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.

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). Continue Reading THE LATEST: Entanglements and Concentrated Markets Require Divestiture in the Dairy Industry

On January 30, 2015, the Federal Trade Commission (FTC) announced a settlement of its investigation into Sun Pharmaceutical Industries Ltd.’s (Sun) acquisition of Ranbaxy Laboratories Ltd. (Ranbaxy) from Daiichi Sankyo Co., Ltd.  Sun and Ranbaxy are both multinational pharmaceutical companies that produce a range of generic and branded drugs.

In its complaint, the FTC alleges the relevant product market to be “the development, license, manufacture, marketing, distribution, and sale of generic minocycline hydrochloride 50 mg, 75 mg, and 100 mg tablets (‘minocycline tablets’).”  Ranbaxy is currently one of only three U.S. suppliers of the relevant doses of minocycline tablets, with Sun being one of a limited number of firms likely to enter the alleged market in the near future.  The complaint further alleges that the acquisition would eliminate a potential future competitor and therefore tend to substantially lessen competition by foregoing or delaying Sun’s entry into the relevant market and increase the likelihood that the combined entity would reduce price competition.

To resolve the competitive concern, the FTC is requiring divestiture not only of the minocycline tablets but also a product outside of the alleged relevant market—minocycline capsules.  In its aid to public comment, the FTC states that this out-of-market divestiture is necessary to ensure that the divestiture buyer “achieves regulatory approval to qualify a new [active pharmaceutical ingredient] supplier for its minocycline tablets as quickly as Ranbaxy would have.”

Once the FTC or U.S. Department of Justice  determines that a competitive problem exists, the agency will seek potential remedies, including divestiture.   A cornerstone principle the agencies apply in evaluating a proposed remedy is that the remedy must restore competition to the level that would have existed had the underlying merger or acquisition not proceeded.   This case illustrates an application of that principle, where the FTC required the divestiture of the out-of-market assets because, in its view, if those assets were not included the remedy would have left the relevant product market less competitive than it would have been if Sun and Ranbaxy remained independent competitors.

Although not a common outcome, firms considering a transaction involving products subject to regulatory approval should take note of the potential for out-of-market divestitures when assessing a potential deal.

The FTC’s complaint and related documents can be found here.

In a challenge brought both by private plaintiffs and the government, a court has ruled that a health system’s acquisition of a competing physician group practice violated the antitrust laws where the transaction resulted in the health system employing 80 percent of the primary care physicians in one area.  Hospitals and health systems pursuing physician practice mergers should carefully consider the implications of this decision on proposed acquisitions and should incorporate antitrust due diligence into their transaction planning.

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