United States: Government Investigations

Over the past year, the U.S. federal antitrust enforcement agencies – the Department of Justice, Antitrust Division (DOJ) and Federal Trade Commission (FTC), (together, the Agencies) have brought a number of civil enforcement actions including a record number of litigated merger challenges. These actions have spanned billions of dollars in transactions across a number of industries, including energy, consumer products and healthcare. Although some of these challenges were litigated in federal court, others resulted in the parties’ abandoning their transaction prior to litigation because of the Agencies’ unwillingness to accept the parties’ proposed remedies. These cases are summarised below.

Litigated merger challenges

After a string of victories the past few years, the Agencies litigated cases in the past year, with mixed success. Not surprisingly, the FTC’s cases mostly concerned the healthcare and pharmaceutical industries, while the DOJ’s actions were in other industries. Most of these cases were in what the Agencies alleged to be highly concentrated industries.

Staples/Office Depot

In February 2015, Staples Inc announced its intent to acquire Office Depot Inc in a US$6.3 billion transaction.¹ Later that year, in December 2015, the FTC challenged the deal, having successfully challenged the transaction in 1997.² In an administrative complaint, the FTC alleged that the transaction would, on a national scale, negatively impact competition in the market for consumable office supplies, for example pens and paper, provided to large companies, because the companies are often among the top-two bidders for such customers.³

In May 2016, the United States District Court for the District of Columbia granted a preliminary injunction in favour of the FTC.⁴ In granting the preliminary injunction, the judge disagreed that local and regional office supply companies, as well as Amazon, could sufficiently offset the competition that would be lost from the deal.⁵ After the news that the court granted the preliminary injunction, Staples and Office Depot terminated the transaction.⁶

Sysco/US Foods

In February 2015, the FTC filed an administrative complaint seeking to halt the proposed merger of US Foods, Inc and Sysco Corporation, alleging the merger would violate section 7 of the Clayton Act and section 5 of the FTC Act by eliminating the ‘vigorous head-to-head competition’ between two of the largest broadline foodservice distributors in the United States and threatening significant harm to foodservice customers.⁷ According to the FTC’s Complaint, post-merger Sysco would control 75 per cent of the national market for broadline foodservice distribution services, or an increase concentration of 2,800 points using the Herfindahl-Hirschman Index (HHI), and over 50 per cent in 32 local geographic markets in which US Foods and Sysco competed, or HHI increases between 1,053 and 3,695 points.⁸ Although the parties had announced a proposed agreement with Performance Food Group (PFG), the country’s third-largest broadline distributor, to divest 11 distribution centres and associated assets to counteract the anticipated competitive effects, the FTC argued such a divestiture would do little to remedy the resulting competitive harm because not only will PFG ‘be an inferior competitor compared to pre-Merger US Foods and particularly inferior compared to post-merger Sysco/US Foods’ in the national market, but also local markets will remain unaffected ‘because PFG will not acquire any additional assets.’⁹

Presented with the question of whether the court should enjoin the proposed transaction until its review by an FTC administrative law judge, the court agreed with the Commission and found ‘[t]he proposed merger of the country’s first and second largest broadline foodservice distributors is likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition.’¹⁰ The court also rejected the parties’ argument that the proposed agreement with PFG would offset the competitive effects of the deal due to PFG’s ‘lack of nationwide geographic coverage,’ ‘likely higher product acquisition costs,’ and competitive disadvantages in terms of fewer stock-keeping unit (SKU) offerings and human resources.¹¹ After the court granted FTC’s request for a preliminary injunction, the parties abandoned the transaction and the Commission dismissed the administrative complaint.¹²

Steris/Synergy Health

The FTC filed administrative and civil complaints in May of 2015 seeking to enjoin Steris Corporation’s US$1.9 billion acquisition of Synergy Health.¹³ According to the FTC, the transaction would substantially ‘reduc[e] competition in regional markets for sterilization of products using radiation, particularly gamma or x-ray radiation.’¹⁴

UK-based Synergy was a small player in the US market, but the FTC sued on a theory of actual potential competition. A federal judge in Ohio listened to three days of evidence on whether Synergy, as a result of the transaction, abandoned a plan to build a sterilisation facility in the US that would compete with Steris. Synergy had considered building a plant in the US, but it insisted the company decided to forego the project after medical device makers would not commit to using the facility. In September 2015, the court declined to issue an injunction, concluding there was no evidence that Synergy was likely to launch competing sterilisation operations in the US absent the merger, and the FTC did not appeal the district court’s decision.

