A January 2011 decision by the Court of Appeals for the Seventh Circuit offered a rare judicial discussion of the antitrust guidelines pursuant to which companies engaging in pre-merger due diligence should exchange confidential competitive information. In fact, the decision, Omnicare Inc. v. UnitedHealth Group, Inc., appears to be the first federal appeals court discussion of the antitrust rules of the road for such information exchanges.
The Omnicare decision involved UnitedHealth Group, Inc.’s (“United”) acquisition in 2005 of PacifiCare Health Systems, Inc. (“PacifiCare”), a rival health care insurer. When due diligence evaluation began, Omnicare Inc. (“Omnicare”), a provider of pharmacy services for senior citizens, was engaged in separate contract negotiations with both United and PacifiCare to provide supplemental prescription drug coverage to their subscribers enrolled in Medicare.
United entered into a contract at rates comparable to those that Omnicare had established with other insurers. PacifiCare, on the other hand, held out. Between the time that United and PacifiCare had executed their merger agreement, but had not yet concluded their merger, OmniCare resumed negotiations with PacifiCare. They signed an agreement two weeks before the merger was concluded at rates that were more favorable to PacifiCare than the rates Omnicare had previously agreed to charge United. After the merger closed, however, United withdrew from its agreement with Omnicare and joined the more favorable PacifiCare agreement.
Omnicare responded by filing suit against both insurers, alleging inter alia, that they had violated Section 1 of the Sherman Act by forming a conspiratorial “buyer cartel” pursuant to which they had improperly shared information while they still were separate companies in order to obtain lower prices from Omnicare.
The district court granted summary judgment in favor of the defendants, dismissing the suit on the ground that Omnicare had failed to carry its burden of producing evidence that tended to exclude the possibility that United and PacifiCare had acted independently in exchanging competitive information during that merger negotiation and pre-integration planning. Omnicare appealed to the Seventh Circuit.
The Seventh Circuit Decision
Omnicare argued before the Seventh Circuit that United and PacifiCare improperly exchanged confidential competitive information during merger negations, which justified sending the case to a jury trial to ascertain whether the two competitors had engaged in a conspiracy that included an agreement to obtain lower rates from Omnicare. The following information exchanges were a major focus of Omnicare’s claims:
- Exchanges of average reimbursement rates to insured consumers and the range of such rates.
- Information provided to United by PacifiCare regarding the nature of its Medicare supplement prescription drug programs.
- Preparation of comparative tables of the two companies’ Medicare bids.
- A risk assessment prepared by an actuary affiliate of United after it met with PacifiCare personnel.
- Most importantly, talks between executives of the two insurers regarding their contractual negotiations with Omnicare.
The Seventh Circuit assessed the evidentiary value of the information exchange from the standpoint of the standard for finding a conspiracy based on circumstantial evidence — whether the evidence tended to exclude the likelihood of independent conduct by each of the two competitive insurance companies. The Appellate Court pointedly remarked that it had to “walk a fine line” in making this evaluation. On the one hand, it did not want to chill the ability of competitors engaged in pre-merger negotiations to exchange due diligence information lawfully because of the fear of antitrust challenge. On the other hand, the court was cognizant that the mere possibility of a merger was not sufficient to allow competitors to exchange competitively sensitive information as a foundation for a conspiracy in violation of the antitrust laws.
Concluding that the information exchanged in this instance was insufficient to allow the case to go to trial, the Seventh Circuit referred to the following evidence supporting its decision:
- The merging parties had provided legitimate due diligence reasons for all the information that was shared.
- In particular, the parties had exchanged only aggregated pricing data rather than detailed data or specific pricing strategies.
- PacifiCare had, in some instances, disclosed less detailed competitive information than United had sought because of concerns expressed by counsel.
- The most selective competitive information was shared only among a tight group of high-level executives “on the eve” of reaching the merger agreement.
The court concluded that Omnicare’s pricing evidence demonstrated only exchanges of eneralized and averaged high-level pricing data, policed by outside counsel, that was more onsistent with independent than collusive conduct.
The one document that was of most concern for the Seventh Circuit was a memorandum written after the merger agreement was executed, but before the merger closed. In it, a United executive declared that PacifiCare was “a stalking horse to obtain the best service and contracts.”  Omnicare contended that this document showed beyond any reasonable doubt that the parties had conspired so that United could obtain a lower rate from Omnicare. Despite a stated concern, the Seventh Circuit determined that the “stalking horse” statement was ambiguous, and insufficient to permit the case to go to trial.
In sum, considering Omnicare’s “plus factor” evidence separately or as a whole, the Seventh Circuit concluded that it was as compatible with each defendant’s independent legitimate business interests as it was with conspiring. As such, it was insufficient to enable jurors to infer that the parties inappropriately shared information that “facilitates the development or advancement of a coordinated negotiating and pricing strategy directed at obtaining lower rates for United from Omnicare.” Accordingly, the summary judgment dismissal was confirmed.
Possible Lessons Learned from the Omnicare Decision
The Omnicare case was not an easy one for the Seventh Circuit. Perhaps the most obvious conclusion that can be reached about the decision is that merging parties can exchange competitively sensitive information during due diligence, provided that the information is necessary for the merging parties to evaluate the proposed arrangement. But antitrust safeguards must be in place from the outset of discussions. In that regard, the Seventh Circuit emphasized that in the case before it, all competitively sensitive information had been reviewed in advance and cleared by antitrust counsel.
The following general antitrust guidelines likely can be taken away from the Omnicare decision:
- Prior to the closing of a merger between competitors, it must be recognized that the parties re separate entities capable of collusion, and that the antitrust laws prohibit collusion between competitors.
- Inferences of collusion possibly can arise from discussions of competitive sensitive information and, for that reason, discussions and exchanges of such information should be carefully monitored and cleared by antitrust counsel to avoid such an inference.
- Confidential information should be shared during pre-merger discussions, including, in particular, competitively sensitive information, only if it is needed for due diligence.
- Sharing aggregated data rather than specific data reduces antitrust risks.
- Participation in discussions and disclosure of matters covered in due diligence discussions should only be made on a need to know basis, after a nondisclosure agreement has been pre-signed by the parties, and by each person receiving the information. Aside from the evidence specific to the Omnicare case, the following additional guidelines are worth keeping in mind with respect to pre-merger discussions between competitors.
- To the greatest extent possible, member of a due diligence team with access to competitively sensitive information should not be engaged in day-to-day business operations competitive with the other party.
- In particular, no due diligence team member should be someone with price or cost-setting authority with respect to any such competitive operations, and such individuals should be fire-walled from seeing sensitive information obtained from the other party.
- Finally, while merging parties can engage in pre-closing planning of matters involving postmerger integration, it is essential to ensure that such planning is not, and cannot be viewed as, a device for reducing competition between the parties before the closing or in the event that the deal is not concluded.
- Examples of permissible integration planning:
- IT integration
- Budget financing integration
- Payroll integration
- Examples of impermissible integration planning that should be the ubject of continued competition between the parties, prior to the closing of the merger:
- Marketing initiatives
- Matters involving costs
- Matters involving non-public pricing data
- Customer allocations
- Examples of permissible integration planning: