- Recent developments indicate that pharmaceutical deals are attracting greater scrutiny from the Federal Trade Commission (FTC).
- In September 2019, FTC Chairman Joseph Simons reportedly stated that the FTC will more closely scrutinize deals with overlaps involving products that are still in clinical study or development. Because of the high failure rate of products in early phases of study, the FTC typically has focused on overlaps between marketed products or products near Federal Drug Administration (FDA) approval, g., products in Phase III of the FDA pipeline. Chairman Simons’s statement makes clear that the FTC plans to examine earlier stage products while reviewing deals.
- In 2018, the director of the FTC’s Bureau of Competition announced in a speech that the FTC would favor divestitures of marketed drugs over pipeline drugs in pharmaceutical deals. Traditionally, when the FTC has had a concern about overlapping products, it has allowed the merging parties to decide which of the overlapping products to divest to remedy the concern. The director explained that, unlike marketed products, pipeline products may be costly to transfer or never be brought to market, eliminating a potential source of future competition.
- Legislators on Capitol Hill have placed pressure on the FTC to scrutinize pharmaceutical deals with more vigor. Nine US senators wrote the FTC in September to voice concerns about the effect of pharmaceutical deals on innovation and prices. In their letter, the senators specifically highlighted divestitures of pipeline products, stating that such divestitures may not sufficiently address threats to competition because pipeline products may never make it to market.
Companies involved in the government contracting industry should take note that the government is honing in on anticompetitive conduct affecting government procurements. The federal government has demonstrated an increased interest in this area, and companies should refresh and audit their compliance programs to avoid hefty civil and criminal penalties and potential prison terms for implicated employees.
THE LATEST: FTC to Look Closely at Competition between Biologics and Biosimilars and Patent Protection Strategies of Branded Manufacturers
On July 18, 2018, US Food and Drug Administration (FDA) Commissioner Scott Gottlieb delivered a speech at The Brookings Institution in Washington, DC, discussing how to bolster competition from biosimilars while maintaining innovation.
The Commissioner noted the absence of true competition among biologics from biosimilar products in the United States, similarly to what the country experienced 30 years ago with respect to generics. The Commissioner said that this situation is caused, in part, by what he views as anticompetitive practices implemented by branded manufacturers, such as:
- Rebating schemes in which drug manufacturers bundle discounts to health insurers and employers across different pharmaceutical products;
- Multi-year contracts granting important rebates to payors, often entered into right before the entry of a biosimilar on the market;
- Volume-based rebates;
- Tying rebates, i.e., when rebates are offered if a product is bought together with a biologic;
- Patent thickets, i.e., when branded manufacturers’ own dense portfolios of overlapping intellectual property rights cover biologics; and
- Bundling biologics with other products, i.e., when a product is sold together with a biologic.
The Department of Justice Antitrust Division (DOJ) implemented new provisions in merger consent decrees that:
- Make it easier for DOJ to prove violations of a consent decree and hold parties in contempt;
- Allow DOJ to apply for an extension of the decree’s term if the court finds a violation; and
- Shift DOJ’s attorneys’ fees and costs for successful enforcement onto the parties.
DOJ has implemented these provisions in four decrees to date1, and has communicated that it will require the same in future decrees.WHAT THIS MEANS
For merger decrees, by reducing its burden of proof for decree violations, DOJ is shifting additional risk to parties for divestitures that do not go as planned. Willfulness is not a required element of civil contempt2, so the change to the burden of proof is significant. Parties will need to be sure to commit to realistic divestiture timelines and asset packages that will not present undue implementation challenges.
For non-merger decrees, settling parties will need to remain vigilant against decree violations or even the appearance of them, as the DOJ has ratcheted up its ability to obtain large settlements and civil penalties for violations.THE CHANGES
The DOJ states that its changes are driven by the principle that antitrust enforcement is law enforcement, not regulation3. Nonetheless, the main impact of the changes is to increase the risk and potential cost on merging parties.
Preponderance Is Now Enough: Reversing the “clear and convincing evidence” standard that has been in place for civil contempt cases since at least the 1960s4, DOJ is now requiring settling parties to agree that a preponderance of the evidence will be enough for a showing of civil contempt and for an appropriate remedy. DOJ states that under the old standard, the DOJ frequently had to engage in extensive discovery when faced with a violation, giving the parties an incentive to hold out from a resolution and “exacerbate the situation.”5 Under a preponderance of the evidence standard, it will be easier for the DOJ to bring an enforcement action without conducting a full CID investigation.
Fee-Shifting Now the Norm: The DOJ now requires the shifting of fees and costs to the parties in the event a violation is proven. DOJ states that fee-shifting provisions are standard fare in many private contracts. Their use by DOJ is designed to discourage violations of consent decrees and speed resolution of disputes.
