There’s been enough news that’s worthy of discussion lately that I’m developing a bit of a backlog. I thought I’d combine a few short takes to help me get caught up.
Let Me Complain About Section 5 Again
I wanted to circle back to one thing I didn’t touch on in my post about the Supreme Court’s Activis decision on Friday. Aside from from Justice Breyer’s rather astounding assertion that a reverse payment case could potentially be proven even without a showing that the patent was invalid, there’s another wrinkle in the case that I should have touched on. And that is that the FTC claims in the case have been limited to an alleged violation of Section 5 of the FTC Act. You know the one. We’ve talked about it before.
It’s the largely undefined statute that prohibits “unfair methods of competition” that FTC officials have been so keen to revitalize lately. It’s also the one that only the the FTC can enforce, thus offering a magical utopia in which the FTC can declare things as bad without immediately creating follow-on private damages actions.
To me, Justice Breyer’s majority opinion is yet another challenge to that latter assertion. It’s pretty clear that Justice Breyer sees a rule of reason case like any other. Nothing about his consideration of “pay for delay” settlements turns on the conduct being “unfair” or otherwise uniquely subject to challenge only under Section 5 or by the FTC. He says the settlements can be shown to be anticompetitive under the rule of reason, and strongly implies that a large reverse payment should weigh heavily in that review. Why wouldn’t that also be the case under Section 1 of the Sherman Act, which private claimants are most definitely authorized to enforce? Will the FTC take a position when the plaintiffs’ bar argues that every word of Breyer’s reasoning should apply to a claim under Section 1 as well?
The Chairwoman Announces Her Staff
FTC announced a slew of new appointments, including of Debbie Feinstein (most recently of Arnold & Porter) as head of the Bureau of Competition. I’ve had the opportunity to work with Debbie on several transactions and she is a competent and qualified choice. She also may be the highest ranking agency official who would recognize me on sight (that is assuming that every Commissioner’s attention isn’t glued to this blog). So I guess that’s good.
You Really Do Need A Lawyer
Today also brings gun jumping news that’s worth some brief discussion. The DOJ announced a $720,000 fine to settle charges for failure to file an HSR notification. The violation itself is quite technical. In briefest summary, MacAndrews & Forbes, Inc. filed an HSR notification and observed the waiting period to acquired a stake in the target in February 2007. It subsequently made additional purchases of the target’s stock without filing a notification, relying on the exemption in 16 C.F.R. 802.21, which applies to certain subsequent acquisitions that do not meet or exceed a higher threshold. The exemption might apply, for example, where a buyer files for acquiring stock valued over the lowest threshold (currently $70.9 million) and subsequently acquires additional small amounts that do not put it over the next higher threshold (currently $141.8 million or, always 50% of the target’s voting securities).
Where the trouble comes in is that the exemption in 802.21 has a time limit. It only applies to subsequent acquisitions that will be consummated within five years of the expiration or early termination of waiting period of the previously-filed notification. So when McAndrews & Forbes went to buy $6.5 million more of the target’s stock in June 2012, it could no longer rely on 802.21. It had been more than five years.
But you can see why I said the violation was technical. MacAndrews & Forbes acquired only a small amount of the target’s stock, nowhere near the lowest threshold. It had not long before done the same thing without a problem. But as soon as that fifth anniversary of the 2007 waiting period passed, the relevant question was whether it held voting securities valued above $70.9 million, considering its entire investment in the target.
I’d argue that the five year limit is arbitrary and not grounded in any particularly sound reason I’ve been able to work out, but it doesn’t matter. Them’s the rules.
MacAndrew & Forbes discovered the error in reviewing its portfolio with HSR counsel in August 2012 and made a corrective filing (i.e., “oops, we shouldn’t have filed for this before, but here it is now, please don’t hurt us too badly”). It was in violation of the HSR Act every day until the expiration of the waiting period on its corrective filing, for something in the neighborhood of 90 days. The statutory fine for HSR Act violations is $16,000 per day per violation, so MacAndrews & Forbes managed to settle for something around half of its total exposure.
The complaint also says that this wasn’t MacAndrews & Forbes first slip up with 802.21. Apparently it had previously made a corrective filing after having inappropriately calculated the value of a different target’s voting securities and therefore failing to realize it had crossed a higher threshold. The complaint doesn’t say whether there was a fine for that violation, but I don’t see a case file on the DOJ website that suggests one. Perhaps MacAndrews & Forbes got one free pass.
The take away, boys and girls, is that interpreting HSR rules is complicated and you really do need help.