Four panels of industry experts broadly discussed: (i) how the FTC should identify and evaluate advertising claims by internet service providers (ISPs) with respect to delivery speed; (ii) how broadband networks and markets have evolved since the 2007 Broadband Report; and (iii) how the FTC should identify and evaluate anticompetitive conduct in the broadband industry.
Antitrust regulators in the United States and Europe were very active in the final quarter of 2018 closing a large number of cases requiring in-depth investigations. In the United States, regulators continue their focus on the potential need to update their methods of reviewing high-tech transactions with public hearings on the future of antitrust enforcement.
In Europe, recent reviews of Takeda’s acquisition of Shire and the creation of a joint venture between Daimler and BMW show a focus on how transactions will impact innovation for new products.
The US Federal Trade Commission’s (FTC) Bureau of Competition announced the launch of a new Technology Task Force that will investigate anticompetitive conduct, review past transactions, as well as contribute to pending merger reviews. The FTC’s investigation of consummated transactions will not be limited to large transactions that meet the HSR filing thresholds, but will also include so-called “non-reportable” transactions. The launch of this task force along with the ongoing FTC Hearings on Competition and Consumer Protection in the 21st Century is further evidence of US antitrust enforcers’ increasing focus on the technology sector.
WHAT HAPPENED:
On February 26, the FTC’s Bureau of Competition announced the creation of a Technology Task Force dedicated to monitoring competition in US technology markets. The mandate is expansive allowing for investigations of anticompetitive conduct, mergers and industry practices.
Importantly, the task force is not only charged with aiding in the review of prospective mergers, but also investigating consummated mergers of any size. For consummated mergers, the task force has the authority to reconsider prior matters and seek the full set of remedies (e.g., divestiture, licensing, etc.) that would be available during the review of a prospective transaction.
Patricia Galvan, currently the Deputy Assistant Director of the Mergers III Division, and Krisha Cerilli, currently Counsel to the Director, will lead the task force. Their team includes approximately 17 existing staff attorneys with experience in complex technological markets such as online advertising, social networking and mobile operating systems.
Bureau of Competition Director Bruce Hoffman explained that “by centralizing [the FTC’s] expertise and attention, the new task force will be able to focus on these markets exclusively—ensuring they are operating pursuant to the antitrust laws, and taking action where they are not.”
WHAT THIS MEANS:
The launch of the Technology Task Force together with the ongoing FTC Hearings on Competition and Consumer Protection in the 21st Century highlights the FTC’s and DOJ’s increasing focus on maintaining “free and fair competition” in the technology sector.
FTC Chairman Joseph Simons’s prior work at the FTC involved launching the Merger Litigation Task Force, which focused on hospital merger retrospectives, and sharpened the FTC’s approach in challenging health care transactions. This appears to be a similar move to sharpen the FTC’s knowledge and approach, but now directed at the technology sector.
Technology companies that have recently completed mergers should take care not to draw scrutiny from antitrust enforcers.
Typically, investigations of consummated transactions and anticompetitive conduct will begin with a review of publicly available materials before burdening targets with compulsory process and seeking information from customers, competitors and industry experts.
Upon receiving information requests from the FTC, targets of the investigations should engage quickly to understand the scope and focus of the investigation. An information request likely means the FTC investigation has progressed beyond the initial phase.
Industry participants (competitors, customers) could also receive significant information associated with FTC investigations. Those parties should also engage with the FTC quickly to jointly develop a reasonable plan for addressing [...]
