At the one year anniversary of the Trump administration, antitrust merger enforcement remains similar to the Obama administration, but it is still early to judge given the delays in antitrust appointments and given the DOJ’s lawsuit against the vertical AT&T/Time Warner transaction, the first vertical merger litigation in decades. Below are some of the recent developments that have impacted merger enforcement by the Federal Trade Commission (FTC) and Antitrust Division of the US Department of Justice (DOJ), as well as European regulators.
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.
- 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.
- 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.
- 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.”
Chile has amended its Competition Law to “consolidate [its] leadership as a sophisticated agency in Latin America.”
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.
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.
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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