Most mergers, acquisitions and joint ventures raise no significant antitrust issues. On the other hand, any deal that involves one of your company’s competitors — no matter how small the deal or how minimally the companies compete with one another — can raise antitrust risks, and it is wise to seek antitrust advice before closing. Two recent enforcement actions by the U.S. antitrust agencies demonstrate just how risky and costly it can be when companies consummate a transaction, only later to find that their transaction faces a serious merger challenge.
The Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) enforce Section 7 of the Clayton Act, which prohibits transactions that substantially lessen competition in any line of US commerce. State attorneys general and private plaintiffs also have rights to obtain relief under the statute. Even when a deal is not subject to the procedural provisions of the Hart-Scott-Rodino Act, either because its value falls below the current reporting threshold (which in 2014 is $75.9 million) or because it is exempt from premerger filing requirements for another reason, the transaction may still be challenged. It is most important to note that, once a deal has been consummated, the buyer will own the assets and therefore will bear the entire burden of defending the transaction. This means that the seller will walk away with the purchase price, while the buyer will face all of the costs of a post-closing remedy on its own, rather than being able to share the antitrust risk with the seller.
Post-closing remedies can be quite costly, as they evidently have been for the internet-based software provider that was the defendant in United States v. Bazaarvoice, Inc. In mid-2012, Bazaarvoice, which sells ratings and review platform software for website commerce sites, acquired PowerReviews, Inc. for $168 million. The transaction was not reportable under the HSR Act because PowerReviews revenues were below reporting thresholds. However, six months after the deal closed, the DOJ filed suit alleging that Bazaarvoice had acquired its primary competitor and that the acquisition was illegal under Section 7 of the Clayton Act. Following a full trial, Judge William Orrick of the U.S. District Court for the Northern District of California agreed, issuing a decision and scheduling a hearing to determine the appropriate remedy.
As a general rule, the most appropriate remedy in horizontal merger cases is to re-create the competitive structure of the industry that would have existed had the acquisition not taken place. Following the district court’s unfavorable decision but before the court had determined what remedy to impose, Bazaarvoice agreed to sell off all of the assets it had acquired from PowerReviews to Viewpoints LLC. Bazaarvoice’s divestiture also included additional important assets, such as perpetual licenses to Bazaarvoice’s patents and the ability to use its trade secrets, know-how and other proprietary information, so that Viewpoints will be able to assume the competitive position that PowerReviews would likely have achieved by the time of the divestiture had it not been acquired nearly two years before that date. Although Bazaarvoice presumably recouped at least a portion of its investment in PowerReviews from this sale, it was later required to provide its new competitor with additional assets important to its business. As the defendant, Bazaarvoice also had in the meantime borne not only the costs of litigation but also the significant disruption to its business that any litigation brings.
Similarly, as is apparent from Federal Trade Commission v. St. Luke’s Health System, Ltd.and its related litigations, the costs of an antitrust remedy post-consummation can come from several sources. Despite an ongoing investigation by antitrust enforcement authorities, at the end of 2012, St. Luke’s Health System acquired Saltzer Medical Group, both of which are based in Boise, Idaho. The FTC and the Idaho attorney general challenged the consummated transaction three months after the parties had closed their deal, alleging that the acquisition gave St. Luke’s an 80 percent market share of the primary care physicians in Idaho’s second largest city, Nampa. Two competitors of St. Luke’s also had already filed suit to unwind the transaction, and the actions were tried together before Judge B. Lynn Winmill of the U.S. District Court for the District of Idaho. He found in favor of the plaintiffs in January 2014. The judge ordered that the parties immediately unwind the transaction, despite their request for a stay pending appeal to the 9th Circuit. In addition, the Idaho attorney general and private plaintiffs are seeking more than $10 million in reimbursements from St. Luke’s to recover their attorneys’ fees, a claim that is allowed under the Idaho Competition Act.
Both of the above cases show why a look at possible antitrust risks need to be undertaken in connection with any transaction, particularly those between competitors. In addition, the costs could be increased if either of the antitrust enforcement agencies decided that the transaction was an appropriate case in which to seek disgorgement. Both the DOJ and the FTC have made clear that, in appropriate circumstances, they may seek also to disgorge ill-gotten gains in consummated merger challenges — in addition to a divestiture — if the merged firm has reaped benefits of reduced competition during the period before the remedy is imposed.
Experienced antitrust counsel can evaluate and provide advice about the possible risks of a particular transaction. Although antitrust cases themselves are often long, drawn-out litigations, the evaluation of antitrust risk for most transactions can be conducted quite expeditiously and during the same timeframe that the parties are doing due diligence and negotiating the purchase agreement. The statement that buyers should beware certainly holds true in these instances, and any costs of seeking early antitrust advice are far less than the possible costs of bearing a full antitrust defense.