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Antitrust jeopardy

by contributors Barry Nigro, Peter Guryan and Aleksandr Livshits, Fried Frank | Published February 7, 2012 at 3:15 PM

In 2011, the Obama administration's antitrust enforcers finally realized the president's campaign promise to chart a course toward greater antitrust merger enforcement. The Department of Justice's challenge to AT&T Inc.'s now-abandoned $39 billion acquisition of T-Mobile USA Inc. is certainly one of last year's highlights. But parties in deals of all types -- large and small, vertical and horizontal, across a variety of industries -- have faced tougher regulatory scrutiny.

It is still the case that most transactions notified to the antitrust agencies do not raise competitive concerns. Parties in strategic transactions, however, are confronting heightened antitrust merger enforcement at both the DOJ and the Federal Trade Commission. As in the past, in 2011, parties in transactions facing antitrust scrutiny were able to resolve the agencies' concerns through consent decrees, some of which contained broad conduct restrictions and prescriptions. Other deals suffered a worse fate, failing to overcome litigation, or in some cases the threat of litigation, that provided the agencies opportunities to test the 2010 Horizontal Merger Guidelines. We would expect the administration's policy of more active merger enforcement to continue in 2012.

The DOJ challenged 18 mergers in 2011 and caused two others to be abandoned once the agency threatened to block the deal -- more than double the number of transactions the agency contested in 2010.

The DOJ's most noteworthy successes were in court. After several high-profile settlements, the DOJ took decisive action to stop in its tracks AT&T's proposed acquisition of T-Mobile. The parties' decision to abandon the transaction is a testament to the DOJ's more aggressive merger enforcement. The DOJ's successful challenge to H&R Block Inc.'s proposed acquisition of 2nd Story Software Inc., the developer of TaxAct digital tax preparation products, was another watershed moment, as it was the DOJ's first merger trial since its 2004 defeat in Oracle Corp.-PeopleSoft Inc. and its first merger litigation victory since 2003. The DOJ's efforts in court were not reserved for multibillion-dollar transactions -- in May, the DOJ filed a lawsuit to block George's Inc.'s $3 million acquisition of a Tyson Foods Inc. chicken-processing plant, only to settle the challenge a month later.

The current DOJ has also exhibited a capacity for swift action. In Nasdaq OMX Group Inc.-NYSE Euronext, the DOJ notified the parties that it was prepared to block the deal only 46 days after it was announced. It has also been reported that the Justice Department's AT&T-T-Mobile complaint came as a surprise to the parties who were still in the process of complying with the various requests for information from the DOJ and the Federal Communications Commission.

The DOJ also demonstrated a greater willingness to address competitive concerns through broader conduct remedies. While the DOJ has disfavored behavioral remedies in the past, the agency signaled a shift when approving the Ticketmaster Entertainment Inc.-Live Nation merger it placed significant restrictions on the parties' future conduct. The DOJ continued this approach in 2011, most notably in Comcast Corp.-NBC Universal Inc. and Google Inc.-ITA Software Inc. where it approved the transactions only after Comcast and Google agreed to remedies designed to prevent them from discriminating against competitors by denying and/or raising the cost of access to the acquired components (programming content in the case of rival cable and satellite providers and online video distributors, and ITA travel software in the case of online travel agents, respectively). The DOJ later memorialized this approach to remedies in its 2011 Policy Guide to Merger Remedies.

At the other end of Pennsylvania Avenue, the FTC also has stepped up its merger enforcement activity. The FTC was in court on five mergers in 2011, a substantial increase over 2010. All five cases involved the healthcare industry. Early in the year, the court in Laboratory Corp. of America Holdings denied the FTC's request for a preliminary injunction, and in August the U.S. Court of Appeals for the 8th Circuit in St. Louis affirmed the decision to dismiss the FTC's complaint in Lundbeck Inc. The FTC also lost its challenge to Phoebe Putney Health Systems Inc.'s acquisition of Palmyra Park Hospital Inc., albeit not on pure antitrust grounds, but because the court found that the transaction was immune from review under the state action doctrine.

In its only court victory in 2011, the FTC obtained a preliminary injunction to ProMedica's proposed acquisition of St. Luke Hospital and later convinced an administrative judge to block the deal. This was the FTC's first hospital merger trial win in more than a decade. The FTC also recently filed a complaint seeking a preliminary injunction of OSF Healthcare System's proposed acquisition of Rockford Health System. In 1989, the DOJ successfully challenged a proposed merger between Rockford and another hospital system in the region, SwedishAmerican Health System. If the current Rockford case reaches trial, the 1989 case could provide an interesting benchmark for how antitrust analysis has changed in the last two decades.

Despite the agencies' de-emphasis of market definition in their revised Merger Guidelines -- a subject of debate among antitrust commentators -- market definition played a critical role in the agencies' victories (and losses) last year. As acting Assistant Attorney General Sharis Pozen noted, "Market definition retains the key role it has always played in division investigations."

For example, in AT&T-T-Mobile, the DOJ's strategy with respect to market definition was crucial to its success. The DOJ alleged that while local markets are appropriate geographic markets from the perspective of individual consumers, the four largest wireless carriers make their competitive decisions, such as marketing, pricing and technology deployment, on a national level, without accounting for competition from regional carriers. Therefore, the DOJ brought the case on the theory that the transaction will have "nationwide competitive effects across local markets." This approach virtually eliminated the possibility of settling the case through a city-by-city-based structural fix.

Further, in the only case litigated by the DOJ this year -- H&R Block -- the court heavily relied on the parties' contemporaneous documents to determine the relevant market, which it defined as digital tax preparation software (as opposed to the market for all tax preparation methods proposed by the merging parties). While U.S. District Judge Beryl Howell discussed in detail the economic evidence presented by the parties, she noted that there are limitations to such evidence.

Two major losses by the FTC also turned on market definition. In Lundbeck, the FTC argued that the only two drugs approved to treat a certain heart condition were in the same product market because they were functionally interchangeable. The court, however, rejected the FTC's market definition, relying on the testimony of physicians who stated the price of the drugs was not a factor in their treatment decisions and on economic evidence that the cross-elasticity of demand between the two drugs was low.

The FTC also lost its bid to block LabCorp's acquisition of Westcliff on market definition grounds. In LabCorp, the FTC alleged that capitated services were a separate market from fee-for-service laboratory services. In its decision, among other factors, the court noted that the FTC had previously relied upon a broader market definition (all clinical laboratory testing services) in a 2003 Quest Diagnostics Inc.-Unilab Corp. transaction and that Commissioner Thomas Rosch had dissented from the issuance of the LabCorp complaint arguing that the relevant market should include both capitated and fee-for-service testing.

After an exceptionally active year, the antitrust agencies' aggressive enforcement agenda for 2012 and beyond is clear. Where divestitures and behavioral remedies are insufficient to resolve competitive concerns, the agencies will not hesitate to litigate, regardless of the transaction's size or the clout that the parties may have on Capitol Hill. Moreover, the agencies' successes in court provide them with a credible litigation threat in future matters, though a court decision following a DOJ trial victory in AT&T-T-Mobile may have had an even broader impact with respect to any future litigation position and in solidifying the vitality of its policies. In any event, while recent developments at the agencies are no surprise to antitrust lawyers who have followed the administration, they are a reminder that merging parties must now seriously consider the antitrust implications when structuring strategic deals.

Barry Nigro is chairman of Fried, Frank, Harris, Shriver & Jacobson LLP's antitrust department. Peter Guryan is a partner in the antitrust department, while Aleksandr Livshits is an associate at the firm.

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