United States: Merger Enforcement Round-Up: Fall 2017

Despite a number of key US federal antitrust posts remaining vacant, the antitrust authorities have remained quite active.1 Below, we discuss five recent transactions and what those cases might mean for merger enforcement in the United States in the coming months and years.

Parker-Hannifin/CLARCOR

On September 26, 2017, the DOJ challenged Parker-Hannifin's consummated acquisition of CLARCOR, Inc., alleging that the transaction substantially lessened competition in aviation fuel filtration systems.2 Interestingly, DOJ's challenge came nearly nine months after the Hart-Scott-Rodino Act's mandatory waiting period expired without agency action.3

The DOJ alleged that the combination of Parker-Hannifin's Velcon-branded filtration products with CLARCOR's PECOFacet-branded filtration products "effectively created a monopoly" for such products and eliminated head-to-head competition between the parties, resulting in a substantial loss of price, service, and innovation competition.4 Specifically, DOJ alleged that Parker-Hannifin and CLARCOR are the only two domestic suppliers for aviation fuel filtration products.5 DOJ emphasized that the parties' systems are the only available products that have passed the rigorous qualification and certification process mandated in US commercial and military aircraft.6 Moreover, DOJ alleged that US commercial and military aviation customers were unlikely to rely on a foreign supplier that lacked a US presence in sales, product, training, or technical support, especially as most customers in the industry demanded readily available product supplies and service offerings.7

In furthering its allegations, DOJ cited in the Complaint an internal Parker-Hannifin email discussing the "area of overlap" between the two companies, questioning whether the parties should be "forthcoming" about this "aviation antitrust potential," and stating that Parker-Hannifin was "preparing for the possibility" that it may have to "divest CLARCOR's aviation ground fuel filtration" business.8

DOJ requested the Court to order the divestiture of either Parker-Hannifin's or CLARCOR'S aviation fuel system business, and "to create a separate, distinct, and viable competing business that can replace CLARCOR's competitive significance in the marketplace."9

Enforcement actions against closed transactions, while rare, do occur.10 This is especially true in situations where: (1) the parties were not required to make an HSR filing, and the authorities only found out about the transaction after closing; (2) an HSR filing was required, but customers were late to voice concerns; or (3) the overlap is a very small part of the transaction and not readily apparent to the investigating agency.11 Even if an overlap is relatively small, the enforcers are not likely to ignore a potentially problematic transaction—here, Parker-Hannifin's and CLARCOR's filtration businesses brought in less than $20 million in annual revenue, less than 0.5 percent of the $4.3 billion deal.12

Merging parties should consider identifying overlaps to the antitrust authorities early in the investigation process, or risk a post-closing enforcement action if the enforcers identify an issue after the transaction has closed. Commenting on the Parker-Hannifin suit, a Division official noted that "if there's really some clear and obvious overlap it may behoove counsel to raise that."13 It appears that Parker-Hannifin may not have raised the potential fuel filter overlap to DOJ, despite acknowledging the overlap in internal emails. Moreover, Parker-Hannifin refused DOJ's request to hold separate the CLARCOR filtration business while DOJ conducted its investigation,14 and, as a result, DOJ brought this action.

Valero/Plains

Despite the FTC declining to take action against Valero's proposed acquisition of two Northern California bulk petroleum terminals from Plains All American Pipeline (Plains),15 the California Attorney General filed suit in the Northern District of California, seeking to obtain a temporary restraining order and enjoin the transaction.16 California alleged that Plains, the "only independent terminal owner in the Bay Area," was a maverick competitor. California further alleged that Valero's acquisition would permit the integrated refiner to reduce competitor access to the terminal hub, which would result in increased fuel prices at the pump.17 In addition to the concern that Valero would be able to recoup lost terminal profits through a downstream increase in gas prices, California also alleged that once all the fuel terminals were vertically integrated, there would be a higher risk of coordination among vertically integrated providers to similarly reduce supply into the terminal and increase downstream fuel prices.18

The Court denied the temporary restraining order and criticized California for waiting until the "eleventh hour" to file a restraining order—ten days after the HSR waiting period had expired and on the day of the parties' announced closing.19A little over a month after denying the temporary restraining order, the Court denied California's preliminary injunction motion. The Court noted that the order was unnecessary, stating it would be "easy to restore the status quo"20 because: (1) Plains' longterm contracts prevented Valero from restricting terminal services from any existing customers during the course of the planned litigation, and (2) the Defendants provided a Declaration detailing firewalls and other commitments to maintain separate businesses.21

In the Order, however, the Court also stated that California had raised "serious questions" about the anticompetitive effect of the transaction,22 and that while the merging parties made "several arguments to the contrary," "none of these [arguments] overcome these serious concerns."23 Moreover, the Court made clear that "if permanent relief is granted and divestiture ordered, defendants will not be heard to complain about any reliance built upon the closing of the transaction. Defendants proceed entirely at their own risk if they close..."24

As a result, despite no action by the FTC and the court denying California's requests for a temporary restraining order and preliminary injunction, Valero and Plains announced they were abandoning the merger on September 19, 2017.25 Despite the parties abandoning the transaction, California has requested the Court to issue an order prohibiting Valero from acquiring one specific terminal at issue by any means for 10 years, otherwise California contends the case should still go to trial.26

This case is a good reminder that state attorneys general are becoming particularly active in merger enforcement especially when a transaction raises local competitive concerns. The state enforcers can—and do—bring cases even when the federal authorities decline to take action.27 As a result, parties need to consider specific state issues when evaluating the risks of a transaction and work diligently during the investigation to address any state concerns.

Amazon/Whole Foods

On August 23, 2017—less than two months after Amazon announced its intention to acquire Whole Foods—the FTC announced that it had decided to close its investigation of the transaction.28 The deal generated a significant amount of interest, including numerous senators and advocacy groups encouraging the FTC to consider issues beyond the competitive implications of this specific transaction.29 The FTC, however, focused its analysis on whether or not there would be anti-competitive effects from the transaction and concluded there would not.

EnergySolutions/Waste Control Specialists

On June 21, 2017, the District Court of Delaware enjoined EnergySolutions' proposed acquisition of Waste Control Specialists (WCS).30 Although Defendants argued that the companies did not compete because they offered different services and had different capabilities for disposing of certain segments of low level radioactive waste (LLRW), the Court agreed with DOJ that the merging parties' processes for LLRW disposal were reasonably interchangeable such that the companies competed substantially with each other. Although the Court adopted part of DOJ's market definition—differentiating between lower-activity and higher-activity LLRW—it did not agree with DOJ's attempt to further subdivide the market into the disposal of "operational" or "decommissioning" LLRW—noting that although there were differences between the two, the disposal options were still essentially the same. The Court concluded that the combined company would have a 100 percent share for higher-activity LLRW disposal and a 96.7 percent share for lower-activity LLRW disposal. The Court's conclusion that the parties competed directly was supported by reference to the parties' own internal documents and customer testimony.

The Defendants also sought to mount a "failing firm" defense, arguing that WCS was likely to fail absent the merger. Despite recognizing that WCS had "never made an operating profit and consistently misses projections," the Court found that the merging parties failed to show that there was a "good faith effort" to elicit reasonable alternative offers from a buyer other than EnergySolutions. The Court was critical of the merger agreement's "no talk" provision, which prevented WCS from seeking other buyers, even though there was evidence that other companies were interested in purchasing WCS.31

As this case demonstrates, there is a high bar for a company to meet the failing firm defense. Parties wishing to successfully invoke such a defense, therefore, must remember that they must demonstrate not only that the target is unable to meet its financial obligations and cannot reorganize successfully, but also that the firm (or assets) are likely to exit the market without the proposed transaction—meaning the firm has conducted a good-faith process to elicit reasonable alternative offers that would present less competitive concerns, but no reasonable alternative offers exist. And, as here, where the merger agreement explicitly prohibits seeking alternative buyers, relying on the "failing firm" defense is significantly more risky.

