Top Antitrust Developments for 2018

In 2016, the antitrust agencies issued a joint policy statement, “Antitrust Guidelines for Human Resources Professionals,” stating that agreements between companies not to poach each other’s employees or to fix employees’ wages violate antitrust laws.

Since then, both the FTC and DOJ have brought enforcement actions. The FTC’s Director of the Bureau of Competition has noted that “[j]ust as it is illegal for competitors to agree to fix prices on the products they sell in order to drive prices up, it is illegal for competitors to agree to fix wages or fees paid to workers in order to drive wages down.” The DOJ, for its part, has already brought an action against companies with “naked no-poach agreements” that restricted competition for US rail industry workers in violation of Section 1 of the Sherman Act, and more such actions are anticipated.

“No poach” and wage-fixing agreements also have received attention from members of Congress, including Senators Cory Booker (D-NJ) and Elizabeth Warren (D-MA), who recently sent letters to various franchise CEOs expressing concern about the use of no-poaching agreements with their employees. State attorneys general have also taken action against conspiring employers.

Companies should advise their human resources personnel not only on avoiding “no poach” agreements, but also on the importance of not sharing or accepting competitively sensitive wage, bonus, and benefit information that could be used to fix wages. Goodwin can provide simple and straightforward guidance to be certain your operations are compliant.

In the wake of the Supreme Court’s Amex decision (more on that decision below), at a recent Senate Judiciary Committee hearing, FTC Chairman Joseph Simons testified that anticompetitive behavior and conduct by online platforms, or “big tech platforms,” continues to be a priority for the FTC as they look for antitrust violations “where there’s likely to be potential significant market power.” In that same hearing, the DOJ’s top enforcer, Assistant Attorney General Makan Delrahim, testified that the Antitrust Division continues to study competitive issues related to technology platforms.

Given the growing public interest in “big tech,” law makers will likely continue to pressure “big tech platforms” and call upon the antitrust agencies to monitor potential antitrust violations. For example, Google, which was hit with a $5 billion fine by European antitrust enforcers, recently faced questions by the US House Judiciary Committee scrutinizing various business practices.

Our clients with strong market positions in online platforms must be vigilant, and should be careful to consider the potential antitrust exposure in all facets of their business dealings as it will be a key focus of antitrust enforcers and particularly interested members of Congress.

The U.S. Department of Justice grabbed headlines in 2018 with investigations or challenges of three large vertical transactions, each with distinct outcomes: AT&T-Time Warner, CVS-Aetna, and Cigna-Express Scripts. The resolutions of these three deals leave certain only the fact that where there are vertical transactions of interest, antitrust enforcers will scrutinize them carefully.

The DOJ’s challenge of the AT&T-Time Warner merger was the first litigated challenge to a vertical merger in nearly 40 years. DOJ’s main theory of antitrust harm was that AT&T’s acquisition of Time Warner would allow the combined entity to profitably increase the price of Time Warner television program content to AT&T’s downstream, horizontal television distribution rivals. After trial, the court rejected the DOJ’s claims that Time Warner’s content was “must have” and concluded that AT&T would not be able to raise prices on rival distributors, thus clearing the transaction and rebuking the DOJ.

The DOJ appealed the district court’s ruling. That appeal is still pending. In the appeal, the DOJ acknowledged that “[m]ost vertical mergers (like most horizontal mergers) are indeed procompetitive or competitively neutral” but argued “[t]his merger’s combination of Turner’s competitively significant programming content with the vast distribution footprint of DirecTV, among other circumstances, makes this the exceptional vertical merger whose effects are to lessen competition substantially, in violation of Section 7 of the Clayton Act.”

Meanwhile, the DOJ cleared CVS’s combination with Aetna, another decidedly vertical transaction combining a large retail pharmacy with a large health insurance provider, with a requirement to divest overlapping assets in Medicare Part D business lines. This transaction is particularly interesting because while the DOJ cleared it, the federal judge charged with approving that the settlement is in the public interest has expressed some deep skepticism and refused to sign off. While the transaction has closed, the particulars of its future are murky and the judge’s inquiry is expected to continue well into 2019, so stay tuned for additional developments.

