Aerospace and defense contractors engage in a wide range of mergers, acquisitions and joint venture transactions, which are often subject to heightened antitrust scrutiny. This article highlights some of the leading antitrust factors that contractors should consider when contemplating M&A transactions in their unique industry.
In a speech at the American Antitrust Association (AAI) and Computer & Communications Industry Association (CCIA) Conference on Innovation, Patents and PAEs on December 10, 2014, Federal Trade Commissioner (FTC) Julie Brill reported that the FTC hopes to complete its study of patent assertion entities (PAEs) by the end of 2015. She cautioned against complacency, however, and said there is much Congress and enforcement agencies can do even before the study of so-called patent trolls is complete.
The FTC is currently conducting an extensive review of PAE activity, using its authority under Section 6 of the FTC Act. The Commission’s authority under section 6(b) enables it to conduct broad economic studies that do not have a specific law enforcement purpose. Under this provision the Commission may also publicize portions of the information it obtains where such publication would serve the public interest.
The FTC has devoted substantial attention to PAEs in recent years. It has hosted or co-hosted a number of workshops to explore PAE-related issues. Although workshop participants shared numerous anecdotes describing the increasing PAE activity, a common refrain in those workshops was the lack of comprehensive and reliable empirical evidence about the costs and benefits of PAE activity. The FTC study was conceived to help fill this gap.
Although the study is underway, Commissioner Brill urged Congress not to await its outcome before taking concrete reforms that could “make it more difficult for PAEs and others that seek to profit by bringing and threatening to bring frivolous patent infringement lawsuits.” She noted that Congress is currently considering several reform proposals. “There is no need to wait for completion of our 6(b) study to act on these and other key legislative patent reform proposals,” Commissioner Brill said. She also emphasized that the ongoing study will have no impact on appropriate law enforcement actions. She said that if the FTC, the Department of Justice or the states “uncover PAE activity that is in violation of current law, they should act expeditiously to take whatever enforcement actions are warranted to stop inappropriate PAE abuse.”
On October 2, 2014, the U.S. Department of Justice (DOJ) issued its first business review letter since issuing jointly with the Federal Trade Commission (FTC) the Agencies’ Antitrust Policy Statement on Sharing of Cybersecurity Information in April 2014 (the Policy Statement). The Policy Statement recognized that sharing cyber threat information is integral to defending against cyber-attacks. It states that cyber information sharing will be reviewed under a rule of reason analysis that focuses on the improved efficiency and security of cyber networks, the nature of the cyber information to be shared, and whether the information exchange is likely to harm competition.
CyberPoint International, LLC, requested the business review letter for its cyber intelligence data-sharing platform called TruSTAR. The TrueStar platform collects incident reports, anonymously submitted, that include technical information, targets of the attack, contextual information and remediation solutions, which help members analyze their organization’s risk and current defenses. The platform also contains a members-only forum where members can anonymously interact with the member that submitted a particular incident report, but requires as a prerequisite for participation a certification that members will not exchange “competitively sensitive information—such as recent, current, and future prices, cost data, or output levels—or otherwise attempt price or other coordination.” Members must also have a Dun and Bradstreet D-U-N-S number, be in good standing with local, state and federal government and agencies, as well as satisfy minimum technical performance criteria.
In analyzing the proposed data-sharing platform, the DOJ found significant that “the business purpose and nature of the information sharing agreement does not suggest competition or consumers will be harmed.” Notably, “the nature of the information that will be shared is unlikely to facilitate tacit or explicit price or other competitive coordination among competitors,” because “[t]he information to be shared through incident reports and the collaboration forum are very technical and is the type of information sharing contemplated by the . . . Policy Statement.” Specifically, “no competitively sensitive information about recent, current, and future prices, cost data, output levels, or capacity will be exchanged,” and “CyberPoint will obtain commitments from members that competitively sensitive information won’t be exchanged.” Therefore, the DOJ concluded that competitive harm was unlikely and that consumers would likely benefit from the lower cost and more efficient means of establishing network security.
