2017 us merger enforcement year in review

32 Pages·2017·0.99 MB·English

2017 US MERGER ENFORCEMENT
YEAR IN REVIEW
Michael Bernstein, Francesca Pisano, Dylan Young,
Titilayo Rasaki, Jamie Long
arnoldporter.com
Table of Contents
Overview _______________________________________3
2017 By the Numbers ___________________________3
Litigations and Challenges to Deals ________________5
The Authorities Challenged Several
Consummated Transactions _____________________5
A Number of Transactions Were Abandoned
in the Face of Litigation _________________________6
Authorities Continued to Win in Court _____________7
State Enforcement Agencies Also
Challenged Transactions ________________________9
More Challenges are Pending ___________________10
Notable Mergers Closed Without Conditions _________11
Divestitures & Consent Decrees ___________________12
Minority Interests ______________________________12
The Failing Firm Defense ________________________13
Entry Considerations ___________________________14
Information Sharing Concerns ___________________15
Local/Regional Competitive Impact _______________16
Pharmaceuticals & Medical Devices ______________17
Industrial Transactions __________________________18
Standard for Enforcing Final Judgments ___________19
The Authorities Actively Enforced the
Hart-Scott-Rodino Rules __________________________20
Takeaways from 2017 and Expectations for 2018 ______22
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved | 2
Overview — 2017 Merger Enforcement
Year in Review
2017 was a year of transition for the antitrust agencies with new leadership for the Antitrust Division of the
Department of Justice (DOJ) and the Federal Trade Commission (FTC). These leadership changes took time
with DOJ spending most of the year without a confirmed Assistant Attorney General until Makan Delrahim was
confirmed on September 27, 2017. While Commissioner Maureen Ohlhausen took over as acting Chair of the
FTC shortly after the inauguration, President Trump nominated the permanent Chair and three Commissioners
only recently. As of the time of publication, the FTC still is operating with only two sitting Commissioners.
However, these transitions did not mean inaction. Antitrust enforcers have remained vigilant—through
2017 both the FTC and DOJ closely scrutinized transactions and intervened in an attempt to stop multiple
transactions. States, like California and Washington, also exerted their antitrust enforcement authority,
attempting to block transactions that the FTC chose not to take action against. And, the new leadership
at DOJ has signaled an increased aggressiveness in evaluating vertical transactions and skepticism in
accepting conduct remedies. While we likely need to wait until later this year to see if this represents a true
policy shift, what else the new leadership at DOJ and the FTC have in store, and whether states will become
more aggressive against transactions to fill any perceived voids by the federal authorities, 2017 provided a
number of clues as to the future of antitrust policy in the coming years.
2017 By the Numbers
Merger activity continued to be strong and, as a result, 2017 remained a busy year for both the FTC and DOJ.
While there was a slight drop-off in formal actions this past year, 2017 still saw near-record enforcement activity.
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Figure 1. Formal Actions Taken by U.S. Federal Antitrust Authorities 2017*

* These figures exclude filings made in opposition to mergers under review by other authorities (e.g., state attorneys general or
FCC), one gun jumping challenge brought by the DOJ, and two challenges by the DOJ (acting on behalf of the FTC) enforcing the
Hart-Scott-Rodino Act’s filing requirements.
In 2017, the DOJ and FTC litigated six transactions and resolved an additional five merger challenges that
were pending at the start of the year, for a total of eleven active litigations through the course of the year.
Figure 2. Federal Court Challenges*

* These figures exclude filings made in opposition to mergers under review by other authorities (e.g., state attorneys general or the
FCC), one gun jumping challenge brought by the DOJ, and two challenges by the DOJ (acting on behalf of the FTC) enforcing the
HSR Act’s filing requirements. These figures include one FTC district court victory currently under appeal.
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Litigations and Challenges to Deals
After years of vigorous merger enforcement by the Obama administration, we continued to see much of the
same in 2017. The DOJ and FTC continued to challenge deals in court—and win. Transactions abandoned
in the face of litigation provided additional victories for the authorities. Notably, the DOJ and FTC challenged
several consummated deals (including one that received HSR approval), demonstrating the aggressiveness
and seriousness with which the authorities are pursuing transactions they believe are likely to substantially
lessen competition. Even the states got in on the action by independently challenging mergers in the
hospital and energy sectors. While investigations for many of these transactions began under the Obama
administration, most of these cases were filed by the Trump administration, which demonstrates that current
authorities are just as serious about merger enforcement as their predecessors.