The DOJ also cleared Cigna’s acquisition of Express Scripts, finding that the deal would be unlikely to substantially lessen competition for the sale of Express Scripts’ pharmacy benefit management (“PBM”) services. The DOJ also found that the acquisition would not harm competition for the sale of PBM services to Cigna’s health insurance rivals. Key to the DOJ’s analysis was the finding that the presence of at least two large and several smaller PBM companies would preserve competition post-merger.

Scrutiny of vertical transactions has increased, and clients contemplating such transactions should proceed carefully and in close consultation with counsel.

There was a time when conventional wisdom suggested that agreeing to alter business practices post-transaction could provide sufficient comfort to the FTC and DOJ to clear a transaction. Recently, the tide has been starting to shift. The DOJ’s challenge of AT&T’s acquisition of Time Warner highlighted the DOJ’s strong preference for structural remedies — rather than conduct-based, behavioral remedies — to potentially anticompetitive transactions. Speaking at an ABA event, Assistant Attorney General Delrahim criticized the DOJ’s previous decisions to enter into behavioral consent decrees to resolve potentially anticompetitive effects of vertical mergers, including in Comcast-NBCU, Google-ITA, and Live Nation-Ticketmaster. He noted that these types of remedies “supplant competition with regulation,” and “antitrust is law enforcement, not regulation.”  Later, he stated, “Such [behavioral] decrees, over time, effectively become perpetual regulations that the [DOJ] and the courts are often not well-suited to enforce.” More recently, he reaffirmed “[a]ntitrust enforcement is law enforcement, not industrial regulation.”

Also, earlier this year, FTC Bureau of Competition Director made clear that the FTC prefers structural remedies because “people are smart” and incentivized such that they can find ways to act around the proscribed conduct remedies.

That’s not to say that behavioral remedies are entirely disfavored. Indeed, Goodwin recently represented five hospital systems in the greater Boston, MA area who received unconditional clearance from the FTC after an intensive investigation on the basis of certain behavioral remedies the parties made to the Attorney General of Massachusetts, including price controls and detailed monitoring provisions. The new entity, Beth Israel Lahey Health, will be the area’s second largest medical system, with revenues into the billions of dollars.

The key takeaway is that parties contemplating transactions that will raise concerns of potential anticompetitive effects should be aware that the antitrust enforcement agencies are hesitant to accept behavioral or conduct remedies to their concerns of potential anticompetitive effects and a proactive and convincing explanation will be required to satisfy such concerns. By way of reminder, parties contemplating any merger remedy should factor in time for the antitrust agencies to review any proposed remedy. Recent FTC guidance suggests that such an evaluation “typically takes four weeks to review . . . after staff and the parties formally submit the settlement package to the Director of the Bureau of Competition.”

Recent antitrust enforcer activity should remind us all that parties to transactions must be aware of the risks associated with the sharing of competitively sensitive information at the deal formation stage, as well as what happens when a merger review opens the door to learning about a party’s broad-based business practices.

Earlier this year, the FTC provided guidance for companies considering acquisitions, mergers, or joint ventures that engage in pre-merger negotiations and due diligence. While the antitrust enforcement agencies recognize that parties to transactions have legitimate needs to access detailed information about the other party’s business in order to negotiate the transaction and implement the merger, sharing some competitively sensitive information (e.g., current and future price information, strategic plans, and costs) may raise antitrust concerns, especially if the two parties are competitors.

The antitrust agencies have taken action against unreasonable information sharing during the merger process. For example, in 2013, the FTC charged a company with violating the FTC Act after the FTC discovered, during its review of the proposed merger, that the firms’ “CEOs repeatedly exchanged company-specific [competitively sensitive] information about future product offerings, price floors, discounting practices, expansion plans, and operations and performance.” The recent guidance should put parties to transactions on notice that the antitrust agencies remain vigilant and will pursue actions against parties that unlawfully exchange competitively sensitive information during deal due diligence.

