DOJ Wins Historic Arbitration Case: Aleris

The Department of Justice this week concluded an arbitration that will resolve a civil antitrust lawsuit challenging Novelis Inc.’s proposed acquisition of Aleris Corporation.

The lawsuit seeks to preserve competition in the North American market for rolled aluminum sheet for automotive applications, commonly referred to as aluminum auto body sheet.  This marks the first time the Antitrust Division has used its authority under the Administrative Dispute Resolution Act of 1996 (5 U.S.C. § 571 et seq.) to resolve a matter.

“This first-of-its-kind arbitration has allowed us to resolve the dispositive issue in this case efficiently, saving taxpayer and private resources, while providing critical time-certainty,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division.  “The Antitrust Division looks forward to the arbitrator’s opinion, and will study this matter both to assess the circumstances in which arbitration may be appropriate and to identify possibilities for further streamlining the process.  We will continue to examine ways to enforce our competition laws in a manner that maximizes the Division’s scarce enforcement resources to protect American consumers.”

On Sept. 4, 2019, the Justice Department’s Antitrust Division filed a civil antitrust lawsuit in the U.S. District Court for the Northern District of Ohio seeking to block Novelis Inc.’s proposed acquisition of Aleris Corporation.  Prior to filing the complaint, the Antitrust Division reached an agreement with defendants to refer the matter to binding arbitration if the parties were unable to resolve the United States’ competitive concerns with the defendants’ transaction within a certain period of time.

As described in Plaintiff United States’ Explanation of Plan to Refer this Matter to Arbitration, filed on the district court’s docket, fact discovery proceeded under the supervision of the district court.  Following the close of fact discovery, the matter was referred to binding arbitration to resolve a single issue: whether aluminum auto body sheet constitutes a relevant product market under the antitrust laws.

If the United States prevails, the United States will then file a proposed final judgment that requires Novelis to divest certain agreed-upon assets to preserve competition in the relevant market.   If the defendants prevail, the United States will seek to voluntarily dismiss the complaint.  Novelis has held separate the agreed-upon divestiture assets pursuant to a hold separate stipulation and order entered by the district court, and defendants are permitted to close the transaction pursuant to this order.

Complaint

The DOJ alleges that the acquisition would substantially lessen competition in the North American market for rolled aluminum sheet for automotive applications, commonly referred to as aluminum auto body sheet.  The complaint explains that steel companies are developing lighter, high strength steel varieties for the auto industry. But as Novelis has observed, high strength steel “is largely replacing existing mild steel” and “cannibalizing the existing material” (i.e., traditional steel). The threat of substitution from aluminum to high strength steel is, as Aleris confirms, “limited.”  The price of aluminum auto body sheet is three or four times more expensive than traditional steel.  The complaint further alleges that the transaction would combine two of only four North American producers of aluminum auto body sheet.  The other two suppliers’ capacity is mostly committed to automakers.  Thus, other automakers rely on Novelis and Aleris to produce aluminum body sheet for automobiles to make cars lighter, more fuel-efficient, safer and more durable.

For years, Novelis was operating in a three firm market where it was the price leader.  It had the ability to increase prices without a loss of sales.  DOJ alleges that in 2016, Aleris entered the North American market as an aggressive competitor, which had an immediate impact on pricing and services.  Indeed, Novelis’ documents show that it decreased prices and increased the quality of its services in response to Aleris’ entry.

Novelis’s acquisition of Aleris would eliminate a rival it described as “poised for transformational growth.”  The complaint quotes other internal presentations to the Board of Directors and emails describing an anticompetitive rationale for the transaction:

• Novelis worried that Aleris could be sold to a “[n]ew market entrant in the US with lower pricing discipline” than Novelis, and that an “[a]lternative buyer [was] likely to bid aggressively and negatively impact pricing” in the market.
• “[A]n acquisition by us as the market leader will help preserve the industry structure versus a new player . . . coming into our growth markets and disturbing the industry structure to create space for himself, while hurting us the most.”
• Novelis should acquire Aleris because there is a “disincentive for market leader [i.e., Novelis] to add capacity and contribute to a price drop” and an acquisition of Aleris “prevents competitors from acquiring assets and driving less disciplined pricing.”

If this deal were allowed to proceed without a remedy, Novelis would lock up 60 percent of projected total domestic capacity and the vast majority of uncommitted capacity of aluminum body sheet, enabling the company to raise prices, reduce innovation and provide less favorable terms of service to the detriment of automakers and ultimately American consumers.

Novelis Contends That DOJ Suit Ignores The Full Scope Of Automotive Body Sheet Competition

It says that the DOJ lawsuit is based on the contention that the only relevant competition among automotive body sheet providers is that among aluminum manufacturers such as Novelis and Aleris. It ignores competition from steel automotive body sheet, even though steel automotive body sheet is currently used for nearly 90 percent of the market.

Novelis says that aluminum automotive body sheet attempts to take share from steel automotive body sheet.  And argues that for the DOJ to prevail in its lawsuit, it needs to prove that there is a distinct “relevant market” for aluminum automotive body sheet, which means that steel automotive body sheet does not significantly constrain the price and quality of aluminum automotive body sheet. Novelis further states that the DOJ does not deny that steel automotive body sheet usually competes with aluminum automotive body sheet, but instead contends that the constraint from steel is absent from some procurements (where an automotive manufacturer has supposedly already decided between steel and aluminum). Novelis believes that by focusing on just a small slice of steel-aluminum competition and ignoring the broader competitive process, the DOJ’s theory contravenes well-established principles of market definition.

Novelis further contends that the DOJ also disregards the extraordinary bargaining power of the automotive manufacturers and their ability to generate bid processes that will ensure competitive pricing for automotive body sheet.

Lessons Learned:

Here, the transaction is presumptively anticompetitive because a large dominant player with 60% of a concentrated market is acquiring a new disruptive entrant.  What is noteworthy is the use of the arbitration procedure agreed to by Novelis and the DOJ.  The DOJ and Novelis clearly are debating the product market definition.  If the DOJ is right on the product market definition, the merger is anticompetitive in the North American market for aluminum auto body sheet and it would require a fix.  The merging parties can then negotiate a divestiture remedy that would resolve the competitive concerns.  As Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division put it, “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.” He added that “[a]lternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers.”  

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints.  The DOJ focuses on “hot docs” when they exist because these documents are very helpful in explaining whether a transaction is anticompetitive.  This case demonstrates why corporate executives must be mindful about what they write as careless and inappropriate language in company documents can have an extremely negative effect on a merger review.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com