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Antitrust M&A Snapshot | Q2 2021

In the United States, aggressive antitrust enforcement is likely to continue with the appointment of Lina Khan as Federal Trade Commission (FTC) Chair and the nomination of Jonathan Kanter to lead the Department of Justice’s (DOJ) Antitrust Division. The premerger notification landscape continues to shift as filings reach another record high. Technology companies remain in the “hot seat” as legislators in the US House of Representatives introduced five antitrust reform bills that would change the enforcement landscape for digital platforms, including seeking to preclude large digital platform companies from acquiring smaller, nascent competitors. And the US Department of Justice is making good on President Biden’s pledge to regulate “Big Ag” by challenging Zen-Noh Grain Corporation’s proposed acquisition of 38 grain elevators from Bunge North America, Inc.

Meanwhile, in Q1 2021, the European Commission (Commission) published its Guidance on Article 22 of the EU Merger Regulation. The Guidance encourages the EU Member States to refer certain transactions to the Commission even if the transaction is not notifiable under the laws of the referring Member State(s). In Q2, not long after the issuance of the Guidance, the Commission received its first referral request to assess the proposed acquisition of GRAIL by Illumina. In light of the growing global debate on the need for more effective merger control, EU Competition Commissioner Margrethe Vestager confirmed that the Commission will not soften EU merger policy going forward. The Commission’s statement was made despite the fact no deals have been blocked by the Commission in about the last two years.

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FTC Looks to Fix Repair Restrictions

A newly announced change in Federal Trade Commission (FTC) policy could have dramatic implications for the ways manufacturers of everything from cell phones to cars draft warranties, design products, and distribute replacement parts. Specifically, the FTC has set its sights on repair restrictions.

On July 21, the Commission unanimously voted to approve a policy statement announcing increased antitrust and consumer protection enforcement against business practices that make it difficult for consumers to repair their own products, or use independent repair shops. Manufacturers should take note of this import change in enforcement policy, and promptly evaluate their exposure.

Notably, the FTC’s announcement comes on the heels of President Biden’s executive order “Promoting Competition in the American Economy,” which encouraged the FTC to address “anticompetitive restrictions on third-party repair or self-repair of items…” It also follows a recent report by the FTC to Congress addressing repair restrictions, and a July 2019 FTC workshop examining the issue.

One area of particular concern for the FTC is product warranties that require the use of specific service providers or parts. Section 102(c) of a 1975 federal law known as the Magnuson-Moss Warranty Act (MMWA) prohibits companies from conditioning warranty coverage, expressly or impliedly, on a consumer’s use of an article or service identified by brand, trade, or corporate name, unless the company provides that article or service without charge or the company has received a waiver from the FTC.

Recent reports, including empirical analyses cited by the FTC in its report to Congress, suggest that violations of Section 102(c) are widespread. Indeed, one recent analysis by a prominent public interest group alleged that 45 out of 50 companies whose warranties the group examined appeared to violate the provision. Accordingly, Section 102(c) enforcement is likely to play a prominent role in the FTC’s crackdown.

It also appears that the FTC intends to use its broad authority under Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices,” to challenge a wide range repair restrictions. In its report to Congress, the FTC highlighted the following practices in particular as “restricting independent repair or repair by consumers:”

  • “Physical restrictions” and “product designs that complicate or prevent repair”;
  • Purposely making parts, repair manuals, and diagnostic software and tools unavailable;
  • Designs that make independent repairs less safe, such as the use of glue to fasten lithium ion cells into mobile phones and other devices;
  • Steering consumers to preferred repair networks using telematics;
  • “Policies or statements that steer consumers to manufacturer repair networks”;
  • “Application of patent rights and enforcement of trademarks;
  • Disparagement of non-OEM parts and independent repair”;
  • “Software locks, Digital Rights Management and Technical Protection Measures”; and
  • “End User License Agreements.”

The diverse range of practices that the FTC has identified make this shift in enforcement an important issue for a wide range of companies. Still, there are clues to how the FTC may deploy its scarce resources in this area, at least initially.

First, its prior enforcement may provide an indication. In 2015, [...]

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FTC “Prior Approval” Policy for Future Transactions Raises Antitrust Risks for Buyers and Sellers

The US Federal Trade Commission (FTC) voted July 21, 2021, to repeal a 1995 policy statement that eliminated prior approval and prior notice provisions from most merger settlements. In repealing this longstanding policy—and likely insisting on the inclusion of such provisions in future settlements—the FTC will have significantly greater authority to review and block future transactions of companies who enter into consent orders with the FTC. This policy change will have significant implications for the negotiation of antitrust risk provisions in transaction agreements.

WHAT HAPPENED:

  • In its 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases, the FTC announced that it would no longer routinely require prior approval of certain future acquisitions in consent orders entered in merger cases.
    • Prior to this statement, FTC consent orders to settle merger reviews routinely required parties to seek and receive the FTC’s prior approval for future acquisitions in the relevant product and geographic markets at issue in the first challenge/consent order for a 10-year period. In some cases, the FTC also included a prior notice provision obligating companies to notify the FTC of any intended transactions that were not subject to the premerger notification and waiting period of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
  • On July 21, 2021, the FTC voted 3-2 to rescind its 1995 policy statement, opening the door to requiring prior approval and prior notice provisions in future merger consent orders.

 
WHAT THIS MEANS:

  • This policy change substantially increases the FTC’s merger enforcement authority for companies that settle investigations with a consent order and become subject to prior approval requirements.
    • Prior approval provisions place the burden on companies to demonstrate that their transactions are not anticompetitive.
    • The FTC can deny approval for these future transactions with very little—if any—limits on its discretion.
    • This differs significantly from the enforcement regime under Section 7 of the Clayton Act, where the FTC has the burden of proving that a transaction will substantially lessen competition or tend to create a monopoly.
  • Prior notice provisions require companies to provide the FTC with advanced notice of certain transactions—even smaller transactions that typically would fall under the HSR threshold (e.g., transactions valued below $92 million). The notification requirement increases the likelihood of FTC investigation for these transactions.
  • By rescinding the 1995 policy statement, the FTC may seek to impose such provisions in its orders as a routine matter. It remains to be seen under what circumstances the FTC will insist on prior approval or prior notice (or how broad they will be crafted). In supporting the repeal, FTC Chair Lina Khan stated that the FTC will employ these provisions based on “facts and circumstances of the proposed transaction.”
    • These prior approval and/or notice provisions, when previously employed, generally lasted for the term of the order—typically 10 years.
    • Generally, the scope of these provisions was limited to the geographic and product market in which the FTC determined that the [...]

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Executive Order Encourages FTC, DOJ to Address Hospital Consolidation, Vigorously Enforce Antitrust Laws

President Biden recently issued an executive order affirming his administration’s policy of enforcing the antitrust laws to “combat the excessive consolidation of industry” and cited healthcare markets as one of several priorities. The Federal Trade Commission (FTC) and US Department of Justice (DOJ) already have been actively enforcing the antitrust laws in provider consolidation matters. The FTC is currently challenging the proposed merger of two health systems in New Jersey, and in the past year unsuccessfully challenged the combination of Jefferson Health and Einstein Health in Philadelphia and successfully challenged the proposed combination of two health systems (Methodist Le Bonheur and Saint Francis) in Memphis.

The executive order follows a proposed bill to increase budgets for the FTC and DOJ, FTC resolutions on compulsory process in healthcare investigations, congressional calls to investigate the use of COVID-19 Provider Relief Fund payments for acquisitions, the FTC physician practice acquisition retrospective and other health antitrust developments.

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Second Circuit Rejects FTC Challenge of 1-800 Contacts, Highlighting Procompetitive Trademark Policy

The US Court of Appeals for the Second Circuit vacated a final order of the Federal Trade Commission (FTC), which had found that agreements to refrain from bidding on keyword search terms for internet advertisements violated Section 5 of the FTC Act. The Court made clear that although trademark agreements are not necessarily immune from antitrust scrutiny, they are entitled to significant deference. 1-800 Contacts, Inc. v. Federal Trade Commission, Case No. 18-3848 (2d Cir. June 11, 2021) (Per Curium). The Second Circuit held that the FTC applied an incorrect analytical framework and incorrectly concluded that the agreements were an unfair method of competition under the FTC Act.

1-800 Contacts and its competitors advertise online through search advertising. They bid on search engine keywords, which help display their websites in response to consumer searches. They also bid on negative keywords, which prevent their ads from being displayed when consumers search for specified terms.

