Entry, the future and the facts in the FTC’s challenge of STERIS/Synergy
Facts matter. Those of us that practise, study or write about the law hear this cliché too often. But for three days in August 2015 at the federal courthouse in Cleveland, Ohio, the facts really did matter. Perhaps so much that they rendered insignificant the standard features of a merger-related preliminary injunction hearing that we’ve become so accustomed to seeing: expert witnesses; a panoply of market share calculations; robust debate on the appropriate product and geographic market definitions; reference to (and reliance on) the country’s Horizontal Merger Guidelines; and consideration of preceding cases.
The facts were all that Judge Dan Polster, an alumnus of the Department of Justice’s Antitrust Division, needed to consider before greenlighting STERIS Corporation’s proposed acquisition of the UK’s Synergy Health.
When the Federal Trade Commission sued to block the $1.9 billion deal in May 2015, it argued that the STERIS takeover thwarted Synergy’s expansion into the US market for medical equipment sterilisation, and consequently harmed what would have been future competition between the two providers. “The acquisition of an actual potential competitor violates federal antitrust law if the relevant market is highly concentrated; the competitor ‘probably’ would have entered the market; its entry would have had procompetitive effects; and there are few other firms that can enter effectively,” the FTC’s pre-hearing brief stated.
For perhaps the first time in a federal merger challenge, the dispositive question was driven purely by the facts. The government’s case hinged on whether one party (Synergy) probably would have entered the US market with a product (x-ray sterilisation services) that might compete with the other party’s (STERIS) existing product (gamma sterilisation). At the time, Ohio-based STERIS had only one real competitor in the United States, Sterigenics.
STERIS and Synergy maintained that the facts were simple, transparent and could only be interpreted in one way: that too many financial obstacles prevented Synergy from bringing x-ray sterilisation to the US, and these obstacles only mounted as Synergy’s plans unfolded.
Rather than debate whether the “actual potential competition” theory was a viable framework in which to demonstrate antitrust injury, Judge Polster assumed as much and instead zeroed in on the facts. He said the FTC had already considered the theory when it voted to proceed with the merger challenge and, besides, the facts would reveal what he needed to know. Months after the case concluded, Judge Polster recalled: “My case was very, very fact specific. I didn’t need experts. I was simply looking at the facts to determine whether Synergy was indeed going to enter the market irrespective of the merger.”
What was Synergy’s technological reality? What were the prospects for financing the necessary equipment for the US project? Did Synergy have firm commitments – not just interest – from customers agreeing to adopt x-ray sterilisation in place of gamma sterilisation? This is what mattered to Judge Polster. Synergy would emphasise a lack of customer commitments throughout the hearing, even drawing out admissions in live testimony from potential US customers, Johnson & Johnson and Zimmer Biomet, that they were still non-committal about x-ray sterilisation; at best, their interest was academic. Meanwhile, the FTC would emphasise that strategic planning for the US x-ray sterilisation project continued in executive meetings and emails authored by Andrew McLean, Synergy’s chief of applied sterilisation technologies, until STERIS offered to buy Synergy.
In what could have been a pivotal moment for the FTC, McLean admitted to the fact that he sent emails to his team saying he was “very pleased to announce the US x-ray strategy has been approved”, and that it was “a huge achievement, marking a fundamental change to how products can be sterilized in the US”. But moments later, McLean insisted that the project could go nowhere if “the financials did not stack up.” Without customer revenues – which Synergy never generated – the project fundamentally could not survive.
Some facts simply trump others. Synergy’s senior executive board indeed approved the strategy to enter the US x-ray market, and the company’s governing board also approved down payments for two new x-ray machines. But for Judge Polster, it was much more significant that not a single medical device customer would commit to a contract, and only about six of the 185 customers Synergy initially targeted in its sales and marketing campaign would sign even a non-binding letter of interest. “The evidence shows that, despite the level of interest expressed by a handful of healthcare products manufacturers in x-ray technology, Synergy could not identify a single customer who would provide the financial commitment required to build x-ray sterilisation facilities in the United States,” he would later write.
Facts remained the focus in post-hearing briefs. Judge Polster relieved the parties from addressing theories of antitrust harm and instead asked them to identify the existing evidence that showed Synergy’s near-term entry into the US market was probable or improbable.