As highlighted in a recent lawsuit, aerospace and defense contractors can face various antitrust risks when using certain tactics to prevent other companies from hiring their employees. See Hunter v. Booz Allen Hamilton Holding Corp., No. 2:19-CV-411 (S.D. Ohio). The plaintiff, a former intelligence professional who worked at the US government’s Joint Intelligence Operations Center Europe Analytic Center in Molesworth, England (JAC Molesworth), filed an antitrust suit on behalf of herself and a class of JAC Molesworth employees. She alleges that three military intelligence contractors—Booz Allen, CACI and Mission Essential—entered into illegal agreements not to hire one another’s employees. The complaint alleges that the three contractors each had Indefinite Delivery / Indefinite Quantity (IDIQ) contracts and, prior to the alleged “no-poach” agreement, competed aggressively to hire employees with experience at JAC Molesworth to provide services under contract task orders. According to the complaint, these alleged no-poach agreements had the effect of suppressing the wages and benefits for skilled workers at JAC Molesworth because they stopped a bidding war for talent.
The US Federal Trade Commission recently announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.
Notification Threshold Adjustments
The US Federal Trade Commission (FTC) announced revised thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) pre-merger notifications on February 15, 2019. These increased thresholds will become effective mid-to-late March. These new thresholds apply to any transaction that closes on or after the effective date.
The base filing threshold, which frequently determines whether a transaction requires filing of an HSR notification, will increase to $90 million.
The alternative statutory size-of-transaction test, which captures all transactions valued above a certain size (even if the “size-of-person” threshold is not met), will be adjusted to $359.9 million.
The statutory size-of-person thresholds will increase slightly to $18 million and $180 million.
The adjustments will affect parties contemplating HSR notifications in various ways. Transactions that meet the current “size-of-transaction” threshold, but will not meet the adjusted $90 million threshold, will only need to be filed if they will close before the new thresholds take effect mid-to-late March.
Parties may also realize a benefit of lower notification filing fees for certain transactions. Under the rules, the acquiring person must pay a filing fee, although the parties may allocate that fee amongst themselves. Filing fees for HSR-reportable transactions will remain unchanged; however, the size of transactions subject to the filing fee tiers will shift upward as a result of the gross national product (GNP)-indexing adjustments:
Filing FeeSize-of-Transaction $45,000 $90 million, but less than $180 million $125,000 $180 million, but less than $899.8 million $280,000 $899.8 million or more Interlocking Directorate Thresholds Adjustment
The FTC also announced revised thresholds for interlocking directorates. The FTC revises these thresholds annually based on the change in the level of GNP. Section 8 of the Clayton Act prohibits a person from serving as a director or officer of two competing corporations if certain thresholds are met. Pursuant to the recently revised thresholds, Section 8 of the Clayton Act applies to corporations with more than $36,564,000 in capital, surplus and undivided profits, but it does not apply where either interlocked corporation has less than $3,656,400 in competitive sales. These new thresholds are effective immediately upon publication in the Federal Register, expected within the week.
On January 28, the US Federal Trade Commission (FTC) announced that it had accepted a proposed settlement with office supply distributors Staples and Essendant in connection with Staples’ proposed $482.7 million acquisition of Essendant. The settlement suggests that the FTC is currently more willing than the US Department of Justice (DOJ) to accept conduct remedies to resolve competitive issues raised by vertical mergers.
WHAT HAPPENED:
The FTC Commissioners voted 3-2 to accept a proposed settlement establishing a firewall to prevent Staples from receiving competitively sensitive customer information from Essendant.
Staples is the largest reseller of office products in the US, and one of only two retail office supply superstores in the US. Essendant is one of only two nationwide office product wholesale distributors. In September 2018, Staples agreed to acquire Essendant.
Staples competes with various resellers to sell office supplies to mid-sized companies. Many of those resellers rely on Essendant as their wholesale distributor. In that role, resellers have to provide Essendant with detailed information about their end customers’ identities, purchasing history, product preferences and similar data.
The FTC alleged in its complaint that the transaction was likely to harm competition by giving Staples access to the commercially sensitive information (CSI) of Essendant’s resellers and those resellers’ end customers. The FTC contended that access to that information could allow Staples to offer higher prices than it otherwise would when bidding against a reseller for an end customer’s business.
To address this competitive concern, the FTC imposed a conduct remedy. Specifically, the FTC required the parties to establish a firewall limiting Staples’ access to the CSI of Essendant’s resellers and the end customers of those resellers.
