Parties are More Willing Than Ever to ‘Litigate the Fix’ in the United States

Overview

US antitrust agencies have become increasingly critical of negotiated remedies in merger cases. This has led merging parties to consider other options when faced with opposition from agencies to their proposed transaction, including what is commonly termed ‘litigating the fix’.

When US antitrust agencies deem that a proposed transaction is likely to substantially lessen competition, the merging parties can walk away, litigate the proposed transaction as is or remedy the proposed transaction. When remedying a proposed transaction to address alleged substantial lessening of competition, merging parties have two options: they can enter into a consent decree with the Federal Trade Commission (FTC) or Department of Justice’s (DOJ) Antitrust Division requiring a remedy; or they can voluntarily provide a remedy (or fix). For the latter, the FTC or DOJ may choose to accept the fix by deciding not to pursue litigation to challenge the proposed transaction. Or, the FTC or DOJ may determine that the fix is insufficient to address its concerns and decide to sue to block consummation of the proposed transaction. When the latter occurs, the parties are said to be litigating the fix.

Although litigating the fix is not a new phenomenon, with precedent cases even predating the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act),^[2] parties are now more willing than ever to litigate the fix in the United States. This is being driven in large part by the Biden Administration’s increased scepticism of remedies. In January 2022, Assistant Attorney General Jonathan Kanter articulated a DOJ policy preference for blocking, rather than settling, mergers deemed likely to lessen competition, noting that the DOJ’s duty to litigate challenging cases ensures that antitrust law reflects current market realities.^[3] Since this January 2022 policy pronouncement, the DOJ has only entered into a single consent decree in ASSA ABLOY AB.^[4] This May 2023 settlement occurred in the midst of a trial litigating the fix and with the DOJ reasoning that the ‘totality of circumstances and risks associated with [the] litigation’ led to its settlement that did not ‘fully eliminate the risks to competition’.^[5] Although the FTC has not announced a similar enforcement policy and has shown itself to be more amenable to consent decrees, FTC Chair Lina Khan has advocated for a similar approach, noting that the FTC is ‘focusing [its] resources on litigating, rather than on settling’.^[6] Recent cases FTC v. Amgen Inc., et al. (challenging Amgen’s acquisition of Horizon Therapeutics plc despite behavioural commitment not to offer multiproduct rebates for Horizon products) and FTC v. Intercontinental Exchange, Inc. et al. (challenging Intercontinental Exchange’s (ICE’s) acquisition of Black Knight despite commitment to divest Black Knight’s loan origination system) demonstrate that the FTC is following through on Chair Khan’s commitment to litigate. Notably, after initiating litigation, the FTC ultimately obtained favourable settlements in each case, particularly in ICE, where the final settlement included divestment of Black Knight’s product pricing and eligibility engines, in addition to the originally offered divestment of Black Knight’s loan origination system.

By way of background, Section 7 of the Clayton Act sets forth the relevant statutory standard, prohibiting transactions where the effect ‘may be substantially to lessen competition’ in a market.^[7] This forward-looking, incipiency standard assesses the likelihood of anticompetitive effects resulting from a proposed transaction.^[8] Section 7 requires more than a ‘mere possibility’ of harm, but not absolute certainty.^[9]

Historically, courts presented with a modified transaction by virtue of behavioural or structural remedies, considered the ‘fix’ when adjudicating an antitrust agency’s merger challenge under Section 7.^[10] Courts tend to follow the DC Circuit’s Baker Hughes burden-shifting framework to assess Section 7 agency challenges.

Under the Baker Hughes framework, ‘the government must first establish a prima facie case that the merger is likely to substantially lessen competition in the relevant market.’^[11] In horizontal transactions, the government can ‘establish a presumption of anticompetitive effect by showing that the “transaction will lead to undue concentration in the [relevant] market”’.^[12] The Supreme Court has held that a significant increase in concentration caused by a post-merger combined market share of at least 30 per cent is sufficient to presumptively establish a Section 7 violation.^[13] Once the prima facie case is established, ‘the burden shifts to the [merging parties] to present evidence that the prima facie case inaccurately predicts the relevant transaction’s probable effect on future competition, or to sufficiently discredit the evidence underlying the prima facie case.’^[14]

If the merging parties adequately rebut the prima facie case or overcome the presumption, ‘the burden of producing additional evidence of anticompetitive effect shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times.’^[15]