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This singular prominence of the facts wasn’t the only way STERIS/Synergy stood out from its counterparts.
That it took place in Cleveland, a few miles from the corporate headquarters of the acquiring party, was unique, considering that the majority of the Obama-era merger challenges played out locally at the DC district court – just steps from the agency offices. If a so-called “home court advantage” ever did exist, the government certainly didn’t have one in Ohio.
That it began promptly on Monday morning without any last-minute motions, surprises or delay was an early indication of Judge Polster’s commitment to the hearing’s truncated time frame he announced weeks prior. According to the judge, one party had requested five days for the hearing, and the other wanted just one day; so, he settled on three days, with the caveat that testimony might continue into the evening since there was no jury to accommodate. Judge Polster reminded the parties in no uncertain terms that barring emergencies, he would not allocate more time for the hearing. Contrast this brevity with two, three and sometimes four-week preliminary injunction hearings that typically unfolded in Washington when the DOJ or FTC challenged proposed deals in federal court there.
Judge Polster’s request that the parties avoid referencing confidential business information in order to keep the courtroom open to the public was welcomed. Too often in recent merger challenges, the gallery has been emptied and testimony taken off the public record to accommodate the parties’ concerns about revealing competitively sensitive information. Until summoned back into the courtroom (only to be herded out again), we sit in courthouse hallways with no indication of when open testimony will resume, sometimes two hours later. Not here. Judge Polster was keen to avoid such disarray. In remarks to the antitrust section of the American Bar Association months after the hearing, Judge Polster said: “If you want to try your case in an American courtroom, things have to be public; if that means the parties are forced to think of different strategies, so be it. That’s their job.”
That we saw a proposed merger challenged on a theory of harm to actual potential competition was also a first (the first, actually). Absent the merger, Synergy would eventually compete head-to-head with STERIS, the FTC said. Instead, the merger allowed “STERIS to insulate itself against this competitive threat, preventing lower prices, improved quality and increased choice for contract sterilisation.” The court was much more sceptical of whether Synergy would actually enter the market than it was of the validity of the actual potential competition doctrine, concluding that the “evidence unequivocally show[ed] the problems that plagued the development of x-ray sterilization . . . justified termination of the project.”
And, finally, that no economic experts were asked to testify was a clear departure from standard merger litigation protocol.
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STERIS/Synergy would be the only proposed merger challenge during the Obama administration that the DOJ or FTC litigated in district court and did not ultimately win (there were merger challenges that the government lost at the district court level, but ultimately won on appeal). The loss in STERIS does not mean that the agencies, in particular the FTC, will close the books on the actual potential competition theory. To the contrary, scrutiny of likely future competition will continue to play a part in how the agency approaches enforcement in the pharmaceutical and other industries. Still, FTC officials see this case as an illustration of the “disconnect between agency theories and judicial decision-making”, as FTC bureau of competition director Deborah Feinstein said at the time. The result in STERIS/Synergy demonstrates how difficult it can be to prove a potential future competition case in court, they said. To bridge the gap, Feinstein said, the FTC will “be thinking about how to tell the story better, how to explain [that] to the judge.”
While a persuasive narrative was crucial to so many of the DOJ and FTC’s victories over the past decade (and especially recently), perhaps in this instance even the best storytelling wouldn’t have tipped the scales in the FTC’s favour. The agency simply couldn’t change the fact that it was arguing about the unknown – competition from a product that did not yet fully exist in the US market, was not fully funded and for which there were no committed customers. It wasn’t just that the numbers weren’t on the FTC’s side; rather that the numbers (market shares, pricing data, customer data) didn’t yet exist. And the facts that did exist appeared to leave too much room for speculation about the future of Synergy’s x-ray sterilisation in the US.
For Judge Polster, the STERIS/Synergy case was an example of why judges should always keep an open mind: “I knew the standard to get a preliminary injunction was fairly low and I thought it would be fairly easy for the government to meet that standard,” he said. “But I looked at the facts and documents and ultimately determined that Synergy couldn’t realistically enter the market with its radiation alternative.” When his opinion was published, it came as no surprise the pages were full of references to the evidentiary record. Without a jury, Judge Polster was literally the fact-finder; without a debate on legal theory or procedure, only one thing mattered: the facts.