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Much has been made in the press of an aggressive antitrust crackdown by the Obama administration on mergers and acquisitions.
Most of the lawyers that InsideCounsel reached out to for this story, including former Federal Trade Commission (FTC) and Department of Justice (DOJ) staff members, agree that such characterizations overstate the situation. Flush corporate treasuries and more readily available credit have led to increased deal activity since 2009 and thus more challenges. Merger challenge rates may have increased under President Obama’s watch, but not to unusually high levels.
A Stanford Law Review study (by two authors who worked in antitrust issues in the FTC, DOJ and Federal Communications Commission under Obama and former President Clinton) evaluated DOJ merger enforcement trends by looking at the ratio of agency merger enforcement actions (litigation, consent settlements and abandonments) to merger filings. They concluded that the Obama administration has reinvigorated merger enforcement after “a large and sustained dip to a level below the norm” during the Bush administration. During President George W. Bush’s first and second terms, they found rates of 0.75 percent and 0.9 percent. The early data from Obama’s first term showed a jump to a rate of 1.5 percent—however, the study’s authors found the long-term average ratio since the beginning of the Reagan administration to be 1.8 percent.
“Merger activity tends to ebb and flow, and when you have more strategic mergers, you tend to see more challenges. … I wouldn’t read too much into it,” says Christine Varney, a partner at Cravath, Swaine & Moore. Varney has served both as assistant U.S. attorney general for the DOJ’s Antitrust Division and a commissioner at the FTC. “On the whole, perhaps in the past four to five years there’s been a bit more appetite to challenge a close call, but not hugely.”
Success Breeds Confidence
It is true that success breeds confidence, and the DOJ has seen success in blocking some major mergers in the past few years. In 2011, the DOJ’s Antitrust Division got a federal judge to block H&R Block’s attempted merger with TaxACT, forced AT&T to withdraw its bid for T-Mobile and shut down Nasdaq’s bid for the New York Stock Exchange. For some, the perception that the government is cracking down on strategic mergers was only solidified on Jan. 31, when it challenged the world’s largest brewer Anheuser-Busch (AB) InBev’s attempted acquisition of Grupo Modelo.
“When the AT&T/T-Mobile deal was blocked, a fair number of people thought that was a one-off thing,” says David Shine, co-chair of Fried Frank’s M&A group. “After the AB InBev deal, I really think a lot of people sat up a little straighter and started to rethink that transformational deal with their third or fourth biggest competitor because the government is really much more highly focused than it used to be.”
The DOJ and FTC’s focus on litigation staffing also bolsters the government’s comfort with bringing merger challenges. Varney says that the DOJ “has sharpened its litigation tools” and upped its litigation staffing.
Robby Robertson, former chief trial counsel for the FTC’s Bureau of Competition, says the FTC also has staffed up in the litigation area. “They still need more litigators, but they’re trying to keep people well-trained in that area, and they have some very sharp young people who work their tails off,” says Robertson, now a partner at Hogan Lovells. “It’s a very vibrant agency and something to be reckoned with, frankly.”
The FTC, which has shown a focus on the health care and pharmaceutical industries, has seen more mixed success than the DOJ. In 2011, the agency lost three merger challenges in court. Recently it has seen some high-profile wins, however: The Supreme Court on Feb. 19 sided with the FTC in a hospital merger case, FTC v. Phoebe Putney Health System, Inc., and the 3rd Circuit last July backed the FTC’s view that “pay for delay” pharmaceutical settlements are presumptively anticompetitive.
After the Fact
Since Hart-Scott-Rodino Act (HSR) premerger filing thresholds increased substantially in 2001, the government has shown no hesitation in pursuing consummated transactions that were not reportable under HSR.
“There is a trend of increased focus on these types of transactions, both investigating them and challenging those that are anti-competitive,” says Peter Guryan, a Fried Frank partner. Previously he worked in the DOJ’s Antitrust Division, where he had a hand in its successful challenge of the WorldCom/Sprint merger. “The antitrust authorities do not draw any lines in terms of the size of the transaction, and indeed have challenged $5 million transactions.”
During the Bush administration, the FTC and DOJ challenged 18 completed mergers total. Between March 2009 and March 2012, the FTC alone challenged nine completed mergers—about a fifth of the agency’s merger challenges in that time frame. Unwinding a consummated deal is far more costly than halting one that hasn’t gone through yet, and perhaps because of what is at stake, post-merger challenges are far more likely to result in litigation. Four of the nine post-consummation challenges mentioned above ended up in litigation versus six of the 39 challenges to unconsummated mergers.
In one ongoing case, Bazaarvoice Inc. acquired its closest competitor PowerReviews for $168.2 million in June 2012 in a transaction that was not reportable under HSR because PowerReviews, with less than $12 million in revenues, didn’t meet HSR’s “size of person” thresholds that trigger filing requirements in deals between $70.9 million and $283.6 million. Bazaarvoice was surprised when on Jan. 10 the DOJ stepped in to sue over the completed deal, claiming that the two companies, which provide product rating and review (PRR) platforms to online retail sites, enjoy about 70 percent of the market, and that before the transaction, PowerReviews was an aggressive price competitor of Bazaarvoice, routinely providing competitive pressure.