Two FTC Commissioners issued dissenting statements, arguing that the settlement does not fully remedy the transaction’s likely anticompetitive effects. In the dissenters’ view, the evidence suggests that the integrated firm could implement a strategy of raising costs for Staples’ reseller rivals.
WHAT THIS MEANS:
The settlement indicates that the FTC remains willing to cure competitive issues raised by vertical mergers with conduct remedies, such as firewalls, instead of imposing a divestiture or seeking to block the deal.
Under Makan Delrahim’s leadership, the DOJ’s Antitrust Division has been less receptive of conduct remedies, even in vertical merger cases. Delrahim has stated that conduct remedies are fundamentally regulatory and are inconsistent with the DOJ’s role as a law enforcement agency.
The DOJ refused to accept conduct remedies to resolve the competitive issues arising from AT&T’s acquisition of Time Warner. DOJ challenged the transaction in federal court. In June 2018, a DC district court judge ruled against the DOJ, and the case is currently on appeal to the DC Circuit.
One of the FTC Commissioners, Rebecca Kelly Slaughter, argued in her dissenting statement that the FTC should be more willing to challenge, and seek to block vertical mergers when it identifies competitive concerns. That position is more aligned with the DOJ’s currently stated policy, but overall the FTC appears more willing to accept conduct remedies [...]
The Federal Trade Commission (FTC) submitted comments supporting the Food and Drug Administration’s (FDA) guidance for assessing whether a pharmaceutical company petitioner is misusing the citizen petition process to delay approval of a competing drug.
WHAT HAPPENED:
The FDA released revised draft guidance intended to discourage pharmaceutical companies from gaming the citizen petition process.
The FTC expressed approval of the considerations the FDA will use to determine whether a petition was submitted to delay or inhibit competition.
The considerations the FDA will use include:
The petition was submitted unreasonably long after the petitioner learned or knew about the relevant information;
The petitioner submitted multiple and/or serial petitions;
The petition was submitted close to the expiration date of a known patent or exclusivity;
The petition’s scientific positions were unsupported by data or information;
The petition was the same or substantially similar to a prior petition to which the FDA had already substantively responded;
The petitioner had not commented during other opportunities for input;
The petition requested a standard more onerous or rigorous than the standard applicable to the petitioner’s drug product; and
Other relevant considerations, including the petitioner’s history with the FDA.
WHAT THIS MEANS:
Each of the FTC commissioners testified during Senate confirmation hearings that scrutinizing health care and pharmaceutical companies would remain a top priority of the Commission.
The FTC’s support of the FDA guidance appears to be part of a broader agenda to actively pursue sham petitions and discourage attempted abuses that seek to use Noerr-Pennington immunity as a shield in an administrative setting.
In 2017, the FTC filed a lawsuit in federal court alleging that Shire ViroPharma Inc. (Shire) violated antitrust laws through repeated use of sham petitioning.
Though the district court dismissed the FTC’s complaint, the FTC has lodged an appeal and appears committed to reining in alleged abuses of the citizen petition process.
Going forward, citizen petitions are likely to face even more scrutiny. Under the revised draft guidance, once the FDA determines that a petition was submitted primarily to delay competition, it will refer that determination to the FTC. Potentially anticompetitive petitions will now face two rounds of review by federal regulators.
The Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) recently formalized a new position on Hart-Scott-Rodino Act (HSR Act) reporting obligations for certain not-for-profit, non-stock transactions. The change is currently in effect and applies to transactions that have not yet closed. The change in position will require reporting of many hospital transactions that have not traditionally been treated as reportable events. The biggest area of change relates to affiliation transactions where hospitals or health systems affiliate under a new parent entity.
Under its previous position, the PNO focused on whether a transaction results in a change of “control” of the board of directors of one or more of the combining entities. Under its new position, the PNO will focus on beneficial ownership–whether one party receives beneficial ownership over the assets of another party as a result of the transaction. Now, a potentially reportable acquisition can occur even when there is no change in the control of the board of directors of one of the combining entities because formal board control is not the exclusive method of obtaining beneficial ownership.
