The American Bar Association’s 65th Antitrust Law Spring Meeting held at the end of March included a number of sessions with representatives from federal and state antitrust enforcement agencies. In the first article in a three-part series covering the meeting, we detailed discussions about enforcement actions and expected priorities. In our second installment, we provide some key takeaways from the sessions, specifically focusing on issues in mergers and acquisitions.

Clearing the Hart-Scott-Rodino Act (HSR)-Reported Deal in 30 Days

A diverse panel of enforcers and practitioners shared best practices on successfully navigating the initial 30-day HSR review period. While the vast majority of HSR filings do not draw extended scrutiny, where the parties’ Item 4 documents, complaints by customers or competitors, or public information suggests that the companies are direct competitors, one of the agencies will likely open a preliminary investigation. The agency will ask the parties to voluntarily submit additional information and schedule interviews with client representatives. The requested information typically includes strategic and marketing plans, win-loss data, and lists of the largest customers or vendors. Because these requests are voluntary, the parties have to make a strategic decision on how forthcoming to be. The panel noted that where there is evidence that the companies face multiple competitors, or the relevant market differs from that described in company documents, the parties should use the preliminary investigation as an opportunity to educate staff and enable them to conclude that second requests are not necessary. The panelists advised conveying the simplest possible story to explain the transaction, and proactively contacting the agency if the deal involves complex products or markets where further explanation could expedite the analysis.

The panel split on the question of when to introduce economists. While the practitioners recommended avoiding early use of economic reports in favor of the simplest story, the enforcers noted that in certain cases, early meetings between the agency and the parties’ economists can help narrow the analytical focus, clarify data, and offer probative value.

Where any information indicates that the transaction may substantially lessen competition, issuance of a second request is highly likely, regardless of the companies’ stated reasons for the transaction, or support by the parties’ economists. Under these circumstances, voluntary cooperation should be regarded as investing in a productive relationship with staff that may expedite the investigation and lead to an acceptable resolution down the road. The panelists all agreed that rather than simply asserting the parties’ own arguments, the parties should use meetings with staff to learn what the agency is hearing in its interviews, what their concerns are, and what evidence would be helpful to address those concerns. Parties should be cautious not to identify additional issues that have not already been recognized, and should be judicious in submitting white papers or economic reports. Similarly, only in very rare situations can prospective remedies be appropriately introduced within the initial 30 days—perhaps only in industries where the agency already has significant expertise and experience (e.g., radio mergers), and where a quick fix could be helpful. The enforcers noted that offering a fix has no bearing on whether the agency proceeds with an investigation. Finally, international coordination between the U.S. agencies and their foreign counterparts is also important, and so timing and process must be carefully navigated.

Strategically Fixing Mergers

The panel discussed clearance strategies for transactions that are likely to require a divestiture or conduct remedy. The delays attendant to HSR review inform this analysis. Currently, the average period of time between the filing of HSR reports and final resolution of an investigation that includes issuance of second requests is about 10 months. For cases that proceed through district court litigation, the delay increases to almost 18 months. For this reason, if the likelihood of prevailing in the litigation seems low or the economic costs of delay are unacceptably high, the merger parties should consider a divestiture package relatively early in the HSR review process. Panelists agreed there is little to be gained by presenting a divestiture package to agency staff before it is clear that staff have established serious concerns about the transaction based on input from customers, and have identified the specific product lines at issue. This typically will not take place until issuance of the second requests, but before the parties have substantially complied with those requests. The panelists recommended providing the staff a term sheet (rather than an executed divestiture agreement) with a third-party buyer to solicit staff views and ensure the proposed divestiture addresses all staff concerns. Any divestiture package will be thoroughly analyzed by the staff, who will "road test" it with customers and other industry participants. Counsel for the third-party buyer must play an active role in the staff’s review of the divestiture package.

Merger Review: Private Equity Funds Beware!

The session focused primarily on "club deals" under which a group of investors bid collectively for a target company. The legal status of such arrangements is an open question in light of the Dahl v. Bain Capital Partners case. Collective bidding can be procompetitive by creating competition where no single bidder has the resources to bid alone, or, where, by acquiring the target alone, any individual bidder would incur substantial economic risk. The panel agreed that absent evidence of cartel activity (for example, the ongoing U.S. Department of Justice criminal prosecution of bidders in foreclosure real estate sales), rule of reason analysis is appropriate.

The lawfulness of club deals turns on the number of collective bidders (did virtually all of the available prospective bidders submit a collective bid?), the size of the bidders (are they large firms that could, absent collective action, bid individually?) and the extent to which the club deal encompasses multiple opportunities, rather than a single target. Where there is evidence that major private equity firms are engaged in an ongoing "club" arrangement under which individual bidders are warned to "stand down" and not bid on (or "jump") specific opportunities being pursued by other club members in exchange for an opportunity to bid on future deals, a court is likely to conclude that collective bidding unreasonably restrains competition. The panel concluded with an extensive discussion of the risks associated with private equity deals and minority stakes under Sherman Act §1 and Clayton Act §7, focusing in particular on the potential issues arising from interlocking directorates under Clayton Act §8.

