On January 16, 2009, a federal district court in Chicago granted summary judgment to the defendants in Omnicare, Inc. v. UnitedHealth Group, Inc., et al, No. 1:06-cv-06235, a lawsuit involving information exchanged between competitors engaged in merger discussions and due diligence. The decision represents one of the most extensive judicial considerations of the propriety of pre-closing communications between parties to a merger transaction and highlights important considerations for companies involved in mergers and acquisitions.
In January 2005, UnitedHealth and PacifiCare, two providers of health insurance to businesses and consumers, began discussing a potential merger. Over the next several months, the companies undertook a due diligence process consisting of meetings between employees of the two companies and an exchange of certain categories of information in order to evaluate the transaction. On July 6, 2005, the two companies signed an agreement committing themselves to a transaction in which UnitedHealth would acquire PacifiCare. In the months following the agreement, the companies engaged in post-merger integration planning. The transaction closed on December 20, 2005.
Throughout the first half of 2005, both UnitedHealth and PacifiCare separately sought federal government approval to provide drug coverage to senior citizens under Medicare Part D. Medicare Part D is a health insurance program administered by the federal government working with private insurers to provide a voluntary prescription drug benefit to senior citizens. Under Part D, private health insurers reimburse retail and institutional pharmacies for providing drugs and pharmacy services to senior citizens enrolled in the insurers’ prescription drug plans. The private health insurers are then compensated by the federal government. Part D went into effect on January 1, 2006.
In order to participate in Part D, a health insurer had to qualify for government approval. Among other things, federal regulators required insurers to form networks of pharmacies that could provide drugs to health plan members. Insurers were required to contract with both retail pharmacies (such as CVS and Walgreens) that would serve the majority of Part D enrollees and institutional pharmacies that would serve Part D enrollees living in long-term care facilities. Omnicare is the nation’s largest institutional pharmacy.
In 2005, UnitedHealth and PacifiCare entered into separate negotiations with Omnicare to be part of their respective networks providing institutional pharmacy services to Part D enrollees. Both insurers ultimately signed contracts with Omnicare. The contract that Omnicare signed with PacifiCare contained a reimbursement rate that was substantially lower than the contract that Omnicare signed with United. The PacifiCare-Omnicare contract was therefore more favorable to the health insurer and less favorable to the pharmacy than the UnitedHealth-Omnicare contract. After the merger closed, UnitedHealth discovered that its contract with Omnicare and the separate PacifiCare-Omnicare contract permitted the combined company to move all of its enrollees to the PacifiCare-Omnicare contract. As a result, in April 2006, UnitedHealth switched its Part D enrollees to the PacifiCare-Omnicare contract.
Omnicare objected to the switch and filed suit on May 18, 2006 alleging that UnitedHealth and PacifiCare violated Section 1 of the Sherman Act by conspiring, prior to the merger, to have PacifiCare obtain the lowest possible price from Omnicare and then switch UnitedHealth’s enrollees over to the more favorable PacifiCare-Omnicare contract. Among other things, Omnicare contended that information exchanged by the merging entities in the period leading up to the merger was competitively sensitive and supported an inference that there was a conspiracy between UnitedHealth and PacifiCare.
Pre-Merger Information Exchange
The Omnicare opinion sets forth portions of the factual record relevant to summary judgment. Specific to pre-merger information sharing, the court indicated that a series of meetings took place between UnitedHealth and PacifiCare in June and July 2005, before the merger agreement was signed, during which PacifiCare provided “strategic” information related to its businesses. The court characterized this information as “general” and “limited.” The information included PacifiCare’s expected Part D average reimbursement rate to pharmacies for branded drugs, which the court observed was “arguably the most competitively sensitive of any of the exchanged information.” PacifiCare also shared with UnitedHealth a template of PacifiCare’s standard contract with pharmacies.
After signing the merger agreement, UnitedHealth and PacifiCare began planning for integration of the two companies once the transaction closed. Among other things, the parties exchanged drafts of a memorandum discussing ways in which UnitedHealth might use PacifiCare’s internal Pharmacy Benefits Manager, RxSolutions, post-acquisition. Omnicare alleged that this memorandum was related to pre-merger, rather than post-merger, activity and that it set forth the framework for the alleged conspiracy.
Summary Judgment Decision
The court rejected Omnicare’s Sherman Act claim and granted summary judgment in UnitedHealth’s favor after concluding that the evidence on which Omnicare relied was at least as consistent with independent conduct of two competitors engaged in legitimate merger discussions and planning as it was with an unlawful agreement. The analysis in Omnicare is limited to whether or not the plaintiff presented sufficient proof of a conspiracy between the two defendants. Because the court found that there was insufficient evidence of a conspiracy it did not analyze any other element of the antitrust claim.