Between 2004 and 2013, 1-800 Contacts entered into a series of settlement agreements to resolve trademark disputes with competitors, as well as one commercial agreement with a competitor, all of which included terms prohibiting the parties from using each other’s trademarks, URLs and similar terms as search advertising keywords. The agreements also required the parties to use negative keywords so that a search including one party’s trademarks would not trigger a display of the other party’s ads. 1-800 Contacts enforced these agreements when it believed them to be breached.

The FTC challenged the agreements, alleging that they “unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions,” violating Section 5 of the FTC Act, 15 U.S.C. § 45. An administrative law judge (ALJ) subsequently found the agreements to violate Section 5. 1-800 Contacts appealed to the full Commission, which affirmed the ALJ’s decision. 1-800 Contacts appealed.

The Second Circuit vacated the FTC’s decision but noted that the FTC was correct to reject 1-800 Contacts’ argument that trademark settlement agreements are necessarily immune from antitrust scrutiny. Citing the Supreme Court decision in Actavis, the Second Circuit held, “the mere fact that an agreement implicates intellectual property rights does not immunize an agreement from antitrust attack.”

The Second Circuit disagreed with the FTC’s specific antitrust analysis, however. The Court held that the FTC erred by applying an “inherently suspect” analysis—also known as a “quick-look” analysis—rather than the rule of reason. The Court focused on the fact that “the restraints at issue here could plausibly be thought to have a net procompetitive effect because they are derived from trademark settlement agreements,” and the fact that the FTC acknowledged as much by finding that the company’s justifications were “cognizable and, at least, facially plausible.” The Second Circuit also noted that courts have limited experience with these types of agreements. The Court concluded that “[w]hen, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our judicial experience . . . . [w]e are bound . . [...]

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Senate Passes Bill to Substantially Increase HSR Merger Filing Fees for Deals Greater Than $5 Billion

On June 6, 2021, the US Senate passed the Merger Filing Fee Modernization Act of 2021. The bill is co-sponsored by Senator Amy Klobuchar (D-MN), the Chairwoman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights; and Senator Chuck Grassley (R-IA).

The bill amends the premerger notification provisions of 15 U.S.C. § 18a and substantially increases the Hart-Scott-Rodino Act (HSR) filing fees for large mergers, while also effectuating a slight decrease in HSR filing fees for smaller mergers. The text of the bill can be found here.

The adjusted HSR filing fees are as follows:

The proposed HSR filing fees are subject to annual increases based on the Consumer Price Index (CPI), unless the CPI increase is less than 1%. Any changes must be published by the Federal Trade Commission (FTC) each year (no later than January 31). The HSR filing fee thresholds themselves will remain correlated to Gross National Product (GNP).

The competition agencies also stand to directly gain from the passage of this bill. Section 3 of the bill authorizes the appropriation of increased funds for both the Department of Justice Antitrust Division (DOJ) and the FTC. The bill appropriates $252 million to the DOJ and $418 million to the FTC, substantially increasing the resources at the disposal of the regulatory agencies and even exceeding the FTC’s requested budget for FY 2022.

The bill is still subject to approval in the House of Representatives and by President Biden. But given the bipartisan support for this bill, its passage appears likely, and it raises the potential for additional bipartisan antitrust legislation in the future.




Proposed Bill to Substantially Increase HSR Merger Filing Fees for Deals Greater Than $5 Billion Advances Out of Committee

On Thursday, May 13, the US Senate Judiciary Committee voice-vote approved and advanced Senator Amy Klobuchar’s (D-MN) Merger Filing Fee Modernization Act of 2021. This bill seeks to increase HSR filing fees required for mergers and acquisitions, altering fees for all transactions, and substantially increasing HSR filing fees for deals greater than $5 billion to $2.25 million. HSR filing fees have not been updated since 2001.

The proposed bill would further increase the fees each year in accordance with the Consumer Price Index. In an effort to gain bipartisan support, the bill would decrease filing fees for smaller transactions, while increasing fees significantly for all deals over $500 million. Below are tables showing the proposed HSR filing fees versus the current HSR filing fees based on transaction size.

Although no changes are imminent, the advancement of this bill indicates politicians’ continued focus on increasing the burden on mid-size and larger companies seeking to merge, while slightly reducing fees for smaller transactions.Senator Klobuchar has argued that the substantial increase in fees for larger deals is needed because of the government cost required to investigate larger deals. Further, she said she believes the affected parties, such as major technology companies, could easily handle the cost because it is a small expense compared to the amount these companies often spend on legal and professional support in effectuating the deals.




