On July 12, 2012, the U.S. Court of Appeals for the Eleventh Circuit upheld the Federal Trade Commission's (the "FTC") Opinion and Order in Polypore International, Inc. v. FTC.  The court agreed with the FTC that Polypore's acquisition of Microporus Products L.P. (the "Transaction"), a rival manufacturer of three types of battery components, would substantially lessen competition in relevant markets, and thus was anticompetitive under Section 7 of the Clayton Act. Polypore has issued a press release stating that it plans to seek further review of the decision by filing a certiorari petition with the U.S. Supreme Court. It was reported that on August 27, 2012, Polypore filed a petition for en banc review by the Eleventh Circuit.
The FTC's challenge to the Transaction is notable for a number of reasons. First, the Transaction was valued below the Hart-Scott-Rodino Act's thresholds. Second, the Transaction had closed prior to the FTC's investigation. Third, the FTC presumed liability on a basis relevant to actual competitors when one of the parties had not made any sales of the challenged product. Finally, the FTC ordered the divestiture of a plant outside the U.S. in order to preserve competition within North America, the geographic market identified by the FTC as the affected market.
At issue in the FTC suit was Polypore's February 2008 acquisition of Micorporus, a rival manufacturer of products in the battery separator market. The transaction was valued below the applicable thresholds of the HSR Act, and therefore was not subject to pre-closing review by the federal antitrust agencies. The FTC challenged the Transaction as anticompetitive in September 2008, claiming the Transaction decreased competition and raised prices for four types of battery separators sold to consumers in North America.
In an Initial Decision announced in March 2010, Administrative Law Judge Chappell found that the Transaction was anticompetitive with respect to all four products, and ordered Polypore to divest Microporus to an FTC-approved buyer--including a Microporus plant in Austria under construction at the time of the Transaction.
Polypore appealed the Initial Decision to the Commission, maintaining that no anticompetitive effects resulted, or were even likely to flow, from the Transaction. Polypore also argued that any possible anticompetitive effects could be offset either by power buyers, or by Asian or existing U.S. suppliers entering the challenged markets. Polypore relied heavily on the econometric testimony of its expert, and discounted the relevance of evidence put in front of the ALJ by the FTC's complaint counsel, challenging the quality and sufficiency of economic evidence supporting the relevant markets.
The FTC disagreed with Poypore, and unanimously upheld the Initial Decision with respect to three of the four North American markets at issue, relying on evidence such as customer testimony and the parties' internal documents, including a description of the "MP Plan", whose was to secure customers believed to be in danger of switching to Microporus; budget documents showing price increases dependent upon the Transaction; and a transaction analysis prepared by the target. The FTC agreed with the ALJ in finding that the Transaction would result in two markets going from two competitors to one, and in the third market Polypore and one other manufacturer were the only two suppliers in North America. One customer stated that the two suppliers did not act as competitors, and the FTC concluded that even though Poypore had not yet made any sales in the market, it had been constraining price increases for the market through its pre-sales activities.
Commissioner Rosch issued a concurring opinion describing an analytical framework that would "focus on the competitive effects of this [closed] transaction instead of focusing initially on defining the precise contours of the relevant market and only then considering the transaction's competitive effects." He supported the use of evidence of motive and the actual effects of a consummated merger in defining a relevant market for purposes of Section 7, pointing to the merging parties' own pre-merger internal documents and post-merger price increases as strong evidence of the Transaction's anticompetitive effects and Polypore's liability. Polypore appealed the FTC decision to the Eleventh Circuit.
Eleventh Circuit Decision
With respect to one of the competing products, Polypore maintained that the FTC improperly analyzed the Transaction as a horizontal merger by treating Microporus as an actual competitor rather than a potential competitor, and by improperly relying on the presumption of liability found in the Supreme Court's Philadelphia National Bank decision from nearly fifty years ago. The Eleventh Circuit disagreed, declaring that despite the absence of actual sales in the market at issue, various pre-acquisition market activities of Microporus provided sufficient evidence of actual competitive presence in the market. The pre-acquisition Micorporus activities included bidding on contracts, running sample products, becoming "qualified" to supply the product for a particular buyer, and entering into a Memorandum of Agreement with another potential buyer who testified that it intended to buy products from Microporus. Based on this record, the burden shifted to Polypore to overcome the presumption of liability, which the Court found it unable to do.
With respect to the two competing products where Microporus was an actual competitor, the Court cited Eleventh Circuit precedent that relied upon the factors set forth in the Supreme Court's 1962 Brown Shoe decision in finding that the record contained ample evidence to support the markets defined by the FTC. Although the record and Commissioner Rosch's Concurrence both contain multiple references to post-closing evidence of anticompetitive effects, the Eleventh Circuit largely relies upon pre-closing evidence such as switching data , and does not specifically rely on any of the econometric evidence put forth by the parties. The Eleventh Circuit's Decision does not mention the agencies' Merger Guidelines or much of the market definition guidance provided therein.
Polypore also challenged the FTC's authority to include a newly constructed Austrian plant in any divestiture Order, noting that the FTC itself limited the relevant geographic market to North America.  Referring to the FTC's concerns over an acquiror's access to adequate capacity for sales to North American customers, the Court noted the FTC's "broad discretion in the formulating of a remedy for unlawful practices," and, since it did not find that the FTC had abused its discretion in ordering the divestiture of he Austrian plant, accorded deference to the FTC's chosen remedy.
Notably, in its decision, the Eleventh Circuit did not refer to the federal antitrust agencies' Merger Guidelines, though the FTC had cited the 1992 and the 2010 Merger Guidelines in its brief to the Court. Instead, the Eleventh Circuit relied on Supreme Court decisions from 1962 to 1974. In contrast to the views in the new Merger Guidelines, the Eleventh Circuit also did not initially focus on actual evidence of competitive effects before defining the precise relevant markets.
Although the Supreme Court has not decided a merger antitrust case since 1974, the Eleventh Circuit's reliance on law established up to 50 years ago to support its decision might pique the Supreme Court's interest in this decision. Depending on whether the Eleventh Circuit grants rehearing en banc, if the Supreme Court ultimately does grant certiorari, the antitrust community could obtain the Court's current views on merger antitrust analysis, including in particular the appropriate roles of actual and potential competition and evidence of competitive effects in market definition. Whether or not the Supreme Courts clarifies those issues, one can expect that the FTC will continue to aggressively challenge transactions it believes are anticompetitive horizontal mergers, notwithstanding a transaction's size, the fact that the transaction has already closed, or the fact that one of the parties may not have yet made any actual competing sales.