The business review letter is available at https://www.justice.gov/atr/public/busreview/309071.pdf.
The Department of Justice (DOJ) Antitrust Division announced on September 16 that the DOJ and Federal Trade Commission (FTC) have entered into a new antitrust cooperation agreement with Colombia’s Superintendence of Industry and Commerce, stating that the “agreement will enable the antitrust agencies in the two countries to further enhance their law enforcement relationship.”
According to DOJ Assistant Attorney General Bill Baer, cooperation between the United States and Colombia is “critical to maintaining competitive markets in the Americas, particularly for economies as linked as ours.” The agreement contains provisions for enforcement cooperation and coordination, conflict avoidance and consultations for enforcement actions, and technical cooperation. It also contains a provision to maintain the confidentiality of any sensitive information.
The agreement, effective September 16, 2014, is similar to those previously entered into with other countries such as Brazil, Canada, Chile and Mexico, and does not change any current laws in either country. Antitrust agencies from both countries have already established a strong working relationship under the U.S.-Colombia Trade Promotion Agreement which was signed in 2006. “We look forward to working with the Superintendence to advance our shared goal of promoting convergence around sound competition policy throughout the hemisphere,” stated FTC Chairwoman Edith Ramirez.
North Carolina’s State Board of Dental Examiners has urged the U.S. Supreme Court to reject the Federal Trade Commission’s (FTC’s) “radical departure” from decades of established precedent that offers state actors immunity from antitrust scrutiny, arguing that the FTC’s approach contradicts the federalist principles that originally gave rise to the state action immunity doctrine.
Earlier this year, the Court agreed to consider whether the Fourth Circuit erred in upholding the FTC’s ruling against the Board. The Board presented its arguments in a brief submitted in advance of oral arguments, which are scheduled for October 2014.
The Board’s brief is but the latest salvo in a long-running battle with the FTC that dates back to 2010. The North Carolina state agency—which includes practicing dentists among its members—licenses dentists in the state and can take disciplinary measures against licensees. Approximately a decade ago, following complaints from dentists practicing in the state, the Board launched investigations into teeth-whitening services provided by non-dentists and ultimately issued dozens of cease-and-desist letters to such service providers. The FTC issued an administrative complaint in 2010 charging that the Board violated the FTC Act by acting to exclude non-dentist teeth whiteners from the market in North Carolina. Relying on its status as a state entity, the Board has maintained that it is immune from scrutiny under the antitrust laws. The FTC has argued that the presence of market participants on the board means the board is more akin to a private actor, which must be subject to active state supervision in order to benefit from immunity. The FTC maintains that such supervision is lacking here. The Fourth Circuit sided with the FTC in 2013, and the Supreme Court agreed to review that decision.
In its brief, the Board contends that the FTC’s position runs contrary to long-established precedent. The Board especially challenges the FTC’s arguments that state action immunity is available only where decisions are made by “disinterested public officials.” According to the Board, the FTC seeks to apply to public officials the test that is applicable to private actors seeking the benefit of state action immunity. The Board contends this is erroneous and that the federalist principles that justified prior state action immunity decisions render the self-interest of individual public officials irrelevant.
The Supreme Court’s resolution of this conflict could have significant repercussions for state regulatory bodies, many of which rely upon participation of professionals and other market participants. 23 states have filed an amici brief that similarly urges the Supreme Court to reverse the Fourth Circuit’s decision.
On July 30, 2014, the U.S. District Court for the District of Maryland denied Aegis Mobile LLC’s motion to quash a Federal Trade Commission (FTC) subpoena seeking information related to an investigation by the Competition Bureau of Canada (Competition Bureau). Aegis, based in Columbia, Maryland, contracted with the Canadian Wireless Telecommunications Association (CWTA) to collect and analyze the advertising used to promote the CWTA’s digital content. The Competition Bureau, alleging the advertising was false and misleading, asked the FTC to seek information from Aegis Mobile about its work for the CWTA. The FTC issued a subpoena for documents relating to the project using its power under the SAFE WEB Act.
