The US antitrust authorities recently have taken action against numerous potential mergers. The enforcement actions include several negotiated divestiture orders addressing alleged violations of the Clayton Act’s prohibition on transactions that ‘tend substantially to lessen competition’, as well as negotiated fines for violations of the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) or prior orders. The most significant development, however, is the substantial increase in merger litigation.
The following is a summary of various recent actions taken by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ).
Merger cases currently in litigation
In December 2008, the FTC filed a complaint in a federal court challenging Ovation Pharmaceuticals’ 2006 acquisition of the rights to the drug NeoProfen from Abbott Laboratories. Ovation and Abbott were not required to submit filings under the HSR Act because the acquisition fell below the requisite thresholds.
NeoProfen, a drug that treats a deadly congenital heart defect in premature babies, was awaiting regulatory approval by the Food and Drug Administration at the time of the acquisition. The FTC alleges, however, that the acquisition eliminated the only competitor for Ovation’s drug Indocin IV, which it obtained from Merck in 2005. After Ovation acquired the rights to NeoProfen, it allegedly raised the price of Indocin nearly 1,300 per cent, from approximately $36 to approximately $500 per vial. Although a generic version of Indocin was approved in July 2008, it has not yet entered the market.
Notably, Commissioners Jon Leibowitz and J Thomas Rosch indicated in their separate concurring statements that they would also have voted against Ovation’s original acquisition of Indocin from Merck, notwithstanding that Ovation had no competitive product at that time. They reasoned that Ovation, unlike Merck, had the incentive to charge a monopoly price for Indocin; Merck allegedly could not charge a monopoly price because it needed to protect the ‘reputation’ of its broad portfolio. Additionally, Commissioner Leibowitz indicated that it would be appropriate for the FTC to seek disgorgement of profits in this matter. These aggressive views could signal a drastic increase in future enforcement challenges by the FTC and are particularly important given that Commissioner Leibowitz is expected to be elevated to Chairman of the FTC by President Obama.
This case is now before an FTC administrative law judge.
Also in December, the DOJ filed a complaint in a federal court challenging Microsemi’s completed 2008 acquisition of Semicoa. The complaint alleges that the merger harmed competition in the market for certain specialised high-reliability electronic components used in aerospace and military applications. More specifically, the FTC alleges that the transaction eliminated competition for JANTXV and JANS transistors by reducing the number of suppliers from two to one and substantially lessened competition for JANTXV and JANS 5811 diodes, because Semicoa was attempting to enter these diode markets at the time of the acquisition.
Although the DOJ’s substantive allegations are straightforward, the case is notable for the size of both the acquisition and the alleged markets: the $25m cash deal was not reportable under the HSR Act; and Semicoa’s 2007 US sales were less than $15m. The complaint demonstrates that the DOJ is willing to devote significant enforcement resources – including the substantial costs of federal litigation – to challenge very small transactions involving a very small amount of US commerce if the DOJ concludes that the transaction is anticompetitive.
The case is now before a federal judge.
CCC Information Services
The FTC recently has initiated injunction actions against larger transactions notified under the HSR Act. A federal district court currently is hearing arguments in connection with the FTC’s challenge to the proposed $1.4bn merger between CCC Information Services and Mitchell International. The FTC alleges that the merger would reduce the number of competitors from three to two in a market for ‘estimatics’, an electronic system used to estimate the cost of collision repairs, and ‘total loss valuation’ systems, software systems used to value passenger vehicles that have been damaged beyond repair.
CRH, the parent company of Oldcastle Architectural, recently abandoned its proposed $540m acquisition of Pavestone Company after the FTC filed a complaint seeking to block the transaction. The FTC alleged that Oldcastle and Pavestone are the only two nationwide suppliers of drycast concrete hardscape products. It took the position that local concrete suppliers were not able to compete sufficiently with the merging nationwide entities.
The FTC continues to pursue its administrative litigation against the premium natural and organic supermarket operator Whole Foods Market for its completed 2007 acquisition of rival Wild Oats Markets. The FTC, however, recently granted Whole Foods’ request to remove the matter from adjudication for the purpose of considering a proposed negotiated consent order.
In addition to the cases above, parties to many recent transactions have entered into consent orders with the FTC or DOJ that require divestitures and other remedies to address alleged anticompetitive effects. These transactions include: Republic Services/Allied Waste Industries (commercial solid waste collection and disposal); PNC Financial Services Group/National City Corporation (retail banking, small business banking and middle market banking services); Teva Pharmaceutical Industries/Barr Pharmaceuticals (generic drugs used to treat acid reflux disease, various types of cancer, bacterial infections, diabetes and depression); Inverness Medical Innovations/ACON Laboratories (consumer pregnancy tests); King Pharmaceuticals/Alpharma (branded oral long-acting opioid analgesic drugs); Dow Chemical/Rohm & Haas (acrylics and other industrial chemicals used to make coated paper products, paints and adhesives); and Getinge/Datascope Corporation (endoscopic vessel harvesting products).
The frequency of divestiture demands by the DOJ and FTC is not likely to decline as the Obama Administration’s appointees assume control of the agencies.
Violations of HSR filing obligations
The FTC and DOJ also continue to penalise companies for failing to submit timely filings under the HSR Act. The agencies recently settled charges that ESL Partners and ZAM Holdings failed to make timely filings in connection with their purchases of AutoZone voting securities. The parties will pay civil penalties of $525,000 and $275,000, respectively, for the violations.
Violations of consent orders
AT&T recently agreed to pay $2m in connection with DOJ allegations that it had violated two court orders resulting from its acquisition of Dobson Communications Corporation. Under the consent, AT&T was required to divest its mobile wireless telecommunications businesses in three separate areas and to take all necessary steps to ensure that the businesses were independent of AT&T. The DOJ claims that AT&T violated the consent order by obtaining unauthorised customer information that, in some situations, it used to contact the divested businesses’ customers. The settlement amount includes reimbursement to the government for the cost of its investigation.
The FTC and DOJ recently have increased their activity in challenging both proposed and completed mergers and they continue to monitor closely violations of the HSR Act and obligations under existing consent orders. Ovation and Microsemi are powerful reminders that both agencies are willing to challenge, and potentially unwind, a completed transaction and that the small size of a transaction and the absence of an HSR filing requirement do not guarantee lack of agency interest. In fact, with the number of HSR filings decreasing in recent months, the agencies are using resources to challenge activity on which they may not have focused during more active merger periods.
Moreover, the Obama campaign promised more intense scrutiny of mergers compared with that under the Bush Administration. Although the Obama antitrust team has not yet taken office, companies should be prepared for more aggressive intervention by both agencies. If a merger or acquisition raises substantive competition issues, regardless of whether it is reportable under the HSR Act, clients should seek early guidance to ensure the best possible outcome.