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.

In the course of one week, two top level DOJ Antitrust officials in the Trump Administration separately spoke at panels and suggested the possibility of a sea change in federal antitrust law with respect to indirect purchaser lawsuits. The comments further reinforce the Administration’s active focus on antitrust issues.

WHAT HAPPENED:

  • Makan Delrahim, DOJ’s Assistant Attorney General in charge of the Antitrust Division (the Division), spoke at a conference organized by the Antitrust Research Foundation on January 19, 2018, and is reported to have stated that the Division was looking into the possibility of pursuing civil damages on behalf of taxpayers in antitrust price-fixing suits.
  • A few days later, on January 23, 2018, Andrew Finch, DOJ’s Principal Deputy Assistant Attorney General for Antitrust, spoke at a Heritage Foundation conference and reportedly stated that the Division was “looking at whether or not it might be worthwhile to revisit those rules and suggest the same to the Supreme Court,” referencing the landmark decision Illinois Brick Co. v. Illinois, which prohibits indirect purchasers from recovering antitrust damages under federal antitrust law.

Continue Reading THE LATEST: Trump DOJ’s Next Target: the Illinois Brick Indirect Purchaser Rule?

WHAT HAPPENED:

  • On Thursday, November 16, 2017, newly confirmed Assistant Attorney General for Antitrust Makan Delrahim, speaking at the American Bar Association Section of Antitrust Law’s Fall Forum, explained where antitrust enforcement fits in the broader Trump administration effort to reduce federal regulations.
  • Delrahim remarked that “antitrust is law enforcement, it’s not regulation.” Antitrust enforcement “supports reducing regulation, by encouraging competitive markets that, as a result, require less government intervention.” Delrahim explained that “[v]igorous antitrust enforcement plays an important role in building a less regulated economy in which innovation and business can thrive, and ultimately the American consumer can benefit.” As a result, the government can minimize regulation related to price, quality, and investment.
  • Delrahim announced that the Antitrust Division of the US Department of Justice (DOJ) would seek to reduce the number of long-term consent decrees and “return to the preferred focus on structural relief to remedy mergers that violate the law,” thereby limiting the use of behavioral remedies in consent decrees particularly in vertical transactions, where such remedies have historically been common. According to Delrahim, “a behavioral remedy supplants competition with regulation; it replaces disaggregated decision making with central planning.” Delrahim also expressed concern that behavioral remedies simply delay the exercise of otherwise anticompetitive market power.
  • Mentioning by name several consent decrees in vertical transactions containing behavioral provisions in merger cases brought by the Obama administration, Delrahim expressed concern that these remedies “entangle the [Antitrust] Division and the courts in the operation of a market on an on-going basis.” Delrahim cautioned that the lack of enforceability and reliability of behavioral remedies diminish the effectiveness of antitrust enforcement, a risk that consumers should not have to bear.

WHAT THIS MEANS:

  • Delrahim’s stance on behavioral remedies starkly contrasts with previous DOJ policies, followed under both Democratic and Republican administrations. Prior administrations strongly preferred structural remedies, but recognized that behavioral remedies could be appropriate particularly for vertical transactions that presented pro-competitive benefits. The DOJ’s most recent policy paper on remedies (issued by the Obama administration) exemplifies this view, stating: “conduct remedies often can effectively address anticompetitive issues raised by vertical mergers.”
  • Despite the new administration’s disfavored view of behavioral remedies for a vertical merger, such remedies are not off the table. To secure a DOJ consent decree with behavioral remedies for a vertical merger, parties will likely have to show that the transaction “generates significant efficiencies that cannot be achieved without the merger or through a structural remedy.” Delrahim unambiguously stated that this is “a high standard to meet.”
  • Delrahim’s speech appeared aimed at several high profile vertical transactions that are currently under review by the DOJ, likely seeking to explain why the DOJ will insist on structural remedies in transactions where most outside observers thought a behavioral remedy may suffice.
  • It is possible that Joe Simons, President Trump’s unconfirmed appointee for Chairman of the Federal Trade Commission, may take a differing stance on behavioral remedies, following prior policy statements. This could result in a slight difference in policies between the Federal Trade Commission and the DOJ in merger enforcement.

To date, the US Department of Justice Antitrust Division (DOJ) has obtained six corporate guilty pleas, three individual indictments and one individual guilty plea in its long-running investigation into price fixing of capacitors by primarily Japanese manufacturers. Capacitors are small electronic components that are found in nearly every device that is plugged in or powered by a battery.

WHAT HAPPENED

  • In a May 24 sentencing hearing, the DOJ took sharp criticism from Judge James Donato (NDCA) for what he called a “sweetheart deal” by DOJ in its plea agreement with Matsuo Electric Co. The plea called for payment of a $4.17 million fine to be paid over five years.
  • The deal, reached at the same time as an individual plea of Matsuo’s former sales manager Satoshi Okubo, was one that DOJ had touted, arguing that “[t]he simultaneous acceptance of responsibility by a company and the executive who supervised its involvement in the cartel demonstrates in a concrete way their future commitment to lawful conduct and an improved business culture.”
  • Judge Donato saw it another way, arguing that he “didn’t like the idea of corporations holding individuals out to dry in return for leniency.” This comment came in reference to the assertion that Okubo had been asked to serve a one-year prison term so the company would get a lesser sentence.
  • The court did not throw out Matsuo’s sentence altogether, but requested further details about the company’s financial resources so that it could decide whether to accept the corporate plea agreement, in particular the extended payment term. Okubo was sentenced in February.
  • In previous sentencings, Judge Donato had imposed terms of probation on the corporations exceeding those requested by DOJ.

Continue Reading Individual Accountability Likely to Continue for Cartel Enforcement

McDermott’s Antitrust M&A Snapshot is a resource for in-house counsel and others who deal with antitrust M&A issues but are not faced with these issues on a daily basis. In each quarterly issue, we will provide concise summaries of Federal Trade Commission (FTC), Department of Justice (DOJ) and European Commission (EC) news and events related to M&A, including significant ongoing investigations, trials and consent orders, as well as analysis on the trends we see developing in the antitrust review process.

Read McDermott’s 1Q2017 M&A Snapshot.