The Bazaarvoice challenge was slightly unusual in that it came so soon after the deal closed, timing that seems to be the result of some particularly damning documents. For example, the lawsuit cites Bazaarvoice internal documents in which executives said the PowerReviews acquisition would eliminate its primary competitor and provide relief from price erosion. Without PowerReviews, one executive said in cited documents, Bazaarvoice would have “literally, no other competitors.”
“The complaint includes references to probably the worst documents I’ve ever seen in a merger case,” says Jonathan Grossman, a member at Cozen O’Connor. “I have trouble imagining a situation where that case would not have been litigated if the facts were even close to what the complaint alleged.”
Such smoking-gun documents—so-called “hot documents”—also played a role in cases such as the AT&T/T-Mobile challenge and the H&R Block/TaxACT challenge.
“The H&R Block opinion was influential in that it actually went through to trial and went to the government substantially on bad documents,” says Michael Keeley, a partner at Axinn, Veltrop & Harkrider. “It was the first piece of the puzzle in the DOJ getting very confident in their abilities to bring these cases.”
Telling the Story
Keeley says usually post-closing challenges come a year or two later, after the buyer raises prices or the government can show some other actual anti-competitive effects of the merger. The government puts substantial weight on such evidence. In a March 2012 speech, then-FTC Commissioner Tom Rosch said focusing on actual aftereffects “is an easier story for a court to understand.” In an earlier speech, he similarly underlined the importance in merger challenges of creating a succinct “story line” rather than relying on “esoteric, econometric formulae that lay judges and juries (including me) are not likely to comprehend.” Doing so also allows the antitrust agencies to “more flexibly consider a broad range of effects to be anti-competitive effects,” Rosch said.
Both agencies have gotten better at telling the story of the allegations underlying their challenges without relying too much on complicated theories, Keeley says.
Consider the challenge of AB InBev’s acquisition of Grupo Modelo. The companies hold the No. 1 (39 percent) and No. 3 (7 percent) market shares of beer sales in the U.S., respectively: The DOJ’s lawsuit alleges that their combined national share understates the effect that Modelo’s elimination from the market would have on competition in the beer industry because of the unique pricing dynamic Modelo has on the market.
No. 2 brewer MillerCoors tends to follow AB InBev’s annual price increases, the DOJ says, while Modelo resists those price hikes and in turn puts pressure on both AB InBev and MillerCoors to offer lower prices and discounts. According to the lawsuit, AB InBev internal documents acknowledge that Modelo’s pricing strategy is directly at odds with AB InBev’s. Eliminating Modelo from the market, the suit alleges, would eliminate this constraint on AB InBev and MillerCoors’ ability to raise their prices.
“It’s a very superficially appealing argument,” Keeley says. “The defendants have a lot of technical and economically based arguments as to why competition would be just fine after the merger. But for a generalist federal judge who has only a few days potentially to focus on the case before deciding to enter a preliminary injunction, going with a simple argument is more promising, and it’s what we’ve been seeing in these last few cases brought by the government.”
Fair Licensing Terms
The U.S. antitrust agencies have displayed continuing concern over practices related to standard-essential patents (SEPs)—patents covering technologies that companies must implement to comply with an industry standard. In filings with the International Trade Commission in June 2012, the FTC said that in matters involving infringements based on implementing standardized technologies, seeking injunctive relief “has the potential to cause substantial harm to U.S. competition, consumers and innovation.” The FTC has noted “increasing judicial recognition” of this view.
SEPs in the merger context were a central issue in two recent high-profile antitrust matters. As part of the FTC’s investigation into Google Inc.’s business practices, in January the agency ordered Google to immediately stop pursuing injunctive relief over SEPs that the company came to hold after its acquisition of Motorola Mobility, which had promised to license the patents on fair, reasonable and nondiscriminatory (FRAND) terms (see “Wrapping Up,” p. 24).
In November 2012, resolving FTC concerns over SEPs were part of a deal allowing Robert Bosch GmbH (a German company with U.S. operations based in Illinois) to complete its proposed acquisition of SPX Service Solutions U.S. The FTC had challenged the deal alleging the acquisition would have given Bosch a virtual monopoly in the market for air conditioning recycling, recovery and recharge devices (ACRRRs), which is equipment used in vehicle air conditioning systems.
Additionally, the FTC charged that prior to the acquisition, SPX had reneged on its commitment to license key SEPs on FRAND terms.
As part of a consent order settling the FTC complaint, Bosch agreed to sell one of its related businesses and also to abandon all of its claims seeking injunctions against willing licensees of SEPs that SPX had held, make them available on a royalty-free basis to companies that use them to adhere to ACRRR standards, and assure that in the future it will license SEPs for industry standards on FRAND terms to any third party that wants to use the SEP-covered technologies to make ACRRR devices in the U.S.
“In the Bosch case, the FTC drew a very harsh line against parties that have these patents that might be implicated by industry standards,” says Chuck Hauff, a partner at Snell & Wilmer. “It’s clear that the FTC and the DOJ are pushing back and saying that if you have patents in this area, you have to be really careful. … We saw this coming, and I expect that there will be further efforts by both agencies to curtail the rights of patent holders in areas where they’re perceived to have anticompetitive effects.”