The decision in this gun-jumping case emphasizes the importance of antitrust guidance during pre-closing due diligence and agreement negotiation.
On January 16, 2009, the U.S. District Court for Northern Illinois in Omnicare v. UnitedHealth Group granted summary judgment for UnitedHealth and PacifiCare after concluding that Omnicare failed to set forth sufficient evidence of an illegal agreement to fix prices of prescription drugs to proceed to a jury trial. Omnicare challenged UnitedHealth’s and PacifiCare’s due diligence information sharing and transaction agreement as amounting to an unlawful price fixing agreement with respect to prescription drug pricing. While this case previously survived a motion to dismiss, under the more rigorous summary judgment standard, Omnicare failed to generate any genuine issue of material fact. The decision reinforces the importance of careful due diligence procedures and antitrust counseling to prevent potential liability under the antitrust laws.
Omnicare is the largest provider of pharmacy services to institutional health care providers, such as nursing homes and assisted living facilities. Omnicare negotiates contracts with prescription drug providers (PDPs) under the Medicare Part D program for a package of services in exchange for a specified reimbursement rate. UnitedHealth and PacifiCare are health insurers that provide prescription drug coverage to senior citizens as PDPs under the Medicare Part D program.
UnitedHealth and PacifiCare signed a merger agreement in July 2005, valued at more than $8 billion. The U.S. Department of Justice (DOJ) cleared the transaction subject to certain divestitures. At the time UnitedHealth signed the merger agreement, UnitedHealth and Omnicare had completed an agreement for pharmacy services, but PacifiCare was still negotiating a new contract with Omnicare. PacifiCare initially ceased negotiations after signing the merger agreement but later resumed discussions with Omnicare and secured a favorable contract.
After the UnitedHealth and PacifiCare merger was finalized, UnitedHealth terminated its agreement with Omnicare and adopted PacifiCare’s more advantageous contract. In May 2006, Omnicare filed federal and state antitrust claims against UnitedHealth, PacifiCare and RX Solutions, a subsidiary of UnitedHealth. Omnicare alleged that defendants conspired to fix prices for Medicare Part D reimbursement. According to the complaint, defendants used the due diligence process to share competitively sensitive information and coordinate competitive behavior while the companies were still independent. As a result of this alleged coordination, according to Omnicare, PacifiCare obtained superior terms from Omnicare so that UnitedHealth could drop its contract with Omnicare and take advantage of the more favorable PacifiCare-Omnicare provisions. The evidence, however, showed otherwise.
The court held that Omnicare failed to establish a genuine issue of material fact as to the existence of an illegal agreement between the defendants. Applying the Supreme Court of the United States’ summary judgment standard articulated in Monsanto and Matsushita, the court concluded that the evidence did not tend to exclude the possibility that UnitedHealth and PacifiCare acted independently in their negotiations with Omnicare.
Omnicare first argued that the merger agreement represented an agreement to coordinate pricing even before the merger was completed. The merger agreement contained a standard material contracts provision, which is commonly used in transaction agreements, that prohibited PacifiCare from entering into contracts outside of its ordinary course of business and valued in excess of $3 million without UnitedHealth’s express authorization. Omnicare claimed that this provision granted UnitedHealth control over PacifiCare’s Medicare Part D contracts. However, a “Company Disclosure Letter,” referred to in the merger agreement, explicitly relieved PacifiCare of securing UnitedHealth’s approval with respect to Medicare Part D contracts. Thus, according to the letter agreement, PacifiCare was free to contract with Omnicare without any input from UnitedHealth. Because it was clear that UnitedHealth had no contractual right to control any of PacifiCare’s Medicate Part D contract, the court did not have to reach the issue of whether a pre-closing control or approval right would have created an antitrust concern if the Omnicare contract had been outside of PacifiCare’s ordinary course of business.
The court then rejected Omnicare’s arguments that PacifiCare acted against its self-interest in negotiating the Omnicare-PacifiCare contract as evidence of a conspiracy. The court determined that PacifiCare’s successful business strategy combined with Omnicare’s failed bargaining resulted in the favorable contract for PacifiCare. The court found it unusual that Omnicare made no attempt to renegotiate the supposedly uncompetitive and unconscionable terms of the PacifiCare agreement. Indeed, Omnicare accepted these terms on their face. Moreover, despite Omnicare’s knowledge of the UnitedHealth-PacifiCare transaction, Omnicare neglected to support a provision that prohibited UnitedHealth from taking advantage of the PacifiCare contract.
Omnicare also argued that information exchanged in due diligence enabled the parties to collude. Omnicare was unable to show that pre-closing communications or information exchanged between the parties created a genuine issue of material fact as to the existence of a conspiracy. Omnicare failed to produce evidence showing that UnitedHealth and PacifiCare ever discussed pricing or strategy regarding Omnicare. The court noted several times that the parties had taken care to ensure that the information exchanged in competitive lines of business was not revealed to personnel who could act on it in their day-to-day activities. In fact, once UnitedHealth and PacifiCare executed their transaction agreement, the parties ceased all due diligence communications and did not discuss any Part D contracting. Omnicare has said it will appeal the district court’s ruling.
This decision reinforces the importance of antitrust counseling on pre-closing due diligence and transaction agreement negotiations. For due diligence, UnitedHealth and PacifiCare adopted guidelines and safeguards to control their antitrust risk. These guidelines included the following:
- Confidentiality agreements between the parties established a “clean room” and “clean team” to protect confidential information.
- Counsel reviewed the company’s documents for antitrust concerns prior to disclosure.
- UnitedHealth did not view PacifiCare’s Part D contracts in due diligence.
- Only high-level executives who did not have day-to-day responsibility for the overlapping product lines attended due diligence meetings that touched on product lines where the merging parties were competitors.
- The parties ensured that pricing information exchanged between the parties involved general “averages and ranges rather than specific bargained-for rates.”
In transactions, antitrust counsel is crucial during both the agreement drafting stage and the due diligence period. Potential antitrust liability can be minimized by provisions in the actual merger agreement. Antitrust counsel can help ensure that parties protect competitively sensitive information throughout the due diligence phase.