd. (Tullett Prebon) and ICAP plc adequately addresses the DOJ’s concerns that the transaction would violate Section 8 of the Clayton Act by creating an interlocking directorate.  The parties restructured their transaction after the DOJ issued a Second Request to adequately investigate the parties post-closing ownership structure.  The DOJ’s investigation of this transaction should serve as a warning for companies considering transactions with competitors where the parties will continue to compete post-merger: the antitrust agencies are going to extensively review any corporate governance structures which could be seen as creating a “cozy relationship” between competitors.

Section 8 of the Clayton Act generally prohibits representatives of a corporation from serving on the board of directors of a competitor corporation. This provision of the Clayton Act, which seeks to prevent the sharing of competitively sensitive information through director communications, continues to be rigorously enforced by the antitrust agencies since the FTC’s 2009 investigation of individuals serving on the boards of multiple large technology companies.

Last year, Tullett Prebon agreed to purchase ICAP’s global hybrid voice broking and information business.  Voice broking involves speaking to clients on the phone to negotiate prices and facilitate business.  The alternative to voice broking is electronic broking where prices are put on a platform and customers can transact without the need for a human broker.  Voice broking is typically used for illiquid assets, whereas electronic broking is used more often in highly liquid markets.  By selling its voice broking business, ICAP sought to focus on its electronic trading services.

As originally structured, the transaction would have resulted in ICAP owning 19.9 percent of Tullett Prebon and having the right to nominate one member of Tullett Prebon’s board of directors.  This structure was problematic for the DOJ due to the fact that ICAP and Tullett Prebon would continue to compete post-merger in non-voice broking platforms.  This led to the DOJ issuing a Second Request, which was focused on post-closing shareholding and governance arrangements.

After the restricting of the transaction, ICAP will not retain any ownership in Tullett and will not have the ability to appoint any directors.   This new structure will allow the parties to be “actually independent of each other” according to Principal Deputy Assistant Attorney General Renata Hesse.  “As originally proposed this deal would have violated [a] core principle – creating a cozy relationship among competitors.”

Companies considering transactions with competitors where the parties will continue to compete should exercise caution in their ownership structures and corporate governance post-closing.  Any arrangements which can be interpreted as allowing the parties to share information or create a conflict of interest will be closely examined by antitrust regulators and may lead to extended reviews.

At a recent panel discussion during George Mason Law Review’s annual antitrust symposium, Deborah Feinstein, director of the Federal Trade Commission’s (FTC) Bureau of Competition, was asked what levels of gross upwards pricing pressure index (GUPPI) could raise concern in the FTC’s merger review process.  Feinstein declined to provide a specific level that would raise concern, thereby rejecting movement towards a safe harbor for merging parties in markets where the GUPPI is particularly low.

The FTC’s policy regarding a GUPPI safe harbor has a substantial impact on its investigations of mergers with potential unilateral price effects.  Generally unilateral price effects exist where the merged entity has the incentive to raise the price of the products of one or both firms.  One way to conceptualize the potential unilateral effects of a merger is to consider the opposing forces of downwards and upwards pricing pressures.  The elimination of competition between merging firms creates upwards pricing pressure.  The benefits gained from efficiencies generate downward pricing pressure.  GUPPI is an economic measure that attempts to estimate the upwards pricing pressure for a particular product resulting from a merger.  Three market conditions lead to a higher GUPPI: 1) a high diversion ratio to the merging partner’s product; 2) a higher margin for the merging partner’s product; and 3) a higher price for the merging partner’s product (Moresi 2010). Continue Reading FTC’s Feinstein Declines to Provide Safe Harbor Guidance for Low GUPPIs

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.

Relevant Markets

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.

Pricing Agreements

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.

Proceedings

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.

Key Implications

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.