Second Request Reforms
Best Practices for Data Collection and Analysis
Implications
On December 11 2002 the Federal Trade Commission (FTC) announced changes to the process by which it investigates proposed mergers and acquisitions. The Guidelines for Merger Investigations relate to the 'second request' process and other merger reviews, and are intended to increase the efficiency of the process while reducing the burden on merging parties. Recently, the FTC's Bureau of Economics also issued best practices with respect to the collection and analysis of data in FTC investigations. These changes, if fully implemented in practice by agency staff and merging parties, could decrease the burden of second request investigations and potentially streamline the process so that FTC merger investigations become more focused and efficient.
The guidelines announced by the FTC were developed following a series of FTC public workshops held in response to criticism and suggestions regarding the burdens of the second request process. In the workshops the FTC sought input from several antitrust practitioners concerning the time, expense and burden involved in responding to a second request.
The FTC's announcement suggests that the agency is genuinely making an effort to address some of the problems that have long been associated with the merger review process. The announced changes appear to be designed to create more transparency in the second request process, to foster cooperation between the FTC and the parties, and to reduce the burdens on the parties.
Increased transparency
Several of the announced changes will allow parties and their counsel to gauge more clearly FTC policy and trends in the merger review process. One significant change is that the FTC will now publish redacted versions of second request modification letters and decisions made by the FTC's general counsel regarding appeals of second request issues. In the past, when a party was negotiating a second request, there was virtually no information available about modifications granted in other transactions. Similarly, although a party could appeal decisions by the FTC staff to the general counsel of the FTC, there was little indication of how the general counsel had ruled on similar issues in the past. Under these new policies, there will be a body of precedents available that can be referenced by parties and their counsel. The agency will also make public new model second requests, including new industry-specific models for the food, supermarket and oil industries.
Making appeal decisions and modification letters available to the public should facilitate modification negotiations, encourage more parties to appeal their disputes with the FTC staff, and ensure that the second request process is more consistent between transactions and between various staff at the agency. The FTC also announced its intention to take steps internally to prevent retaliation by FTC staff against companies that appeal, but the FTC did not give any specifics as to what steps would be taken.
Particularly welcome is the FTC's announcement that it will now give a copy of investigational hearing (ie, deposition) transcripts to the testifying witness upon completion of the deposition as soon as the transcript is available. This change ends the FTC's long-criticized policy of not allowing witnesses and their counsel to see transcripts of FTC depositions until late in the investigation, if at all. It also brings the FTC's policy in line with the Department of Justice's existing policy in this area.
Increased cooperation earlier in the process
The FTC announced that it believes that it is important for parties to provide early access to knowledgeable business people so that it can tailor and narrowly focus the second request. Additionally, parties are now encouraged to negotiate the scope of the FTC's data requests with the FTC staff and economists, and to involve the appropriate business and IT employees in those negotiations at the earliest possible stage to assure FTC access to relevant data, while minimizing the burden on the parties.
Experience suggests that such early negotiations can be highly advantageous to companies in certain circumstances. Such negotiations may not only limit the scope of the second request, but may also narrow the scope of the issues being considered by the FTC and create a good rapport with FTC staff. Although the timing and scope of such discussions will depend on the circumstances of each case, experience shows that such communication can be critical to a successful outcome.
Changes to second request requirements
While some staff at the FTC have generally been willing to work with parties in granting modifications to a second request, the FTC's announcement shows that it expects staff to be more uniformly receptive to modification proposals. Indeed, the FTC indicated that it plans to conduct an internal study comparing the practices within each division at the FTC. This suggests that in future companies and their counsel might be better able to negotiate narrower second requests that focus primarily on the documents and data that are most relevant to the FTC's investigation.
The FTC's announcement also sets forth several changes in what the FTC will require from parties during the second request. For instance, the FTC will no longer require that samples of the products at issue be submitted. However, parties are still encouraged to assist the staff in understanding the relevant products. Additionally, parties will now be able to produce documents as they are kept in the ordinary course of business, and are no longer required to sort documents in groupings that correspond to the FTC's information requests. These changes bring the FTC's process into line with the Department of Justice's current practices in these areas and should reduce the burden on merging parties.
