In early September 2007, the Federal Trade Commission (FTC) issued a complaint alleging that two dialysis clinic operators – American Renal Associates, Inc. (ARA) and Fresenius Medical Care Holdings, Inc. (Fresenius) – unlawfully restrained competition in violation of Section 5 of the FTC Act when ARA paid Fresenius to close clinics located near competing ARA clinics in Rhode Island and Massachusetts as a part of a 2005 asset purchase agreement.

According to the FTC complaint, the parties entered into an Asset Purchase Agreement dated August 3, 2005, whereby ARA proposed to acquire five Fresenius clinics in the Providence, RI / Fall River, MA area, and pay Fresenius to close another three competing clinics, for approximately $4.4 million. The parties terminated this agreement on March 13, 2006 after the FTC staff raised antitrust concerns.

The Commission’s complaint charged that the agreement between ARA and Fresenius – competitors in the provision of outpatient dialysis services – to close three Fresenius clinics was a per se unlawful horizontal agreement to eliminate competition and to reduce dialysis capacity in the three affected areas. The parties written contract listed each Fresenius clinic to be closed and the specific amount of money to be paid by ARA for closing each clinic, and allocating each amount to the ARA clinic closest to the clinic to be closed. The parties further agreed that Fresenius would not reopen any outpatient dialysis clinics within 10 to 12 miles of the closed facilities for at least five years, and would attempt to enforce the non-compete provisions of its agreements with the medical directors of the closed facilities for ARA’s benefit, preventing those physicians from serving as medical directors for any potential new entrant.

The Commission also charged that ARA’s proposed acquisition of Fresenius’s two Warwick, Rhode Island, facilities would have substantially reduced competition for outpatient dialysis services by eliminating competition between these Warwick clinics and ARA’s nearby Cranston, Rhode Island, clinic. The Commission’s analysis laid out the factors the Commission looked at to conclude that the relevant geographic market was so localized, including the distance ESRD patients are willing and able to travel to receive dialysis treatments. The Commission noted that because ESRD patients often suffer from multiple health problems and may require assistance traveling to and from the dialysis clinic, and because of the high frequency of treatments, these patients are unwilling and unable to travel long distances for dialysis treatment. Furthermore, the FTC concluded that time and distance a patient will travel in a particular location is significantly affected by local traffic patterns; whether an area is urban, suburban, or rural; local geography; and a patient’s proximity to the nearest dialysis clinic, as well as a variety of other factors including population density, roads, geographic features, and political boundaries.

The parties agreed to a consent order that prohibits ARA and Fresenius for ten years from agreeing with any person to close a dialysis clinic, or allocate any dialysis customer, territory, or market. The consent order also would require ARA to give the Commission prior notice before acquiring any interest in a dialysis clinic in the Warwick/Cranston area because there is a risk that ARA remains interested in expanding in the area, but any such further acquisition likely would fall below Hart- Scott-Rodino Act premerger notification thresholds.

The Commission’s action in this matter is unusual in that it proceeded to investigate and obtain an order against the parties even after they had abandoned the originally proposed deal. The Commission’s aggressive position here is a reminder that companies cannot diminish the impact of problematic contractual provisions in a merger agreement by simply walking away from the deal. Care always must be taken in drafting contractual provisions even in transactions that are unlikely to receive significant scrutiny.