On April 8, 2020, Judge Leonard Stark of the U.S. District Court for the District of Delaware denied an injunction requested by the Antitrust Division of the U.S. Department of Justice (“DOJ”) to block Sabre Corp.’s $360 million acquisition of Farelogix Inc., finding that DOJ failed to meet its burden of proving that the transaction would harm competition in a relevant product and geographic market.1 This ruling came on the heels of the similar refusal on January 24, 2020 by Judge Timothy Kelly of the U.S. District Court for the District of Columbia to grant the U.S. Federal Trade Commission (“FTC”) an injunction against Evonik Industries’ $640 million acquisition of PeroxyChem.2 Both transactions offer some important lessons for merger challenges.
Key Takeaways
Market Definition Remains a Central Issue for Merger Challenges
- Both merger challenges relied upon oversimplified proposed product markets.
- Markets must be defined by commercial realities and not gerrymandered.
Novel Theories of Competition Raise Risks for the Agencies
- Neither merger challenge involved a combination of close competitors.
- Attempts to overstate competition between the merging parties backfired.
Customer Complaints Are Not a Silver Bullet for the Agencies
- Both opinions discounted statements from several concerned customers.
Courts Will Consider Binding Commitments Proposed by the Parties
- Proposals eschewed by the agencies were actively considered at trial.
Discussion
Judge Stark’s decision in the Sabre/Farelogix case marks the second time this year that a federal court has refused to enjoin a merger because the agency bringing the challenge failed to adequately define a relevant product and geographic market where the transaction would harm competition. This decision follows Judge Kelly’s refusal to enjoin the Evonik/PeroxyChem transaction on similar grounds.
1. Market Definition Remains a Central Issue for Merger Challenges
Defining a relevant product market is a basic first step for a government agency in any trial challenging a merger. In many cases, this step is overlooked, but the failure by an agency to properly define a relevant product market can prove fatal to a merger challenge. Without a viable product market for its analysis, the court cannot ultimately find anticompetitive harm in that market sufficient to enjoin the proposed merger.
Both the Sabre/Farelogix and Evonik/PeroxyChem challenges failed because the agencies’ proposed product markets did not comport with commercial realities.
In Sabre/Farelogix, DOJ alleged that the transaction would harm competition in a purported market for “booking services” sold through online travel agencies (“OTA”) and brick-and-mortar traditional travel agencies (“TTA”).4 The court found it relevant, however, that Sabre Corp. (“Sabre”), a Global Distribution System (“GDS”) that connects travel agencies and airlines, did not actually sell a “booking services” product independent of the other services it provides and that, as a result, the DOJ’s expert economist could not identify basic features of the product, including the independent price or value of the “booking services” offered by either Sabre or Farelogix, Inc. (“Farelogix”).5
The court found similar flaws with the proposed product market for all “non-electronics” hydrogen peroxide in the Evonik/PeroxyChem matter.6 Just as the single “booking services” market in Sabre/Farelogix masked the array of different GDS services actually provided by Sabre, this single proposed product market for all “non-electronics” hydrogen peroxide glossed over a wide array of different hydrogen peroxide products purchased by different customers at different prices for widely different end uses.7 Recognizing these different end-uses and a lack of demand-side substitution between these hydrogen peroxide products, the FTC contended that these products belonged in a single market purely based on the theoretical ability of each supplier to switch production between these different hydrogen peroxide products.8
To evaluate whether this proposed product market was viable based on supply-side substitution, the court looked for “evidence about whether suppliers’ swinging between production of these grades [of hydrogen peroxide] is nearly universal, easy, and profitable, as set forth in the Merger Guidelines.”9 Based on the real world evidence provided at trial, the court concluded that none of those elements were met.10
In both Sabre/Farelogix and Evonik/PeroxyChem, the courts also rejected the geographic market definitions that were offered by the agencies at trial based on evidence that some of each parties’ key customers were located outside of the geographic market definition offered by each agency.11
Market definition issues are certainly not limited to these two merger challenges.12 Nevertheless, Sabre/Farelogix and Evonik/PeroxyChem both demonstrate the extent to which agency definitions of proposed product and geographic markets can hinder a merger challenge when they diverge from the commercial realities adduced at trial.
