The US government’s attempts to litigate challenges to recent merger transactions have suffered unprecedented setbacks – allowing, so to speak, four merger weddings to go forward and one proposed deal to die. Some 55 years ago, in reviewing a Department of Justice (DOJ) challenge to a merger of grocery stores, Justice Potter Stewart observed “[t]he sole consistency that I can find is that in litigation under § 7, the Government always wins”. Today, somewhat the opposite might be inferred.

In a quick flurry, the US government – the DOJ and the Federal Trade Commission (FTC) – lost several merger challenges, cases into which the government had put tremendous resources. The DOJ did pull off a major victory in the publishing case that appeared particularly important to the Biden administration’s progressive enforcement agenda. Given that other cases are being actively litigated, and parties to potential transactions must always assess their litigation risks in proposing any transaction and/or a possible resolution to competitive concerns, these results and their potential effect on the government’s approach to merger litigation are significant.

Cases

The four cases that the government has lost (in the order of the decisions) are:

• Illumina;
• UnitedHealth;
• US Sugar; and
• Booz Allen.

For further details on the basic background of the Illumina and UnitedHealth cases, see “Novel challenge to Illumina-Grail merger has unhappy ending for FTC (for now),” and “FTC intensifies healthcare activism“, respectively.

The remaining two cases (US Sugar and Booz Allen) and the case that the DOJ won (Penguin Random House (PRH)) generally appeared to be straightforward horizontal merger cases:

• US Sugar – the DOJ alleged that the acquisition of Imperial Sugar Company by United States Sugar Corporation (US Sugar) would lessen competition in a south-eastern US sugar market. The DOJ claimed that the acquisition would result in US Sugar controlling over 75% of sugar sales in the south-east;
• Booz Allen – the DOJ alleged that Booz Allen’s acquisition of EverWatch would combine the only competitors preparing to bid to provide operational modelling and simulation services to the National Security Agency (NSA); and
• PRH – the case focused on potentially reduced competition (and lower royalties) for book authors. The court’s brief order denying the DOJ’s motion for a preliminary injunction found that the DOJ had “shown that ‘the effect of [the proposed merger] may be to substantially lessen competition’ in the market for the U.S. publishing rights to anticipated top-selling books”. But the court’s lengthier opinion explains that this was its shorthand for a finding of harm to the labor (author) market.

In what is undoubtedly an unfair oversimplification, the four cases were lost because the government ignored what appears to be relatively obvious counterviews of the situation in each case, opening up the government’s challenge to what was apparently a more persuasive presentation by the merging parties:

• In the US Sugar case, the counterfactual was the ability of numerous other competitors to supply customers in the south-east.
• In the UnitedHealth case, the counterfactual was a divestiture and conduct remedies that were certain to be implemented at the closing of the transaction.
• In the Illumina case, the administrative law judge found a lack of current or relatively proximate competition among Grail and the potential customers that would require Illumina’s genetic sequencing. In any event, Illumina was offering a standardized, long-term contract to supply any company desiring Illumina’s genetic sequencing instruments.
• In the Booz Allen case, the DOJ appeared to ignore, among other things, that the market for modelling and simulation services encompasses a variety of potential customers (not just the NSA) and potential modelling and simulation services competitors. Therefore, the court found that the DOJ’s proposed market of “signaling modeling and simulation services” (which would limit the buyer side of the market to a single customer (the NSA) and the current competitors to EverWatch and Booz Allen) was not appropriate.

The PRH case appeared to have been won for the opposite reason: the DOJ was thorough and broad, had strong witnesses, and handled the proposed merger partners’ arguments effectively and persuasively, often testing its own findings against the methodology of the defendants. As discussed below, the proposed fix that the publishers were attempting to litigate seemed less concrete and subject to manipulation in a way that the other proposals were not. This may have harmed the defendants’ credibility and the court viewed it as an admission that they recognized the competitive problems with their proposed transaction.

Lessons

It is too early to tell precisely how these losses will impact the government’s merger litigation program. There are some key areas, however, to monitor.

“Fixes” to transactions
Courts generally like “fixes” to transactions and factor those into the analysis. This is not new – the Trump administration lost its high-profile challenge to the Time Warner/AT&T transaction because it failed to account for the impact of the long-term contracts that Time Warner had with other distributors of programming content.

The UnitedHealth court’s analysis of the issue is particularly worthy of note: it rejected the DOJ’s position that a divestiture “must replace the competition that is lost” through the acquisition and stated that the proper analysis where divestiture is certain would be to ask whether the resulting acquisition (ie, minus any divested assets) would substantially lessen competition. This is a sensible approach and one that favors the merging parties. In the end, the court said that this difference in standards did not matter since it found that the DOJ had not met its burden under either standard. Whether other courts adopt this analysis and under what circumstances (eg, only where there is a divestiture that has been contracted for without conditions) is well worth monitoring.

Another key question about “litigating the fix” cases is whether a promise to divest assets to fix a transaction will be viewed as equivalent to more certain resolutions. This very issue seemed likely to be tested by the government’s challenge to ASSA ABLOY’s proposed acquisition of Spectrum Brand Holdings’ Hardware and Home Improvement division currently before the US District Court for the District of Columbia. There, the defendants had previously proposed a divestiture of assets that would result in the sale of some of ASSA ABLOY’s US residential lock assets. The DOJ’s complaint indicates all of the perceived shortcomings of that resolution.