Penn State Hershey/Pinnacle

In December 2015, the FTC and Pennsylvania Attorney General filed a civil complaint seeking to enjoin a merger between Penn State Hershey Medical Center and PinnacleHealth System pending an administrative trial. The complaint alleged that the merged entity would ‘substantially reduce competition in the area surrounding Harrisburg, Pennsylvania, and lead to reduced quality and higher healthcare costs for the area’s employers and residents.’¹⁵

A federal judge in the middle district of Pennsylvania rejected the FTC and Pennsylvania’s request to enjoin the merger, finding the FTC’s proposed geographic market definition ‘unrealistically narrow.’¹⁶ Although the court’s determination that the government failed to present a relevant geographic market was dispositive, the court discussed what it considered ‘important equitable considerations,’ including the ‘compelling efficiencies arguments’ offered by the parties.¹⁷ The district court also suggested that the case was inconsistent with the current regulatory landscape, ‘find[ing] it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the Hospitals intend here.’¹⁸

The case is currently on appeal before the Third Circuit.

Advocate/Northshore

In December 2015, the FTC filed administrative and civil complaints seeking to enjoin the proposed merger of two Chicago-area health care systems: Advocate Health Care Network and NorthShore University HealthSystem.¹⁹ The complaint alleged that the merged entity ‘would operate a majority of the hospitals in the area and control more than 50 per cent of the general acute care inpatient hospital services,’ resulting in increased healthcare costs for consumers.²⁰

After a week-long hearing, a district judge denied the FTC’s request for a preliminary injunction, finding the FTC’s geographic market definition too narrow. As in Penn State Hershey/Pinnacle, the court’s determination that the government failed to meet its burden of establishing a relevant geographic market was dispositive.

The court’s primary objection to the FTC’s geographic market definition was that it excluded destination hospitals, which are ‘outside of the North Shore Area but are associated with outpatient facilities or doctors’ offices within the Area that drive significant inpatient volume to ... those outside hospitals.’²¹ The court criticised the FTC’s economic expert, describing his analysis in general as ‘flawed’ and his decision to exclude destination hospitals as lacking any ‘economic basis.’²²

The court also took issue with the FTC’s approach of only including hospitals that overlap with both Advocate and NorthShore, stating that doing so ignores the fact that ‘you can constrain the postmerger system by constraining any one of its hospitals.’²³

The case is currently on appeal before the Seventh Circuit.

Mergers abandoned due to enforcement actions

There have been a few notable instances where the merging parties have abandoned their transaction in the face of an Agency challenge or substantial investigation.

Halliburton/Baker Hughes

The second and third-largest oil services companies in the world, Halliburton Co and Baker Hughes Inc, first attempted to join forces in November 2014.²⁴ Since then, the deal dropped several billion dollars in value and the companies abandoned the transaction.²⁵ The DOJ sought to block the proposed transaction in April 2016.26 The DOJ alleged that the combination of the two companies would eliminate ‘head-to-head competition in markets for 23 products or services used for on- and off-shore oil exploration and production in the United States.'²⁶

Although Halliburton offered to divest certain assets in an attempt to mitigate the DOJ’s concerns, the DOJ’s complaint noted that the divestitures would be only of assets without the other elements of the business, such as intellectual property and research and development, putting the potential buyer of those assets at a disadvantage.²⁷ The offered divestitures allegedly would not have replicated the existing competitive environment.²⁸