DraftKings/FanDuel

On June 19, 2017, the FTC filed suit to block the merger between DraftKings and FanDuel, alleging that the parties would control a combined 90 percent of the paid daily fantasy sports contests market resulting in a "de facto monopoly." The parties abandoned the transaction less than a month later.

Market definition was critical in this case—the FTC alleged a narrow market of "paid daily fantasy sports contests" that were distinguished from "season-long" contests. The parties, however, argued that their businesses compete with "many fantasy sports, sports entertainment, and other gaming and recreation companies."32

The FTC relied on a number of factors to demonstrate this distinction, including the cost (season-long contests are often free), exclusivity of player selection, and whether the contest players were generally focused on winning money (daily players) or interacting with friends and family (season-long players).33 The FTC also presented examples of the parties' internal documents purportedly illustrating robust competition between the two companies. For example, DraftKing senior executives commented in one document that the company planned to put a "foot on [FanDuel's] throat and press down hard," and "don't let up until they stop breathing."34 The DraftKing CEO also noted that: "[t]here is only one competitor of consequence—FanDuel."35 And, internal emails from both DraftKing and FanDuel showed competition among the parties on both price and quality.36

Ordinary course business documents, including emails, continue to play an important role in merger investigations. Parties should have a good understanding of what their documents say and be prepared to address documents that do not support the parties' arguments. Moreover, given the prevalence and the potential perception by some businesses of the informality of email, it is critical that businesses are reminded that internal communications will be scrutinized for consistency with any antitrust arguments.

Conclusion

In sum, recent enforcement activity illustrates several important themes in merger review:

First, despite the change in administration and the number of empty posts at the FTC and DOJ, investigations are proceeding and the authorities are challenging mergers where they have concerns.

Second, state antitrust enforcers continue to be active and may take action even if the federal authorities do not.

Third, ordinary course documents can play a critical role in merger investigations—the authorities regularly rely on such materials as evidence in their complaints. It can be very difficult for parties to overcome internal documents, emails, or presentations that contradict the parties' arguments and theories about competition in the marketplace.

Fourth, HSR clearance is no safe harbor. The authorities will go after closed transactions—including transactions where an HSR filing has been made and the waiting period expired—if they believe the transaction raises competitive concerns.37 As a result, companies should be mindful that the failure to highlight meaningful overlaps to the authorities during the investigation stage may risk a post-closing challenge to the transaction.

Fifth, it is important to understand the risks of merger litigation. A victory in the early stages of litigation does not always mean the transaction will close. Given the risks, costs, and time associated with litigating a merger, parties must determine whether proceeding to litigate is a realistic approach, and if so, devise a litigation strategy that fits with the company's broader goals.

Finally, the antitrust authorities continue to focus their analysis on the competitive effects of the transaction—and not extend the analysis to other factors such as jobs or public policy concerns.

© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

Footnotes

1 The FTC continues to operate with just two Commissioners with no nominee and no permanent chair while Makan Delrahim was just confirmed as the Assistant Attorney General for Antitrust on September 26, 2017.

2 Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

3 Complaint, US v. Parker-Hannifin Corporation, at 4, No. 1:17-cv-01354 (D. Del. Sept. 26, 2017).

4 Id. at 11.

5 Id. at 1.

6 Id. at 9.

7 Id. at 8-9, 12.

8 Id. at 3. Deputy Assistant Attorney General Donald Kempf commented: "Parker-Hannifin bought CLARCOR knowing that this transaction raised serious antitrust concerns."Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

9 Complaint, US v. Parker-Hannifin Corporation, at 15, No. 1:17-cv-01354 (D. Del. Sept. 26, 2017).

10 See, e.g., Complaint, In the Matter of Valeant Pharmaceuticals International, Inc., No. 151-0236 (F.T.C. Nov. 7, 2016); Complaint, US v. Bazaarvoice, Inc., No C-13-0133 (N.D. Cal. Jan. 10, 2013); Complaint, US v. George's Foods, LLC, No. 5:11-cv-00043 (W.D. Va. May 10, 2011).

