On January 28, the US Federal Trade Commission (FTC) announced that it had accepted a proposed settlement with office supply distributors Staples and Essendant in connection with Staples’ proposed $482.7 million acquisition of Essendant. The settlement suggests that the FTC is currently more willing than the US Department of Justice (DOJ) to accept conduct remedies to resolve competitive issues raised by vertical mergers.

WHAT HAPPENED:

  • The FTC Commissioners voted 3-2 to accept a proposed settlement establishing a firewall to prevent Staples from receiving competitively sensitive customer information from Essendant.
  • Staples is the largest reseller of office products in the US, and one of only two retail office supply superstores in the US. Essendant is one of only two nationwide office product wholesale distributors. In September 2018, Staples agreed to acquire Essendant.
  • Staples competes with various resellers to sell office supplies to mid-sized companies. Many of those resellers rely on Essendant as their wholesale distributor. In that role, resellers have to provide Essendant with detailed information about their end customers’ identities, purchasing history, product preferences and similar data.
  • The FTC alleged in its complaint that the transaction was likely to harm competition by giving Staples access to the commercially sensitive information (CSI) of Essendant’s resellers and those resellers’ end customers. The FTC contended that access to that information could allow Staples to offer higher prices than it otherwise would when bidding against a reseller for an end customer’s business.
  • To address this competitive concern, the FTC imposed a conduct remedy. Specifically, the FTC required the parties to establish a firewall limiting Staples’ access to the CSI of Essendant’s resellers and the end customers of those resellers.
  • Two FTC Commissioners issued dissenting statements, arguing that the settlement does not fully remedy the transaction’s likely anticompetitive effects. In the dissenters’ view, the evidence suggests that the integrated firm could implement a strategy of raising costs for Staples’ reseller rivals.

WHAT THIS MEANS:

  • The settlement indicates that the FTC remains willing to cure competitive issues raised by vertical mergers with conduct remedies, such as firewalls, instead of imposing a divestiture or seeking to block the deal.
  • Under Makan Delrahim’s leadership, the DOJ’s Antitrust Division has been less receptive of conduct remedies, even in vertical merger cases. Delrahim has stated that conduct remedies are fundamentally regulatory and are inconsistent with the DOJ’s role as a law enforcement agency.
  • The DOJ refused to accept conduct remedies to resolve the competitive issues arising from AT&T’s acquisition of Time Warner. DOJ challenged the transaction in federal court. In June 2018, a DC district court judge ruled against the DOJ, and the case is currently on appeal to the DC Circuit.
  • One of the FTC Commissioners, Rebecca Kelly Slaughter, argued in her dissenting statement that the FTC should be more willing to challenge, and seek to block vertical mergers when it identifies competitive concerns. That position is more aligned with the DOJ’s currently stated policy, but overall the FTC appears more willing to accept conduct remedies than the DOJ.

This month has seen significant changes in the landscape of federal leadership and the changes have now reached the Federal Trade Commission (FTC). On January 13, current Chair Edith Ramirez announced that she would resign from her position effective February 10, 2017. This Wednesday, January 25, the new administration designated Maureen Ohlhausen as Acting Chair. Ohlhausen, a Republican, was one of two remaining commissioners at the agency, along with Democrat Terrell McSweeny.

Ramirez served as a commissioner since 2010 and chair since early 2013 by designation of fellow Harvard Law Review member, President Obama. She spent her early career as a litigator with Quinn Emanuel and focused on antitrust, unfair competition and Lanham Act work. From the beginning of her tenure as chair, Ramirez developed a reputation as a hard-working and effective leader who was experienced, even-handed and not afraid to bring mergers to court. As a Latina and the daughter of Mexican immigrants, Ramirez was the first member of an ethnic minority to oversee the agency. During her tenure, she also secured a number of high-profile wins for the commission.

Ohlhausen has been a commissioner since 2012, though she started at the FTC’s General Counsel’s Office back in 1997. She has also worked as an advisor to former FTC Commissioner Orson Swindle and has been Deputy Director and then Director of the Office of Policy Planning. Ohlhausen stated at a Heritage Foundation antitrust conference this month that “all signs point to a new antitrust policy.” She discussed narrowing the scope of “Second Requests” in merger reviews by making them more targeted and therefore less burdensome. She also expressed a priority of greater protection for intellectual property rights, complaining that the agency has been too quick to accuse standard essential patent (SEP) holders of anticompetitive behavior when suing to defend their rights.

Meanwhile, the new administration’s position on merger activity hasn’t been clear. While in October 2016, Donald Trump described the AT&T-Time Warner deal as “a deal we will not approve in my administration because it’s too much concentration of power in the hands of too few,” and said that Comcast’s acquisition of NBC Universal “concentrates far too much power in one massive entity that is trying to tell the voters what to think and what to do,” he has subsequently chosen advisers on telecom and antitrust issues who appear to apply traditional antitrust analysis that is more merger-friendly than the prior administration.

Republican and Former Commissioner Joshua Wright leads the new administration’s transition of the FTC. The incoming administration will need to find three new commissioners for the five-member panel. At least one of the three must be a Democrat. The new appointments will be very important to follow for clients considering mergers in the near future.

The wireless industry has seen steady consolidation since the late 1980s.  Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively.  Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.

T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.”  Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,”  As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.

Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011.  Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.”  In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses.  In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T.  The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition.  This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.

The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition.  The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”