2. Novel Theories of Competition Raise Risks for the Agencies
In some ways, the oversimplified markets proposed by the agencies in Sabre/Farelogix and Evonik/Peroxychem reflect deeper problems with both merger challenges. In other cases, for example, the agencies often focus on narrow markets where the merging parties are close, if not closest, competitors offering very similar products or services. By contrast, Sabre/Farelogix and Evonik/PeroxyChem were mergers of firms that offered somewhat different products and services, which may have been a central factor motivating both agencies to propose oversimplified markets to highlight a perceived nexus of competition between the merging parties.
Sabre/Farelogix involved two companies operating under very different business models. As a GDS, Sabre “is a transaction platform that connects a large number of travel suppliers, such as airlines, hotels, and car rental companies, to a large number of travel agencies.”13 GDSs provide various services using airline fare, scheduling, and availability information, assembling flight options that an airline can provide in response to a travel agent’s request, along with other services to combine and compare flight options from multiple airlines and to manage travel agency bookings.14 The court noted that Sabre’s “primary competitors” are Amadeus and Travelport, which operate rival GDSs.15
Farelogix, by contrast, sells a “suite of IT solutions for airlines” that allows airlines to distribute directly to customers through their own websites and to reach travel agencies through one of three paths, including so-called “direct connections,” non-GDS aggregators, or GDSs like Sabre.16 Farelogix does not provide the same services as a GDS. Instead, Farelogix does not aggregate content from multiple airlines; it only enables airlines to sell their own content to various distribution points through dedicated direct connections.17
Despite these differences, the court did find some evidence of competition between specific products offered by Sabre and Farelogix, and the court recognized that some customers at least viewed those products as substitutes.18 At the same time, the court found that price comparisons between Farelogix and Sabre were difficult because, although Farelogix offered lower prices, those prices covered far fewer services than those provided by Sabre.19 The court also took into account evidence presented by DOJ to show that Sabre had twice tried and failed to sell a direct connect product that was similar to products sold by Farelogix,20 but the court viewed this evidence only as further proof that Sabre and Farelogix offer different products.21
DOJ recognized that, even within its proposed product market, Farelogix’s market share was low. In terms of overall revenues, DOJ did not argue that Farelogix was a close GDS competitor. Nevertheless, in deciding to challenge the merger, DOJ expressed concern that Sabre, as a dominant firm, was trying to “take out a disruptive competitor that has been an important source of competition and innovation,” which “would likely result in higher prices, reduced quality, and less innovation for airlines and, ultimately, traveling American consumers.”22 As a result, Sabre/Farelogix was widely seen as aimed at protecting nascent competition.
In the end, however, DOJ struggled to convince the court that its concerns were supported by the record, and the court dismissed those concerns as follows: “DOJ offers nothing more in support of its contention [that the merger will harm innovation] than vague theories from Dr. Nevo . . . These generalities do not help the Court conclude the merger would harm competition.”23
Like Sabre/Farelogix, Evonik/PeroxyChem also involved two companies operating with very different business models. While both companies sold various hydrogen peroxide products, the defendants spent significant time at trial detailing the substantial differences between their production methods, products, and client bases.24
As one example, the FTC included “pre-electronics” grade hydrogen peroxide within its “non-electronics” hydrogen peroxide product market, even though PeroxyChem did not produce or sell pre-electronics grade hydrogen peroxide to any customers.25 To address that gap, the FTC introduced evidence that PeroxyChem produces an electronics grade hydrogen peroxide as evidence that it “may” be able to sell a pre-electronics product.26 Nevertheless, the court found that PeroxyChem’s failure to sell a pre-electronic product “after years of trying” disproved the notion that it was “easy” for suppliers to swing between selling these products.27
Together, Sabre/Farelogix and Evonik/PeroxyChem may be cautionary tales for the agencies when addressing merging parties that are not close competitors. In both cases, the agencies struggled to define a relevant product market precisely because the products sold and marketed by the merging parties appealed to different customers and served different uses.
In Sabre/Farelogix, DOJ addressed this gap by proposing an amorphous “booking services” market, seemingly invented by carving out the aspects of Sabre’s services that most closely resembled Farelogix’s services and then defining a market around them. In rejecting this approach, the court concluded that the DOJ’s proposed market for “booking services” was simply not supported by market realities.
Similarly, in Evonik/PeroxyChem, the FTC sought to aggregate the merging parties’ different hydrogen peroxide products into a single market for analysis by relying on a supply-side substitution theory that has not been offered by a federal agency in court since the 1992 Horizontal Merger Guidelines first focused market definition around demand-side substitution factors. While the court did not reject this theory outright, it concluded that the use of this supply-side substitution theory in Evonik/PeroxyChem to support a single proposed market for non-electronics grade hydrogen peroxide was inconsistent with the commercial realities of the industry.28
3. Customer Complaints Are Not a Silver Bullet for the Agencies
The agencies’ failure to demonstrate that these mergers would harm competition in a relevant product and geographic market may be surprising given opposition to the mergers from several customers.