DOJ Can Request Extension of Decrees: Settling parties must now agree that in the event a court finds a violation, DOJ can request a one-time extension of the decree’s term. The extension that DOJ can request is not time-limited, and the new language does not set forth a standard for when the court should grant DOJ’s request. For decrees that involve costly monitoring and affirmative compliance, this open-ended provision may greatly raise the cost of disputing an alleged violation.CONCLUSION
The DOJ’s new provisions shift risk and cost to settling parties in the [...]
Between 2012 and 2013, Marine Harvest ASA (“Marine Harvest”), a Norwegian seafood company, acquired Morpol ASA (“Morpol”), a Norwegian producer and processor of salmon. Marine Harvest notified the transaction to the European Commission under the European Union’s Merger Regulation (“EUMR”), but implemented it prior to the European Commission having granted clearance. In 2014, the European Commission imposed a EUR 20 million fine on Marine Harvest for “jumping the gun”. On 26 October 2017, the General Court of the European Union (“General Court”) confirmed the European Commission’s decision (“Decision”).WHAT HAPPENED:
On 14 December 2012, Marine Harvest entered into a share and purchase agreement (“SPA”) with companies owned by Jerzy Malek, the founder and former CEO of Morpol. Under the SPA, Marine Harvest acquired 48.5% of the shares in Morpol (“Initial Transaction”). The Initial Transaction was closed on 18 December 2012. On 15 January 2013, Marine Harvest submitted a mandatory public offer for the remaining 51.5% of the shares in Morpol (“Public Offer”). Following settlement and completion of the Public Offer in March 2013, Marine Harvest owned a total of 87.1% of the shares in Morpol (together, the “Transaction”).
Marine Harvest established first contact with the European Commission on 21 December 2012 by submitting a “Case Team Allocation Request”, which initiates the pre-notification process under the EUMR. After submitting various drafts and answers to requests for information, Marine Harvest formally notified the Transaction on 9 August 2013. On 30 September 2013, the European Commission cleared the Transaction subject to some conditions.
On 31 March 2014, the European Commission formally launched a separate investigation into alleged “gun jumping” by Marine Harvest, and in the decision of 23 July 2014, the European Commission imposed a fine of EUR 20 million on Marine Harvest (“Fining Decision”). The European Commission held that Marine Harvest, by implementing the Initial Transaction, had acquired de facto control over Morpol. By acquiring de facto control, Marine Harvest had infringed Art. 7(1) EUMR (“Standstill Obligation”). Under the Standstill Obligation, transactions requiring notification to, and clearance by, the European Commission may not be implemented prior to clearance.
The European Commission rejected Marine Harvest’s argument that the implementation of the Initial Transaction was covered by an exemption provided for in Art. 7(2) EUMR (“Public Bid Exemption”). Under the Public Bid Exemption, the acquisition of control from various sellers through a public bid, or a series of transactions in securities, can be implemented prior to clearance. However, this applies only if the transaction is notified without delay to the European Commission, and if the acquirer does not exercise the respective voting rights. According to the European Commission, the Public Bid Exemption is not intended to cover situations involving the acquisition, from a single seller, of a “significant block of shares” which in itself confers de facto control.
Marine Harvest appealed against the Fining Decision to the General Court. However, with the Decision, the General Court confirmed the European Commission findings, both on substance on with respect to the level of the fine.WHAT [...]
On October 19, 2017, the French Competition Authority (the “FCA”) imposed a EUR 302 million fine on the three leading companies in the PVC and linoleum floor coverings sector; Forbo, Gerflor and Tarkett, as well as the industry’s trade association, SFEC (Syndicat Français des Enducteurs Calandreurs et Fabricants de Revêtements de Sols et Murs), for price-fixing, sharing commercially sensitive information, and signing a non-compete agreement relating to environmental performance advertising.
The FCA said the significant fine reflected the gravity of the offence and the long duration of the anticompetitive behavior, which for one company lasted 23 years.
The proceedings were originally initiated by unannounced inspections carried out in the floor coverings industry in 2013 by the FCA, acting on information submitted by the DGCCRF (Directorate General for Competition Policy, Consumer Affairs and Fraud Control), which resulted in the discovery of three distinct anticompetitive practices.
The FCA found that the three main manufacturers of floor coverings in France met secretly at so-called “1, 2, 3” meetings, from October 2001 to September 2011, at hotels, on the margins of official meetings of the SFEC or through dedicated telephone lines, in order to discuss minimum prices and price increases for their products. The manufacturers also entered into agreements covering a great deal of other sensitive information, such as the strategies to adopt with regard to specific customers or competitors, organization of sales activities and sampling of new products.
