After almost a year of review, the Federal Trade Commission (FTC) announced early on the morning of April 2 that it had closed its investigation of the proposed merger between two large pharmacy benefit managers—Express Scripts Inc. and Medco Health Solutions Inc.—without taking any action. Upon the conclusion of the FTC’s investigation, the final closing condition of the transaction was met, and Express Scripts and Medco were free to close.
The proposed merger and the FTC’s review of it were closely watched in many circles, including by investors, Congress, competitors and customers. During the investigation, Express Scripts made several public announcements on its progress and the expected timing of closing (if the FTC did not pursue litigation). For instance, on March 12, Express Scripts publicly disclosed that it had agreed with the FTC not to close the transaction and that Express Scripts expected to close sometime in the “earlier part of the second quarter of 2012.” Sixteen days later, Express Scripts signaled that the closing could occur earlier than previously suggested, “as early as the week” of April 2.
The day after Express Scripts’s March 28 announcement, two of the groups tracking the FTC’s investigation—National Association of Chain Drug Stores (NACDS) and National Community Pharmacists Association (NCPA) —along with several independent and chain pharmacies filed suit in the Western District of Pennsylvania seeking preliminary and permanent injunctions to prevent the transaction from closing.
On March 30, the plaintiffs filed a motion for a temporary restraining order (TRO) with a notice to the court that they would supplement the motion with a memorandum in support the following business day (April 2). Because the plaintiffs were not privy to any of the discussions between Express Scripts and the FTC, they were not aware of whether and when the FTC would close its investigation.
Apparently, the FTC informed Express Scripts that it was closing its investigation on March 30. Accordingly, Express Scripts closed the transaction and began integrating with Medco before 8:30 a.m. on April 2. The closing and integration of two merged firms is sometimes colloquially referred to in the antitrust world as “scrambling the eggs.” Later that day, the plaintiffs filed a memorandum in support of their TRO and sought to have the scrambling of the eggs halted through a hold separate.
On April 3, Judge Cathy Bissoon held a phone conference with the parties after which she set a hearing date on the issue of the requested TRO/hold separate for April 10 (one week later). Judge Bissoon did not ask Express Scripts to discontinue its integration of Medco. Over the course of the following week, Express Scripts continued to scramble the eggs, and by April 10, counsel for Express Scripts was able to provide a litany of integration events that had already occurred, including termination of senior and junior management at Medco and Express Scripts’s review of Medco’s confidential and trade secret information.
On April 25, Judge Bissoon denied the TRO/hold separate based almost entirely on the fact that Express Scripts had done such a good job scrambling the eggs that the majority of the harms that the plaintiffs argued justified preliminary relief had already occurred. According to Judge Bissoon, there was, thus, no longer demonstrable immediate and irreparable harm.
Judge Bissoon reasoned that because the harms that the TRO/hold separate sought to protect against had already happened, “any hold-separate order issued by this Court would be ineffective as a means to protect Plaintiffs from the particular form of asserted harm.” The court further concluded that the plaintiffs had not demonstrated how “a brief delay in the divestiture of Medco from [Express Scripts] would cause them any additional immediate and irreparable harm.”
While the plaintiffs did claim that certain other irreparable harms such as loss of goodwill and reputation were imminent, Judge Bissoon rejected those claims because they “had not yet occurred” and thus the arguments did not go “beyond the speculative level.”
Judge Bissoon’s ruling potentially has broad implications when companies are deciding whether and how quickly to close transactions. It also suggests that companies can significantly benefit from widespread and immediate integration. Plaintiffs—and the antitrust enforcement agencies in particular—often have raised concerns about companies scrambling their merged eggs, but until now there have been very few court decisions discussing the consequences of such scrambling.
Judge Bissoon’s decision provides credence to concerns that if a transaction closes and integration begins, the threat of immediate and irreparable harm (the standard in TRO and preliminary injunction cases) is diminished because such harm has arguably already occurred and is no longer imminent.
The lesson for companies considering a private action to prevent a transaction is to make sure that all papers are filed long before the potential closing date (and to parse public statements by the merging entities with respect to the timing of closing closely). The lesson for merging entities is that if all closing conditions are met, closing the transaction and taking quick and decisive steps to integrate can prevent third parties from successfully obtaining preliminary injunctive relief.
While the NACDS decision did not involve the government, Judge Bissoon’s rationale would seem to apply regardless of the plaintiff. So, for non-reportable transactions, the merging entities now appear to have a legal incentive to integrate as quickly as possible.