On April 28, 2008, the Federal Trade Commission (the "FTC") announced a complaint challenging a string of transactions completed between 2002 and 2005, and proposed a consent order that imposed conduct restrictions on the acquirer in order to reduce the anti-competitive effects of the cumulative transactions. The FTC claimed that a series of acquisitions by TALX, Inc. ("TALX") of virtually all of its competitors had unlawfully enhanced the company's ability to increase prices unilaterally while decreasing the quality of services it provided. TALX, a wholly owned subsidiary of Equifax, Inc., provides outsourced unemployment-compensation management ("UCM") and verification of income and employment ("VOIE") services. UCM service providers administer unemployment compensation claims on behalf of large employers, and VOIE servicers provide employee income and employment information on behalf of employers to third parties.
Rather than implementing its usual remedy of divestiture, the FTC imposed unusual conduct restrictions on TALX in order to restore competition in the relevant lines of commerce. TALX entered into a settlement agreement with the FTC, in which TALX did not admit or deny wrongdoing, but agreed to follow the FTC's conduct restrictions. Jeffrey Schmidt, Director of the FTC's Bureau of Competition, explained that "while each transaction individually may not have been problematic, the FTC looked at the cumulative effect of the acquisitions. This case sends a message that firms can't get away with unlawful acquisitions just because they take place in relatively small increments."
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The Transactions
Between 2002 and 2005, TALX completed seven acquisitions of companies that provided UCM and VOIE services. TALX bought the two largest UCM service providers in the national market, most of the UCM and VOIE assets of four companies, and the unemployment tax management business of another company. Even though the individual acquisitions fell below the Hart-Scott-Rodino reporting threshold, the FTC alleged that the acquisitions cumulatively reduced competition.
In its complaint, the FTC alleged that TALX's acquisitions eliminated competition between the largest UCM service providers in the national market and substantially reduced competition in the national market for UCM and VOIE services. The FTC alleged further that TALX's acquisitions "enhanced its ability to increase prices unilaterally and enhanced its ability to decrease the quality of services provided in each of the relevant lines of commerce." The FTC alleged that the transactions cumulatively reduced competition, and thus violated Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.
The FTC alleged further that the relevant markets are highly concentrated, and that TALX substantially increased that concentration by acquiring most of its competition. Entry into the market for the provision of these services is difficult and slow, partly because UCM companies like TALX and the companies it acquired have long term customer contracts and non-compete and non-solicitation agreements with current and former employees. The FTC alleged that the agreements with employees reduced the number of experienced and talented employees available to be hired by would-be competitors to enter or expand in the near term. In order to remedy the anti-competitive effects of the series of acquisitions, the FTC imposed a number of conduct restrictions on TALX
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The Consent Order And Conduct Restrictions
While the FTC usually prefers divestiture as a remedy, in this matter the FTC chose instead to encourage competition through conduct restrictions. The consent order aims to foster competition by allowing certain long-term UCM customers to terminate their contracts with TALX on 90-days notice, and by restricting the company's ability to enforce certain employment provisions against past and current employees who accept employment with competitors. TALX may not enforce specific provisions of non-compete and non-solicitation agreements, and it may not enforce agreements not to disclose trade secrets against a certain number of past and current employees.
Additionally, the order provides that for ten years, TALX must give the FTC thirty days advance notice before acquiring or entering into a management contract with a UCM or VOIE service provider. TALX may also not enter into, or attempt to enter into, any agreements to divide or allocate markets for UCM services. TALX may not enter into agreements that would prevent or discourage any entity from supplying goods or services to a UCM competitor. Through the conduct restrictions in the consent order, the FTC is attempting to remedy the anti-competitive effects of the acquisitions
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Conclusion
This case signals that the FTC may be increasingly likely to look at the cumulative effect of acquisitions that are not individually problematic in order to determine whether the acquisitions are unlawful. Additionally, the FTC may choose to remedy any anti-competitive effects by restricting the acquirer's business practices instead of requiring divestiture. Firms should exercise caution when acquiring smaller competitors through a series of mergers which could have anti-competitive effects on the market.