The Authorities Challenged Several Consummated Transactions
Enforcement actions after a transaction has closed are relatively rare. But, 2017 saw a number of such
challenges—including cases brought by new leadership at the DOJ and FTC. Importantly, these cases also
highlight that even the expiration of the HSR waiting period may not mean the end of antitrust scrutiny.
Otto Bock HealthCare/Freedom Innovations
On December 20, 2017, roughly three months after the parties closed the transaction, the FTC issued an
administrative complaint challenging the acquisition of Freedom Innovations, a manufacturer of lower limb
prosthetics, by Otto Bock, a global provider of limb prosthetics, orthotics, mobility solutions, and medical care.1
The FTC alleged that the acquisition reduced competition in the US market for microprocessor prosthetic
knees, which adapt stiffness or positioning of the knee in response to different walking patterns and ground
conditions.2 In particular, the FTC claimed that the merger eliminated a significant and disruptive competitor
in Freedom Innovations, which offered significant discounts and product upgrades that benefit amputees.3
Moreover, the FTC claimed that timely entry by other competitors was unlikely because development of a
microprocessor knee can take longer than two years.4 While the case is pending, Otto Bock agreed to stop
integration of the two companies and hold separate the Freedom Innovations business.5
Parker-Hannifin/Clarcor
Nearly nine months after the HSR waiting period expired and seven months after Parker-Hannifin Corporation
closed its $4.3 billion acquisition of Clarcor Inc., DOJ challenged the transaction in the District of Delaware
alleging that the acquisition substantially lessened competition for aviation fuel filtration systems.6 While the
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reason for the delayed challenge was not publicly disclosed, it is possible that customer complaints arose after
HSR clearance.7 In bringing its challenge, DOJ alleged that the parties were the only two domestic suppliers
of the products at issue and that the transaction would result in higher prices, lower quality of service, and
less innovation.8 DOJ further alleged new and foreign entry was unlikely to mitigate any competitive issues
due to the rigorous qualification process mandated in US aviation.9 DOJ buttressed these allegations by
pointing to internal Parker-Hannifin documents stating that there was a “notable area of overlap” between
the two companies and stating that Parker-Hannifin was “preparing for the possibility” that it may have to
“divest Clarcor’s aviation ground fuel filtration” business.10 Parker-Hannifin filed an answer on October 18,
2017 arguing that the acquisition was procompetitive and entry was likely.11 Shortly thereafter Parker-Hannifin
agreed to divest the business unit that included Clarcor’s aviation fuel filtration assets.12
TransDigm Group Incorporated/Takata Corporation
On February 22, 2017, TransDigm Group Incorporated acquired two Takata Corporation subsidies, SCHROTH
Safety Products GmbH and Takata Protection Systems, Inc. (collectively “SCHROTH”), for $90 million.13 The
transaction was not reportable under the HSR Act due to the structure of the deal.14 Ten months after the
deal closed, the DOJ filed suit to force a divestiture alleging that prior to the merger, TransDigm’s AmSafe
subsidiary was the only meaningful competitor to SCHROTH in the market for commercial aviation restraint
systems.15 The DOJ also pointed to high barriers preventing new competitors from entering the market, such
as technical expertise and complex certification requirements.16 To resolve the DOJ’s concerns, TransDigm
agreed to divest the entirety of SCHROTH to a consortium of private equity funds.17
Mallinckrodt ARD Inc./Novartis AG
In January 2017, Mallinckrodt paid $100 million to settle FTC allegations that it illegally maintained a US
pharmaceutical monopoly by acquiring the US rights to a potential entrant’s product.18 Mallinckrodt has long
sold Synacthen, the only US adrenocorticotropic hormone (ACTH) drug used to treat infantile spasms, nephrotic
syndrome, and other disorders.19 Outside the U.S., Novartis AG sold a synthetic ACTH drug at a lower price
point.20 Novartis accepted bids for the US rights to its ACTH drug in 201321 and Mallinckrodt won the bidding
process, beating several competitors. The FTC alleged under a monopolist theory that these other bidders
were interested in bringing the drug into the US to compete with Mallinckrodt and that Mallinckrodt’s purchase
harmed competition by preventing such entry.22 “Even without alleging that Synacthen was ‘likely’ to clear all
regulatory and other hurdles to reaching the market, the Commission nevertheless alleged that the acquisition
violated Section 2 of the Sherman Act.”23 Mallinckrodt settled the dispute by paying $100 million and agreeing
to license the US rights to synthetic ACTH to an approved licensee.24 The FTC originally approved Marathon
Pharmaceuticals, but Marathon spun off its ACTH business to West Therapeutic Development over the course
of 2017.25 The FTC approved West as a replacement sublicensee on July 14, 2017.26
A Number of Transactions Were Abandoned in the Face of Litigation
Protracted antitrust investigations and litigation can add significant burdens and delays to closing a transaction.