Hospital Merger Enforcement

A panel of FTC representatives, economists and defense counsel reviewed recent trends in challenges to hospital mergers, focusing specifically on the central importance in these cases of geographic market definition. The recent appellate victories for the FTC in the Hershey and Advocate cases illustrate the movement away from the Elzinga-Hogarty test that typified an earlier approach to geographic market definition, and which had led to a string of FTC defeats. Hospital markets are almost always local, but there are conflicting opinions as to which test is most appropriate in defining geographic markets pertinent to a given set of facts. The panel debated the merits of the economists’ hypothetical monopolist test against actual commercial realities, and agreed that both are important factors. The Hershey and Advocate cases are the first ones to deviate from Elzinga-Hogarty in the prospective merger context, and the appellate courts noted the inherent problems with that approach to geographic market definition, including the limitations imposed by the “silent majority fallacy.” Both the U.S. Court of Appeals for the Third and Seventh Circuits preferred an approach that encompassed important perspectives from three sources—hospitals, patients, and insurers—in shaping and applying the hypothetical monopolist test.

Two additional topics were also discussed: (1) the presence of “failing” and “flailing” company defenses in hospital mergers; and (2) recent passage of preemptive state COPA (certificate of public advantage) legislation. Only one panel member favored that approach, while the FTC suggested strong opposition.

Pharmaceutical Mergers and Innovation

This session focused on the application of innovation markets, and the FTC’s recent lens on potential competition in assessing pharmaceutical mergers. The panelists reviewed the evolution of competitive analysis of pharmaceutical mergers, and they noted that the FTC’s Mergers I Section has developed sufficient expertise and an analytical formula that allows most issues to be resolved at the staff level. Competitive overlap is rarely both present and predictable, so the merger analysis must necessarily be extremely fact specific and differentiate among mergers between current rivals, innovation rivals, and incumbents combining with potential entrants. Given the low statistical probability of any given preclinical drug eventually reaching the market, consolidation may be procompetitive if channeling resources into one prospective product and accelerating its development and testing can improve its chance of successfully reaching the market. Additional compelling evidence of procompetitive effects include documents showing that the target firm is underspending on R&D, or if the buyer’s documents show an intention to increase R&D funding. In trying to anticipate the impact of the Trump administration, the panelists observed that the GOP generally disfavors consideration of innovation markets or affords them only minimal weight.

Views From the Bench on Merger Cases

The Honorable William H. Orrick III (N.D. Cal.), Dan A. Polster (N.D. Ohio), and Emmet G. Sullivan (D.D.C.) gave an insightful presentation of their observations from significant merger trials over which they recently presided. Many of the judges’ observations focused on procedure, the public’s right to access, and the importance of a clear and respectful presentation (by lawyers, witnesses, and experts) at trial.

Procedurally, the judges acknowledged and expressed some frustration with the time pressures involved in trying merger cases, which result from “drop-dead dates,” the pendency of a parallel administrative action and, in some cases, the agencies’ failure to bring suit until just before the merger is to be consummated. These time pressures also mean that parties effectively have no appeal ability, so the district court’s word is usually the last.

All three judges emphasized the importance of resisting clients’ requests to over-seal and over-redact documents and the public’s right to an open-door trial. Finally, the judges emphasized the importance of an effective presentation. Their tips included:

• Use (simple) graphics—they are helpful and entertaining;
• Do not allow your adversary to stipulate to the qualifications of your expert—qualifying him or her before the factfinder allows the factfinder to get to know the expert;
• When establishing expertise, use analogies—a powerful theme that humanizes and personalizes the trial issues can go a long way;
• If you have bad documents, embrace them—if you try to disavow them, you will lose credibility; and
• “Be the best you can be” in terms of personal performance and treatment of others, including courtroom staff, paralegals and younger attorneys.

Joint Ventures: Keeping Competitor Collaborations Compliant

The panel discussed antitrust issues attendant to the creation of competitor joint ventures, and the scope of ancillary restraints under the DOJ/FTC Antitrust Guidelines for Collaboration Among Competitors, the DOJ/FTC Statements of Antitrust Enforcement Policy in Healthcare, and related case law and consent decrees. The ideal joint venture creates a situation in which one plus one equals more than simply two; it provides new products or technologies, facilitates interoperability between competing or complementary products, or permits the parties to achieve economies of scale and scope. The critical question for antitrust enforcers is, "But for the joint venture, what would’ve happened?" Would the parties have proceeded independently (and competitively), or not at all?

Ancillary restraints require the enforcement agencies to ask, "Why have the parties agreed not to do X in order to achieve outcome Y?" Is the ancillary restraint related to and reasonably necessary to achieve a procompetitive result? For example, a joint venture in which small competing manufacturers A and B co-invest in research and development that neither can undertake on its own may legitimately require the companies not to fund such research and development on their own. Alternatively, a joint venture in which such firms jointly develop and manufacture a new product may be accompanied by restrictions on the marketing of the product to ensure that each party is adequately compensated for its investment. By contrast, an agreement by these firms to sell all of their products at agreed-upon prices might be regarded as a per se unlawful pricing agreement. An agreement by them to develop and manufacture all future products would be regarded as a merger and analyzed accordingly.

A version of this article was originally published by Law360 on April 4, 2017.

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