In particular, the Sabre/Farelogix transaction received public opposition from American Airlines and United Airlines, customers described by the court as “two of the largest airlines in the United States.”29 Of note, American Airlines and United Airlines also appear to be Farelogix’s only two customers in the United States.30 Nevertheless, the court concluded that “[m]ost of the players in the airline travel ecosystem – including especially travel agencies and airlines – support the proposed transaction.”31 Moreover, the court concluded that the complaining customers, who had previously attempted to acquire Farelogix through a joint venture, “have obvious interests in seeing the deal die.”32
The Evonik/PeroxyChem transaction did not receive the same level of opposition from customers. Nevertheless, while the court did not directly address the in-court testimony of any FTC customer witnesses in its decision, it noted that FTC had produced several customer complaints in the form of out-of-court declarations indicating that a reduction in the number of suppliers might lead to a decrease in the level of competition in the market.33 The court concluded, however, that “[t]hese declarations are not enough to outweigh the overall trends in the hydrogen peroxide market reflected in the record: decreasing prices, aggressive competition for sophisticated customers with large and long-term contracts, and substantial cost savings from blind bidding.”34
Together, Sabre/Farelogix and Evonik/PeroxyChem demonstrate that customer complaints on their own may be insufficient to support a merger challenge without a more complete record of compelling evidence of likely anticompetitive harm.
4. Courts Will Consider Binding Commitments Proposed by the Parties
In both Sabre/Farelogix and Evonik/PeroxyChem, the merging parties offered voluntary commitments to address the concerns raised by the agencies and, in both cases, the courts gave serious consideration to those proposals.
In Sabre/Farelogix, for example, the court took into account letters sent by Sabre CEO Sean Menke to then current Sabre and Farelogix customers, including an offer to extend any existing contract on the same terms for a period of at least three years past its termination date.35 The court noted that this provision would provide Farelogix customers time to find an alternative supplier before their next negotiation with Sabre and that it believed that “Menke intends to abide by the commitments he has expressed to customers and the market.”36 At the same time, the Court did not appear to rely on the commitments, accepting the DOJ’s contention that “Sabre has not memorialized its offer in any legally binding agreement, and no airline has accepted Sabre’s offer.”37 Had DOJ settled the case by accepting these commitments, of course, it could have made those commitments binding in the form of a consent order.
Unlike the commitments offered in Sabre/Farelogix, the commitments proposed in Evonik/PeroxyChem were legally binding on the merging parties. There, Evonik and PeroxyChem committed to excluding PeroxyChem’s Prince George plant in the Pacific Northwest from their transaction if it closed and divesting it instead to United Initiators, an international chemical company that would be a new entrant for hydrogen peroxide in North America.38 Following an in-depth evaluation of United Initiators as a divestiture buyer and its proposed bid for the Prince George plant, the court accepted the binding voluntary commitment, which resolved the most significant competitive concerns raised by the FTC in connection with the transaction.39
Conclusion
Even after Sabre/Farelogix and Evonik/PeroxyChem, the best way for merging parties to win a merger challenge remains to avoid it entirely. Where a merger challenge cannot be avoided, however, Sabre/Farelogix and Evonik/PeroxyChem offer good lessons on how a merger challenge can be won by focusing on the commercial realities of each industry and the ways in which the agency’s case fails to align with those realities. Where the merging parties can demonstrate that projections of anticompetitive harm are not supported by the record or are adequately addressed by commitments offered by the merging parties, winning a merger challenge in court is still possible.
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Dechert’s Antitrust/Competition Group represented PeroxyChem at trial in the Evonik/PeroxyChem matter, but all views expressed herein are those of the authors and not the merging parties themselves.
Footnotes
1) States v. Sabre Corp., Civil Action No. 1:19-cv-01548-LPS (D. Del. Apr. 8, 2020) [hereinafter Sabre/Farelogix].