In a recently published Tip Sheet, the PNO provided analysis of reportability for three types of not-for-profit combinations that it regularly sees, which we summarize below. The first two examples involve traditional application of the rules to hospital transactions, while the third example represents the PNO’s newly formed position on affiliations. Note that in all of the examples below, we focus on the nature of the transaction structure to evaluate whether a potentially reportable acquisition of assets has occurred. In any specific transaction, the parties would also need to evaluate whether the statutory thresholds are met (e.g., the $84.4 million size-of-transaction test), as well as whether any exemption applies.
1. A simple acquisition in which an existing acquiring person (g., a not-for-profit hospital) is deemed to hold the assets of the acquired entity (e.g., another not-for-profit hospital) as a result of the acquisition. This can happen in a variety of ways, such as a straight asset acquisition or a transaction in which one not-for-profit becomes the sole corporate member of another. If one not-for-profit obtains the right to manage and operate another through a corporate transaction, that is likely a reportable structure.
a. PNO conclusion: This structure is reportable as an asset acquisition.
2. A transaction in which the existing not-for-profit entities remain independent but form a new joint venture entity as a jointly owned subsidiary or affiliate. The pre-existing entities remain separate persons for HSR Act purposes.
a. PNO conclusion: This structure is reportable. However, the 16 C.F.R. § 802.40 exemption for the formation of a not-for-profit joint venture is likely to apply. b. The illustration below depicts this structure:
3. A transaction in which the existing not-for-profit entities consolidate under a new not-for-profit entity. The existing entities lose [...]
Recently, a federal district court in California granted partial summary judgment for the US Federal Trade Commission (FTC) in an important intellectual property and antitrust case involving standard essential patents (SEP). The court’s decision requires an SEP holder to license its SEPs for cellular communication standards to all applicants willing to pay a fair, reasonable and non-discriminatory (FRAND) rate, regardless of whether the applicant supplies components or end-devices. The decision represents a significant victory for the FTC in enforcing its views of an SEP holder’s commitments to license patents on FRAND terms.
Both US antitrust agencies marked the third quarter of 2018 with significant policy announcements regarding the merger review process. The announced reforms seek to expedite the review process through cooperation between the agencies and the merging parties. Moving first, the Federal Trade Commission (FTC) revealed a Model Timing Agreement that provides the FTC Staff with earlier notice of the parties’ intent to substantially comply with a Second Request. Earlier notice allows the FTC Staff to create a more effective timeline for meetings with division management, front office staff and the Commissioners. Less than two months after the FTC revealed its Model Timing Agreement, the Antitrust Division of the US Department of Justice (DOJ) announced procedural reforms aimed at resolving merger investigations within six months of filing. The DOJ will commit to fewer custodians and depositions in exchange for the merging parties providing key information earlier in the investigation. Overall, these reforms appear to be a positive step forward for parties considering future transactions, but their effectiveness remains uncertain as the agencies start a difficult implementation period. While the FTC timing agreement may provide more certainty around the process, it does not reduce the review timing and actually extends it.
EU: July – September 2018 Update
The European Commission (EC) remained quite active clearing mergers in the third quarter of 2018. Most notably, the EC cleared Apple’s acquisition of Shazam without imposing conditions despite the EC’s stated concerns about access to data as a competitive concern. The EC opened a Phase II investigation into the transaction to investigate the potential for Apple to obtain a competitive advantage over competing music streaming services by accessing Shazam’s consumer data obtained through its music recognition services. In this case, the EC did not find evidence that the access to Shazam’s data would provide Apple a competitive advantage. In addition, the EC found that there were no concerns about Apple potentially restricting Shazam as referral source for Apple’s competitors. Going forward, it is clear that access to data is an issue that the EC will continue to investigate, but it is also clear that the EC is taking a careful approach in assessing when that access will truly lead to a competitive harm. (more…)
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