Ultimately, the companies abandoned the transaction, citing ‘[c]hallenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics.’²⁹ Attorney General Loretta Lynch called the abandonment ‘a victory for the US economy and for all Americans.'³⁰ In commenting on the dissolution of the deal, the DOJ highlighted that it will enforce antitrust laws vigorously, no matter the size or complexity of the transaction.³¹

GE/Electrolux

The DOJ filed suit in July 2015 to block Electrolux’s US$3.3 billion acquisition of General Electric Company’s appliance business.³² According to the DOJ, both General Electric and Electrolux are leading manufacturers of appliances, such as ranges, cooktops and wall ovens, in the United States.³³ The combination of the two, the DOJ said, would hinder competition, causing potential price increases on those items.³⁴ The DOJ also alleged the transaction would create a duopoly in selling these types of appliances to builders and commercial purchasers.³⁵

The lawsuit went to trial in the US District Court for the District of Columbia, during which the government presented evidence that a combined Electrolux-General Electric entity would manufacture over 60 per cent of ranges.³⁶ The companies presented evidence on competition in the industry, as well as evidence on over US$150 million in claimed synergies.³⁷ With companies such as Samsung and LG lowering appliance prices, Electrolux and General Electric argued, they needed their combined scale to compete in the market.³⁸

After several weeks of trial, General Electric abandoned the transaction.³⁹ In the wake of the abandonment, General Electric did not offer an explanation, but did say that it would continue to try to sell its appliance business.⁴⁰

Comcast/Time Warner

Comcast Corporation announced it would merge with Time Warner Cable Inc, a US$45.2 billion transaction, in February 2014.⁴¹ This transaction would have combined the first and second largest cable providers in the United States, which would have held about 30 per cent of the market.⁴² The DOJ expressed concerns about the transaction, specifically that the deal would put Comcast in a position where it would be a gatekeeper for internet-based services that need a broadband connection to operate.⁴³ After learning of these concerns, Comcast abandoned the transaction.⁴⁴ Former Attorney General Eric Holder emphasised that the DOJ ‘can and will defend the interests of the American consumer no matter the complexity of the issue or the size of the opponent.’⁴⁵

Non-merger enforcement efforts

The FTC and DOJ continued to bring conduct cases over the past year, with the FTC’s bringing another so-called ‘pay for delay’ case and the DOJ challenging certain contracting practices between healthcare providers and achieving a significant victory in its e-books case against Apple.

Endo Pharma/Impax Labs

Challenging an agreement not to market an authorised generic – or a ‘no-AG commitment’ – as a form of reverse payment, the FTC sued Endo Pharmaceuticals Inc, Impax Laboratories, Inc, and other pharmaceutical companies for agreements entered into by innovator Endo with the first generic companies that filed for FDA approval for generic versions of two of Endo’s most important branded prescription drug products.⁴⁶ Although the FTC had previously argued in ‘pay-for-delay’ amicus briefs that it viewed no-AG commitments as presenting similar antitrust concerns as those identified in Actavis since ‘a no-AG commitment can be extremely valuable to the first-filer generic, because it ensures that this company will capture all generic sales and be able to charge higher prices during the exclusivity period,’ this suit represented the first time the Commission had challenged such a no-AG commitment.⁴⁷ These types of commitments, according to chairwoman Edith Ramirez, ‘harm consumers twice – first by delaying the entry of generic drugs and then by preventing additional generic competition in the market following generic entry.’⁴⁸

Accordingly, the FTC is seeking a permanent injunction barring the defendants from similar anticompetitive behaviour in the future, a judgment declaring the defendants’ conduct violates the antitrust laws, and ‘restitution or disgorgement’ of profits to ‘redress and prevent recurrence.’⁴⁹ Although the FTC accepted a settlement with Teikoku and its US affiliate, preventing Teikoku from entering into no-AG agreements and certain other kinds of agreements for 20 years, its claims against Endo, Endo International plc, Watson Laboratories, Inc, Allergan plc, and Impax Laboratories, Inc remain and are currently being litigated in the Eastern District Of Pennsylvania.⁵⁰ Affirming the Commission’s enforcement priorities, Chairwoman Ramirez remarked that ‘[t]his lawsuit reflects the FTC’s commitment to stopping pay-for-delay agreements that inflate the prices of prescription drugs and harm competition, regardless of the form they take.’⁵¹