Perhaps more concerning, parties should be prepared for the antitrust agencies to take actions against anticompetitive conduct discovered incidentally during the merger review process. A recent example involved a price fixing conspiracy in the canned tuna fish industry that was uncovered during the DOJ’s review of a merger between two companies. What began as an ordinary merger investigation evolved into a criminal price fixing investigation and ultimately led to guilty pleas by company executives and millions of dollars in levied fines and restitution obligations, not to mention the potential treble damages resulting from the attendant private class actions.

More recently, the DOJ brought and settled charges against multiple television broadcast stations for unlawfully exchanging competitively sensitive information. The DOJ alleged that the broadcasters exchanged revenue pacing information, which is used to inform advertising pricing. Presumably, evidence of the exchange was discovered by the DOJ during the DOJ’s and FCC’s review of the Sinclair-Tribune merger, as the DOJ’s action came on the heels of the parties abandoning the deal after they were unable to reach a settlement with regulators to cure potential competitive concerns.

These examples underscore the need for comprehensive antitrust compliance programs and document creation policies, especially by entities planning strategic transactions.

Under the HSR Act, an acquisition of voting securities that exceeds the $84.4 million (as adjusted annually) size of transaction threshold may be exempt if the buyer will hold 10% or less of the target’s voting securities and will hold the stock solely for purposes of investment. The HSR Act rules define the term “solely for purposes of investment” to mean that the buyer has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”

The types of conduct that the antitrust agencies have identified in the past as being evidence of an activist intent to influence management and the basic business decisions of the company include:

• Holding a board seat or nominating a candidate for the board of directors;
• Proposing corporate action that requires shareholding approval;
• Soliciting proxies;
• Being an officer of the issuer;
• Being a competitor of the issuer; and/or
• Holding, directly or indirectly, more than 10% of the outstanding voting stock of an entity that is in the same business and competes with the target. 

Until recently, FTC said that holding a non-voting board observer seat was not inconsistent with a passive investment intent. No longer. In a November 2018 update, FTC said that “depending on the level of involvement with the Board that the role entails,” the passive investor exemption may not be available to an investor who holds a non-voting board observer seat. This new interpretation of the passive investor exemption is consistent with other recent cases that show the antitrust agencies believe an investor is active if it even considers taking action that would influence management or the direction of the target’s business. In their view, that consideration of potential future action makes an investor ineligible to use the passive investor HSR Act exemption.

A narrow exemption has become even more so. Goodwin can provide guidance regarding the scope of the exemption depending on the nature of your particular circumstances.

This year, both antitrust agencies have spoken about their desire to speed up the merger review process. In a recent speech, DOJ Assistant Attorney General Delrahim said, “[p]rovided that the parties expeditiously cooperate and comply throughout the entire process, we will aim to resolve most investigations within six months of filing.” Relatedly, the FTC has undertaken a study of its internal data to help pinpoint what is taking time in the merger review process and why delays are happening. These reforms are welcomed and may well be working to some extent, as one study shows the average length of significant merger review investigations was 9.8 months in Q3 2018, which is a month faster than 2017’s 10.8 month average.

Parties to transactions with potential antitrust risk should be aware of this general timeline when negotiating a deal’s drop dead date. Also, as preparation is key to a timely review, Goodwin’s Antitrust+Competition team regularly represents clients before the antitrust agencies in merger investigations and can help clients identify and gather the type of information the agencies will need to conduct their investigation even before the agencies come asking for it.

The Standard Merger and Acquisition Reviews Through Equal Rules Act, or SMARTER Act, has been considered by Congress for several years. The Act’s purpose is to streamline the antitrust agencies’ merger enforcement processes by eliminating differences between the two agencies based on the fact that the DOJ must challenge mergers under the Clayton Act and the FTC can challenge mergers under the Clayton Act and/or the FTC Act. Whether a transaction is reviewed by the FTC or DOJ is determined case-by-case depending on which agency has more expertise with the industry involved.  As such, over time the antitrust agencies have each gained expertise over certain industries. The most significant difference between the two procedures is that the legal standard for a preliminary injunction against a deal is different in the different forums. While the FTC must show that an injunction is “in the public interest,” the DOJ is required to demonstrate “irreparable harm” will result in the absence of an injunction.  Another important difference is the forum wherein the antitrust agencies seek to challenge a merger. The FTC, being an administrative agency, has the option of challenging the merger in the administrative court, while the DOJ does not.

