The Federal Trade Commission (FTC) scored a victory in the Eleventh Circuit this summer when the court upheld a divestiture order based on violations of the Clayton and FTC Acts.[55] As if the FTC winning an Eleventh Circuit decision was not rare enough,[56] the court relied on several cases[57] and methods thought by some antitrust practitioners to be merely quaint anachronisms.[58] The lessons are clear: documents can still provide a smoking gun for regulators; merging to create a monopoly is still very tough to justify; and post-merger remedies can be draconian. The case is Polypore International, Inc. v FTC.

Bringing Separators Together

If you own a car, you probably have something made by Polypore. Polypore makes battery separators. Without separators, a battery would short circuit or be unable to regulate the flow of electricity. In 2007, there were three companies that made battery separators for use in North America: Polypore, Microporous, and Entek. The FTC identified three major types of battery separators at issue: deep cycle, used in products like golf carts; motive, used primarily in industrial machinery; and starter-lighter-ignition, or SLI, used in car, truck, and other automotive starter batteries.[59] Polypore and Microporous split the deep cycle and motive markets,[60] while Polypore and Entek split the much larger SLI market.[61]

Smoking Guns

Starting in the early 2000s, Microporous geared up to enter the SLI market, causing Polypore to view Microporous as a "real threat."[62] Polypore responded by locking major customers into exclusive contracts and evaluating options to acquire Microporous.[63] Internal documents revealed just how real a threat Polypore believed Microporous to be.

For instance, one Polypore sales associate wrote to tell a colleague that Polypore should be prepared to push for premium prices where Microporous was not able to compete.[64] A Polypore board presentation outlined how far the company's earnings would fall if it did not acquire Microporous and how much prices and profits would rise with the acquisition.[65] Perhaps worst of all, the same Board presentation listed the ability to "implement price increase[s] to non-contract" customers as a benefit of the proposed merger.[66] Needless to say, such documents rendered it virtually impossible for Polypore to argue later that the acquisition was designed to help consumers.

In 2008, Polypore bought Microporous for $76 million.[67] The merger did not require notification under the Hart-Scott-Rodino Act,[68] so the merger went through without pre-clearance from the FTC.[69] Six months later, the FTC issued an administrative complaint, alleging that the acquisition substantially lessened competition in the three major battery separator markets.[70] An Administrative Law Judge (ALJ) found in the FTC's favor and ordered Polypore to divest itself of all the former Microporous assets, effectively turning back the clock to before the merger.[71] The full Commission affirmed the ALJ's decision.

You Can't Have it Both Ways

Polypore appealed the ruling to the Eleventh Circuit, arguing the Commission had relied on outdated case law, used the wrong market definition, and that the divestiture order was too broad.[72] A unanimous Eleventh Circuit panel agreed with the Commission, and affirmed.

The crux of the legal argument was whether the Commission correctly found that Microporous was Polypore's competitor in the SLI market.[73] Polypore tried to argue Microporous was merely a potential competitor, not an actual competitor. That's important, because if Microporous was merely a potential competitor, different legal presumptions should have applied. Polypore's documents proved otherwise.

Although the Eleventh Circuit did not go in to as much cringe-inducing detail[74] as the Commission, the court's opinion is clear. Among the choice quotations the judges used is this one: "The president of Daramic [Polypore's battery separator division] put Microporous at the top of his list of potential acquisitions to eliminate price competition."[75] Although there is no intent element under section 7 of the Clayton Act, there is little doubt quotations in ordinary course of business documents like that one hurt Polypore's case. Moreover, the FTC had evidence that Polypore actually did raise prices after the merger.[76]

In relying on two Supreme Court decisions from the 1960s (Philadelphia National Bank[77] and El Paso Natural Gas[78]), the Eleventh Circuit made a strong point: the modern economy still has to play by the established rules. Philadelphia National Bank was one of the first cases to lay out the "incipiency doctrine" where the Supreme Court held Congress intended the Clayton Act "to arrest anticompetitive tendencies in their incipiency."[79] The case (and the doctrine) means there is a presumption that a merger between two competitors in a market that is already highly concentrated will harm consumers. The presumption can be rebutted by introducing merger specific precompetitive efficiencies, but that can be uphill fight in a merger to a duopoly or monopoly, as was the case in Polypore.