The FTC also announced that it will eliminate most requests for subsequent searches for newly created responsive documents (commonly called 'second sweeps'), and will encourage parties to produce documents on a rolling basis. If second sweeps are deemed necessary, the agency will attempt to limit such requirements, to, for example, a limited number of business people.
Recognizing that the production of electronic documents has been an area of particular difficulty in recent years, due to the proliferation of email and other electronic documents, the FTC announced that it would make several modifications regarding such productions. These changes could improve the process significantly. The FTC announced that:
- it will now encourage, but will not require, the production of electronic documents in electronic form;
- its current model for dealing with archived electronic files is unsatisfactory. As a result, it will be considering several unspecified alternatives for dealing with such files. The appropriate alternative will depend on the specific facts on a case-by-case basis;
- the practice of limiting the scope of documents to be reviewed for relevance by doing 'term searches' for certain words and/or phrases is not prohibited and will now be encouraged; and
- staff will be encouraged to find ways to reduce the burden of email production, such as narrowing the number of people whose emails must be searched, allowing term searches or limiting relevant time periods for such searches.
Finally, the FTC announced several technical changes regarding logs of attorney-client privileged information, including elimination of:
- the requirement to log privileged documents created after the Hart-Scott-Rodino filing is made;
- the requirement to identify the portion of the request to which each privileged document is responsive; and
- the requirement to include the number of pages in the document on the log.
The FTC also announced its position that the inadvertent production of privileged documents will not constitute a waiver of privilege. However, if privileged materials are produced on a regular basis or appear to have been produced for strategic reasons, then the FTC might still consider such a production to be a waiver of privilege.
Best Practices for Data Collection and Analysis
The FTC's economists have also recently issued best practices governing the collection and analysis of data to be used in their economic and financial analyses of merger investigations. The best practices are intended to "clarify processes and procedures" and provide suggestions for staff and parties to follow. These include the following:
- Early interaction between staff and the parties and their consultants is encouraged, to determine what data is available and suitable for analysis, in order to make production of the data easier and faster. The bureau recommends that these interactions take place before any second request is issued, and involve knowledgeable business people who are familiar with the data and systems used by the party. Such early interaction could lead to a narrower and more focused data request in the second request. The decision to engage in such communications will be easy when a second request is clearly imminent. However, where the likelihood of a second request is less clear, parties may have to make a strategic decision between continuing on a path to try to dissuade the agency from issuing a request, or committing resources to begin discussions to try to narrow and focus the request if it is issued, or both.
- Bureau staff will discuss data and economic issues with the parties and their consultants, including theories that are being considered by agency staff. FTC staff will be encouraged to engage the parties and their consultants in discussions regarding possible empirical analyses and data pertinent to potential anti-competitive theories being explored by staff.
- Parties are encouraged to share their analyses with FTC staff early, and FTC staff will provide their assessment of the parties' analyses. The best practices also state that FTC staff will provide the results of their own analyses to the parties, including any data used and the analyses performed, to the extent permitted by confidentiality constraints. Experience suggests that this process can be very effective.
These procedures are intended to apply to not just merger investigations, but to any antitrust investigation conducted by the FTC. They aim to encourage a more productive dialogue between the parties and FTC staff which could produce more efficient and less costly data requests.
While the FTC's guidelines do not mark a change in the FTC's substantive analysis in investigating merger transactions, they could be a significant change in the process involved in those investigations. This does not mean that the FTC's scrutiny will be any less intense, nor does it mean that second request productions will be substantially reduced in every case. Nevertheless, the ultimate result could be a more streamlined process that will be less burdensome than in the past. Further, merging parties in negotiations with staff will now be armed with public statements to the effect that the FTC wants to work with the parties to limit the scope of the documents and data that are produced, and wants to ensure a more transparent process.
The guidelines, if implemented fully, could reduce the costs and burdens associated with complying with a second request. They may also cause the FTC to focus on key issues more quickly and to begin an earlier dialogue with the parties on those issues. The real benefits from the changes will depend on how earnestly they are adopted by FTC staff in practice. However, if staff and the parties fully implement the FTC's announced policy of cooperation, parties should be able to address FTC concerns more quickly and effectively.
For further information on this topic please contact Janet L McDavid or Joseph Krauss at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or [email protected]).