The ASSA ABLOY defendants are now, however, pursuing an actual divestiture, bringing the case (if the divestiture is successful) more in line with the UnitedHealth decision, which put tremendous weight on the fact that the divestiture was a certainty. The issues now likely to be faced include whether the proposed purchaser can compete effectively and to what extent with the assets to be divested, which apparently will require some brand-splitting and other gerrymandering to limit the divestiture package.

Courts accept conduct remedies to address vertical concerns
In both the Illumina and UnitedHealth cases, the court appeared influenced by commitments by the respective parties to protect downstream competitors. This may have come as some shock to the FTC and the DOJ, both of which have relatively long-standing positions that conduct remedies are insufficient to resolve competitive concerns. Indeed, “we don’t accept conduct remedies” was a key feature of antitrust enforcement under the Trump administration. This policy position led to the filing of an amicus brief in the Jeld-Wen case – the only case by a private party requiring divestiture of assets acquired some four years before the transaction was challenged (for further information, see “Do three rights make a wrong? Private party challenging consummated merger can obtain divestiture years later“).

Both UnitedHealth and Illumina were bolstered in their litigation position by the fact that there were parties accepting those contracts (and more broadly in the UnitedHealth case to a commitment to maintain confidentiality of customer data). Again, the contrast to the Jeld-Wen case is striking: the Jeld-Wen case itself involved a relatively long-term (seven-year minimum) contract to supply that the plaintiff alleged had been breached. This is the concern that the DOJ emphasized in UnitedHealth – UnitedHealth could breach its obligations and enforcement would be costly and time-consuming. The FTC raised similar concerns in the Illumina case.

Yet in the PRH case, the court rejected PRH’s proposed “fix” of a promise to have PRH compete “internally” with Simon & Schuster. The judge noted that the promise appeared to be made “just to get the deal done” and it was wholly unenforceable. While the former is true of virtually all proposed “fixes” on the surface, the latter (the promise to continue internal competition) is not concrete and is not enforceable by the potential authors. Stated differently, supply agreements (or licensing or confidentiality agreements) such as the agreements at issue in the Illumina and UnitedHealth cases are common, often contain the precise terms of performance, and are enforceable. A promise to compete, on the other hand, lacks any objective measures of performance or mechanisms for enforcement. The government has not been successful in convincing the courts that standard contracts do not work because supply or confidentiality conditions can be manipulated or ignored, but the DOJ did convince the PRH court that the proposed fix was illusory.

Impact on outstanding cases
The current remaining cases being litigated (ASSA ABLOY, American Airlines/JetBlue and Meta/Within) each face some of the aspects discussed above and therefore suggest some careful reconsideration and caution by the US government:

• In the American Airlines/JetBlue case (which is technically a challenge to their alliance under section 1 of the Sherman Act), the government’s complaint quickly dismisses alleged efficiencies from the alliance and the impact of commitments that the parties have made to the US Department of Transportation. The DOJ needs to seriously question whether the court will be equally dismissive.
• In the ASSA ABLOY case, the parties had proposed a divestiture but did not have a party lined up at the time the complaint was filed. ASSA ABLOY is now in the process of securing a sale of its proposed divestiture package, and has apparently stated that an agreement will be secured by 1 December 2022. Even if any actual divestiture is not what the DOJ would want in the first instance, how will such a divestiture, even if not to an ideal party, impact the court?
• In Meta/Within, do the FTC’s problems with potential competition in the Illumina case suggest problems with its challenge to Meta’s acquisition of Within since the potential competition between Meta’s “Beat Sabre” application and Within’s fitness application seem somewhat remote? For further information on the FTC’s litigation with Meta, see “FTC v Facebook – where are they now?“. The addition of several states to the litigation does not change this concern; it simply demonstrates the antitrust enforcers’ overall concern with the power of the large platforms.

Labor market focus
The victory in the PRH case and the court’s treatment of the lessening of competition for a certain class of authors vindicates to some extent the Biden administration’s focus on labor (and other input) markets. Some had questioned that case since it was focused on a lessening of competition for authors getting advances in excess of $250,000 and was thus not exactly a run-of-the-mill labor matter, but the DOJ must be well pleased in reinforcing the application of section 7 of the Clayton Act to buyer-side (monopsony) mergers.

Comment

These losses are unlikely to significantly deter the DOJ or the FTC; indeed, the striking victory in the PRH case will likely embolden the government. Thus, while it can be expected that there will be a continued focus on nascent competitor cases, supply (including labor) implications of transactions and efforts to broaden the government’s overall reach and control in the merger review process, the results may increase the thoroughness of investigations to ensure that the government does not miss some obvious alternative explanations for a transaction’s rationale or for key market facts.

These results may be expected to encourage the government to become more realistic about resolving alleged competitive issues and will give at least some credence to the parties’ assertions of fact. Whether any of this will change the government’s behavior of course remains to be seen, but for parties proposing difficult transactions, there is always hope and the promise that the courts will continue to be persuaded by their presentations.

This content was originally published on November 17, 2022, via the International Law Office (ILO) newsletter. It can be found here:  Four weddings and a funeral: government loses four merger cases but wins one

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