After long investigations and the threat of litigation, a number of parties abandoned their merger when
confronted with the possibility of litigation to enjoin the transaction.
DraftKings/FanDuel
DraftKings and FanDuel, which both offer daily, weekly, and season-long sports fantasy contests in various
sports, announced their merger in November of 2016.27 The FTC filed suit to block the transaction in June
2017, alleging that the combined firm would have controlled more than 90% of the US market for paid “daily
fantasy sports” (DFS) contests.28 The parties argued that neither company was profitable at the time of the
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merger29 and the businesses competed with “many fantasy sports, sports entertainment, and other gaming
and recreation companies.”30 However, the FTC’s challenge hinged upon the distinction between paid DFS
contests where customers build a new fantasy team each day as opposed to paid season-long fantasy sports
(SLFS) contests.31 The FTC alleged that DFS consumers are unlikely to view SLFS contests as a meaningful
substitute to paid DFS, due to differences in contest duration, limitations on the number of entrants, athlete
exclusivity in SLFS contests, and differences in entry fees and other financial incentives.32 For instance, the FTC
alleged that SLFS participants play primarily for social reasons whereas DFS participants are more motivated
by instant gratification and large prizes.33 Moreover, with respect to the parties’ arguments about their lack of
profits, the FTC noted that they were “relatively young companies…striving toward profitability.”34 Further, the
FTC’s complaint used internal DraftKings documents to describe the company’s strategy as trying to “fight tooth
and nail to attract customers” and to “put a ‘foot on [FanDuel’s] throat and press down hard,’ and ‘don’t let up
until they stop breathing.’”35 Just about a month after the FTC and the Attorneys General of California and DC
filed for a preliminary injunction, the parties abandoned the transaction.36
Deere/Precision Planting
On August 31, 2016, the DOJ filed suit to enjoin Deere & Company’s (Deere) proposed acquisition of
Precision Planting LLC, a subsidiary of Monsanto Company (Monsanto), despite having previously cleared
the transaction under the HSR Act.37 Deere manufactured a broad line of heavy equipment, including planters,
while Precision Planting manufactured precision equipment components to retrofit conventional planters and
other agricultural equipment.38 DOJ alleged that Deere and Precision Planting both sold “high-speed precision
planting systems” (HPPS)39 with a post-transaction US market share of 86%.40 The complaint alleged the
transaction could lead to higher prices and less innovation in precision planting technology.41 Although the
parties contended that HPPS was not an appropriate relevant market and that the parties’ products were
different in terms of “price, compatibility, features, and grower demand”42 such that they were not significant
competitors, they abandoned the transaction on May 1, 2017 before the case went to trial.43 Later in 2017,
Monsanto sold Precision Planting to AGCO, a global agricultural equipment manufacturer, after obtaining
necessary regulatory clearances.
Authorities Continued to Win in Court
As in prior years, the authorities continued to notch substantial victories in the courtroom, with the FTC and
DOJ each winning a case at trial as well as a case on appeal for a total of four victories in 2017.
Sanford Health/Mid Dakota
On June 22, 2017, the FTC and North Dakota filed a complaint seeking a temporary restraining order and
preliminary injunction to block Sanford Health’s proposed merger with Mid Dakota Clinic, P.C. (MDC).44
The FTC alleged that Sanford Health and MDC are each other’s closest rivals in the four-county Bismarck-
Mandan region of North Dakota and would create a group of physicians with at least 75 to 85 percent share
in the provision of adult primary care, physician care, pediatric services, obstetrics, and gynecology and a
monopoly in general surgery.45 On December 14, 2017, the Court granted a preliminary injunction, temporarily
blocking Sanford Health’s proposed acquisition of Mid Dakota Clinic.46 The Court concluded that the proposed
transaction was anticompetitive, relying heavily on the FTC’s expert witness testimony that the transaction
would increase concentration in the provision of the four medical services in the Bismarck-Mandan region.47
The two hospital networks argued that the transaction would allow the combined entity to add new services
in the areas of reproductive medicine, urogynecology, pediatric endocrinology, pediatric gastroenterology,
and pediatric neurology, as well as increased clinical trials.48 However, the Court was not persuaded the
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claimed efficiencies would offset the potential price increase predicted by the FTC’s expert.49 The parties
have appealed the district court order.50
Energy Solutions/Waste Control Specialists
On June 21, 2017, the US District Court for the District of Delaware enjoined the proposed $367 million
acquisition of Waste Control Specialists (WCS), a domestic provider of low-level radioactive waste disposal
services, by EnergySolutions, a global nuclear services company.51 DOJ challenged the transaction, alleging
that EnergySolutions and WCS were the only two providers of low-level radioactive waste disposal in 36
states,52 with entry highly unlikely because of regulatory barriers.53 The District Court agreed with DOJ and
found that the parties offer “reasonably interchangeable” services and products, such that the acquisition
would substantially lessen competition.54 The parties attempted to demonstrate that WCS was a failing firm by