Lessons for Buyers
The Omnicare decision clearly acknowledges the need for a buyer to obtain information from a seller during due diligence. The court noted the need for the law to strike a sensitive balance between chilling business activity by limiting legitimate business conversations during merger talks on the one hand and opening the door for “sham” merger negotiations with free exchange of competitively sensitive information between rivals on the other. As a result, the court found it necessary to examine carefully the nature of the information exchanged between two merging competitors and the mechanisms in place to guard against anticompetitive use of the information. Specifically, the court cited the importance of examining factors including: (a) who was involved in the information exchange and what precautions were taken to limit distribution of competitively sensitive information, (b) whether the specific information exchanged was necessary to evaluate the transaction, (c) whether the information exchanged was competitively sensitive, (d) when the information exchange occurred, and (e) whether pre-merger integration planning was clearly prospective in nature. Although the court drew no clear lines as to what sort of conduct would result in antitrust liability, each of these five factors presents a lesson for companies seeking to evaluate transactions through due diligence and information sharing.
First, to reduce antitrust risk, information from the seller should only be shared with employees of the buyer who require the information in order to evaluate the transaction, and precautions should be put in place to ensure that confidential information is not distributed to other employees. The Omnicare court found it important that the meetings between PacifiCare and UnitedHealth were largely limited to senior level employees such as CEOs, CFOs, and senior executives of various business segments. The court noted that the meetings did not include lower level operational employees and did not include those employees who negotiated directly with Omnicare. The court also noted that the parties had taken precautions to limit the disbursement of confidential information beyond employees who needed it to evaluate the transaction by entering into two confidentiality agreements. The first agreement made confidential information available only to members of UnitedHealth’s due diligence team and prevented them from sharing it with individuals outside of that team. The second confidentiality agreement created a “clean room” for highly confidential material and permitted only members of UnitedHealth’s “clean team” to access such highly confidential material. The “clean team” was composed of a subset of the due diligence team. Additionally, prior to sharing any information with UnitedHealth, PacifiCare’s outside counsel developed a “data room” to review all PacifiCare documents and determine the propriety of sharing them with UnitedHealth.
Second, companies seeking to reduce their exposure should only exchange information that is actually necessary to evaluate the transaction. The court in Omnicare found that it was necessary for the parties to exchange Part D information in order to evaluate the transaction. With respect to the Part D pricing information that was shared, the court found that this information was necessary for UnitedHealth to determine the value of PacifiCare. Both factors supported the conclusion that the information exchange was consistent with independent activity.
Third, if competitively sensitive information must be exchanged, it should be as general as possible to enable the acquirer to evaluate the target’s business and the level of risk the buyer is undertaking. In this case, the court noted that no information was shared between UnitedHealth and PacifiCare that related to specific pharmacies or reimbursement rates. To the extent PacifiCare provided UnitedHealth with pricing information, it did so by way of averages and ranges rather than specific rates.
Fourth, information exchanges may be more likely to withstand scrutiny if confined to the preagreement due diligence period. According to the court, the Omnicare record contained no evidence of competitive information sharing between UnitedHealth and PacifiCare related to Part D pricing or strategy after the merger agreement was signed. The court found that this was consistent with independent activity and suggested legitimate due diligence. Additionally, the court noted that pricing information was shared only at the end of the due diligence process, shortly before the merger agreement was signed.
Fifth, to the extent that parties undertake integration planning before the close of the transaction, which the court recognized was a legitimate endeavor, such planning should clearly be aimed at post-merger issues. Despite Omnicare’s contention that the planning memorandum exchanged between UnitedHealth and PacifiCare dealt with pre-merger activity and related to the alleged conspiracy, the court found that the memorandum on its face clearly was written prospectively with an eye towards integration of services after completion of the transaction.
Also of particular interest to buyers, the court rejected Omnicare’s allegation that a merger agreement provision requiring PacifiCare to obtain UnitedHealth’s approval for any transaction, other than those entered in the ordinary course of business, in excess of $3 million constituted evidence of a conspiracy. The court noted that this type of provision is relatively common in merger agreements and is intended to prevent a seller from assuming major liabilities that the buyer would be responsible for after the merger. The court concluded: “As numerous commentators, including Omnicare’s expert and the general counsel of the Federal Trade Commission, have noted, these approval provisions are common practice in mergers, and the presence of one here does not constitute evidence of conspiracy.”
Lessons for Sellers
The Omnicare decision also acknowledges that a seller may sometimes have a need to obtain information from a buyer, albeit information of more limited content. At the same time, the court noted that information provided by a seller to a buyer could be unnecessary in certain circumstances and therefore potential evidence of a conspiracy. In this case, the court found that there was a rational basis for UnitedHealth to share limited information about its Part D bid with PacifiCare because the shareholders and executives of PacifiCare were entitled to some assurance that UnitedHealth was well-run and had a strong strategic vision. The court also noted that the information provided by UnitedHealth was subject to similar precautions as the information shared by PacifiCare.
The recent Omnicare decision highlights several important considerations for companies seeking to share information with competitors in the context of evaluating a merger or acquisition. To reduce antitrust risk, both buyers and sellers should ensure that sufficient precautions are in place to share confidential information only to the extent it is necessary to evaluate the transaction and to do so using averages and ranges rather than specific data and numbers. Parties also should ensure that such confidential information is distributed only to employees evaluating the transaction and should structure the information sharing in such a way as to limit the potential for due diligence improprieties. Finally, parties to a transaction would be well-served to involve outside antitrust counsel early in the due diligence process.