In El Paso Natural Gas, the Supreme Court stopped a merger between El Paso and Pacific Northwest Pipeline Corp., a company El Paso viewed as a potential threat.[80] The Supreme Court analyzed the case under the incipiency doctrine even though Pacific Pipeline had not sold any natural gas in California (the relevant market) and therefore, according to El Paso, not an actual competitor.[81] The Supreme Court disagreed, noting that Pacific Pipeline had unsuccessfully bid for business against El Paso, had plans to enter the California market and would have had opportunities to enter if it had remained independent. "Unsuccessful bidders are no less competitors that the successful one," remarked the Court.[82] Such a merger was presumptively unlawful under Philadelphia National Bank because the California market was already highly concentrated and therefore the merger created a "tendency to monopoly."[83]

The Eleventh Circuit found Polypore's situation almost identical to the merger in El Paso. Even though Microporous had not yet sold a single SLI separator, the Eleventh Circuit found the potential threat Microporous posed was enough to make the two companies direct competitors. The court relied on evidence that Polypore's customers bargained for lower prices by threatening to buy from Microporous[84] and that prices rose after the merger.[85]

Some practitioners may have thought that Philadelphia National Bank and its progeny had fallen into disfavor in recent years as antiquated and reflecting outdated economics. Yet, the Eleventh Circuit's use of the incipiency doctrine here was a clear signal that those old cases are still "good law." The court's decision tells businesses and the FTC, that if a business wants to merge into a monopoly, it better have a very good story as to why that merger will help consumers. Since Polypore's documents said one of this merger's benefits was the ability to raise prices, this case may have been doomed at the outset.

Considering very few antitrust cases make it to trial, the question remains: why did Polypore fight? The answer may have been in the remedy. The court found the FTC had wide latitude to fashion an appropriate remedy and here the divestiture order was reasonable.[86] Classic antitrust doctrine states divestiture is nearly always the preferred remedy, since the goal is to "restore competition lost through the unlawful acquisition."[87]

For Polypore, that meant having to sell off the Microporous assets, and license intellectual property Polypore used at the acquired sites after the merger.[88] The Commission reasoned (and the court agreed) that it would be unfair to a potential buyer to be forced to remove any improvements Polypore made to the Microporous facilities.[89] As a result, Polypore lost its acquisition and, in the process, made its competitor more effective.

So What?

Polypore is at least a cautionary tale. It might also be the proverbial canary in the coal mine.

First, it reminds us that bad documents can still trump economic theory. It may have been possible for Polypore to make an efficiency case for the merger. We'll never know, because it seems apparent that neither the Commission nor the Eleventh Circuit wanted to look past the dozens of company memos that talked about using the acquisition to raise prices.

Second, it means Philadelphia National Bank is still the law of the land. The Eleventh Circuit did something courts have been doing for years: it shifted the burden of proof to the merged company after the government established a probability of anticompetitive effects. Since the FTC challenged this merger after it happened, it had evidence that Polypore increased prices post-merger.[90] Between the pre-merger documents claiming Polypore could raise prices and the post-merger evidence of actual price increases, the court was left with little to decide.

Finally, divestiture is still a potent and realistic threat. It is fitting that the Polypore-Microporous merger closed on February 29, a day that usually doesn't exist. The FTC's order made the entire merger cease to exist and brought back the status quo ante, except now Polypore will presumably face a more efficient rival.

Whether Polypore is an anomaly or a harbinger remains to be seen. As we have previously written, the FTC is becoming more aggressive in evaluating mergers, even after they have been consummated. A revitalized incipiency doctrine would force businesses to be more cautious in analyzing mergers, and the specter of divestiture still hovers over every enforcement action. It may be retro, but Polypore tells us those old cases have some life in them.