The burden of proof

Although the Baker Hughes framework is widely accepted, it is disputed whether the parties or the antitrust agencies bear the burden of proving the competitive implications of a proposed remedy. Both views have support in case law, but the courts have more commonly accepted the antitrust agencies’ position.^[16] Historically, the antitrust agencies’ position has been that, under the Baker Hughes framework, once it is established that the transaction submitted for review under the HSR Act (i.e., not accounting for the fix) is likely to substantially lessen competition in the relevant market, the merging parties’ rebuttal case must establish that the divestiture will ‘replace the competitive intensity lost as a result of the merger’.^[17] More recently, the DOJ has advanced a more aggressive position not yet taken up by a court – that a proffered divestiture merely serves as a proposed remedy to an otherwise unlawful transaction rather than as evidence of whether a transaction violates Section 7.^[18] Merging parties, meanwhile, contend that under Section 7 and Baker Hughes, the antitrust agencies must prove in their prima facie case that the modified transaction, accounting for the fix, is likely to substantially lessen competition.^[19] Recently in UnitedHealth, although the court ultimately assessed the transaction under the antitrust agencies’ preferred framework, it noted that the antitrust agencies’ position ‘contradicts the text of Section 7 and the Baker Hughes framework’.^[20] Alternatively, merging parties generally take the position that evidence of a proposed ‘fix’ is relevant to rebut the government’s prima facie case at ‘step two’ of the Baker Hughes framework.

When merging parties propose behavioural remedies, courts are more likely to align with the antitrust agencies and require the parties to rebut the prima facie case as established by the original transaction not accounting for the remedy. For example, in Bertelsmann (Penguin Random House) the merging parties committed to an internal bidding process to increase competition in the absence of external competition. The court, in rejecting this ‘unenforceable promise’ considered it within the context of the merging parties’ rebuttal case.^[21] Similarly, in CCC Holdings Inc, the merging parties’ proposed remedy of entering into a more open software licensing agreement that does not restrict use for certain customers was considered by the court in the merging parties’ rebuttal case, after the court had found that the FTC had established its prima facie case on the basis of the original transaction.^[22] And, in Franklin Electric, where the merging parties proposed an IP licensing and supply agreement with a potential competitor, the court concluded that the DOJ started with a presumption limited to ‘a merger of the only two competitors in the market’, not accounting for the proposed remedy.^[23] However, more recently, in FTC v. Microsoft, the court was confronted with a vertical foreclosure theory of harm that did not square as cleanly with the typical Baker Hughes framework as more straightforward horizontal transactions.^[24] There, the court rejected the FTC’s position that the merging parties’ commitment to maintain open licensing should not be considered in the government’s prima facie case.^[25] In fact, the court took specific issue with the FTC’s reliance on its very own Illumina decision, which held that the merging parties’ commitment to maintaining supply for an extended period of time was only relevant after the FTC had established its prima facie case. ^[26]

Important divestiture considerations

Courts have adopted a framework under Section 7 for assessing whether a divestiture can replace lost competitive intensity, including: the likelihood of the divestiture; the experience of the divestiture buyer; the scope of the divestiture, the independence of the divestiture buyer from the merging seller; and the purchase price.^[27] It is important for merging parties to finalise as much as possible with a divestiture buyer as early as possible, to increase the likelihood that the proposed divestiture is deemed sufficient.

Divestiture likelihood

Starting with an assessment of the likelihood of divestiture is natural, as a court must be comfortable that the possible basis for rejecting an agency challenge is likely to occur. Absolute certainty is not a requirement. Instead, courts have considered divestiture evidence when parties have shown that a divestiture is ‘sufficiently likely to occur’.^[28] Merging parties can best show divestiture likelihood by negotiating and executing a definitive agreement with minimal or no conditions to close and with as demanding of an ‘efforts standard’^[29] as possible. For example, in UnitedHealth, the court considered the divestiture to be a ‘virtual certainty’ because the parties had entered into a definitive purchase agreement where all agreement conditions, except for those satisfied at closing or by resolution of the DOJ’s challenge in the parties’ favour, had been satisfied.^[30] Similarly, in RAG-Stiftung, the court found that the divestiture was ‘highly likely to occur’ because the parties to the divestiture agreement had agreed to use commercially reasonable efforts to ensure satisfaction of closing conditions and the divestiture buyer was financially capable of closing.^[31] Even in Aetna, where state insurance regulators expressed concerns with the divestiture, the court considered the divestiture sufficiently likely to occur for purposes of considering its effect.^[32]

Divestiture buyer experience

Divestiture buyer experience is an important consideration for determining whether the divestiture buyer can effectively compete in the relevant market allegedly harmed by the original transaction. Courts consider both geographic and product experience relevant. For example, in Sysco, where the divestiture buyer was acquiring 11 distribution centres to add to its portfolio of 35 distribution centres, the court identified significant geographic gaps that would make competition for large national customers difficult.^[33] And, in Aetna, the court decided the proposed divestiture was not sufficient where the buyer had experience in one type of health insurance but not the type of health insurance that would be divested.^[34] However, a lack of specific experience in the relevant market is not necessarily disqualifying. For example, in UnitedHealth, the private equity divestiture buyer’s broader healthcare experience, coupled with its ‘carve-out investment’ experience and significant committed investment, was found to be sufficient experience to compete effectively in the relevant market.^[35]