2) Federal Trade Commission v. RAG-Stiftung, Civil Action No. 1:19-cv-02337-TJK (D.D.C. Jan. 24, 2020) [hereinafter Evonik/PeroxyChem]. Unlike Evonik/PeroxyChem, which closed shortly after the FTC declined to file an appeal, the Sabre/Farelogix transaction still faces considerable headwinds. On April 9, 2020, the Antitrust Division provided notice of its intent to file an appeal and the Competition and Markets Authority in the United Kingdom released its own opinion blocking the deal. Competition and Markets Authority, Anticipated acquisition by Sabre Corporation of Farelogix Inc., Final Report (Apr. 9, 2020).
3) Sabre/Farelogix at 1, 74.
4) Id. at 75-76.
5) Evonik/PeroxyChem at 1-2.
6) Judge Kelly highlighted the different uses of hydrogen peroxide products from the start of his opinion as follows: “Hydrogen Peroxide peroxide (H2O2) is a veritable swiss army knife of chemicals. Often an environmentally friendly alternative to other substances, it bleaches paper, treats wastewater, disinfects knee scrapes, fuels rockets, and plays a role in manufacturing semiconductors, to name a few of its myriad applications.” Id. at 1.
7) See id. at 14 (“The FTC’s only basis for aggregating standard, specialty, and pre-electronics grade hydrogen peroxide into a single market is supply-side substitution.”).
8) Id. at 14-15.
9) Id. at 14-24.
10) See Sabre/Farelogix at 80-82 (noting that 13 of 15 Farelogix customers were located outside of the government’s proposed U.S. Point of Sale market); Evonik/PeroxyChem at 40-42 (noting differences between certain customers’ willingness to make purchases across different distances for different grades of hydrogen peroxide).
11) For example, the relevant product market was also the sole issue in the DOJ’s recent challenge to Novelis Inc.’s proposed acquisition of Aleris Corporation. The DOJ, utilizing its authority for the first time under the Administrative Dispute Resolution Act of 1996, used a binding arbitration proceeding to resolve a single issue: whether aluminum auto body sheet constitutes a relevant product market. See “Justice Department Wins Historic Arbitration of a Merger Dispute,” DOJ Press Release, March 9, 2020, available at https://www.justice.gov/opa/pr/justice-department-wins-historic-arbitration-merger-dispute. DOJ prevailed in the proceeding. See In re Arbitration of United States v. Novelis, Inc., Civil Action No. 1:19-cv-02033-CAB (N.D. Ohio Mar. 9, 2020).
12) Sabre/Farelogix at 12.
13) Id. at 12-13.
14) Id. at 13.
15) Id. at 20-22.
16) Id. at 23.
17) Id. at 31-32.
18) Id. at 32.
19) Id. at 77.
20) Id.
21) Press Release, U.S. Department of Justice, Justice Department Sues to Block Sabre's Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.
22) Sabre/Farelogix at 90.
23) Those efforts were largely successful. As Judge Kelly’s opinion explains, the proposed merger was “unlikely to cause unilateral effects that substantially lessen competition . . . in large part because in general, Evonik and PeroxyChem are not close competitors. Evonik’s Mobile, Alabama plant and PeroxyChem’s Bayport, Texas plant—their two facilities in the Southern and Central United States—largely sell hydrogen peroxide intended for different end uses.” Evonik/PeroxyChem at 60.
24) Id. at 15.
25) Id. at 20.
26) Id. at 20-21.
27) Judge Kelly acknowledged that “very few cases have considered supply-side substitution,” but accepted the 2010 Horizontal Merger Guidelines’ factors for supply-side “swinging” to aggregate product markets because they are generally consistent with the few cases that have considered supply-side substitution. Evonik/PeroxyChem at 14 n.4. For reference, the most recent supply-side substitution case before Evonik/PeroxyChem was decided in 1989 when the 1984 Merger Guidelines were current. Id. (citing FTC v. Elders Grain, Inc., 868 F.2d 901, 907 (7th Cir. 1989)).
28) Sabre/Farelogix at 61.
29) See id. at 23 (identifying American Airlines and United Airlines as Farelogix customers), 81 (noting that “13 out of 15” Farelogix customers “are airlines located outside of the United States”).
30) Id. at 60.
31) Id. at 60-62.
32) Evonik/PeroxyChem at 62.
33) Id. Moreover, while Judge Kelly did find that “the loss of PeroxyChem as a competitor may lead to a price increase for some customers,” he concluded that the proposed merger “as a whole” was not likely to substantially lessen competition. Id. at 58 (italics in original).
34) Sabre/Farelogix at 59-60.
35) Id. at 60.
36) Id.
37) Evonik/PeroxyChem at 32-40.
38) Id.