Carolinas Healthcare System

Similarly, a recent lawsuit by the DOJ suggests that a certain kind of conduct may now be a top enforcement priority: anti-steering provisions in insurer contracts. The lawsuit, which was filed in June 2016, seeks to enjoin Carolinas HealthCare System (CHS) from ‘impos[ing] steering restrictions in its contracts with insurers [because] [t]hese restrictions impede insurers from providing financial incentives to patients to encourage them to consider utilizing lower-cost but comparable or higher-quality alternative healthcare providers.’⁵² Specifically, as alleged in the Complaint, ‘CHS encourages insurers to steer patients toward itself by offering health insurers modest concessions on its market-power driven, premium prices. However, CHS forbids insurers from allowing CHS’s competitors to do the same [because] CHS prevents insurers from offering tiered networks that feature hospitals that compete with CHS in the top tiers, and prevents insurers from offering narrow networks that include only CHS’s competitors.’⁵³ According to the DOJ, by dominating the Charlotte area hospital system with approximately a 50 per cent share of the relevant market, CHS is allegedly able to maintain and exert ‘its market power to impede insurers from negotiating lower prices with its competitors and offering lower-premium plans’ through these steering restrictions.⁵⁴ The result, according to the DOJ, are ‘higher prices for health insurance coverage ... fewer insurance plans from which to choose, and ... denied access to consumer comparison shopping and other cost-saving innovative and more efficient health plans that would be possible if insurers could steer freely.’⁵⁵

US v Apple (E-Books)

Finally, following the DOJ’s Second Circuit victory in 2015 whereby the Second Circuit affirmed the district court’s finding that Apple had conspired with book publishers to raise e-book prices in violation of Section 1 of the Sherman Act, the Supreme Court denied Apple’s petition for certiorari, making final the lower court’s ruling.⁵⁶ As articulated by Apple, the question presented to the Court was whether Apple’s behaviour as a ‘disruptive market entrant’ should be treated as a per se violation of Section 1, or rather be analysed under the rule of reason.⁵⁷ The Second Circuit, agreeing with the Southern District of New York, had found Apple’s agreement among the defendant publishers to raise prices constituted a horizontal price-fixing conspiracy, and therefore was unlawful under the per se rule.⁵⁸ This agreement included contract terms such as moving e-books to an ‘agency model,’ whereby the publishers set the retail price and split the revenue with the retailer, and a most-favoured nation clause, which here ‘require[d] the publisher to offer any e-book in Apple’s iBookstore for no more than what the same e-book was offered elsewhere, such as from Amazon.’⁵⁹

In its cert petition, Apple had argued the Second Circuit erred when it declared its involvement in the conspiracy as per se illegal, rather than analysing it under the rule of reason, ‘because such vertical activity also had the alleged effect of facilitating horizontal collusion among the suppliers.’⁶⁰ By denying Apple’s petition, not only does the Second Circuit’s per se approach stand, but additionally Apple must pay US$400 million to e-book consumers under settlement agreements reached with 33 state attorneys general and private plaintiffs, representing a notable victory for the DOJ as a result of its enforcement action.⁶¹

