Three recent antitrust merger reviews involving nascent competition demonstrate enforcers are paying close attention to acquisitions by industry leaders of emerging, but early-stage competitors. The US antitrust agencies have been criticized for allowing leading technology companies to extend their entrenched positions to multiple markets or technologies through acquisitions. We are now seeing regulators increasing their scrutiny of acquisitions of nascent competitors that were positioning themselves to challenge an entrenched, strong rival.
There was significant antitrust activity in the third quarter of 2019. In the United States, the Federal Trade Commission (FTC) and Department of Justice (DOJ) continued an active docket challenging M&A transactions. DOJ is resolving antitrust reviews significantly faster than the FTC, following DOJ’s 2018 policy establishing a six-month target. The DOJ also made use, for the first time, of its authority to arbitrate a market definition dispute, potentially opening the door for a new tool the DOJ could employ to resolve challenges more rapidly.
In the European Union, the European Commission (EC) agreed to clear, subject to conditions, the acquisition of broadband and energy networks following lengthy Phase 2 investigations. Meanwhile, the national European regulators opened new in-depth investigations into commercial radio advertising, software as a service for airlines, autonomous sea surface vehicles and the promotion of live music events (all in the UK) and prohibited the merger of two recyclers (Germany).
Today, companies looking to merge with others across jurisdictions would do well to consider antitrust issues at the beginning of the transaction process; regulatory antitrust challenges to M&A are increasing globally. On Corporate Counsel, McDermott partners Jon B. Dubrow and Joel R. Grosberg discuss six risks to deals from antitrust regulators, such as vertical merger enforcement changes at the US DOJ, and ways to manage them.
On September 4, 2019, the US Department of Justice’s Antitrust Division (DOJ) sued to block Novelis Inc.’s proposed $2.6 billion acquisition of Aleris Corporation.
DOJ alleged that the transaction would combine two of only four North American producers of aluminum auto body sheet (ABS). DOJ further alleged that Aleris was a new and disruptive rival supplier of aluminum ABS whose expansion into the North American market immediately impacted pricing.
Prior to DOJ’s suit to block the transaction, the merging parties and DOJ agreed that the dispute boiled down to a single dispositive issue: whether aluminum ABS constitutes a relevant product market, and specifically, whether the market for aluminum ABS also includes steel ABS.
DOJ and the merging parties agreed to refer this product market issue to arbitration pursuant to the Administrative Dispute Resolution Act of 1996 (5 U.S.C. § 571 et seq.) and the Antitrust Division’s implementing regulations (61 Fed. Reg. 36,896 (July 15, 1996).
In a filing in federal court the DOJ explained that it decided to arbitrate rather than litigate the merger in federal court because all sides agreed that the case turned on the single question of product market definition and referring the matter to arbitration would lessen the burden on the Court and reduce litigation costs to the merging parties and to the United States.
DTE and Enbridge’s natural gas pipeline joint venture, Nexus, agreed to purchase the Generation Pipeline (Generation).
Generation was owned by a group of sellers including North Coast Gas Transmission (North Coast).
Generation’s primary asset is a 23-mile pipeline that serves the Toledo, Ohio, area.
North Coast continues to own a competing pipeline near Toledo, Ohio.
The purchase agreement contained a non-compete provision that prevented the sellers, including North Coast, from competing in three counties surrounding Toledo, Ohio, for three years.
After an investigation, the FTC announced a settlement with DTE, Enbridge and Nexus to remedy the FTC’s concern with the non-compete provision by requiring the purchase agreement to be amended to remove the non-compete provision.
The FTC Commissioners were unanimous in their conclusion that the challenged non-compete was unlawfully broad, though several Commissioners issued concurring statements regarding the import of the FTC’s action in this case.
