United States: Mergers

US merger enforcement over the past year has been marked by continuity in the face of uncertainty. The surprising election and presidency of Donald Trump has raised questions about the direction of merger enforcement that remain largely unresolved, though the Trump antitrust doctrine is, at a minimum, expected to pull back significantly from the aggressive enforcement of the Obama years. That said, a number of significant enforcement actions have been threatened or announced in the early months of the Trump administration, and the acting and incoming antitrust leadership have for the most part voiced a message of antitrust stability, suggesting that any dramatic changes in antitrust enforcement will emerge slowly, if at all.

The Trump antitrust doctrine: to be determined

As President Donald Trump took office in January 2017, there was uncertainty and debate on whether his administration would approach antitrust enforcement from a traditional Republican framework of bipartisan agreement on the principles underlying antitrust enforcement (albeit with a bit less enforcement at the margins), or from a less traditional perspective in which populist or other political considerations would play a meaningful role. Candidate Trump did not speak at any length about his antitrust views, but the few statements he did make seemed to echo his broader populist views, suggesting he would be critical of big business. Trump openly discussed the possibility of blocking AT&T's proposed acquisition of Time Warner, and suggested that Amazon has a ‘huge antitrust problem' owing to its size. These statements, coupled with a broader Trump administration philosophy of ‘deconstruction of the administrative state' (in the words of senior adviser Stephen Bannon) have led some to wonder whether the broad consensus that has made US and global merger enforcement relatively stable for many years would be replaced with a less predictable new approach under President Trump.

To this point, Trump's appointments to the antitrust agencies suggest more of a return to traditional business-friendly Bush-era Republican antitrust policy than a more radical change. For the leadership of the DOJ Antitrust Division, President Trump tapped Makan Delrahim, who previously served as Deputy Assistant Attorney General with responsibility for appellate, international, and policy affairs in the Antitrust Division under President George W Bush. Delrahim has pledged to employ a fact-based, non-political approach in his leadership.

While Delrahim is an experienced antitrust hand unlikely to dramatically rock the antitrust boat, some changes are likely. For example, Delrahim is expected to weigh the potential benefits of transactions somewhat more heavily against potential harms than the Obama-era Antitrust Division when considering enforcement decisions. Delrahim has also expressed some misgivings regarding enforcement actions grounded on alleged abuses of IP rights.

On 8 June 2017, the Senate Judiciary Committee voted 19-1 to move forward with Delrahim's nomination. Senator Amy Klobuchar, the ranking Democrat on the Antitrust subcommittee, supported Delrahim's nomination, but expressed concern about Trump's meetings with companies that have deals pending before the antitrust agencies (Delrahim testified he had been the subject of no attempts to influence his views on pending cases by members of the Trump White House). Delrahim's confirmation by the full Senate is expected shortly.

At the FTC, Trump has appointed FTC Commissioner Maureen Ohlhausen as Acting Chairman. While Commissioner Ohlhausen has served on the Commission since 2012 and generally staked out mainstream Republican positions during that time, as Acting Chair, she has quickly moved to put her stamp on the Commission. Ohlhausen has launched an initiative that would eliminate ‘wasteful, legacy regulations and processes that have outlived their usefulness,' including by streamlining information demands from companies under investigation, and reviewing dockets to identify older investigations for closing. Commissioner Ohlhausen has also expressed her view that the Commission should be guided by a spirit of ‘regulatory humility' and avoid enforcement efforts premised on ‘speculative harms' - views suggesting a more generous reception to merging parties.

President Trump still has considerable ability to reshape the FTC further given that three of the five Commission seats are currently vacant, but the early indications suggest that antitrust has not been identified as an administration target for sweeping change. It may thus be more likely than not that the remaining appointments will be other traditionalist antitrust conservatives in the mould of Delrahim and Ohlhausen. Indeed, as this article went to press, rumours indicated that Trump planned to appoint Joseph Simons, an experienced antitrust traditionalist who served as director of the FTC's Bureau of Competition under President George W Bush, as Chairman of the FTC in lieu of Acting Chairman Ohlhausen.