showing that it never made an operating profit due to high fixed costs associated with regulatory mandates,
a reduction in the volume of low-level radioactive waste, and rising costs.55 However, DOJ argued that WCS
had not defaulted on its debt, was current on lease payments and payroll, had executed several long-term
contracts, invested in future growth opportunities, and had a revolving credit facility with its parent company,
Valhi.56 Without reaching the question of whether WCS was actually failing, the Court rejected the defense
when it agreed with DOJ’s argument that WCS did not demonstrate EnergySolutions was the only available
purchaser (especially in light of the fact that WCS engaged with only one other potential bidder, did not
actually inform that bidder of the sales process, and ended discussions with that potential bidder before a
bid was made).57 Following the court decision, EnergySolutions and WCS abandoned the acquisition, and
WCS continues to seek a new buyer.58
Anthem/Cigna
On April 28, 2017, almost two years after the merger was announced, the DC Circuit Court of Appeals upheld
the District Court’s decision to enjoin the merger between health insurance providers Anthem and Cigna.59 The
DOJ filed suit to block the merger, alleging that the transaction would lessen competition in (1) national health
insurance accounts, (2) at least 35 local commercial markets, and (3) public exchanges in several locations.60
The District Court blocked the merger on February 8, 2017, finding—without reaching the other claims—that
the merger would likely reduce competition in the health insurance markets for national accounts and for
large group employers in Richmond, Virginia.61 Anthem appealed this decision and argued that the District
Court failed to adequately consider the parties’ efficiencies defense, which claimed that the merger would
result in $2.4 billion of medical cost savings, 98% of which would be passed on to customers.62 The Court
of Appeals rejected this argument and concluded that Anthem’s cost saving calculations were speculative
—they assumed the combined company would actually succeed in renegotiating for lower provider rates,
and pass the savings from lower provider rates along to customers.63 Therefore, the Court of Appeals held
that it was not an abuse of discretion for the District Court to fail to credit Anthem’s efficiencies argument.64
On May 12, 2017, Anthem terminated the proposed transaction.65
Advocate/NorthShore
While the US District Court for the Northern District of Illinois originally denied the preliminary injunction sought by
the FTC to stop the merger of two hospital systems in the Chicago area, the FTC appealed that decision to the
Seventh Circuit and eventually prevailed on remand.66 This fight centered on the geographic definition for inpatient
hospital services.67 The FTC alleged that the transaction would allow Advocate to control more than half of the
general acute care inpatient hospital services in northern Cook County and southern Lake County, Illinois.68 While
the District Court was troubled that the FTC’s expert witness excluded from the proposed geographic market
nearby “destination hospitals” to which some patients from the Chicago area would travel, the Seventh Circuit
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found that the geographic market definition should focus on insurers rather than patients, because “insured patients
are usually not sensitive to retail hospital prices, while insurers respond to both prices and patient preferences.”69
Thus, the Seventh Circuit focused on testimony by insurers that supported the FTC’s argument that Advocate
and NorthShore hospitals were necessary for insurance networks to compete for employer plan contracts in the
Chicago area.70 On remand, the District Court applied the Circuit Court’s reasoning regarding an insurer-centric
analysis and upheld the FTC expert’s market definition.71 While the defendants had argued that the FTC expert
still relied upon measures of patient substitution, the District Court concluded that the Circuit Court decision did
not mean that patient choices are irrelevant, but that the data must be interpreted through the lens of an insurer.72
Advocate and NorthShore abandoned their attempted merger after the adverse ruling, and the FTC dismissed
the administrative complaint on March 20, 2017.73
Aetna/Humana
Aetna and Humana, two of the nation’s largest health insurance providers, entered a merger agreement on
July 2, 2015 for $37 billion.74 Over a year later, the DOJ filed suit in the District Court for the District of Columbia
to block the merger.75 DOJ alleged that the merger would reduce competition in the Medicare Advantage
market, arguing that Humana is the second largest and Aetna is the fourth largest insurer in that market.76
The DOJ also alleged that the merger would reduce competition on the public healthcare exchanges in at
least a hundred counties.77 The trial began on December 5, 2016 and on January 23, 2017, the District Court
granted an injunction to prevent the merger, finding that the transaction would likely harm competition in both
the Medicare Advantage market and in the individual market on the exchanges.78
State Enforcement Agencies Also Challenged Transactions
Even where the FTC or DOJ declines to take action, state attorneys general, as well as private litigants, may
bring claims that a transaction violates the antitrust laws. While it is not common for states to go it alone, these
cases serve as an important reminder that companies should consider whether a transaction raises state-specific
issues and whether there are risks that a state may bring a challenge (even if the federal authorities do not).