The second quarter of 2019 proved to be a busy season for antitrust matters. In the United States, agencies continued to be aggressive and blocked transactions or required significant remedies. They cleared three mergers where divestitures were required; and in the face of FTC or DOJ opposition, companies abandoned several transactions, including between Republic National Distribution Company and Breakthru Beverage Group. Regarding vertical transactions, we continued to see a split between the FTC Republican and Democratic Commissioners regarding whether enforcement is required and the appropriate remedies.
In the European Union, the EC published a report on competition policy for the digital era, which deals with, among other things, acquisitions of nascent competitors. The EC also closed two merger control proceedings subject to divestitures, blocked a proposed joint venture, and showed that it will seek large fines for companies violating EU competition rules for merger notifications.
On May 7, 2019, Governor Jay Inslee of Washington State signed House Bill 1607 into law. The law goes into effect for transactions closing after January 1, 2020, and requires advance notice to the Washington Attorney General (AG) of certain transactions 60 days in advance of closing the transaction. The intent of the law is “to ensure that competition beneficial to consumers in health care markets across Washington remains vigorous and robust[.]”
Parties must file written notice with the AG for any deal that involves two or more hospitals, hospital systems, or other provider organizations that represent seven or more health care providers in contracting with insurance companies or third-party administrators. A “provider” includes a physician, nurse, medical assistant, therapist, midwife, athletic trainer, home care aide, massage therapist, among others.
The law can apply to transactions involving very small medical groups, as long as there are seven providers who contract with insurance providers. The law can also apply to transactions with non-Washington parties if the out-of-state party generates $10 million or more in revenue from Washington patients.
Given the relatively low thresholds for an AG filing, this law would require notifications for transactions that are not reportable under the Hart-Scott-Rodino Act (HSR Act), as well as those that are reportable under the HSR Act.
If a transaction is HSR reportable, the parties must submit their HSR filing to the AG.
If a transaction is not HSR reportable, parties must submit the following information in writing to the AG:
The names and addresses of the parties;
The locations where health care services are provided by each party;
A brief description of the nature and purpose of the proposed transaction; and
The anticipated effective date of the transaction.
The notification requirement applies to mergers, acquisitions and contracting affiliations. A contracting affiliation is a “formation of a relationship between two or more entities that permits the entities to negotiate jointly with carriers or third-party administrators over rates for professional medical services” but does not include arrangements among entities under common ownership.
The penalty for noncompliance is $200 per day.
The AG has 30 days from the date of notice to submit a request to the parties for additional information. If the AG has antitrust concerns, it may serve a civil investigative demand to investigate.
The Federal Trade Commission (FTC), along with the Antitrust Division of the Department of Justice (DOJ), approved amendments to the Hart-Scott-Rodino (HSR) Rules and the instructions for completing the HSR Form.
Data on non-manufacturing revenue will be required to be reported using the updated 6-digit NAICS codes, while data on manufacturing revenue will be required to be reported using both the 6-digit NAICS industry code and the 10-digit NAPCS product codes.
The FTC intends to update the instructions for the HSR Form to reflect the changes made to the revenue reporting requirements.
What this Means:
Companies expecting to file an HSR after September 25 will need to familiarize themselves with the new 10-digit NAPCS codes and the updated 6-digit 2017 NAICS codes, and may want to update their databases to be in a position to file promptly when the new codes take effect on September 25.
2018 saw a significant upswing in antitrust litigation against health care providers; 27 cases were filed in 2018 versus 17 in 2017. In the latest Antitrust Update for Health Care Providers, we discuss what caused the notable rise, what kinds of cases were brought over the past two years and how they were decided, and what cases warrant particular attention in 2019.
The first quarter of 2019 proved to be as active as ever for antitrust regulators in both the United States and Europe. In the United States, vertical merger enforcement was the focus of a few high-profile matters. The US DOJ has been working on an update to the Non-Horizontal Merger Guidelines, possibly providing clarification for merging parties.
Meanwhile in Europe, although the European Commission cleared a number of merger control proceedings with remedies, the European Commission also blocked two transactions during the first quarter of 2019.
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