The SAFE WEB Act enhances the FTC’s investigative and enforcement functions in information sharing, investigative assistance, cross-border jurisdictional authority and enforcement relationships. The FTC advocated the reauthorization of the Act by Congress in 2012, pointing to over 100 investigations with international components that the FTC had already performed. The FTC also pointed to figures suggesting cross-border fraud problems, including over 100,000 U.S. consumer complaints against foreign business in 2011.
One of the provisions of the SAFE WEB Act, 15 U.S.C. § 46(j), gives the FTC the authority to assist foreign authorities in investigating fraudulent and deceptive commercial practices, with certain exceptions. The FTC employed the SAFE WEB Act here, and in response Aegis Mobile, sought to quash the FTC’s subpoena on the grounds that Aegis Mobile was a “common carrier,” and would therefore be exempted from the subpoena. The court held that Aegis Mobile was not a common carrier and was subject to the FTC’s investigation.
On July 16, 2014, Andrew Gavil, Director of the Office of Policy Planning at the Federal Trade Commission (FTC), testified on the subject of “Competition and the Potential Costs and Benefits of Professional Licensure” before the House Committee on Small Business. Gavil explained the FTC’s rationale for evaluating the competitive effects of different licensing regimes and described its strategy of promoting competition among professionals through a combination of advocacy and enforcement.
The FTC’s approach in this area is to evaluate the pros and cons of specific licensure regulations on a case-by-case basis. In a nutshell, the agency recognizes that, “although licensure may be designed to provide consumers with minimum quality assurances, licensure provisions do not always increase service quality,” and indeed “may . . . discourage innovation and entrepreneurship” and “impede the flow of labor or services.” Advocacy is an important component of the FTC’s strategy because state and local licensing regimes are often not actionable under the federal antitrust laws. Instead, the agency utilizes tools such as comments, testimony, workshops, reports and amicus briefs to encourage policymakers to consider the likely competitive effects of proposed regulations. Gavil noted a recent example in which, at the request of Chicago Alderman Brendan Reilly, FTC staff provided a comment assessing the potential competitive effects of a proposed Chicago ordinance creating a licensing scheme to regulate mobile ride-sharing apps. The comment, available here, details how certain provisions of the ordinance might “unnecessarily impede competition in these services without providing any apparent consumer protection benefits,” for example, by placing licensees at a competitive disadvantage to traditional transportation services or by restricting innovative pricing models.
The FTC also keeps an eye out for opportunities to flex its enforcement muscle and discourage anticompetitive conduct by independent regulatory boards that are not protected by the state action doctrine. For example, the Fourth Circuit last year sided with the FTC in a suit challenging the North Carolina Board of Dental Examiners’ practice of issuing cease-and-desist letters to non-dentist providers of teeth-whitening services. See N.C. State Bd. of Dental Examiners v. FTC, 717 F.3d 359 (4th Cir. 2013), cert. granted, No. 13-564, 5014 WL 801099 (U.S. Mar. 3, 2014). In particular, state agencies comprised mostly of industry participants who are chosen by other industry participants must take special precautions to avoid violating the antitrust laws. Many of the examples of enforcement actions Gavil provided in his testimony concerned the healthcare arena, which is consistent with the FTC’s ongoing commitment to promote competition in that sector.
The text of the Commission’s prepared statement is available here.
The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of “conditional pricing” programs. Most panelists were academics, including economists and law school professors. The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.
Conditional pricing programs. Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company’s prices charged will vary depending upon the level of purchases the customer makes from the company’s competitors. Examples include:
Theories of harm. The panelists discussed two basic categories of theories of competitive harm.