Confidential information exchange via the trade association
The FCA found that from 1990 until the start of the FCA’s investigations in 2013, Forbo, Gerflor and Tarkett also exchanged, in the context of official meetings of the SFEC, very precise information relating to their trading volumes, revenues per product category and business forecasts. In its decision, the FCA also raised the active role played by the SFEC, supporting companies in their conduct.
Non-compete agreement relating to environmental performance advertising
The three main manufacturers of floor coverings in France, together with the trade association, also signed a ‘non-compete’ agreement which prevented each company from advertising the individual environmental performance of its products. The FCA considered that this agreement may have acted as a disincentive for manufacturers to innovate and offer new products, earmarked by better environmental performance, compared to the products offered by their competitors.
Neither the manufacturers nor the trade association disputed the facts and all of them sought a settlement procedure. In addition, Forbo and Tarkett, leniency applicants, benefited from fine reductions corresponding to the respective dates they approached the FCA (the sooner, the higher the fine reduction), the quality of the evidence they provided and their cooperation during the investigation.
WHAT THIS MEANS
The FCA’s decision in the floor coverings cartel case has significant impact due to the total amount of the fines imposed which is (i) higher than the aggregate amount of sanctions imposed by the FCA in 2016 (i.e., EUR 202,873,000), and (ii) until now the highest fine imposed by the FCA in 2017, the FCA having imposed a EUR 100 million fine on Engie for abusing its dominant position in the [...]
On 6 December 2016, the European Commission cleared the acquisition of LinkedIn by Microsoft, subject to Microsoft granting LinkedIn’s competitors access to certain LinkedIn tools.
“BIG DATA” CONCERNS ANALYSED AND DISMISSED
The acquisition of LinkedIn’s “data” was one of the most anticipated issues in the case. Following Facebook/WhatsApp and Google/Doubleclick, Competition Commissioner Vestager highlighted the problem of “big data” in a 2016 speech, noting that “The problem for competition isn’t just that one company holds a lot of data. The problem comes if that data is really unique, and can’t be duplicated by anyone else.” As an overall matter, Microsoft’s and LinkedIn’s activities only overlapped in the provision of non-search online advertising services.
The Commission considered two ways in which combining the parties’ respective datasets relating to online advertising could harm competition. First, combining datasets can increase the parties’ market power in the supply of data, or increase barriers to entry for actual or potential competitors that need the data to compete, thus reducing competition. Second, even if the parties do not intend to combine their datasets post-merger, concerns can still arise if the datasets were the basis for competition between them pre-merger, and the transaction removed this competitive dynamic. The Commission dismissed these concerns, noting that Microsoft and LinkedIn had a limited presence in online advertising, did not compete closely and did not make their data available to third parties for advertising purposes. (more…)
THE LATEST: Enforcers Continue Recent Focus on Innovation Concerns with Emerson/Pentair Consent Agreement
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.
- 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 July 6, 2016, Danone S.A. (Danone) agreed to acquire The WhiteWave Foods Company (WhiteWave) for $12.5 billion.
WhiteWave is the leading manufacturer of fluid organic milk in the United States and one of the top purchasers of raw organic milk. Danone is the leading US manufacturer of organic yogurt (Stonyfield). Nearly 90 percent of the raw organic milk used by Danone to manufacture organic yogurt is supplied via a strategic agreement by CROPP Cooperative (CROPP). As of 2009, the strategic supply agreement between Danone and CROPP also includes Danone providing CROPP with an exclusive license for the production and sale of Stonyfield branded fluid organic milk.
WhiteWave and CROPP are the two largest purchasers and top competitors for purchasing raw organic milk from farmers in the Northeast US. Additionally, WhiteWave, CROPP and Danone-CROPP are the only nationwide competitors for the sale of fluid organic milk to retailers and have a 91 percent share of nationwide branded fluid organic milk: Horizon (WhiteWave), Organic Valley (CROPP) and Stonyfield (Danone-CROPP). (more…)
Rolls-Royce Proposed Acquisition of Spanish Rival Industria de Turbo Propulsores. The European Commission Invites Interested Third Parties to Submit Comments
On 4 March 2017, the European Commission (Commission) published a notice concerning the notification of the proposed acquisition of the Spanish aircraft company Industria de Turbo Propulsores SA (Spain, ITP), by Rolls-Royce Holdings plc. (UK, Rolls-Royce). Interested third parties, such as competitors, suppliers or customers can provide the Commission with their observations on the likely impact of the proposed transaction on competition in order to facilitate its substantive assessment.
Interested third parties’ observations must reach the Commission no later than 14 March 2017.
Rolls-Royce is active in the development and manufacture of aircraft engines and power systems for civil aerospace, defense aerospace, marine and energy applications. ITP is a joint venture between Rolls-Royce and Sener Grupo de Ingenieria SA, and it is active in the design and manufacture of aircraft engine components.