The SMARTER Act would standardize merger review by requiring the FTC to challenge a transaction in federal court, rather than in its own administrative court, and imposing the same legal standard — a showing of irreparable harm — on both antitrust agencies. It’s unclear whether the new Congress will pursue a version of the SMARTER ACT, even with a Democratic House of Representatives. If a version of the bill does become law, parties would be guaranteed identical processes for challenging a transaction whether the deal was examined by the FTC or DOJ. This could prove meaningful and we will continue to monitor developments.

While the Supreme Court’s decision in Ohio v. Amex has been and will continue to be debated as it is applied in lower courts, it did provide some guidance on how the antitrust laws apply to two-sided platform products, such as the two-sided credit card market that brings together merchants and customers. At issue in Amex were American Express’s “anti-steering” provisions which prevented merchants from directing customers to use a credit card that charged a lower processing fee than American Express. In evaluating whether these provisions violated the Sherman Act, the Court determined that the credit card market should be viewed as a single market where transactions are jointly consummated by merchants and cardholder customers. Because evidence of anticompetitive effects was only presented on the merchant side of the market and not on the cardholder side of the market, the Court concluded that the plaintiffs had not met the burden of showing anticompetitive effects. As such, platforms with “indirect network effects” — where the value of the platform for one group depends on how many members of a different group participate — may be considered one platform market as opposed to two distinct markets for purposes of antitrust analysis.

The consequence of Amex is a broader than just credit cards. It may have an effect on other two-sided markets that could be considered a single market, which may make it more difficult for plaintiffs to demonstrate anticompetitive effects. Dissenting, the minority opinion argued that it was not even necessary to define the market at the first stage of the rule of reason analysis because the district court had found direct evidence of competitive effects. This has furthered the debate about the role of market definition in antitrust cases but it is not clear in what direction this will ultimately land.

Whether and how the Court’s decision will apply only to the credit card industry or broader multisided platforms like Facebook Inc., Google Inc. and Amazon Inc. remains to be seen, but Amex has potentially given these platforms more latitude under the antitrust laws. Goodwin will continue to monitor these developments especially on behalf of clients who are part of these affected ecosystems.

In October, a Virginia federal judge ordered a divestiture to remedy the anticompetitive effects of a consummated merger in a lawsuit brought by a private company without government help. The case, Steves and Sons v. Jeld-Wen, No. 3:16-CV-545, 2018 WL 4844173 (E.D. Va. Oct. 4, 2018), is notable in that the DOJ twice reviewed and cleared the acquisition, with one investigation ending in 2012, and the second ending in 2016, weeks before the challenger brought suit. The judge called the case “first of its kind” because of the success of the private antitrust action in obtaining a divestiture remedy. The divestiture is in addition to a jury award of $176 million total in trebled damages stemming from alleged anticompetitive conduct. The ruling demonstrates that even consummated transactions reviewed by the antitrust authorities may still be at risk of private challenges years later.

In addition to the court-ordered divestiture, Jeld-Wen now faces a proposed class action lawsuit by building supply customers accusing Jeld-Wen and the other vertically integrated interior molded door manufacturer, Masonite Corp. The plaintiffs allege Jeld-Wen and Masonite used their combined market positions, which were a result of the 3-to-2 merger, to fix prices.

This is not the only time consummated transactions have been unwound. Indeed, the FTC and DOJ have pursued and won such challenges in the recent past. Thus, parties contemplating transactions with antitrust risk should be aware that clearance by an antitrust agency does not necessarily mean the antitrust issues are solved. Obtaining careful guidance pre-transaction is therefore essential.