Negotiating Merger Remedies with the Antitrust Division and Litigating the Proposed Fix

By Thomas J. Horton.¹

Since the passage of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. §18(a) ("HSR Act"), the Antitrust Division frequently negotiates with merging parties as to appropriate potential relief that falls short of fully blocking a proposed merger. In many cases, the negotiated settlements maintain or restore the competition that was potentially lost due to the merger. In other cases, however, such remedies fall short when implemented, and critical pre-merger competition is lost, resulting in higher prices, reduced output, and diminished quality.

In 1999, the Federal Trade Commission ("FTC") undertook "A Study of the Commission’s Divestiture Process". The FTC determined that divestitures generally are more successful than partial relief, such as licensing agreements, in maintaining or restoring post-merger competition. The FTC further found that "divestitures of on-going businesses succeed[] at a higher rate than divestitures of selected assets." The FTC additionally concluded that "buyers who must rely on respondents for continuing support to enter a business with the divested assets are more vulnerable than buyers who do not need that support." Finally, the FTC observed that "small entrepreneurial firms [are] at least as successful with divested assets as large corporations."

More recently, both the FTC and the Antitrust Division have separately released formal policy guides or statements on merger remedies. The October 2004 Antitrust Division Policy Guide to Merger Remedies closely follows the recommendations in the FTC’s 1999 Divestiture Study, and tracks the FTC’s 2003 "Statement of the FTC’s Bureau of Competition on Negotiating Merger Remedies." For example, the Division’s 2004 Guidelines conclude that "structural remedies are preferred," and that "conduct relief is appropriate only in limited circumstances." The Division further notes that "a divestiture must include all assets necessary for the purchaser to be an effective, long-term competitor", and that "the merged firm must divest rights to critical intangible assets."

Although the Antitrust Division’s and the FTC’s Merger Remedies Guides are straightforward and simple in concept, the actual negotiation of a merger remedy often is a complex and intensely fought battle. Understandably, the buyer may not wish to divest a successful ongoing business it either has built through considerable effort or acquired at great expense. On the other hand, the government legitimately may be concerned about post-merger strategic behavior by the buyer that may tend to reduce output and increase prices. The inevitable result is that the government and the buyer will occasionally reach an impasse in their negotiations, and the government will threaten to sue to block the merger.

On several notable occasions since 2000, rather than simply walk away from the proposed merger when the government threatens to sue, the merging parties have decided to fight by asking the federal courts to approve their proposed merger remedies. Consequently, in recent cases such as United States v. Franklin Electric Company, 130 F.Supp. 2d 1025 (W.D. Wis. 2000); Federal Trade Commission v. Libbey, 211 F.Supp. 2d 34 (D.D.C. 2002); and FTC v. Arch Coal, Inc., 329 F.Supp. 2d 109 (D.D.C. 2004), proposed merger remedies have figured significantly in the actual litigation and the court’s final decisions.²

1. What is the "Acquisition" Being Judicially Reviewed?

Article III of the United States Constitution limits the federal courts to deciding actual "cases or controversies" over which they have jurisdiction. In a merger case, federal jurisdiction arises under Section 7 of the Clayton Act, which allows the government to challenge a proposed acquisition where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."

In cases where the government sues to block an acquisition, and the parties defend on the basis of proffered post-acquisition remedies, the question necessarily arises as to what "acquisition" the court actually is reviewing. Does the "acquisition" include the proposed remedies? If so, how frequently and how substantively can the proposed remedies change? In Franklin Electric, the proposed remedies virtually changed on a daily basis throughout the trial, as the merging parties sought to respond to different aspects of the Antitrust Division’s case. The shifting target culminated in an offer to the Court by one of Franklin Electric’s executives during his direct testimony to limit any post-acquisition price increases. The court sustained an objection to the offer under Rule 408 of the Federal Rules of Evidence.³

To my knowledge, no court has formally reviewed the issue of whether it has Article III jurisdiction to adjudicate a unilaterally proffered remedy to an otherwise anticompetitive acquisition. This issue needs to be addressed, as the Supreme Court held in United States v. Borden Co., 347 U.S. 514, 519 (1954), that private parties cannot avoid antitrust liability through "private consent decrees":

2. Is the Proposed "Merger Remedy" a "Compromise" (or Offer to Compromise) Under Federal Rule of Evidence 408?

Federal Rule of Evidence 408 generally excludes offers of compromise "to prove liability for or invalidity of the claim or its amount." Surprisingly, however, I am unaware of any formal court ruling as to whether unilaterally proffered merger remedies should be excluded under FRE 408. Although the issue was raised in U.S. v. Franklin Electric, the court never ruled on the government’s motion in limine (copies are attached), instead holding that in any event, the proffered remedy was "mere window-dressing" that would not solve the anticompetitive effects of the proposed acquisition.

A party seeking to offer such evidence should counter that they are simply offering evidence as to the likely effects of the acquisition. To this point, the courts consistently have heard such evidence while avoiding a serious discussion of their jurisdictional basis for so doing. The court’s struggle in FTC v. Libbey, supra, to hear the evidence of the proposed remedy while ultimately blocking the proposed acquisition highlights the dilemma.

Given the current state of the law, the astute antitrust lawyer trying a merger case must be prepared for almost anything. For example, a lawyer representing the merging parties must be prepared for the nightmarish possibility that the court will reject some or all of the evidence relating to the proposed fix. The lawyer also must be prepared to quickly tailor and effectively present potential alternative solutions based upon the evidence coming in at trial and the court’s stated concerns and questions during the trial.

On the other hand, a government antitrust lawyer seeking to block an acquisition cannot realistically count on keeping out evidence relating to a proposed fix. Consequently, the government team must focus on such potential evidence from the beginning, and be prepared to show that the proposed fix will not cure the anticompetitive effects of the underlying transaction. The government lawyer also must be flexible and prepared to shoot at an ever shifting target, as the merging parties unilaterally attempt to fine tune their proposed remedies immediately before and during the trial.