United States: Merger Enforcement Takeaways From 5 Recent Cases

Despite a number of key U.S. federal antitrust posts remaining vacant,1 the antitrust authorities have remained quite active. 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 Sept. 26, 2017, the U.S. Department of Justice challenged Parker-Hannifin's consummated acquisition of Clarcor Inc.,2 alleging that the transaction substantially lessened competition in aviation fuel filtration systems. Interestingly, the 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, the DOJ alleged that Parker-Hannifin and Clarcor are the only two domestic suppliers for aviation fuel filtration products.5 The DOJ emphasized that the parties' systems are the only available products that have passed the rigorous qualification and certification process mandated in U.S. commercial and military aircraft.6 Moreover, the DOJ alleged that U.S. commercial and military aviation customers were unlikely to rely on a foreign supplier that lacked a U.S. 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, the 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

The 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 for 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 DOJ 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 the DOJ, despite acknowledging the overlap in internal emails. Moreover, Parker-Hannifin refused the DOJ's request to hold separate the Clarcor filtration business while the DOJ conducted its investigation,14 and, as a result, the DOJ brought this action.

Valero/Plains

Despite the Federal Trade Commission declining to take action against Valero's proposed acquisition of two Northern California bulk petroleum terminals from Plains All American Pipeline,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 – 10 days after the HSR waiting period had expired and on the day of the parties' announced closing.19 A 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' long-term 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 anti-competitive 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 Sept. 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 Aug. 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.30 Although the 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 the 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 the DOJ's market definition – differentiating between lower-activity and higher-activity LLRW – it did not agree with the 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, DraftKings 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 DraftKings CEO also noted that: "[t]here is only one competitor of consequence – FanDuel."35 And, internal emails from both DraftKings 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.

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 Sept. 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 Corp., 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, U.S. 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, U.S. v. Bazaarvoice Inc., No C-13-0133 (N.D. Cal. Jan. 10, 2013); Complaint, U.S. 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 (subscription required).

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, (subscription required).

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 LP, Valero Energy Corp. 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 Corp., et al., 3:17-cv-03786 (N.D. Ca. July 12, 2017). See also Amended Complaint, State of California v. Valero Energy Corp. et al., 3:17-cv-03786 (N.D. Ca. Sept. 6, 2017).

17 Amended Complaint, State of California v. Valero Energy Corp. 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) (subscription required).

20 Order re Motion for Preliminary Injunction, State of California v. Valero Energy Corp. 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 Corp. 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 See, e.g., Food and Water Watch, letter to the Federal Trade Commission, In re: Proposed Amazon-Whole Foods Merger.

31 Id. at 28-30.

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

33 Complaint, In the Matter of DraftKings Inc. and FanDuel Ltd., 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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.