In a unanimous Opinion and Final Order issued on November 1, 2019, the Federal Trade Commission (“FTC”) upheld an administrative law judge’s determination that the acquisition by one leading US supplier of lower-limb prosthetics of another in 2017 had “substantially” lessened competition in the market for microprocessor-equipped prosthetic knees (“MPKs”), and ordered the acquiring party, Otto Bock HealthCare North America, Inc. (“Otto Bock”), to divest itself of the assets and business acquired in the 2017 transaction within 90 days. Because the transaction did not meet the reporting thresholds of the Hart-Scott-Rodino (HSR) Act, the parties had long since closed the deal. This is the first time that the FTC, as currently constituted, has issued an order requiring that a consummated acquisition be unwound, and serves as a reminder that parties to a transaction must be mindful of the potential competitive impact of their deal, even if the transaction is not HSR reportable.

The Otto Bock Transaction and FTC Final Order

According to the FTC’s opinion, prior to the acquisition, Otto Bock and the acquired entity, FIH Group Holdings, LLC (“Freedom”), were the first and third largest manufacturers, respectively, of MPKs by revenue, and the two companies competed vigorously against each other on both price and innovation. As a result of the acquisition, Freedom became a wholly-owned subsidiary of Otto Bock, giving Otto Bock an “80-plus percent market share” in what the FTC found to be “an already highly concentrated all-MPK relevant market.” The FTC commenced its investigation of the deal in September 2017, just after Otto Bock acquired Freedom, and issued a complaint in December 2017 challenging Otto Bock’s acquisition of Freedom as a violation of Section 5 of the FTC Act and Section 7 of the Clayton Act.

In a trial before an administrative law judge (“ALJ”) of the FTC lasting 31 days, Otto Bock and the FTC presented the testimony of 69 witnesses and over 3,000 exhibits. In April 2019, the ALJ issued a decision in which he concluded that the acquisition had “substantially” lessened competition in the relevant market. Notably, the record evidence included “documents from Otto Bock confirming that it viewed Freedom as a direct and serious competitive threat and demonstrating that eliminating that threat was a strategic objective and an expected result of the [a]cquisition.” The ALJ rejected Otto Bock’s argument that the “failing firm” defense should apply, finding that Freedom had experienced “operating losses” and suffered “financial challenges” in the years leading up to the acquisition, but also had rejected overtures from two other potential buyers in 2017 that could have resulted in transactions with fewer anticompetitive effects.

On review, the five commissioners of the FTC unanimously upheld the ALJ’s determination that the acquisition had substantially lessened competition. The commissioners also unanimously joined in a Final Order requiring Otto Bock to divest itself of the assets and business of Freedom to a buyer approved by the FTC within 90 days of the order, “with potential exceptions for certain lines of prosthetic foot products that may not be necessary for competition in the MPK market.”

Lessons to be Learned

The FTC’s action is particularly notable because the five commissioners who reviewed the ALJ’s decision are recent arrivals to the FTC, having all been sworn in between May 1, 2018 and September 26, 2018, and this is the first case in which the FTC, as currently constituted, has issued an order requiring that a consummated acquisition be unwound. It is not the first time that the federal government has forced the unwinding of a consummated transaction; for example, the US Department of Justice in 2014 forced Bazaarvoice to divest assets it acquired from PowerReviews “to restore competition in the provision of online product ratings and reviews platforms.”

Parties should recognize that falling below the HSR reporting threshold is not a safe harbor, and the agencies can and will seek to unwind transactions they believe will substantially lessen competition. An early assessment of this regulatory risk as part of due diligence—including an evaluation of the structure of the existing market and internal documents showing how the buyer and seller participate in and perceive competition in that market—is a best practice for deals between competitors, and can help avoid substantial pain later.