Divestiture scope

Regarding the scope of the divestiture, courts generally prefer divestitures of stand-alone businesses that possess all of the physical assets, personnel and infrastructure needed to compete effectively.^[36] In Sysco, the court took issue with the scope of the proposed divestiture when considering nationally active customers, as the divestiture included only 11 stand-alone distribution centres and where the divestiture buyer had sought to purchase more assets.^[37] However, divesting a standalone operating business is not always necessary. For example, in UnitedHealth, the court found the divestiture scope to be sufficient, even in the face of the FTC’s objections that only a single claims editing product (and associated assets) part of a broader software and analytics business organisation, rather than the full suite of payment-accuracy products, was being divested.^[38] The court was particularly persuaded by evidence showing that customers purchased the divestiture product on a standalone basis and concluded that the success of the divestiture ‘does not turn on its being part of a broader suite of payment-accuracy products’.^[39]

Divestiture buyer independence

Both antitrust agencies and courts consider the pre- and post-divestiture relationships between the merging party and the divestiture buyer. Courts have found it problematic to allow ‘continuing relationships between the seller and buyer of divested assets after divestiture, such as a supply arrangement or technical assistance requirement, which may increase the buyer’s vulnerability to the seller’s behavior’.^[40] But, there is not an absolute prohibition on continued relationships. For example, in RAG-Stiftung, the court saw ‘no reason to question’ the divestiture buyer’s independence, even though it was an ongoing customer of each merging party, because the divestiture agreement appropriate protections and the divestiture buyer testified to maintaining independence.^[41] Similarly, in UnitedHealth, although the divestiture buyer and seller had previously engaged in other ‘heavily and hotly negotiated’ transactions at arm’s length, the court found the divestiture buyer to be an independent buyer because of testimony reassuring commitment to vigorous competition going forward.^[42]

Divestiture purchase price

Finally, courts consider whether the divestiture purchase price raises any concerns about the divestiture’s buyer commitment to competing vigorously post-divestiture. The DOJ has reasoned that a ‘fire sale’ price may suggest that the divestiture buyer ‘does not intend to keep the assets in the market’.^[43] Courts have shared similar views, with the court in Aetna articulating that ‘[a]n extremely low purchase price reveals the divergent interest between the divestiture purchaser and the consumer.’^[44] In Aetna, the low purchase price (an 86–92 per cent discount over the usual asset purchase price in the ordinary course) and the divestiture buyer’s statements that it may withdraw from certain geographic markets supported the court’s lack of confidence in the divestiture buyer effectively replacing lost competition.^[45] Courts, however, recognise that divestitures within the context of in-depth merger investigations provide divestiture buyers with ‘enormous leverage’ over the sellers, who face significant pressure to quickly make the divestiture to proceed with the transaction.^[46] In RAG-Stiftung, for example, the court rejected the FTC’s contentions that a purchase price below other third-party valuations was a cause for concern. The court recognised that the limited diligence time frame likely contributed to the low purchase price (as it would for any rational actor under the circumstances) and that the divestiture buyer had demonstrated its good faith intentions with a separate, earlier asset purchase that it had continued to operate.^[47]

Appropriate timing for remedy disclosure

It is important that merging parties provide the antitrust agencies with adequate time to evaluate a proposed remedy and avoid any possible perception of ‘sandbagging’. There is not a set deadline by which merging parties must propose a remedy, and courts have even considered evidence of remedies finalised after the filing of a complaint. For example, in Libbey, the court rejected the FTC’s argument that the parties were attempting to evade FTC and judicial review by amending their agreement to narrow the scope of the transaction a week after the FTC filed its complaint.^[48] Similarly, in UnitedHealth, UnitedHealth announced its divestiture intention one month prior to the complaint being filed, but it did not finalise the divestiture agreement until two months after the DOJ filed its complaint.^[49] The court, however, still considered the divestiture in rejecting the DOJ’s challenge, with the trial taking place four months after the divestiture agreement was finalised.^[50] Even so, the antitrust agencies are continuing to staunchly oppose, in particular, perceived sandbagging when litigating. For example, in ASSA ABLOY, the DOJ sharply criticised the merging parties for signing a divestiture agreement two and a half months after the complaint was filed, after only informally proposing a divestiture prior to the complaint being filed.^[51]

Regardless, courts are likely to be more receptive to considering fixes when merging parties provide antitrust agencies with as much notice as reasonably possible. Courts have, on numerous occasions, rejected remedies proposed too late during litigation. For example, in Ardagh, the court refused to consider evidence of a remedy that was proposed three weeks prior the hearing.^[52] Likewise, in Chemetron, the court refused to consider evidence of a divestiture proposed in the middle of a hearing.^[53]

Conclusion

Courts closely scrutinise litigated remedies. Although it is not entirely settled whether antitrust agencies have the burden of establishing that a fixed transaction is likely to substantially lessen competition or whether merging parties must prove that a remedy completely replaces lost competition, merging parties should be careful to provide the antitrust agencies with as much detail as possible regarding the scope of the proposed remedy as soon as reasonably possible. Doing so will ensure that the court has the appropriate facts to reach an informed decision regarding the effect of a remedy on the loss of competition allegedly caused by the proposed transaction.

Notes