Relevance of cost based tests. The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful. The issue is whether conditional pricing programs that result in a product being sold “above cost” should fit within a safe harbor.
On May 30, 2014, the U.S. District Court for the District of Columbia ruled in favor of the Federal Trade Commission (FTC) in a dispute with the Pharmaceutical Research and Manufacturers of America (PhRMA) regarding the Commission’s authority to require the pharmaceutical industry to report certain transfers of exclusive patent rights under the Hart-Scott-Rodino (HSR) Act.
The dispute centered on a Final Rule promulgated by the FTC in November 2013. Patents are considered assets by the FTC and their transfer may be reportable. Some transactions provide for the transfer of certain exclusive patent rights without implicating the transfer of the patent in its entirety. The FTC maintains that the exclusive right to commercially use all or part of a patent is, in substance, identical to a full acquisition of the patent. The challenged rule was intended to clarify the circumstances when a transfer of exclusive rights to a pharmaceutical patent is considered a potentially reportable acquisition of an asset under the HSR Act.
PhRMA sued to have the new rule set aside. PhRMA contended in its complaint that the FTC lacked the statutory authority to issue rules that target a single industry, as opposed to rules of general effect. The trade organization also contended that the FTC failed to establish a rational basis for an industry-specific rule and that it failed to comply with legally required procedures in instituting the rule. PhRMA and the FTC both filed motions for summary judgment.
In granting summary judgment to the FTC, Judge Beryl Howell agreed that Congress had never spoken in the HSR Act to the specific issue of whether the FTC was authorized to issue industry-specific rules: “Nothing in this text restricts the FTC to generating only general rules rather than industry specific rules.” Given the congressional silence on this specific question, the court next considered whether the FTC’s interpretation of the statue was a permissible one. Under the applicable legal standard, an agency’s rule is entitled to deference “as long as it is a permissible construction of the statute.” The FTC contended that the Final Rule did not expand “‘HSR requirements to parties or transactions not covered by the Act,’ but ‘simply clarif[ied] the types of transactions that constitute asset transfers for which the Act requires prior notification.’” The court concluded this was a permissible construction of the authority granted to the FTC under the HSR Act.
On May 21, 2014, the Federal Trade Commission (FTC) and Department of Justice (DOJ) released the Hart-Scott-Rodino Annual Report covering Fiscal Year (FY) 2013 (October 1, 2012 – September 30, 2013). The report describes key merger enforcement actions over the past year and provides interesting data regarding the agencies’ antitrust enforcement activity.
Specifically, the report indicates that in FY 2013, 1,326 transactions were reported under the Hart-Scott-Rodino (HSR) Act, representing an approximate 7 percent decline in reported transactions from FY 2012. The FTC was granted clearance to investigate 145 of these transactions, while the DOJ was granted clearance to investigate 72 transactions. Of the 145 transactions the FTC investigated in FY 2013, it only issued 25 second requests. In other words, the FTC only issued second requests in 17.2 percent of its investigations in FY 2013. The DOJ’s Antitrust Division, on the other hand, issued second requests in 22 of the 72 transactions it was granted clearance to investigate (i.e., 30.6 percent of its investigations).
However, of the FTC’s 25 second requests in FY 2013, it brought 23 merger enforcement actions. That is, the FTC brought enforcement actions in more than 90 percent of the transactions for which it issued a second request in FY 2013. The DOJ’s Antitrust Division brought only 15 merger enforcement actions in FY 2013, or just under 70 percent of the transactions for which it issued a second request (15 out of 22).
This information can be a helpful tool to assist clients in evaluating their chances before the merger enforcement agencies at various stages of the HSR notification process. While the FTC and DOJ together only investigated 217 transactions in FY 2013, most of those investigations were brought by the FTC. Furthermore, the agencies’ decisions to issue second requests made it increasingly likely that they would bring enforcement actions to block or unwind the transactions, particularly with respect to the FTC.
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