UPDATE: On May 11, 2017, the Delaware Chancery court denied Anthem’s motion for preliminary injunction to prevent Cigna from withdrawing from the proposed merger, citing Anthem’s slim chance of success and the adequacy of money damages as a remedy.
In a split decision, on April 28, 2017, the Court of Appeals for the District of Columbia Circuit affirmed the district court’s decision to issue a permanent injunction blocking the merger of Anthem, Inc. and Cigna Corp., two of the nation’s largest health insurance providers. As we’ve previously written, in July 2016, the Department of Justice and attorneys general from multiple states sued to halt the merger pursuant to Section 7 of the Clayton Act, alleging that it would substantially lessen competition in the market for employers purchasing insurance for more than 5,000 employees ( “national accounts”) in multiple states and employers purchasing insurance for more than 50 employees (“large group employers”) in Richmond, Virginia. After a six-week bench trial, the district court enjoined the merger on the basis of its likely substantial anticompetitive effects in both markets.
The appeal presented two issues: (1) whether courts can consider the efficiencies realized as a result of a merger a defense to illegality under Section 7 and (2) if so, whether the district court clearly erred in holding that the efficiencies Anthem identified were insufficient to overcome the merger’s likely anticompetitive effects.
The Availability of the Efficiencies Defense
The majority first addressed whether efficiencies realized as a result of a merger (lower costs to the combined company, for example) are a defense to illegality under Section 7.
Most notably, the majority discussed FTC v. Procter & Gamble Co., 386 U.S. 568 (1967), where the Supreme Court held that “[p]ossible economies cannot be used as a defense to illegality. Congress was aware that some mergers which lessen competition may also result in economies but it struck the balance in favor of protecting competition.” Id. at 580. The opinion acknowledged, however, that “[d]espite the clear holding of Procter & Gamble” other circuit courts (including the D.C. Circuit in a prior case) have “recognized the use of efficiencies evidence in rebutting a prima facie case.” The Eleventh Circuit, for example, “concluded that whether an acquisition would yield significant efficiencies in the relevant market is an important consideration in predicting whether the acquisition would substantially lessen competition.” (internal citations & quotations omitted). Ultimately, the majority sidestepped the question by “simply assum[ing] the availability of an efficiencies defense to Section 7 illegality because Anthem fail[ed] to show that the district court clearly erred in rejecting Anthem’s efficiencies defense.”
Judge Kavanaugh, in a dissent, staked out a firmer position: “we must take account of the efficiencies and consumer benefits that would result from this merger.” In a dissent that analyzed the historical development of antitrust law, he explained that under the “modern approach,” “the fact that a merger such as this one would produce heightened market concentration and increased market shares . . . is not the end of the analysis.”
Anthem’s Identified Efficiencies
At trial (and on appeal), Anthem identified three ways a merger would allow it to achieve total cost savings of $2.4 billion. First, it argued that it could “rebrand” Cigna customers as Anthem customers to allow them to pay Anthem’s lower rates. Second, it contended that it could exercise affiliate clauses present in some of its agreements with healthcare providers to allow Cigna customers access to the lower rates. Finally, it claimed the larger combined company could negotiate more favorable rates with healthcare providers. The majority held that the district court did not clearly err in holding that these efficiencies did not justify the merger either because they are not sufficiently verifiable, not merger specific, or both.
On the first efficiency, the Court held that the savings from rebranding are not merger specific. Anthem witnesses admitted that “in the short term, rebranding would simply involve Anthem offering Cigna customers Anthem products in a manner that is no different than Anthem selling new business in the market.” (internal citations and quotations omitted.) The Court concluded that this “rebranding” is “not a merger-specific outcome; that is just more successful marketing of the existing Anthem product.” The Court also rejected the purported long term benefits because, over the long haul, “the evidence offered by Anthem is woefully insufficient to show that it cannot develop better customer-facing programs” on its own.
The Court also concluded that the cost savings are insufficiently verifiable for all three proposed efficiencies. It found that the district court properly credited evidence that countervailing business pressures would either render the savings impossible to achieve, or possible only with a concomitant reduction in quality of services. The majority also expressed doubt as to whether any cost savings would be passed on to customers, rather than simply captured by Anthem.
The dissent, on the other hand, found that “the record decisively demonstrates that this merger would be beneficial to the employer-customers who obtain insurance services from Anthem and Cigna.” Judge Kavanaugh found that the record evidence suggested that although employers would pay the merged Anthem-Cigna additional fees of between $48 million to $930 million per year, those large employers would also save an amount ranging from $1.7 to $3.3 billion annually due to reduced rates charged by healthcare providers. Thus, in his view, the record established “that the merger would generate significant medical cost savings for employers” and he believed that the “District Court clearly erred.”
What’s Ahead for Anthem
After the D.C. Circuit’s decision, Anthem continued its efforts to salvage the merger. It filed a petition for certiorari on May 5, 2017, relying primarily on the circuit split over the availability of the efficiencies defense. If the Supreme Court takes the case, it will be the Court’s first Section 7 merger case since 1975. It also remains to be seen whether the Trump administration takes a different view of the case than the Obama administration did. The President’s nominee for the head of the Antitrust Division, Makan Delrahim, was a lobbyist for Anthem and has pledged to recuse himself from the case. Meanwhile, Anthem has moved in Delaware Chancery Court for a 60-day preliminary injunction to block Cigna from pulling out of the merger while Anthem’s cert petition is pending. We will continue to monitor the litigation as it unfolds.