Top Takeaways: Permissible Provider Collaborations During COVID-19 and Beyond

If you missed our latest webinar, enjoy the replay below and learn more as we provide highlights on competitor collaborations, avoiding violations in labor markets, provider M&A and partial acquisitions.


Competitor Collaborations
  • Antitrust compliance remains an important priority in the US. While companies have been engaged in finding creative solutions to COVID-19 challenges and regulators are expressing a willingness to be more flexible in interpreting and enforcing the law, the pandemic is not a carte blanche to engage in anti-competitive
  • Regulators are more prone to accept collaborations limited in scope to respond to COVID-19 and its aftermath, and arrangements undertaken at the behest of or in partnership with government actors. Companies should avoid high-risk conduct such as direct exchanges of competitively sensitive
  • Procompetitive agreements not relating to price, wages or market/product allocations remain possible. Companies should conduct an antitrust analysis before entering new collaborations and consider whether it would be helpful or advisable to engage with federal antitrust authorities or state governments to receive
Avoiding Antitrust Violations in Labor Markets
  • COVID-19 does not change antitrust rules for labor Antitrust laws apply to labor markets just as they do to markets for goods and services. Agreements with competing employers not to recruit, to set employee compensation or hours or to exchange confidential compensation information that reduces compensation can violate the antitrust laws. The Department of Justice (DOJ) will prosecute certain labor market antitrust violations criminally.
  • Establish guardrails to minimize antitrust risk in labor markets. Non-solicitation covenants that are part of broader collaborations should be tailored in scope to minimize antitrust Compensation benchmarking and salary surveys should be done in compliance with DOJ, FTC guidance.
Provider M&A
  • Antitrust planning for transactions should begin early in the deal. This allows the antitrust strategy to be developed and pursued based on specific facts. This planning should include due diligence regarding market conditions, the rationale or justification for pursing the transaction and the financial position of the Parties should also adopt protocols for document creation and communications.
  • Parties should consider transaction efficiencies, and how they benefit payors and patients. Clearly articulating the deal’s cost, access, quality and other benefits can help reduce deal delays from antitrust
Partial Acquisitions
  • Partial acquisitions potentially may help healthcare entities mitigate both the financial impact of the COVID-19 crisis and antitrust Acquiring a minority share in a rival can be less competitively restrictive than doing a full-scale merger or acquisition, because by law the parties must remain and act as separate and independent competitors.
  • But anticompetitive effects can result from a partial acquisition and the FTC/DOJ Horizontal Merger Guidelines identify three reasons why: the partial buyer may be able, through board seats or governance rights, to influence the target’s decisions; the buyer may have an incentive to compete less aggressively to protect its investment; and the buyer may have access to its rival’s competitively [...]

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FTC and DOJ Issue Joint Antitrust Statement Regarding COVID-19 and Competition in Labor Markets

The COVID-19 pandemic has placed additional stressors on labor markets, particularly for healthcare workers and essential employees. While recognizing that employers, recruiters and staffing agencies may need—and be allowed to—cooperate in unprecedented ways to address current needs, on April 13, 2020, the US Department of Justice and US Federal Trade Commission issued a joint statement reinforcing their vigilance against collusion or anticompetitive conduct in labor markets and their willingness to pursue criminal and civil actions against violators.

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Antitrust M&A Snapshot | FTC and DOJ Continue M&A Transaction Investigation While UK CMA Continues Role as Key Jurisdiction in Merger Clearance Process

Antitrust regulators in the United States and Europe were very active in the final quarter of 2019. The FTC and DOJ continue to investigate and challenge M&A transactions in a variety of industries. Events of this quarter highlight the importance of states in merger enforcement. As well, recent FTC activity highlights the regulators’ focus on preventing monopolists from buying nascent competitors.

In Europe, the UK CMA continues to expand its role as a key jurisdiction in the merger clearance process, which will only accelerate with Brexit. The EC agreed to clear, subject to conditions, acquisitions in the aluminum production and battery industries as well as in the wholesale supply and retail distribution of TV channels after conducting Phase II reviews. Moreover, the EC opened new in-depth investigations into transactions in the copper refining and engineering sectors.

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