Antitrust regulators in the United States and Europe were very active in the final quarter of 2018 closing a large number of cases requiring in-depth investigations. In the United States, regulators continue their focus on the potential need to update their methods of reviewing high-tech transactions with public hearings on the future of antitrust enforcement.

In Europe, recent reviews of Takeda’s acquisition of Shire and the creation of a joint venture between Daimler and BMW show a focus on how transactions will impact innovation for new products.

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The US Department of Justice (DOJ) recently sued former joint venture partners because they allegedly coordinated their competitive activities beyond the legitimate scope of their venture. This case illustrates several important points. First, companies who collaborate through joint ventures and similar arrangements need to be mindful that any legitimate collaborative activity does not “spill over” to restrain competition in other unrelated areas. Second, DOJ discovered the conduct during its review of documents produced in connection with a merger investigation. This is the most recent reminder of how broad ranging discovery in merger investigations can result in wholly unrelated conduct investigations and lawsuits. Third, one of the parties was a portfolio company of a private equity sponsor, highlighting how private investors can be targeted for antitrust violations. Continue Reading Out of Bounds: Sports Agencies Flagged for Anticompetitive Bidding Agreements

The US Federal Trade Commission recently announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.

Notification Threshold Adjustments

The US Federal Trade Commission (FTC) announced revised thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) pre-merger notifications on February 15, 2019. These increased thresholds will become effective mid-to-late March. These new thresholds apply to any transaction that closes on or after the effective date.

  • The base filing threshold, which frequently determines whether a transaction requires filing of an HSR notification, will increase to $90 million.
  • The alternative statutory size-of-transaction test, which captures all transactions valued above a certain size (even if the “size-of-person” threshold is not met), will be adjusted to $359.9 million.
  • The statutory size-of-person thresholds will increase slightly to $18 million and $180 million.

The adjustments will affect parties contemplating HSR notifications in various ways. Transactions that meet the current “size-of-transaction” threshold, but will not meet the adjusted $90 million threshold, will only need to be filed if they will close before the new thresholds take effect mid-to-late March.

Parties may also realize a benefit of lower notification filing fees for certain transactions. Under the rules, the acquiring person must pay a filing fee, although the parties may allocate that fee amongst themselves. Filing fees for HSR-reportable transactions will remain unchanged; however, the size of transactions subject to the filing fee tiers will shift upward as a result of the gross national product (GNP)-indexing adjustments:

Filing Fee Size-of-Transaction
$45,000 $90 million, but less than $180 million
$125,000 $180 million, but less than $899.8 million
$280,000 $899.8 million or more
Interlocking Directorate Thresholds Adjustment

The FTC also announced revised thresholds for interlocking directorates. The FTC revises these thresholds annually based on the change in the level of GNP. Section 8 of the Clayton Act prohibits a person from serving as a director or officer of two competing corporations if certain thresholds are met. Pursuant to the recently revised thresholds, Section 8 of the Clayton Act applies to corporations with more than $36,564,000 in capital, surplus and undivided profits, but it does not apply where either interlocked corporation has less than $3,656,400 in competitive sales. These new thresholds are effective immediately upon publication in the Federal Register, expected within the week.

The Federal Trade Commission (FTC) submitted comments supporting the Food and Drug Administration’s (FDA) guidance for assessing whether a pharmaceutical company petitioner is misusing the citizen petition process to delay approval of a competing drug.

WHAT HAPPENED:

  • The FDA released revised draft guidance intended to discourage pharmaceutical companies from gaming the citizen petition process.
  • The FTC expressed approval of the considerations the FDA will use to determine whether a petition was submitted to delay or inhibit competition.
  • The considerations the FDA will use include:
    • The petition was submitted unreasonably long after the petitioner learned or knew about the relevant information;
    • The petitioner submitted multiple and/or serial petitions;
    • The petition was submitted close to the expiration date of a known patent or exclusivity;
    • The petition’s scientific positions were unsupported by data or information;
    • The petition was the same or substantially similar to a prior petition to which the FDA had already substantively responded;
    • The petitioner had not commented during other opportunities for input;
    • The petition requested a standard more onerous or rigorous than the standard applicable to the petitioner’s drug product; and
    • Other relevant considerations, including the petitioner’s history with the FDA.

WHAT THIS MEANS:

  • Each of the FTC commissioners testified during Senate confirmation hearings that scrutinizing health care and pharmaceutical companies would remain a top priority of the Commission.
  • The FTC’s support of the FDA guidance appears to be part of a broader agenda to actively pursue sham petitions and discourage attempted abuses that seek to use Noerr-Pennington immunity as a shield in an administrative setting.
    • In 2017, the FTC filed a lawsuit in federal court alleging that Shire ViroPharma Inc. (Shire) violated antitrust laws through repeated use of sham petitioning.
    • Though the district court dismissed the FTC’s complaint, the FTC has lodged an appeal and appears committed to reining in alleged abuses of the citizen petition process.
    • Going forward, citizen petitions are likely to face even more scrutiny. Under the revised draft guidance, once the FDA determines that a petition was submitted primarily to delay competition, it will refer that determination to the FTC. Potentially anticompetitive petitions will now face two rounds of review by federal regulators.

