The Antitrust Division of the Department of Justice (DOJ) recently broke new ground by invoking its authority under the Alternative Dispute Resolution Act of 1996 (ADRA) to use binding arbitration to resolve a dispositive issue in its Clayton Act Section 7 challenge to the proposed acquisition of Aleris Corporation by Novelis, Inc. While the DOJ has in the past included arbitration clauses in consent decrees to resolve disputes over compliance with the terms of a settlement, this marks the first time it has used arbitration as an alternative to settlement or litigation to resolve a merger challenge or conduct case. The DOJ's decision to use arbitration in this matter, together with an explanatory filing and a speech by Makan Delrahim, the Assistant Attorney General in charge of the Antitrust Division, may signal that the DOJ is serious about exploring arbitration as an enforcement tool, at least where the contours of the dispute are clear and there is an identifiable, discrete issue or set of issues that can be submitted to arbitration. Depending on the outcome in this case, companies faced with a potential enforcement action by the DOJ may want to consider whether arbitration provides a quicker path to resolution than litigation in court.
On September 4, 2019, at the conclusion of a 14-month investigation, the DOJ filed a civil lawsuit in the Northern District of Ohio to block flat-rolled aluminum supplier Novelis from acquiring Aleris, a recent entrant into the US market. Defining the relevant market as "the sale of aluminum auto body sheet (ABS) to North American automakers," the DOJ alleges that the "4-3" merger would harm competition by eliminating a competitor from an already concentrated market with high barriers to entry. The DOJ expressed particular concern that Novelis wishes to acquire Aleris in order to remove a robust competitor—or to prevent its rivals from doing the same. In support, the DOJ's Complaint cites internal Novelis documents recommending that by acquiring Aleris, Novelis could stave off competition that might "negatively impact pricing." DOJ further alleges that Novelis itself expects that the merged entity could have roughly 60% of the total aluminum production capacity for North America. In response, Novelis asserts that the DOJ’s analysis ignores automakers' "extraordinary bargaining power," which they use to "ensure competitive pricing for automotive body sheet." Furthermore, Novelis rejects DOJ's relevant market definition and contends that it should include steel suppliers as well as aluminum sheet suppliers. According to Novelis, "steel automotive body sheet is currently used for nearly 90% of the market." It is this core dispute regarding how to define the relevant market that the parties have agreed to submit to binding arbitration.
The Arbitration Process
On September 9, 2019, the DOJ filed two documents regarding the arbitration process agreed to by the parties: a redacted version of the arbitration terms and an explanation of the procedure. In the explanatory filing, the DOJ noted that the ADRA authorized federal agencies to resolve enforcement matters by submitting them to binding arbitration, "provided that agency-specific guidelines on the appropriate use of binding arbitration have been issued." In 1996, the DOJ issued such guidance, which specifically authorized the use of arbitration in "merger review to reach a settlement."
In this case, the sole issue to be submitted for arbitration is whether ABS is a relevant antitrust product market, which both the DOJ and the merger parties agree is the "single dispositive issue." Consequently, the DOJ has agreed to withdraw its Complaint if the arbitrator finds that the product market is broader than just ABS, whereas if the arbitrator agrees with the DOJ that ABS is a relevant antitrust product market, the parties will be obligated to divest certain overlapping assets to a buyer approved by the DOJ and ultimately approved by the court through a Tunney Act proceeding.
The case will remain before the court as the parties conduct fact discovery. If a settlement is not reached by the conclusion of fact discovery, the parties "will work in good faith to commence the arbitral hearing within 120 days of the filing of Defendants' answer, with the arbitral hearing being completed in no more than 21 days, and the arbitrator being asked to issue a decision within 14 days of the conclusion of the arbitral hearing."
Although the DOJ's filings are short on details of the arbitration process—including the process for selecting the arbitrator—AAG Delrahim's speech shed some additional light and provided some helpful guidance. Calling the agreement "groundbreaking" and a potential "model for future enforcement actions," Delrahim stated that expanding the use of arbitration for both merger review and conduct cases could make federal antitrust enforcement more efficient. Delrahim added; "this new process could prove to be a model for future enforcement actions, where appropriate, to bring greater certainty for merging parties and to preserve taxpayer resources while staying true to our enforcement mission." Delrahim also pointed to the potential benefit of having an expert arbitrator resolve the disputed claims. For example, an antitrust specialist or former judge with economics training or experience handling complex antitrust cases "could bring an understanding of economic issues and testimony, which should provide for greater accuracy and efficiency."
Finally, Delrahim provided guidelines (if not an exact roadmap) regarding the factors the DOJ would consider in the future when deciding whether to pursue arbitration in a particular case:
First, what are the efficiency gains relative to the alternatives? The Division would be more likely to arbitrate if doing so could save significant time or taxpayer money while ensuring that competition and consumers are protected.
Second, is the question the arbitrator will be asked to resolve clear and easily can be agreed upon? If not, then arbitration may not be the best use of our or the parties’ resources.
Third, would arbitration result in a lost opportunity to create valuable legal precedent? This will depend on the facts of the particular case, but the effect could be mitigated depending on the transparency of the process and the arbitrator’s decision.
Whether this case signals the DOJ's willingness to embrace arbitration as an alternative to litigating antitrust enforcement actions in court remains to be seen and will likely depend on several factors, including the outcome of the arbitration and further DOJ policy guidance on its use. Nonetheless, a few important takeaways can be gleaned from the DOJ's decision—and the parties' agreement—to use arbitration to resolve this case. First, the nature of the dispute—where both the DOJ and the merging parties apparently agree that the case hinges on the relatively discrete, dispositive issue of whether ABS constitutes a relevant antitrust product market—may make this the ideal case for arbitration. Second, questions of market definition can involve a technical foray into antitrust economics that an arbitrator with specialist knowledge may be better equipped to handle than a generalist judge. Finally, the DOJ and the merging parties’ apparent agreement that divestiture is an appropriate and workable remedy—in the event the arbitrator agrees with the DOJ that ABS is a relevant antitrust product market—may have factored into the DOJ's decision to agree to arbitration. In a case where divestiture is not a viable remedy, the DOJ may be more inclined to seek a full stop of the transaction.
In cases where one or more of these factors and circumstances are not present, the DOJ may be less willing to use arbitration to resolve anticompetitive concerns in connection with a pending merger or business conduct. Thus, going forward, companies should be mindful of the circumstances the DOJ chooses to deploy arbitration as a tool in future enforcement actions, as well as be on the lookout for additional guidance on this topic that may clarify its intentions. Given the DOJ's statements regarding the use of arbitration in this case and in the future, however, companies facing a possible enforcement action would be prudent to consider whether the facts and issues of their case make it suitable for arbitration. In the right circumstances, agreeing to binding arbitration could provide resolution in a timely and cost-effective manner.