Franciscan Health System/WestSound Orthopedics & The Doctors Clinic
On August 31, 2017, the State of Washington filed suit in federal court to force contract rescission and
profit disgorgement, along with other penalties, in connection with Franciscan Health System’s July 2016
acquisition of WestSound Orthopedics.79 Washington alleged that the acquisition of WestSound’s assets had
reduced price competition, quality of care, and consumer choice in the orthopedic care market in Washington
(specifically on the Kitsap peninsula)80 and presented evidence that Franciscan described the merger as
“eliminat[ing]…the competitive threat” of WestSound.81 In the complaint, Washington also challenged as per
se price fixing a separate agreement between Franciscan Health System and a second medical practice,
The Doctor’s Clinic (TDC),82 under which Franciscan acquired ancillary surgical imaging and lab services
in exchange for TDC receiving Franciscan’s negotiated reimbursement rates with healthcare payers.83
Washington treated the TDC transaction as a conspiracy to fix prices rather than a merger because it argued
that TDC remained an independent entity, with separate liability insurance, protocols, directors, employers,
and records whereas WestSound did not.84 Washington cited internal emails from Franciscan executives
that appear to acknowledge that customers will be harmed by the TDC agreement.85 Notably, neither of the
agreements was HSR reportable, and the FTC has not weighed in on the matter.86 The case is scheduled
for trial on March 19, 2019.
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Valero/Plains All American Pipeline, L.P.
While the FTC investigated Valero Energy Corporation’s proposed acquisition of two northern California bulk
petroleum terminals from Plains All American Pipeline, L.P., and took no action,87 the State of California filed
suit on July 10, 2017. Valero, a diversified energy company that refines crude oil,88 was attempting to acquire
what California alleged was the “only independent terminal owner in the Bay Area.”89 As a result, California
argued the transaction would allow Valero to restrict access to the terminals or coordinate with other vertically
integrated refiners to increase fuel prices.90 The US District Court for the Northern District of California,
while rejecting the state’s motions for a temporary restraining order and preliminary injunction against the
acquisition, stated that California had raised “serious questions” about the possible anticompetitive effect of
the transaction.91 The parties subsequently abandoned the transaction, and on October 12, 2017, a federal
court in the Northern District of California entered a stipulated order that enjoined Valero from seeking to
acquire these terminals for a period of ten years.92
More Challenges are Pending
Two additional transactions were challenged in the latter half of 2017 in cases that remain pending. While
the outcomes are yet to be determined, these cases demonstrate that the new administrations at the FTC
and DOJ are just as willing as their predecessors to litigate.
Tronox/Cristal
On December 5, 2017, the FTC filed an administrative action to enjoin Tronox Limited’s $1.67 billion acquisition
of Cristal.93 The FTC did not, however, seek a preliminary injunction. In a separate federal court complaint
alleging that the FTC has not sought a preliminary injunction in order to exhaust the remaining time before
the underlying agreement expires,94 Tronox claimed that the FTC stated it was waiting for the EU to finish
its review of the transaction.95 On the substance, the FTC alleged that the acquisition would merge two of
the three largest manufacturers of titanium dioxide (TiO2), and result in a combined 80% share of the North
American “chloride process” TiO2 market.96 In its complaint, the FTC alleged not only that the transaction
would enhance the likelihood of coordinated effects, but also that Tronox would be able to restrict supply of
TiO2, which the FTC argues Tronox already does and would do more effectively given the market power it
would have post-transaction.97 Trial is scheduled to begin on May 8, 2018.98
AT&T/Time Warner
On November 20, 2017, DOJ filed suit to enjoin AT&T’s $108 billion acquisition of Time Warner Inc.99 Although
AT&T and Time Warner do not compete with each other, the DOJ has claimed that this vertical transaction
would lead to increased prices for Time Warner’s networks to video distribution providers that compete with
AT&T and to slow the adoption of new distribution models.100 The case is pending before the District Court
of the District of Columbia, with trial set for March 2018.
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