The Department of Justice (DOJ) announced last week that it and the State of North Carolina have reached a settlement with Carolinas Healthcare System / Atrium Health relating to provisions in contracts between the health system and commercial insurers that allegedly restrict payors from “steering” their enrollees to lower-cost hospitals. The settlement comes after two years of civil litigation, and serves as an important reminder to hospital systems and health insurers of DOJ’s continued interest in and enforcement against anti-steering practices.

WHAT HAPPENED:

  • On June 9, 2016, the DOJ and the State of North Carolina filed a complaint in the Western District of North Carolina against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, now Atrium Health (Atrium).
  • In its complaint, DOJ accused Atrium of “using unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive health care services offered by [Atrium’s] competitors.”
  • DOJ alleged that Atrium held approximately a 50 percent share of the relevant market and was the dominant hospital system in the Charlotte area. DOJ defined the relevant product market as the sale of general acute care inpatient hospital services to insurers in the Charlotte area.
  • DOJ alleged that Atrium used market power to negotiate high rates and impose steering restrictions in contracts with insurers that restrict insurers from providing financial incentives to encourage patients to use comparable lower-cost or higher-quality providers. Such financial incentives include health plan designs that charge consumers lower out-of-pocket costs (such as copays and premiums) for using top-tier providers that offer better value, or for subscribing to a narrow network of providers.
  • Atrium also allegedly prevented insurers from offering tiered networks with hospitals that competed with Atrium in the top tiers, and imposed restrictions on insurers’ sharing of value information with consumers about the cost and quality of Atrium’s health care services compared to its competitors. These “steering restrictions” allegedly reduced competition and resulted in harm to consumers, employers, and insurers in the Charlotte area.
  • Atrium allegedly included these steering restrictions in its contracts with the four largest insurers who in turn provide coverage to more than 85 percent of commercially insured residents in the Charlotte area.
  • On March 30, 2017, the court denied Atrium’s motion for judgment on the pleadings, finding that the government met its initial pleading burden. Atrium had argued that the complaint failed to properly allege that the contract provisions actually lessened competition or lacked procompetitive effects.
  • More than a year later, on November 15, 2018, DOJ announced that the State of North Carolina and DOJ had reached a settlement with Atrium, which prohibits Atrium from continuing its practices of using alleged steering restrictions in contracts with commercial health insurers. The proposed settlement also prevents Atrium from “taking actions that would prohibit, prevent, or penalize steering by insurers in the future.” The agreement lists certain prohibitions and permissions for Atrium; for example, that Atrium may not enforce existing alleged anti-steering provisions, and must allow payors to be transparent with consumers about price, cost and quality information. However, Atrium is permitted to enforce other contract provisions that protect against carve outs (where an insurer unilaterally removes a health care service from coverage in a health plan), and may restrict payor steering for any co-branded plan or narrow network in which Atrium is the most prominently-featured provider.

WHAT THIS MEANS:

  • Going forward, both DOJ and the Federal Trade Commission (FTC) are likely to investigate similar contract provisions by health systems susceptible to allegations of market power. The resolution of the Atrium matter comes just one month after Senator Chuck Grassley sent a letter to FTC Chairman Joseph Simons, asking FTC to investigate certain allegedly anticompetitive hospital system managed care contracting practices and to assess how prevalent they are in the marketplace. Senator Grassley’s October 10 letter cited to a recent Wall Street Journal article detailing various provisions said to increase health care costs and restrict patient choice, including anti-steering provisions. The letter cited to the then-pending Atrium case specifically. In the wake of the Grassley letter and the Atrium settlement, hospital systems that have entered into alleged anti-steering provisions with payors may need to expect inquiry from the FTC or DOJ.
  • The Atrium settlement follows the resolution of another DOJ challenge to anti-steering provisions. Earlier this year, in American Express, the Supreme Court rejected DOJ’s challenge to the anti-steering rules that the credit card company imposed on merchants. The cases are distinguishable in part due to the difference in market share of defendants. American Express held 26.4 percent of the credit card market, whereas Atrium allegedly holds 50 percent of the relevant market asserted by DOJ.
  • Many watched the Atrium case as an opportunity for further guidance from the courts on the competitive implications of anti-steering practices, but the settlement means practitioners and industry members must continue to wait for judicial consideration of these types of provisions in the health care industry.
  • The Atrium matter serves as a reminder of the agencies’ interest in alleged anti-steering and other restrictive contracting practices. Now is an opportune time for hospital systems to review their managed care contracting practices for potential antitrust risk under the rule of reason, particularly hospital systems with relatively high shares within concentrated service areas or that have contracting provisions with payors representing a majority of the local patient population that could be characterized as allegedly restrictive.

The Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) recently formalized a new position on Hart-Scott-Rodino Act (HSR Act) reporting obligations for certain not-for-profit, non-stock transactions. The change is currently in effect and applies to transactions that have not yet closed. The change in position will require reporting of many hospital transactions that have not traditionally been treated as reportable events. The biggest area of change relates to affiliation transactions where hospitals or health systems affiliate under a new parent entity.

Under its previous position, the PNO focused on whether a transaction results in a change of “control” of the board of directors of one or more of the combining entities. Under its new position, the PNO will focus on beneficial ownership–whether one party receives beneficial ownership over the assets of another party as a result of the transaction. Now, a potentially reportable acquisition can occur even when there is no change in the control of the board of directors of one of the combining entities because formal board control is not the exclusive method of obtaining beneficial ownership.

In a recently published Tip Sheet, the PNO provided analysis of reportability for three types of not-for-profit combinations that it regularly sees, which we summarize below. The first two examples involve traditional application of the rules to hospital transactions, while the third example represents the PNO’s newly formed position on affiliations. Note that in all of the examples below, we focus on the nature of the transaction structure to evaluate whether a potentially reportable acquisition of assets has occurred. In any specific transaction, the parties would also need to evaluate whether the statutory thresholds are met (e.g., the $84.4 million size-of-transaction test), as well as whether any exemption applies.

1. A simple acquisition in which an existing acquiring person (g., a not-for-profit hospital) is deemed to hold the assets of the acquired entity (e.g., another not-for-profit hospital) as a result of the acquisition. This can happen in a variety of ways, such as a straight asset acquisition or a transaction in which one not-for-profit becomes the sole corporate member of another. If one not-for-profit obtains the right to manage and operate another through a corporate transaction, that is likely a reportable structure.

a. PNO conclusion: This structure is reportable as an asset acquisition.

2. A transaction in which the existing not-for-profit entities remain independent but form a new joint venture entity as a jointly owned subsidiary or affiliate. The pre-existing entities remain separate persons for HSR Act purposes.

a.  PNO conclusion: This structure is reportable. However, the 16 C.F.R. § 802.40 exemption for the formation of a not-for-profit joint venture is likely to apply.
b. The illustration below depicts this structure:

3. A transaction in which the existing not-for-profit entities consolidate under a new not-for-profit entity. The existing entities lose their separate pre-acquisition identities or become wholly owned subsidiaries of the new entity. The exact structure of board appointment for the members of the not-for-profit entities does not drive the reportability assessment.

a. PNO conclusion: Under the PNO’s new position, the transaction is reportable as a consolidation.
b. The illustration below depicts this structure:

In the Tip Sheet, the PNO described several factors that it has considered relevant to the analysis of beneficial ownership in the context of hospitals affiliating under a new entity:

  • The new entity becomes the corporate member of the affiliating hospital entities
  • The new entity has the right to authorize and/or approve the articles, bylaws, and other governance documents of the affiliating hospital entities
  • The new entity has the right to authorize and/or approve the sale or lease of the affiliating hospital assets
  • The new entity has the right to appoint and/or approve the senior officers of the affiliating hospital entities
  • The new entity has the right to devise and/or approve the strategic plans, capital budgets and expenditures, and significant contracting of the affiliating hospitals

Overall, not-for-profit hospital systems need to plan for HSR Act filings being required for many transactions that, under prior PNO analysis, would not have required notification. While the FTC would routinely investigate hospital affiliations that did not require HSR Act filings, the FTC will have additional procedural leverage when there is a mandatory filing, which creates the statutory waiting periods and Second Request mechanisms.

Recently, a federal district court in California granted partial summary judgment for the US Federal Trade Commission (FTC) in an important intellectual property and antitrust case involving standard essential patents (SEP). The court’s decision requires an SEP holder to license its SEPs for cellular communication standards to all applicants willing to pay a fair, reasonable and non-discriminatory (FRAND) rate, regardless of whether the applicant supplies components or end-devices. The decision represents a significant victory for the FTC in enforcing its views of an SEP holder’s commitments to license patents on FRAND terms.