11 See,e.g., Parker-Hannifin 'Anticompetitive and Illegal' Deal not Shielded by HSR Clearance, DOJ Official Says, mLex, Sept. 28, 2017.

12 Parker Acknowledges DOJ Filing Regarding its US Qualified Aviation Ground Fuel Filtration Business, Sept. 26, 2017.

13 Parker-Hannifin 'Anticompetitive and Illegal' Deal not Shielded by HSR Clearance, DOJ Official Says, mLex, Sept. 28, 2017.

14 Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

15 In 2005, Valero sought to acquire the same terminals as part of a larger acquisition of Kaneb Services and Kaneb Pipe Line Partners. The FTC investigated the transaction, and Valero divested the two petroleum terminals at issue here as part of the settlement. The decree prohibiting subsequent re-acquisition of the terminals expired in 2015. See, e.g., Valero, L.P., Valero Energy Corporation, et al., In the Matter of, FTC (FTC Sept. 16, 2005).

16 Order Denying TRO, Setting Briefing Schedule for Preliminary Injunction Motion, and Granting Limited Discovery,State of California v. Valero Energy Corporation, et al., 3:17-cv-03786 (N.D. Ca. July 12, 2017). See also Amended Complaint, State of California v. Valero Energy Corporation, et al., 3:17-cv-03786 (N.D. Ca. Sept. 6, 2017).

17 Amended Complaint, State of California v. Valero Energy Corporation, et al., at 2-3, 3:17-cv-03786 (N.D. Ca. Sept. 6, 2017).

18 Id. at 3.

19 Restraining Order Against Valero Energy Terminal Deal Filed Too Late, Judge Says, mLex (July 13, 2017).

20 Order re Motion for Preliminary Injunction,State of California v. Valero Energy Corporation, et al., 3:17-cv-03786 (N.D. Ca. Aug. 28, 2017).

21 Id.

22 Id.

23 Id.

24 Id.

25 Attorney General Becerra: Valero's Abandoned Takeover of Independent Petroleum Distributor Is Welcome News for Californians and Competition, Sept. 18, 2017.

26 Joint Case Management Statement, State of California v. Valero Energy Corporation, et al., at 2-3, 3:17-cv-03786 (N.D. Ca. Sept. 28, 2017).

27 See also State of Washington v. Franciscan Health System, et al., No. 3:17-cv-05690 (W.D. Wash. Aug. 31, 2017).

28 Statement of Federal Trade Commission's Acting Director of the Bureau of Competition on the Agency's Review of Amazon.com, Inc.'s Acquisition of Whole Foods Market Inc., Aug. 23, 2017.

29 See, e.g., Food and Water Watch, letter to the Federal Trade Commission, In re: Proposed Amazon-Whole Foods Merger.

30 US v. Energy Solutions, et al., No. 16-1056 (D. Del. June 21, 2017).

31 Id. at 28-30.

32 Answer and Defenses of Respondent FanDuel, Ltd, In the Matter of DraftKings, Inc. and FanDuel Limited, No. 9375 (FTC July 3, 2017).

33 Complaint, In the Matter of DraftKings, Inc. and FanDuel Limited, at 6-7, No. 9375 (FTC June 19, 2017).

34 Id. at 2.

35 Id. at 9.

36 Id. at 9-10.

37 See, e.g., US DOJ: Merger Counsel Should Highlight Overlaps, Global Competition Review (Sept. 28, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions