On September 26, 2017 the Antitrust Division of the United States Department of Justice (DOJ) filed a complaint in the US District Court for the District of Delaware seeking to partially unwind a merger between two producers of aviation fuel filtration products. In its complaint, the DOJ alleged that the $4.3bn consummated acquisition of CLARCOR Inc. (CLARCOR) by Parker-Hannifin Corporation (Parker-Hannifin) violated Section 7 of the Clayton Act (Section 7) by substantially lessening competition in the US market for aviation fuel filtration products, a small segment of the parties’ broader businesses. US v. Parker-Hannifin Corporation, Case No. 1:17-cv-01354-UNA (September 26, 2017).
Aviation fuel filtration products are used to remove contaminants and water from aviation fuel before use in civilian and defense aircraft, preventing impurities that could otherwise cause aircraft engines to stall and potentially fail. Prior to the challenged transaction, Parker-Hannifin and CLARCOR were both suppliers of aviation fuel filtration products in the United States. The transaction met the US premerger notification thresholds as set out in the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR), and accordingly the parties submitted the requisite HSR notification to the DOJ and the US Federal Trade Commission (collectively, the US Antitrust Agencies) in late 2016. The mandatory HSR waiting period expiredon January 17, 2017 without DOJ action, and on February 28, 2017 Parker-Hannifin closed the transaction. Notwithstanding the expiration of the mandatory HSR waiting period – otherwise permitting the parties to close the transaction – the DOJ filed a complaint nearly seven months after consummation alleging that the acquisition effectively amounted to a merger-to-monopoly in the US market for aviation fuel filtration products in violation of Section 7.
In its complaint, the DOJ alleged that Parker-Hannifin and CLARCOR were the only two US producers of aviation fuel filtration systems that met the applicable industry standards as set out by the Energy Institute (EI). In accordance with aviation industry standards, civilian and defense aircraft operators use only EI-qualified aviation fuel filtration systems. By acquiring its only US competitor for EI-qualified aviation fuel filtration systems, the DOJ alleged that Parker-Hannifin removed the competitive constraints once exerted by CLARCOR to the detriment of price and non-price competition, and that new entry or expansion is unlikely to counteract the competitive harm. The DOJ’s complaint asks the court to require the parties to divest the relevant business lines of either Parker-Hannifin or CLARCOR in order to restore the pre-transaction competitive status quo.
The timeline of the DOJ’s action suggests that it only learned of the areas of potential competitive concern – likely via customer complaints – subsequent to the expiration of the HSR waiting period, and thereafter launched an in-depth investigation. In its public commentary accompanying the Parker-Hannifin/CLARCOR enforcement action, the DOJ asserts that during the pendency of the post-closing DOJ investigation, Parker-Hannifin “failed to provide significant document or data productions in response to the [DOJ’s] requests,” and further would not agree to enter into a hold separate arrangement (keeping the Parker-Hannifin and CLARCOR businesses separate and apart) that the DOJ deemed satisfactory. In a press release, Parker-Hannifin acknowledged the filing of the DOJ’s complaint while asserting that: (i) the customary HSR waiting period had expired on January 17, 2017, (ii) the combined annual revenue of the products in question is less than $20m and (iii) it has cooperated fully throughout the DOJ post-closing process.
The DOJ’s challenge to Parker-Hannifin/CLARCOR serves as an important reminder that expiration of the applicable HSR premerger waiting period does not immunize a notified transaction from subsequent challenge by the US Antitrust Agencies. In addition to the enforcement powers within the typical HSR premerger notification process, the US Antitrust Agencies retain residual jurisdiction to pursue consummated transactions in instances where: (i) the HSR waiting period has expired or been terminated (as was the case in this instance), or (ii) a transaction did not otherwise trigger a notification pursuant to the HSR rules – broad jurisdictional features not commonly available to authorities employing mandatory premerger notification regimes outside the United States. While the US Antitrust Agencies have utilized their residual jurisdiction sparingly, the DOJ’s investigation and eventual enforcement action in Parker-Hannifin/CLARCOR – seeking to unwind previously combined assets following the expiry of the applicable premerger review period – demonstrate a resolve to utilize the full breadth of US merger control authority when deemed necessary, including in circumstances where the business line in question represents a very small portion (less than .5 percent) of the broader transaction value.