On Feb. 26, 2009, The Lubrizol Corporation (“Lubrizol”) agreed to enter into a consent agreement with the Federal Trade Commission (“FTC”), subject to final approval, settling the FTC’s challenge to Lubrizol’s 2007 acquisition of the oxidate assets of its competitor, The Lockhart Company (“Lockhart”). The settlement was just the latest in a series of challenges by U.S. antitrust agencies to consummated transactions that were not required to be reported to the FTC and Department of Justice (“DOJ”) pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (as amended, the “HSR Act”). These recent cases serve as a reminder that antitrust agencies will challenge transactions and agreements they believe harm consumers, even if post-integration unwinding of assets is required.
The products at issue in the current challenge were chemical additives used to make rust preventives. According to the FTC’s complaint, the acquisition violated the FTC Act and the Clayton Act by lessening competition in the market for rust preventives that contain oxidates. The purchase price for such assets was approximately $15.6 million.
The FTC alleged that the relevant market was highly concentrated and that, prior to the acquisition, Lubrizol and Lockhart were the only significant providers in the U.S. The FTC determined that customers did not consider the oxidates manufactured by smaller firms to be suitable alternatives. Accordingly, Lubrizol was left with no significant competitors in the U.S. market. Furthermore, the FTC found that oxidate customers benefited from the competition between Lubrizol and Lockhart (in terms of pricing, innovations and customer service), which was eliminated as a result of the transaction.
In addition, the asset purchase agreement included a non-competition provision prohibiting Lockhart from engaging in any business that would compete with the assets it sold to Lubrizol for five years. The FTC alleged that this provision prevented new entry into the market since, without access to an existing plant such as Lockhart’s Flint, Mich., facility, it is unlikely that a new entrant would be able to generate sales sufficient to justify the cost of investment necessary to enter the market.
The proposed consent agreement requires Lubrizol to sell certain assets to Additives International LLC (“AI”), including a non-exclusive license to AI to manufacture rust-preventive formulas acquired from Lockhart, the right to use Lockhart trademarks for two years, technical information relating to the manufacture of the Lockhart oxidate products, and copies of Lubrizol’s and Lockhart’s approvals and certifications relating to the Lockhart oxidate products. Lockhart is also required to lease a portion of its Flint plant to AI and Lubrizol is required to rescind the aforementioned non-compete provision. AI also acquired a right of first refusal to purchase the Flint plant from Lockhart. The proposed consent agreement will be open to public commentary through March 27, 2009, after which the FTC will decide whether to make it final.
Other recent challenges by the antitrust agencies include the FTC’s December 2008 challenge to Ovation Pharmaceuticals’ 2006 acquisition of the drug NeoProfen from Abbott Laboratories, alleging that Ovation unlawfully maintained a monopoly by acquiring NeoProfen, and unlawfully profited from its ability to set monopoly pricing. That same month, the DOJ challenged Microsemi Corporation’s acquisition of certain assets of Semicoa Inc. relating to the manufacture of semiconductor devices for military and aerospace applications.
These recent cases serve as a reminder that the FTC or DOJ may challenge a transaction at any time prior to or after closing. Furthermore, the fact that the U.S. antitrust authorities continue to challenge transactions that were not required to be reported under the HSR Act emphasizes that even transactions valued below the current $65.2 million HSR Act threshold are still subject to substantive antitrust scrutiny. The Lubrizol case also shows that non-competition agreements, while lawful if reasonably limited in scope to protecting the covenantee’s legitimate interests and ancillary to the significant lawful business purpose of the contract, may not be accepted by the antitrust agencies if there are no other significant current or potential competitors in the affected market.
Parties should be aware that the U.S. antitrust authorities may take a closer look at transactions between competitors in concentrated markets (for example, those involving chemicals, healthcare or national security). Accordingly, the advice of counsel should be sought in connection with any transaction between direct or potential competitors, regardless of the purchase price or relative size of the affected market.