To date, many of the early antitrust enforcement actions in the Trump administration have the flavour of continuity, albeit in a small sample whose portents different observers can reasonably read in very different ways. In Dow/DuPont, for example, the DOJ conditioned approval of the roughly US$73 billion merger on multiple divestitures, including a broadleaf herbicide divestiture in a structural category (40 per cent combined share, three post-merger competitors) that an aggressively laissez-faire enforcer might have been expected to clear. That said, DOJ's Dow consent decree came after a European Commission order requiring divestitures in the same markets, making the US divestitures an easy give in context for the parties, and was made before incoming AAG Delrahim took office, so its precedential value remains unclear.

Other enforcement decisions in the Trump administration have involved relatively clear-cut fact patterns that even antitrust conservatives might tend to agree warranted enforcement. For example, in GE/Baker Hughes, the DOJ required the divestiture of refinery process chemicals in which the parties together accounted for more than half the market and engaged in significant head-to-head competition against each other. In Danone/WhiteWave, the transaction would have essentially combined the top three brands of branded organic raw milk, accounting for more than 90 per cent of branded organic raw milk and more than 50 per cent of all organic raw milk sales. And the FTC's complaint challenging the Draft Kings/Fan Duel transaction alleged that the merging parties would account for more than 90 per cent of the daily fantasy sports market.

These early decisions show that it will take time for sufficient evidence to emerge how, and how much, Trump-era antitrust may depart from what has preceded it. However, two pending cases will be interesting canaries in the antitrust coalmine to test whether political factors in general (or an animus against Trump adversaries in particular) may factor into the Trump administration's antitrust decisions: AT&T's US$85 billion bid for Time Warner and Amazon's pending bid for Whole Foods. Both deals implicate first-order Trump foes: Time Warner owns CNN, and Amazon CEO Jeff Bezos owns the Washington Post, both frequent targets for Trump scrutiny, and, as mentioned above, Trump sounded antitrust warnings with respect to both AT&T/Time Warner and Amazon generally during his candidacy. After the election, Trump met with the CEO of AT&T and other heads of companies with pending deals before the antitrust agencies, raising eyebrows about the potential for political influence on the antitrust review of the deal. If the antitrust review for either deal falls outside the range of normal antitrust outcomes, it could signal unusually interesting antitrust times ahead.

Federal coordination with global and state enforcers put to the test

Convergence and comity with both the global competition law community and state government enforcers have long been federal antitrust priorities, though these priorities may be strained by the Trump administration's broader willingness to challenge established foreign affairs relationships and state actions at odds with their priorities. On the international front, incoming DOJ chief Delrahim has indicated that he will make it a priority to work with the global antitrust community to encourage newer antitrust authorities to steer clear of politicised or protectionist enforcement motives. Similarly, acting FTC Chair Ohlhausen participated in a recent International Competition Network annual meeting that issued best practices for global merger review and has stressed the importance of international convergence. Strong transnational antitrust relationships are well established and the importance of antitrust convergence is broadly agreed, which together should be sufficient to weather most foreign policy storms that may arise. That said, trade wars or other more serious international affairs challenges that have been threatened by the Trump administration could place those relationships under significant tensions whose impacts on antitrust convergence are hard to predict.

To the extent that the Trump administration will adopt relatively lax antitrust enforcement policies, state attorneys general may pick up the slack, as they have in other eras when federal enforcement was at a low ebb. Some evidence that state enforcers are prepared for this role can be seen in the non-merger context, where attorneys general from 11 states recently petitioned the Supreme Court to review the American Express steering litigation in the wake of the DOJ's decision not to appeal the Second Circuit's reversal of the District Court's decision finding American Express' rules constituted an unreasonable restraint on trade, showing a willingness to pursue independent action that may also become more common on the merger front.

Insurance mergers blocked

Many of the year's biggest merger decisions have involved investigations and challenges started under the Obama administration. Consistent with past practices, antitrust enforcers have placed a premium on carefully scrutinising mergers affecting the delivery of healthcare to consumers. Perhaps most importantly, the DOJ successfully challenged two mergers by large insurance companies that had been announced last summer, amid loud criticism of the Affordable Care Act, Aetna/Humana and Cigna/Anthem. The federal courts issued their decisions earlier this year, as lawmakers sought to act on their promises of reform.

