On September 28, 2007, the District Court for the Northern District of Illinois denied United’s motion to dismiss in Omnicare v. UnitedHealth Group, Civ. Act. No. 06-cv-06235, N.D. Ill., 9/28/07, allowing the case against United and PacifiCare alleging that they violated the antitrust laws through illegal activities prior to consummating their merger to continue. Omnicare is an institutional pharmacy that provides drugs and services to long-term care facilities serving the elderly population. Based on the population it serves, Omnicare largely relies on reimbursement from Medicare Part D plans, otherwise known as Prescription Drug Providers (PDPs), who reimburse pharmacies through a combination of enrollee premiums and government subsidies. Omnicare negotiates with PDPs for a package of services in exchange for a certain reimbursement rate. PDPs are required by the Center for Medicaid and Medicare Services (CMS) to build a broad network of pharmacies, including those that provide services to long-term care facilities.
United and PacifiCare signed a merger agreement on July 6, 2005, valued at $8.15 billion. The Department of Justice (DOJ) eventually cleared the transaction on May 23, 2006, subject to a consent agreement in which United agreed to divest PacifiCare’s contract with the University of Colorado, Boulder and its commercial insurance contracts in the Tucson, Ariz. area. Prior to their merger, both United and PacifiCare competed to provide PDP services to enrollees and in turn both companies contracted with pharmacies, including Omnicare. Omnicare alleged that the merger agreement between United and PacifiCare required that PacifiCare seek consent from United before entering into any Part D agreement with Omnicare based on the fact that the agreement required United’s prior written consent for “any Contract . . . that involves [PacifiCare] or any of its Subsidiaries incurring a liability in excess of $3,000,000 individually or … $7,500,000 in the aggregate.”
Omnicare’s complaint alleged that, after United and PacifiCare signed the merger agreement but before the transaction closed, the two merging entities conspired to fix prices. Omnicare alleged that PacifiCare, after consulting with United, refused to negotiate terms of its contract and instead insisted upon noncompetitive reimbursement rates and minimum services. Omnicare, allegedly at the urging of CMS, agreed to the terms of the contract with PacifiCare. Following the merger, United allegedly adopted the terms of the Omnicare-PacifiCare contract to take advantage of the noncompetitive rates and terms that Omnicare was forced to accept in its PacifiCare contract. The District Court upheld Omnicare’s ability to challenge the agreement as an unlawful agreement in violation of Section 1 of the Sherman Act. The court rejected United’s argument that under Copperweld parties to a merger agreement have a unity of interest which makes them incapable of conspiring with one another to restrain trade. The court distinguished this case from both Copperweld and International Travel Arrangers v. NWA, which accepted a jury finding that parties to a merger agreement had not conspired because the unity of interest between the parties to that agreement was sufficient. The court found that signing a merger agreement does not mean that the parties are unable to collude under the antitrust laws during the period after signing but before closing. Furthermore, the court held that if the parties did collude, the allegations were sufficient to warrant per se treatment rather than a rule of reason analysis.
This case will be followed closely because there is little judicial precedent in the gun-jumping area. Until now, advice to merging parties regarding pre-consummation merger activities has been largely based on consent agreements and speeches or papers by government authorities. This case also sends a signal to merging parties that they should consider not only the threat of government actions when they undertake pre-consummation due diligence and transition planning, but also potential lawsuits from customers.