On November 6, 2019, the Federal Trade Commission (“FTC” or “Commission”) unanimously upheld an Administrative Law Judge’s decision requiring Otto Bock HealthCare North America, Inc. (“Otto Bock”) to unwind its consummated acquisition of Freedom Innovations (“Freedom”).The Commission concluded that the transaction resulted in anticompetitive harm in the market for microprocessor-equipped prosthetic knees (“MPKs”), which offer certain improvements over conventional, mechanical prosthetic knees.The decision represents the first time that the current slate of Commissioners has ordered the unwinding of a consummated transaction.
According to the Commission’s decision, prior to the transaction, “Otto Bock and Freedom were the first and third largest manufacturers of MPKs by revenue and competed vigorously against each other on both price and innovation.”Through the transaction, Otto Bock’s share in the MPK market would grow to more than 80 percent.Nonetheless, Otto Bock proceeded with the transaction in September 2017.
At the time of signing, the transaction did not trigger a Hart-Scott-Rodino (“HSR”) filing.Even without an HSR filing, FTC staff became aware of the transaction and issued an Administrative Complaint in December 2017.The Commission’s complaint challenged the acquisition as a violation of Section 5 of the FTC Act and Section 7 of the Clayton Act.After a trial on the merits, an Administrative Law Judge ruled that the transaction substantially lessened competition for the sale of MPKs to prosthetic clinics in the United States, and ordered Otto Bock to unwind the transaction.
On appeal, the Commission unanimously sided with FTC staff and the Administrative Law Judge.It concluded that anticompetitive effects have already occurred, and found that the acquisition is likely to cause future anticompetitive effects in the form of higher prices and less innovation for amputee patients and customers of prosthetic clinics.Accordingly, the Commission ordered Otto Bock to divest most of Freedom’s legacy business.
The Commission’s decision is notable in three main respects.
First, the Commission’s decision reinforced recent precedent holding that “a merger can cause unilateral effects even if the merging products are not each other’s closest competitors.”Here, the merging parties argued that any post-merger attempts to leverage Otto Bock’s high market share would be unsuccessful because, while Otto Bock and Freedom’s products compete, each product has a closer competitor.In essence, this argument suggests that customers would switch to other competitors’ products when faced with higher prices or lower volumes of Otto Bock and Freedom’s products.However, the Commission rejected this argument, instead relying on evidence that showed “a significant portion” of customers consider Otto Bock and Freedom’s products to be the each other’s “next-best choice.”The Commission specifically pointed to the testimony of two large customers who said they would switch between Otto Bock and Freedom’s products and generally did not consider other competitors’ products.In this respect, the Commission held that a unilateral effects argument could be persuasive if a “significant fraction” of customers would switch between the merging parties’ products.
Second, the Commission refused to “litigate the fix” and consider a proposed divestiture by Otto Bock in the context of the prima facie showing of anticompetitive effects.The Commission distinguished the circumstances of this case from others where proposed divestitures were factored into the determination as to whether the merger violated Section 7 of the Clayton Act for two reasons.First, the Commission found the proposed divestiture would take place in the future, well after Otto Bock’s acquisition of Freedom.In this sense, the divestiture would not occur “simultaneously or almost simultaneously” with the underlying transaction being challenged.The second reason the Commission refused to consider Otto Bock’s proposed divestiture as part of the prima facie case was that the offer to divest was made well after the complaint had been filed by FTC staff.In prior cases where the Commission considered divestitures in its competitive effect analysis, the divestiture offers were entered before either the complaint was issued or just after allowing the FTC staff time to consider the divestiture as part of the overall transaction.Going forward, merging parties should consider the timing of any divestiture offers and the overall transaction timeline, to allow FTC staff to consider the underlying transaction and the divestiture as one event.
Finally, the Commission’s decision serves as a reminder to merging parties that regulators can still investigate and challenge a transaction that does not meet the HSR thresholds.Even without an HSR filing, when evidence suggests that the merging parties have high market shares, are each other’s “next-best choice” for a significant portion of customers, or face limited competition, merging parties are strongly advised to involve antitrust counsel early to minimize any potential risks.
High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp.