In 2020, the defense side ended a 15-year drought in litigating the fix. When the U.S. antitrust authorities seek to block a proposed merger, they must obtain an injunction in federal court. One strategy the defense can employ to defeat a merger challenge is to proactively agree to divest assets to a third-party buyer and convince the court that it is sufficient to remedy the alleged anticompetitive effects. Antitrust practitioners call this strategy litigating the fix.
Until the D.C. District Court's decision in Evonik/PeroxyChem earlier this year – where Dechert represented the seller PeroxyChem – no court since Arch Coal/Triton in 2004 had found that a proposed remedy in a litigated merger challenge was sufficient to offset the anticompetitive effects. In the intervening 15 years, a number of merging parties attempted to litigate the fix, all unsuccessfully. There was a growing sense that the aggregate precedential weight of these failures could make future efforts to litigate the fix more difficult. That concern was put to rest earlier this year, when the defenses first in Evonik/PeroxyChem and then in T-Mobile/Sprint both employed a litigate-the-fix strategy to defeat government merger challenges.
- The best witnesses are fact witnesses, not experts
- The divestiture buyer's bad documents can derail a strategy to litigate the fix
- Credible testimony from the divestiture buyer's senior management is critical
- The defense can use government guidelines offensively
- A low purchase price for the divested assets is relevant, but not dispositive
- The defense can leverage other government settlements to bolster its case
Prior to Evonik/PeroxyChem, a String of Courts Rejected Proposed Remedies
From Arch Coal/Triton in 2004 to Evonik/PeroxyChem in January 2020, merging parties uniformly failed in their attempts to litigate the fix. For example, in Sysco/U.S. Foods, the court rejected a proposed divestiture consisting of a minority of the seller's distribution centers, as the buyer would not "step into [the seller's] shoes to maintain....the pre-merger level of competition" in the marketplace.1 The buyer would have been half the size of the acquired company, lacked nationwide coverage necessary to compete for the largest customers, and faced higher costs.2
Moreover, the divestiture buyer's internal documents expressed concerns that it was not getting enough in the deal to succeed.3
Another example comes from a 2017 merger litigation, in which a court found a divestiture buyer to be too inexperienced in the market at issue. The court relied on the divestiture buyer's internal senior-management documents expressing reservations about the company's ability to expand into the new market.4
From 2004 to 2020, several other courts rejected proposed remedies on similar grounds.5
The Evonik/PeroxyChem and T-Mobile/Sprint Decisions Reaffirm that Litigating the Fix Can be a Path to Closing
Questions lingered following this string of defense losses. Was this an underlying trend? More specifically, was it simply that the proposed remedy in each case was insufficient when judged on its own merits or did it signify courts' general skepticism towards the litigate-the-fix defense? Following the decisions in Evonik/PeroxyChem and T-Mobile/Sprint earlier this year, it is clear that litigating the fix can provide a path to victory.
First, in Evonik/PeroxyChem, the defense convinced the court that a divestiture of a plant in British Columbia, Canada resolved any competitive concerns in the FTC's alleged Pacific Northwest geographic region. In contrast to prior cases, the defense demonstrated that the divested assets constituted a stand-alone ongoing business with all necessary "personnel, customer lists, information systems, [and] intangible assets" sufficient to replace the lost competition.6 Credible, detailed testimony from management of the divestiture buyer – who would be responsible for the business post-closing – convinced the court that the divestiture buyer had the requisite capabilities to succeed and allowed the court to swat away attacks to the divestiture buyer's independence, the future viability of the divested plant, and the low purchase price.7
Then in T-Mobile/Sprint, two merging cellular service providers faced the unusual situation of defending their deal against a handful of plaintiff states despite reaching settlements with the Department of Justice (DOJ) and the Federal Communications Commission (FCC). There, the merging parties agreed to a remedy designed to stand up Dish, a satellite TV provider, as a new nationwide competitor for cellular services. Most significant among them was the divestiture of Boost Mobile, a successful prepaid cellular provider.8 As in Evonik/PeroxyChem, the defense relied heavily on testimony from the divestiture buyer's executives (which the court cited liberally in its opinion) to convey their business plan and to deflect the states' attacks.9
Some Practical Litigation Takeaways
There are a number of lessons that merging parties seeking to litigate the fix can learn from the defense's successes in Evonik/PeroxyChem and T-Mobile/Sprint. These are just a few.
The best witnesses are fact witnesses, not experts. Courts' assessment of a proposed remedy is a fact-based predictive analysis that usually is better addressed through testimony from the divestiture buyer, company witnesses, and third party-witnesses, as well as through documentary exhibits, rather than through economic expert analysis. It may not be a good use of the economic expert's time, focus, or credibility to weigh in on the sufficiency of the remedy. Indeed, the merging parties in Evonik/PeroxyChem and T-Mobile/Sprint did not rely on economic expert testimony to litigate the fix.
The divestiture buyer's bad documents can derail a strategy to litigate the fix. Or conversely, the absence of bad documents can help smooth the path to victory. In Evonik/PeroxyChem, the FTC did not identify any documents suggesting that the divestiture buyer was unwilling or unable to compete effectively. In T-Mobile/Sprint, the states cited to T-Mobile and Sprint ordinary course documents created before the proposed fix speculating that the divestiture buyer would not be able to scale quickly enough to compete.10 The court dismissed those documents, finding that the divestiture buyer's more recent documents and trial testimony were more persuasive. That evidence indicated that the divestiture buyer would be able to scale more quickly and at a lower cost than the merging parties had earlier speculated.11
In short, both merging parties and divestiture buyers' internal communications should reflect confidence in their ability to succeed post-divestiture. They also should anticipate any objections that regulators may raise in opposition to the remedy and document the steps they are taking to overcome those objections.
Credible testimony from the divestiture buyer's senior management is critical. In both Evonik/PeroxyChem and T-Mobile/Sprint, the courts cited testimony from the divestiture buyer's senior management to support their conclusions. For example, in Evonik/PeroxyChem, the court found that the divestiture buyer's senior manager who would oversee the divested assets "credibly dispelled" an FTC argument that an ongoing commercial relationship caused the divestiture buyer to be beholden to Evonik.12 Likewise, the court in T-Mobile/Sprint relied on testimony from the divestiture buyer's chairman to reject the states' argument that the divestiture buyer did not actually plan to build out a network to compete with the merging parties.13 In contrast, other courts in rejecting proposed divestitures questioned the credibility of the divestiture buyer's testimony.14
These examples underscore a point that is not novel but is important enough to bear repeating – credible testimony by the divestiture buyer's senior managers is critical to convincing a court that the remedy will succeed. To most effectively persuade a court, the defense should proffer testimony from the divestiture buyer's senior manager that will be responsible for guiding the strategic direction of the divested assets. To the extent that written or remote (via video-conference) testimony is an option, there should be a strong preference for live testimony so that the court can evaluate the witness's demeanor and credibility in person. In addition, the defense can bolster the divestiture buyer's testimony with its own business documents, such as documents discussing the buyer in a positive light. They also should utilize customer witness testimony supporting the divestiture – even government witnesses that oppose the transaction may be positive about the divestiture.
The defense can use government guidelines offensively. In Evonik/PeroxyChem, the merging parties argued to the court that the proposed divestiture was exactly the type of divestiture that the agency would approve outside the litigation context.15 In fact, the FTC's own 2017 Merger Remedies Study agreed that divestitures of an ongoing business – which was the case in Evonik/PeroxyChem – always succeeded in maintaining or restoring competition.16 The court agreed that the divestiture was likely to succeed, relying on that same study.17
Merging parties should carefully review the antitrust agencies' published guidance on remedies18 as well as the aforementioned 2017 Merger Remedies Study. These will help in crafting divestiture packages that will withstand court scrutiny. In addition, looking at the past failures and distinguishing your case from those can help show why your divestiture will succeed.
A low purchase price for the divested assets is relevant, but not dispositive. In an earlier merger litigation, the divestiture buyer had agreed to acquire divested assets at the "screaming good price" of approximately 8% to 13% of the market rate.19 The government persuaded the court that such a "fire sale" price gave the divestiture buyer a low-risk option to walk away if it failed, relying on the divestiture buyer's own internal business documents.20 The FTC turned to this same argument in Evonik/PeroxyChem, arguing that the low purchase price would allow the divestiture buyer to liquidate the plant or "drive it into the ground and still turn a profit."21 This time, though, the court rejected the FTC's argument. First, "to state the obvious," the court agreed with the defense that divestiture buyers have enormous bargaining leverage and therefore one should expect that they will negotiate a bargain price.22 Then, in contrast to prior cases, the court rejected the premise that a low purchase price gave the divestiture buyer little incentive to compete. "To the contrary," the testimonial and documentary evidence demonstrated that the divestiture buyer "is a good-faith purchaser that intends to compete effectively...and grow the business, and it has strong incentives to do so."23
Taken together, these cases show that a low purchase price in and of itself is not evidence that a divestiture will fail. Given that a below-market purchase price is common in a litigate-the-fix scenario, both the merging parties and divestiture buyers should prepare to rebut predictable government objections by carefully documenting (1) the rationale for the low purchase price; (2) the pro-competitive benefits that the divestiture buyer can realize from the low purchase price, such as increased investment or financial stability; and (3) the divestiture buyer's incentive and ability to compete, such as a desire to enter the market or affirmative steps it is taking to hit the ground running post-divestiture.
The defense can leverage other government settlements to bolster
its case. Often other government agencies such as foreign
competition authorities or industry regulators (such as federal or
state communications, insurance, or energy regulators) also review
the transaction that is the subject of a merger litigation. These
other reviews can be a double-edged sword. In the recent
Sabre/Farelogix case, for example, the merging parties
defeated a DOJ lawsuit only to have the United Kingdom's
Competition and Markets Authority block their transaction a few
days later.24 Sabre and Farelogix later abandoned
their transaction. But merging parties also can use agreements with
other regulators to their advantage. In Evonik/PeroxyChem,
the merging parties reached a settlement with the Canadian
Competition Authority to divest a plant, and this remedy assured
the court that it need not require more relief.25
In T-Mobile/Sprint, the merging parties had reached
settlements with both the DOJ and the FCC.26 The
court analyzed the proposed remedies on their own terms, but still
"accord[ed]...some deference" to the fact that the DOJ
and FCC were satisfied with the remedies.27
The good news for merging parties facing down the threat of a government lawsuit is that litigating the fix can be a fruitful path to defeating a litigated merger challenge. The above lessons illustrate just some of the many strategies that the defense can employ to successfully litigate the fix. It is important to think creatively about the available evidence and ways to present it in court so that judges – human beings who understandably take seriously the consequences of allowing an ineffective remedy to go through – can trust that they are making the right decision.
1) FTC v. Sysco Corp., 113 F. Supp. 3d 1, 73 (D.D.C. 2015) (Sysco/U.S. Foods).
2) Id. at 73-76.
3) Id. at 75-76.
4) United States v. Aetna Inc., 240 F. Supp. 3d 1, 70-71, 74 (D.D.C. 2017) (Aetna/Humana).
5) See FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26, 57-59 (D.D.C. 2009) (rejecting a licensing agreement to a small new entrant as insufficient); In the matter of Otto Bock Healthcare North America, Opinion of the Commission, FTC No. 9378, at 54-60 (FTC 2019) (Commission opinion in FTC administrative litigation rejecting asset package as insufficient); see also FTC v. Libbey, Inc., 211 F. Supp. 2d 34, 50 (D.D.C. 2002) (finding that amended merger agreement excluding certain businesses from the transaction did not remedy the competitive effects); United States v. Franklin Elec. Co., 130 F. Supp. 2d 1025 (W.D. Wisc. 2000) (rejecting intellectual property license to a third party as insufficient). One court declined to consider a proposed remedy where the defense rested its case without presenting any affirmative witnesses. See FTC v. Staples Inc., 190 F. Supp. 3d 100, 137 n.15 (D.D.C. 2016).
6) FTC v. RAG-Stiftung, No. 19-2337, Memorandum Opinion, at 35 (D.D.C. Jan. 24, 2020) (Evonik/PeroxyChem).
7) Id. at 35-40.
8) State of New York v. Deutsche Telekom, No. 19-5434, Decision and Order, at 110 (S.D.N.Y. Feb. 11, 2020) (T-Mobile/Sprint).
9) See, e.g., id. at 121-22 (relying on testimony from Dish's chairman to resolve a factual dispute regarding Dish's intent to compete in the future).
10) Id. at 113.
11) Id . at 114-116.
12) Evonik/PeroxyChem at 37.
13) T-Mobile/Sprint at 27, 121.
14) See, e.g., Sysco/U.S. Foods at 75; Aetna/Humana at 70-71, 74.
15) Evonik/PeroxyChem, Trial Tr. 73:24-74:2 (Nov. 12, 2020) ("[I]f the FTC were not in litigation but, instead, was resolving this case through consent decree, it would very much welcome a buyer like United Initiators.").
16) Evonik/PeroxyChem, Defendants' Proposed Findings of Fact and Conclusions of Law, at 50 (Jan. 10, 2020) (citing Federal Trade Comm'n, The FTC's Merger Remedies 2006-2012: A Report of the Bureaus of Competition and Economics, at 1 (Jan. 2017)).
17) Evonik/PeroxyChem at 36.
18) See U.S. Dep't of Justice, Antitrust Division Policy Guide to Merger Remedies (Oct. 2004); Federal Trade Comm'n, Negotiating Merger Remedies (Jan. 2012); Federal Trade Comm'n, A Guide for Potential Buyers: What to Expect During the Divestiture Process, https://www.ftc.gov/system/files/attachments/merger-review/a_guide_for_potential_buyers.pdf; Federal Trade Comm'n, Frequently Asked Questions About Merger Consent Order Provisions, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/merger-faq.
19) Aetna/Humana at 72.
21) Evonik/PeroxyChem at 38.
22) Id. at 38.
23) Id. at 39.
24) See Competition & Markets Authority, Anticipated Acquisition by Sabre Corporation of Farelogix Inc.: Final Report, at 6 (Apr. 9, 2020).
25) Evonik/PeroxyChem at 33-34.
26) T-Mobile/Sprint at 103.
Originally published June 24, 2020.
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.