Aetna/Humana

The DOJ challenged the merger of Aetna and Humana, two of the largest US health insurance companies, based on its potential impact on individual Medicare Advantage plans in 364 counties across 21 states and individual commercial health insurance plans offered on public exchanges in 17 counties across three states. The merging parties argued that Medicare Advantage competes with traditional Medicare and should thus be included in the same relevant product market. They also argued that competitive harm was unlikely for a variety of reasons, including ‘the government's regulatory authority over Medicare Advantage,' potential new entry, a proposed divestiture comprising a portion of their Medicare Advantage business and Aetna's post-merger announcement decision to exit the public exchanges in the 17 counties.

The district court enjoined the merger, finding that Medicare Advantage did not compete with traditional Medicare based on both contemporaneous business documents and econometric evidence and that the parties were head-to-head competitors in Medicare Advantage in the relevant geographic areas. The court also concluded that Aetna only exited the public exchanges in the 17 counties for the purpose of evading judicial scrutiny, and thus gave the withdrawal ‘little weight in predicting where Aetna will compete in later years.'

Cigna/Anthem

Cigna and Anthem proposed a merger that would have created the largest seller of medical healthcare coverage to large commercial accounts, in a market with only four national carriers. The DOJ sued to block the merger, arguing that it would harm competition downstream in the sale of health insurance to large group employers in 35 local regions.

The district court enjoined the merger, finding that health insurance sales to national accounts was a properly defined product market. The court rejected the parties' claimed efficiencies from Anthem's post-merger ability to lower costs by driving harder bargains with providers. The DC Circuit Court affirmed the district court's decision, finding that the parties failed to show ‘the kind of extraordinary efficiencies necessary to offset' the loss of competition. Cigna has since sued Anthem in Delaware Chancery Court for a US$1.85 reverse breakup fee and nearly US$13 billion in damages for the premium Cigna shareholders allegedly lost because of the failed merger.

Hospital mergers: significant FTC appeals court victories

Hospital mergers are similarly a consistent focus for antitrust agencies, and the FTC rebounded from significant district court defeats to hospital merger challenges in the Penn State Hershey/PinnacleHealth and NorthShore/Advocate transactions with victories in the Third and Seventh Courts of Appeals, respectively, focused on geographic market definition.

In Penn State Hershey/PinnacleHealth, the district court rejected the FTC's proposed geographic market of a four-county area in the Harrisburg, Pennsylvania area in which the FTC had argued that the post-merger entity would control over 76 per cent of the market. The district court concluded that the proposed geographic market was too narrow, finding that 43.5 per cent of Hershey's patients came from outside of the four-county area and that there were 19 other hospitals within a 65-minute drive that patients could go to in order to avoid a price increase. In its September 2016 decision reversing the district court's judgment, the Third Circuit found that the district court's focus on patent migration was inappropriate, and explained that the role of health insurance payers relying on competition between the hospitals to provide competitively priced health insurance products in the area served by merging hospitals must also be factored into the relevant analysis. The Third Circuit also rejected the efficiencies arguments that the district court had been influenced by, finding, in keeping with the weight of US efficiencies analysis, that only ‘extraordinarily great cognisable efficiencies' could prevent such a merger from being anticompetitive.

Similarly, in NorthShore/Advocate, the district court had concluded that the FTC's proposed geographic market definition was too narrow on the ground that many patients' second-choice hospitals fell outside the boundaries proposed geographic market. The Seventh Circuit reversed the ruling, sending the case back to the district court for reconsideration and explaining that the district court erred in finding that academic medical centres were in the same market with the general acute care hospitals operated by the parties. On remand, the district court blocked the deal.

Continuing interest in pharmaceutical and medical device transactions

Consistent with the agencies' broader focus on healthcare, pharmaceutical and medical device transactions continued to be an area of active enforcement. In September 2016, the FTC ordered its biggest pharmaceutical divestiture in history in the US$40.5 billion Teva/Allergan transaction, requiring Teva to divest the rights and assets to 79 pharmaceutical products to 11 separate buyers. Teva/Allergan illustrates the FTC's continued insistence on divestitures to remedy 5-to-4 overlaps in the pharmaceutical context (14 of the overlaps of currently marketed products and 19 overlaps of pipeline products fell into this category). In medical devices, the FTC's conditioned approval of the US$25 billion Abbott Labs/St. Jude Medical transaction on divestitures of St. Jude's vascular closures and Abbott's steerable sheaths businesses. The FTC also required Abbott to notify it of future acquisitions related to lesion-assessing ablation catheter assets from Advanced Cardiac Therapeutics.

FTC merger remedies study concludes that remedies are working

In February, the FTC published its long-awaited study of merger remedies from 2006 through 2012 to assess whether the remedies accepted by the FTC to cure section 7 concerns arising from proposed mergers were effectively preserving competition. Following up on a similar study conducted in 1999, the FTC concluded that the remedies process is generally working, with remedies having ‘maintained or restored competition' 80 per cent of the time. Consistent with previous guidance on the remedies process, the study found that divestitures comprising ‘ongoing businesses' (ie, assets with an established customer base, a fully staffed facility of some sort, or an otherwise self-contained business) were particularly successful, with a 100 per cent success rate. By contrast, divestitures of assets amounting to less than ongoing businesses succeeded only 70 per cent of the time. While the study acknowledged that the remedies process is not perfect, it concluded that significant changes to the FTC's overall approach to remedies are not warranted.

The FTC study's finding that ‘ongoing business' divestitures are particularly successful aligns with longstanding agency preference, but divestitures of smaller asset packages continue to be accepted in appropriate circumstances. For example in ChemChina/Syngenta, the FTC accepted a divestiture of certain crop protection assets of ChemChina's subsidiary ADAMA comprising US product formulation rights and approvals and a long-term supply agreement with a ChemChina affiliate, but no hard assets, as part of a broader global review in coordination with antitrust agencies in Australia, Canada, the European Union, India and Mexico. The Syngenta divestiture was likely acceptable to the FTC in large part because the parties had identified AMVAC, an established industry player with assets around the US, as the divestiture purchaser.

While the FTC study concluded that the remedies process is generally successful, prominent counter-examples still occur. In April 2017, the FTC approved Sycamore's sale of 323 former Dollar Tree stores that were divested as a condition of the Dollar Tree/Family Dollar merger in 2014. Sycamore argued that the stores could ‘no longer operate as a viable stand-alone business,' citing both a general decline in dollar store business and competition from Dollar Tree as factors. After the sale was approved, Dollar Express, the company Sycamore formed to operate the divested stores, filed a lawsuit against Dollar Tree and Family Dollar, alleging that Dollar Tree and Family Dollar made materially false representations to Dollar Express and the FTC about their ‘commitment to a seamless transformation of the stores into viable competitors under the Dollar Express banner.' Dollar Express also alleged that the defendants used their confidential business and financial information to identify locations to open competing Family Dollar stores in order to drive Dollar Express out of business.

HSR violations remain an enforcement target

Finally, authorities continue to seek fines in cases where parties fail to satisfy Hart-Scott-Rodino reporting obligations, quite apart from any substantive antitrust issues. Repeat offenders are held to a particularly close standard: Caledonia Investments paid a US$480,000 fine for failure to timely file a HSR in connection with the vesting of additional shares acquired after the five-year safe harbour period following its 2008 HSR filing for its investment in Bristow Group. While such a violation might normally not have triggered a fine, Caledonia had made a corrective filing in 1997 upon discovery of an unrelated HSR violation, and the DOJ cited Caledonia's pledge to ‘do its utmost to ensure that it submits all required filings' as a justification for its relatively harsh fine in the second case. Similarly, Mitchell Rales was fined US$720,000 for HSR Act violations related to his open market purchases of voting securities of Colfax Corporation and Danaher Corporation after having previously been fined for a HSR violation in an unrelated 1991 matter.

 

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