Notes

1. Karlee Weinmann, Staples Scoops Up Office Depot For $6.3B In Cash, Stock, LAW360 (Feb. 4, 2015, 7:49 AM), www.law360.com/articles/618198/staples-scoops-up-office-depot-for-6-3b-in-cash-stock.
2. Press Release, Federal Trade Commission, FTC Challenges Proposed Merger of Staples, Inc. and Office Depot, Inc. (Dec. 7, 2015), available at https://www.ftc.gov/news-events/press-releases/2015/12/ftc-challenges-proposed-merger-staples-inc-office-depot-inc.
3. Id. (‘The Commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies,’ said FTC chairwoman Edith Ramirez. ‘The FTC’s complaint alleges that Staples and Office Depot are often the top two bidders for large business customers.’).
4. Press Release, Federal Trade Commission, After Staples and Office Depot Abandon Proposed Merger FTC Dismisses Case from Administrative Trial Process (19 May 2016), available at https://www.ftc.gov/news-events/press-releases/2016/05/after-staples-office-depot-abandon-proposed-merger-ftc-dismisses.
5. Id.
6. Id.
7. Complaint at 1-2, In the Matter of Sysco Corp., Docket No. 9364 (F.T.C. Feb. 19, 2015).
8. Id. at 12-13.
9. Id. at 20-21.
10. FTC v Sysco Corp., 113 F. Supp. 3d 1, 2 (D.D.C. 2015).
11. Id. at 107-08.
12. Press Release, Fed. Trade Comm’n, Following Sysco’s Abandonment of Proposed Merger with US Foods, FTC Closes Case (1 July 2015), available at https://www.ftc.gov/news-events/press-releases/2015/07/following-syscos-abandonment-proposed-merger-us-foods-ftc-closes.
13. Press Release, Federal Trade Commission, FTC Challenges Merger of Companies That Provide Sterilization Services to Manufacturers (29 May 2015), available at https://www.ftc.gov/news-events/press-releases/2015/05/ftc-challenges-merger-companies-provide-sterilization-services.
14. Id.
15. Press Release, Federal Trade Commission, FTC and Pennsylvania Office of Attorney General Challenge Penn State Hershey Medical Center’s Proposed Merger with PinnacleHealth System (8 December 2016), available at https://www.ftc.gov/news-events/press-releases/2015/12/ftc-pennsylvania-office-attorney-general-challenge-penn-state.
16. FTC v Penn State Hershey Medical Center et al., No. 1:15-cv-02362, Memorandum Opinion & Order, at 11 (M.D. Pa. 9 May 2016).
17. Id. at 14, 17.
18. Id. at 25.
19. Press Release, Federal Trade Commission, FTC Challenges Proposed Merger of Two Chicago-area Hospital Systems (18 December 2016), available at https://www.ftc.gov/news-events/press-releases/2015/12/ftc-challenges-proposed-merger-two-chicago-area-hospital-systems.
20. Id.
21. FTC v Advocate Health Care et al., No. 1:15-cv-11473, Amended Memorandum Opinion & Order, at 9 (E.D. Ill. 20 June 2016).
22. Id.
23. Id. at 12-13.
24. Mike Stone, Halliburton and Baker Hughes scrap $28 billion merger, Reuters (2 May 2016, 12:18 PM), www.reuters.com/article/us-bakerhughes-m-a-halliburton-idUSKCN0XS1KW.
25. Id.
26. Press Release, Department of Justice, Justice Department Sues to Block Halliburton’s Acquisition of Baker Hughes (6 April 2016), available at https://www.justice.gov/opa/pr/justice-department-sues-block-halliburton-s-acquisition-baker-hughes.
27. Id.
28. Id.
29. Id.
30. Stone, supra note 1.
31. Press Release, Department of Justice, Halliburton and Baker Hughes Abandon Merger After Department of Justice Sued to Block Deal (1 May 2016), available at https://www.justice.gov/opa/pr/halliburton-and-baker-hughes-abandon-merger-after-department-justice-sued-block-deal.
