Reconcilable differences

A hospital group's recent decision to cancel a merger that took nearly two years to arrange is a direct result of a dirty little secret of antitrust law. The Federal Trade Commission and its sister antitrust agency, the Department of Justice, have different standards in blocking deals.

The June 6 decision by Inova Health System Foundation to jettison its planned $200 million acquisition of Prince William Hospital in Manassas, Va., was a recognition that the merger had run into a variety of antitrust problems at the FTC and in court. In theory, it shouldn't matter which agency reviews a particular merger because they consider the same economic factors when judging whether a merger poses harm to consumers. But idiosyncrasies of the FTC merger review process were major ingredients in the gale that tore apart Inova's takeover plans. Of particular importance was the standard for convincing a federal judge to issue a preliminary injunction that would prevent a merger from closing while the merger challenge was under way.

Although differences in the two agencies' procedures are well known, government officials often have dismissed their importance to the outcome of an antitrust review.

The Antitrust Modernization Commission, a congressionally mandated panel, looked at the matter and asked the FTC to weigh in. FTC General Counsel William Blumenthal insisted the two agencies face identical burdens before the courts. "The commission asks whether the standard DOJ must meet to obtain a preliminary injunction to block a merger differs, as a practical matter, from that the FTC must meet," Blumenthal testified to the AMC in November 2005. "The answer is no."

Only a few years later, however, the FTC's official line changed. At a May 30 hearing on the hospital deal, agency lawyers persuaded U.S. District Court Judge Claude Hilton that the FTC only needed to raise "serious" questions about a merger's potential harm in order to win a preliminary injunction. Their reading followed case law from the Eastern District of Virginia that predates the Hart-Scott-Rodino Act of 1976, the law that lays out the premerger review process.

The DOJ and other agencies, however, must convince a judge they have sufficient facts on their side to have a strong chance of winning their case.

Hilton seemed to embrace the position that the FTC's standard is different. Speaking May 30 from the bench in Alexandria, Va., the judge announced he was not interested in reviewing the facts of the case, saying that was a matter "for the FTC to decide."

Winning a PI is critical to an FTC merger challenge. To challenge any merger, the FTC must hold an in-house trial known as a Part 3 process. Without a PI first, merging parties may close their deals, making it impossible for regulators to unwind them when a merger case concludes a few years down the road. The DOJ has no such in-house process. It must ask for a PI and a permanent injunction, generally conflating the two into one hurried procedure. The DOJ process is preferable for merging parties because it concludes quickly and poses less threat to a deal's financing arrangements.

The AMC decided that the discrepancy is a problem and its laundry list of recommended changes to antitrust regulation included a call for congressional legislation that would establish identical standards for FTC and DOJ merger reviews. It also suggested rescinding the FTC's in-house administrative hearings process.

The Inova case follows the agency's effort to block Whole Foods Market Inc. from buying rival organic foods grocery chain Wild Oats Markets Inc. The FTC lost the case, the merger closed, and the agency is now appealing on the grounds that U.S. District Court Judge Paul Friedman did not properly interpret the FTC Act. The AMC's report has been generally ignored, while the Inova and Whole Foods cases demonstrate that the issue is coming to a head.

Cecile Kohrs Lindell covers antitrust for The Deal.