Over the past several years, the Federal Trade Commission and Department of Justice, Antitrust Division (DOJ) have not shied away from litigating merger challenges. Although many of these actions have been relatively straightforward "structural cases" involving an alleged loss of ongoing, head-to-head competition between the merging parties in a well-understood antitrust product market, a number of these cases have advanced, with varying degrees of success, novel arguments. For example, recent cases have involved theories relying on loss of potential competition or on very narrow product market definitions. Companies considering mergers should take note of these recent developments in enforcement and ensure that their antitrust analysis and defense strategy takes new theories into account. Three recent cases demonstrate how serious the agencies are in using these theories in litigation.
Loss of Potential Competition
On May 29, 2015, the FTC filed an administrative complaint and authorized staff to seek a temporary injunction to block the acquisition of Synergy Health plc by Steris Corporation alleging that the proposed acquisition would reduce "potential competition" in regional markets for the sterilization of products using radiation. Steris and Synergy both own and operate radiation sterilization facilities, but they do not currently compete for services in the United States. At the time the proposed merger was announced, Synergy was implementing a strategy to open new plants in the United States that would use x-ray technology to compete with gamma radiation facilities (including those run by Steris). X-rays are as effective as gamma rays when used to sterilize products without the environmental or regulatory concerns gamma radiation presents. There are currently no x-ray sterilization service providers in the United States.
On September 24, 2015, a district court in the Northern District of Ohio denied the FTC's motion and refused to enter a preliminary injunction to block the merger, finding that the FTC had not met its burdern of showing that the deal was likely to lessen competition in the U.S. because there was not sufficient evidence to show that Synergy would enter the
x-ray market absent its merger with Steris. The ruling was not entirely surprising, as potential competition cases like these are rare and tend to be difficult for the FTC to prove. To prevail in any enforcement action, the FTC must demonstrate that, post-transaction, the proposed combination would substantially lessen competition—a task akin to predicting the future. The FTC generally uses evidence of current competition to aid in this analysis, but cases involving future competition cannot rely on current competition. Notwithstanding these hurdles and its recent loss in federal court, the FTC will likely continue to aggressively scrutinize transactions resulting in a loss of potential competition.
Narrow Product Markets
In two recent successful merger challenges, the DOJ and FTC convinced federal courts that a narrow product market is proper when analyzing competition.
On June 26, 2015, a federal district court issued a preliminary injunction requested by the FTC that blocked the consummation of a merger between Sysco Corporation with US Foods, Inc. The parties abandoned the proposed $8.2 billion deal after the preliminary injunction was granted. Central to the merger challenge was the definition of the market affected by the proposed merger. The FTC alleged that the appropriate product market was "broadline foodservice distribution," which "entails the warehousing, sale, and distribution of a wide range of product categories and a variety of products within those categories." Compl. at ¶ 63. In contrast, Sysco and US Foods argued that the FTC's "broadline" market was improperly based on "an unrepresentative sample of subjective customer preferences," and "fail[ed] to account for customers' demonstrable ability to spread their purchases freely across multiple distribution channels simultaneously." Defs.' Opp. at 12-16. The FTC also alleged that the proper geographic market was national, and that Sysco and US Foods are "by far" the largest distributors who serve "National Customers." The parties countered that there is no valid distinction between national and local customers, and that the FTC's separation of these two groups of customers was calculated by the FTC to raise artificially the combined firm's market share. The court agreed with the FTC on all counts, holding that "broadline foodservice distribution" is the proper relevant product market because "other modes of foodservice distribution are not functionally interchangeable with broadline foodservice distribution," because they lack "product breadth and diversity" and scale. The court then analyzed the likely effects on competition resulting from the combination of Sysco and US Foods, and found that the resulting increase in concentration established "a rebuttable presumption that the merger will substantially lessen competition" in these markets. Op. at 72, 81.
In 2014, the U.S. District Court for the Northern District of California held that online consumer review site Bazaarvoice, Inc.'s $168 million acquisition of PowerReviews violated Section 7 of the Clayton Act. Bazaarvoice acquired PowerReviews in a June 2012 transaction that did not trigger reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act. Two days after the transaction was consummated, however, the DOJ launched an investigation and later filed a civil suit. In its complaint, DOJ alleged that Bazaarvoice had acquired PowerReviews to eliminate its most significant competitive threat and to stem price competition. After a three-week trial that included testimony from 40 live witnesses and 980 exhibits, the district court issued a 141-page decision that adopted virtually all of DOJ's arguments as to why the transaction was anticompetitive. The court accepted DOJ's narrow market definition (of online ratings and review platforms in the United States), in which Bazaarvoice and PowerReviews' combined market share exceeded 50 percent, based largely on the defendants' own internal documents and witness testimony. Specifically, according to the court, other "social commerce" products such as online forums, blogs, and social networks, were not included in the market because they "serve a different purpose than online ratings and reviews ("R&R") and are not substitutes for R&R." The court explained that R&R "provides potential consumers with product-specific feedback from other consumers at the point of purchase" whereas other social commerce products "are often focused on brand advertising rather than driving the sale of individual products."
The three FTC and DOJ merger challenges show that the Agencies are willing to bring cases that are challenging under the framework set forth in the Horizontal Merger Guidelines. The cases also have a number of things in common. First, they remind us that companies' internal business documents play a pivotal role in merger investigations and litigation. The FTC's and DOJ's complaints in Steris, Sysco, and Bazaarvoice were riddled with quotes from the companies' e-mails, as well as board presentations, SEC filings, and notes taken during executive meetings, all of which bolstered the Agencies' theories. Second, customer reaction to a merger is critical. Importantly, customers' perspectives on market definition and the competitive landscape substantially influence the Agencies' positions and courts' decisions. Finally, the rationale for the transaction is important. To overcome presumptions of anticompetitive effect, the merging parties must have a strong procompetitive rationale for the transaction, such as giving the combined company the scale and scope necessary to compete more effectively against much larger and financially stronger competitors.