Last week the U.S. Court of Appeals for the Fourth Circuit upheld a district court order that had required the defendant to divest assets it had acquired nine years earlier.1 When the defendant acquired the assets, it sought and obtained antitrust clearance for the transaction under the Hart-Scott-Rodino Act (HSR Act).2 Nonetheless, the court held that the plaintiff was permitted to challenge the transaction after its consummation and that divestiture was an appropriate remedy after the district court concluded that the transaction violated Section 7 of the Clayton Act.

The case provides a stark reminder of the following:

  • Antitrust challenges to transactions can occur at any time, including well after the transaction has closed.
  • Clearance of a transaction under the HSR Act process does not provide any immunity or repose. Both the government and private parties have successfully challenged transactions that have obtained HSR clearance.
  • Customers are often the source of pre- and postclosing complaints about a transaction, either to the government or in their own suits. It is thus critical that parties to a transaction and the postclosing owner not take steps that would lead a customer to conclude that the transaction was anticompetitive.

Background

In this case the buyer was one of three domestic producers of a key input and bought the smallest of the other two producers. The buyer also produced the end product from the input. The plaintiff was both a purchaser of the input and a competitor of the buyer in the downstream market. Prior to the announcement of the transaction, the buyer negotiated a seven-year supply agreement with the plaintiff for that input on terms favorable to the plaintiff, including a termination provision that would provide the plaintiff seven-year written notice if the buyer decided to terminate for any reason. Accordingly, when the Department of Justice (DOJ) contacted the plaintiff as part of its review of the transaction under the HSR Act, the plaintiff did not oppose the transaction because it believed the supply agreement would prevent the buyer from unreasonably withholding supply. The DOJ subsequently closed its investigation, and the buyer acquired its competitor less than a month later.

In 2014, after the plaintiff rejected buyer’s attempt to impose a nonstandard price increase, the buyer provided notice of its plan to terminate the supply agreement effective 2021. The plaintiff sought other options, including a supply agreement from the only other domestic producer, but that producer offered to supply the plaintiff on a spot basis, depending on availability, and would not commit to a long-term supply agreement. In 2015, when it appeared there were no viable alternatives, the plaintiff brought the matter to the attention of DOJ, but, after a few months, the DOJ closed its investigation. Shortly after DOJ closed its investigation, the plaintiff brought suit alleging, among other things, that the buyer’s 2012 acquisition violated Section 7 of the Clayton Act,3 which prohibits anticompetitive mergers and acquisitions. The plaintiff’s claims were tried by a jury, which concluded both that the buyer had violated the supply agreement and that the buyer’s 2012 acquisition was illegal. The district court held proceedings on the proper remedy for the illegal transaction and concluded that the buyer must divest itself of the assets it had acquired in 2012. The Fourth Circuit has now upheld the district court’s divestiture order.

The buyer has indicated that it plans to appeal. If it does so and the Supreme Court takes the case, it will be first antitrust merger case before the Supreme Court since 1974.4

Private Merger Challenges

While most antitrust challenges are brought by either DOJ or the Federal Trade Commission (FTC), the Clayton Act permits states and private parties to sue to block or unwind a transaction.5 Although suits by private parties to challenging transactions are infrequent, and often unsuccessful, on occasion plaintiffs have been able to obtain injunctions barring a transaction or other remedies.6 But this case is unique because it shows, for the first time, that a plaintiff can win a challenge against a consummated transaction where it shows that (a) the transaction was illegal at the time it was consummated and (b) divestiture is the only resolution that will remedy the resulting harm.  

Takeaways

Transactions Can Be Challenged After Consummation

Since the passage of the HSR Act, which established a premerger notification program that allows FTC and DOJ to review certain transactions before consummation, most antitrust challenges to transactions happen prior to closing. But nothing in the Clayton Act prohibits challenging an anticompetitive combination after it closes, including HSR-notifiable transactions and transactions that fall below the HSR Act thresholds.7 Accordingly, parties to strategic transactions that raise facial antitrust issues must not assume that they are free from potential challenge just because the transaction has closed. Buyers in particular should consider the risk of postconsummation challenges as the burden of remedy will likely fall exclusively on them because the seller either no longer exists or is highly unlikely to be required to reacquire any assets that are ordered divested or to pay any damages or penalties.

Clearance Under the HSR Act Does Not Provide Repose

Parties often assume that termination of the HSR waiting period immunizes the transaction from future antitrust challenges. This is not true. Nothing in the HSR Act or any other statute provides that HSR clearance offers any sort of immunity or repose. The federal government, states, or private parties are free to challenge transactions that have cleared HSR review.8 Indeed, in 2017, DOJ challenged a merger that had cleared HSR only seven months before.9

In the instant case, the district court barred the buyer from presenting evidence that DOJ had previously cleared the transaction after a preliminary investigation, which the court of appeals affirmed, opining: 

The Department’s decision not to pursue the matter isn’t probative as to the merger’s legality because many factors may motivate such a decision, including the Department’s limited resources. ... A defendant may not use an enforcement authority’s ‘decision not to take action as a sword because inaction on the part of the government cannot be used to prove innocence.’ In short, evidence of the Department’s decision could have misled the jury into thinking that the Department deemed the merger to be legal ‘when no such determination ha[d] been made.’10

Accordingly, parties should not assume that just because the government did not challenge their transaction during the HSR review process that their transaction is immune from future antitrust challenge.

Divestiture Orders Can Come Years After Closing

Since the implementation of the HSR Act, divestiture orders years after closing have been rare, and such orders have been unprecedented where private parties were the plaintiff. But as the Fourth Circuit’s decision shows, they are not inconceivable. Even in government cases, divestiture orders can come well after closing. On more than one occasion since the passage of the HSR Act, the government has obtained divestiture orders a number of years after the transaction was consummated, even in cases where the transaction previously had cleared the HSR process.

Do Not Anger Your Customers

One of the common elements in most postconsummation antitrust challenges is that either they are brought by customers or the government opens an investigation as a result of complaints by customers.11 Just as in the current case, often the acquirer changes prices or other terms that customers of the seller had benefited from for many years or, as in this case, threatened a customer’s supply of a key input. The affected customers, concerned about their economic well-being, are much more motivated at that point either to complain to the government or bring suit. By contrast, if customers find that the transaction has no effect on them or offers certain benefits, such as a wider selection of products or lower prices, those customers would not be inclined to complain either during the HSR review process or, potentially more damaging for the buyer, postclosing.

As in much of commerce, this case and the outcome simply reinforce the view that the customer is always right.