32. Id. (‘This case serves as a stark reminder that no merger is too big or too complex to be challenged, and that the hardworking men and women of the department’s Antitrust Division stand ready, willing and able to vigorously enforce the nation’s antitrust laws when companies propose deals that would enhance shareholder value at the expense of consumer interests. I am proud of the lawyers, economists, and others at the Justice Department whose work on this multi-year investigation and litigation made this result possible.’)
33. Press Release, Department of Justice, Electrolux and General Electric Abandon Anticompetitive Appliance Transaction After Four-Week Trial (7 December 2015), available at https://www.justice.gov/opa/pr/electrolux-and-general-electric-abandon-anticompetitive-appliance-transaction-after-four-week.
34. Press Release, Department of Justice, Justice Department Files Antitrust Lawsuit to Stop Electrolux from Buying General Electric’s Appliance Business (1 July 2015), available at https://www.justice.gov/opa/pr/justice-department-files-antitrust-lawsuit-stop-electrolux-buying-general-electrics-appliance.
35. Id.
36. Id.
37. Michael Macagnone, DOJ Antitrust Trial Ends As GE-Electrolux Deal Collapses, Law360 (7 December 2015, 9:37 AM), www.law360.com/articles/734793/doj-antitrust-trial-ends-as-ge-electrolux-deal-collapses.
38. Id.
39. Id.
40. Press Release, Department of Justice, supra note 11; Macagnone, supra note 15.
41. Macagnone, supra note 15.
42. Karlee Weinmann, Comcast Puts Up $45.2B In Surprise Time Warner Takeover Bid, Law260 (13 February 2014, 7:55 AM), www.law360.com/articles/509764/comcast-puts-up-45-2b-in-surprise-time-warner-takeover-bid.
43. Id.
44. Press Release, Department of Justice, Comcast Corporation Abandons Proposed Acquisition of Time Warner Cable After Justice Department and the Federal Communications Commission Informed Parties of Concerns (24 April 2015), https://www.justice.gov/opa/pr/comcast-corporation-abandons-proposed-acquisition-time-warner-cable-after-justice-department.
45. Id.
46. Id.
47. Complaint, Fed. Trade Comm’n, v. Endo Pharm. Inc., 2016 WL 1253815, at *1 (E.D. Pa. 30 March 2016).
48. Press Release, Fed. Trade Comm’n, FTC Sues Endo Pharmaceuticals Inc. and Others for Illegally Blocking Lower-Cost Generic Versions of the Branded Drugs Opana ER and Lidoderm (31 March 2016), available at https://www.ftc.gov/news-events/press-releases/2016/03/ftc-sues-endo-pharmaceuticals-inc-others-illegally-blocking-lower.
49. Id.
50. Endo Pharm. Inc., 2016 WL 1253815 at *48-49.
51. See Stipulated Order For Permanent Injunction, Fed. Trade Comm’n v Teikoku Pharma USA, Inc., No. 2:16-cv-01440-PD (E.D.Pa. 7 April 2016), ECF No. 14.
52. Press Release, supra, FTC Sues Endo Pharmaceuticals Inc. and Others for Illegally Blocking Lower-Cost Generic Versions of the Branded Drugs Opana ER and Lidoderm.
53. Complaint, United States v Charlotte-Mecklenburg Hosp. Auth., 2016 WL 3202191, at *1, 3 (W.D.N.C. 9 June 2016).
54. Id. at *4.
55. Id. at *2, 4-5.
56. Id. at *8.
57. Press Release, Dep’t of Justice, Supreme Court Rejects Apple’s Request to Review E-Books Antitrust Conspiracy Findings (7 March 2016), available at https://www.justice.gov/opa/pr/supreme-court-rejects-apples-request-review-e-books-antitrust-conspiracy-findings.
58. Petition for Writ of Certiorari, Apple Inc. v United States, 136 S.Ct. 1376 at i (No. 15-565).
59. See United States v Apple, Inc., 791 F.3d 290, 323 (2d Cir. 2015), cert. denied, 136 S. Ct. 1376 (2016).
60. Id. at 303-04.
61. Petition for Writ of Certiorari, Apple Inc., 136 S.Ct. at i (No. 15-565).
62. Press Release, supra, Supreme Court Rejects Apple’s Request to Review E-Books Antitrust Conspiracy Findings.