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United States: July – September 2018 Update

Both US antitrust agencies marked the third quarter of 2018 with significant policy announcements regarding the merger review process. The announced reforms seek to expedite the review process through cooperation between the agencies and the merging parties. Moving first, the Federal Trade Commission (FTC) revealed a Model Timing Agreement that provides the FTC Staff with earlier notice of the parties’ intent to substantially comply with a Second Request. Earlier notice allows the FTC Staff to create a more effective timeline for meetings with division management, front office staff and the Commissioners. Less than two months after the FTC revealed its Model Timing Agreement, the Antitrust Division of the US Department of Justice (DOJ) announced procedural reforms aimed at resolving merger investigations within six months of filing. The DOJ will commit to fewer custodians and depositions in exchange for the merging parties providing key information earlier in the investigation. Overall, these reforms appear to be a positive step forward for parties considering future transactions, but their effectiveness remains uncertain as the agencies start a difficult implementation period. While the FTC timing agreement may provide more certainty around the process, it does not reduce the review timing and actually extends it.

EU: July – September 2018 Update

The European Commission (EC) remained quite active clearing mergers in the third quarter of 2018. Most notably, the EC cleared Apple’s acquisition of Shazam without imposing conditions despite the EC’s stated concerns about access to data as a competitive concern. The EC opened a Phase II investigation into the transaction to investigate the potential for Apple to obtain a competitive advantage over competing music streaming services by accessing Shazam’s consumer data obtained through its music recognition services. In this case, the EC did not find evidence that the access to Shazam’s data would provide Apple a competitive advantage. In addition, the EC found that there were no concerns about Apple potentially restricting Shazam as referral source for Apple’s competitors. Going forward, it is clear that access to data is an issue that the EC will continue to investigate, but it is also clear that the EC is taking a careful approach in assessing when that access will truly lead to a competitive harm.  Continue Reading Antitrust M&A Snapshot

Today, Assistant Attorney General Makan Delrahim announced a series of reforms with the express goal to resolve most merger investigations within six months of filing. The reforms seek to place the burden of faster reviews not only on the Antitrust Division of the Department of Justice (DOJ), but also on the merging parties.

The DOJ will require fewer custodians, take fewer depositions, and commit to shorter time-periods in exchange for merging parties providing detailed information to the DOJ early in the investigation in some cases before a Hart-Scott-Rodino (HSR) filing is made. AAG Delrahim believes that merging parties need to avoid “hid[ing] the eight ball” and work with the DOJ in good faith to remedy transactions that raise competitive concerns.

By announcing these reforms, the DOJ acknowledges that merger reviews are taking longer in recent years. AAG Delrahim cited a recent report noting that the length of merger reviews has increased 65 percent since 2013 and that the average length of a significant merger review is now roughly 11 months. AAG Delrahim believes an assortment of factors contribute to the increasing length of reviews including larger quantities of documents produced during a Second Request, increasing numbers of transactions with international implications, and the DOJ’s insistence on an upfront buyer for most consent orders. Continue Reading DOJ Announces Procedural Reforms Seeking to Resolve Merger Investigations within 6 Months of Filing

WHAT HAPPENED

  • The FTC posted a short article indicating that after finalizing a settlement package with FTC Staff, it takes approximately four weeks for the Directors of the Bureau of Competition and the Bureau of Economics (the Directors), as well as the Commission to review the Directors’ recommendations and vote on the package.
  • The FTC explained that an expedited review is unlikely, particularly when the parties’ actions contributed to the timing concerns.
  • The FTC provided a procedure for how parties seeking an expedited review should proceed, and outlining potential scenarios that would cause the FTC to look unfavorably upon the application–g., the parties caused their predicament. Expedited review is unlikely, for example, when:
    • The parties agreed to a too-early drop dead date or a ticking agreement that fails to properly account for antitrust review; or
    • Negotiations between the parties and the FTC on custodian review drag on or the parties provide responses to requests for documents and information that are incomplete.

WHAT THIS MEANS

  • Since the Merger Remedy Report was released in 2017, both the FTC and DOJ have taken steps to improve best practices for evaluating settlement packages. In particular, greater vetting of both the remedy package and buyer is the new norm, with more extensive information requests to establish the sufficiency of the settlement package. These changes are extending the merger review process when a settlement is necessary to address antitrust enforcer concerns.
  • In addition to its revised best practices for Staff development of settlement packages, this procedural move supports the FTC’s recent focus on developing protocols that allow it to take its due time in reviewing merger remedies.
    • Last month, the FTC published a new Model Timing Agreement that, if agreed to, provides the government additional time to evaluate cases beyond the statutory period.
    • The FTC has followed that move this month by setting out protocols and timing expectations for Directors and Commissioners to vet settlement packages advanced by Staff.
  • The latest move makes clear that the extended development of settlement packages by Staff will not lead to a curtailed review of those same settlement packages by the Directors or the Commission. Antitrust enforcers continue to take the principled view that enforcers must be cautious when approving a merger with remedies and any risks in the process should be shifted to the parties where appropriate.