The long-awaited remedy phase of United States v. Google concluded on September 2, 2025, when U.S. District Judge Amit P. Mehta delivered a carefully calibrated ruling following his August 2024 finding that Google illegally monopolized search. The decision stops short of breaking up the company yet aims to curtail anti-competitive behavior via behavioral constraints.

Key Remedies Imposed

Despite Google’s resounding defeat last year in the U.S. Department of Justice’s case targeting its search monopoly, Judge Mehta only handed down a mixed bag of remedies aimed at propping up search engine rivals and limiting the exclusive nature of its distribution contracts Judge Mehta’s decision imposes several targeted limitations while allowing Google and its partners like Apple to retain significant benefits:

1. Ban on Exclusive Deals
   GOOGLE may no longer enter or maintain exclusive contracts for distributing Google Search, Chrome, Google Assistant, or the Gemini app.
   This curtails Google’s ability to lock competitors out through tied default arrangements.
2. Conditional Revenue-Share Restrictions
   Agreements conditioning revenue-share benefits on distribution or placement of Google’s apps beyond one year are barred. This means Apple and Google can enter annual contracts and maintain the same relationship.
3. No Divestiture of Chrome or Android
   The court rejected calls to mandate a sale of Chrome or Android, finding such remedies too disruptive and poorly tailored to the offending conduct.
4. Allowed Payments Remain in Place
   Google can still pay partners for preloading and default placement, avoiding what the court saw as potentially harmful disruptions to the broader ecosystem.
5. Data Sharing Mandate
   Google must share certain search index and user-interaction data with “qualified competitors,” though not advertising data.
6. Syndication Services for Rivals
   Competitors can buy search and text-ads syndication from Google on commercial terms, though scope and duration are narrower than DOJ sought.
7. No Choice Screens Required
   The court ruled against mandating user-facing choice screens, citing poor precedent and lack of proven pro-competitive effect.
8. No Keyword Bidding or Granular Ads Data Required
   Google won’t be forced to restore exact-match bidding or share granular ad data with advertisers.
9. Transparency in Auctions Required
   Google must publicly disclose material changes to its ad auction systems, enhancing visibility into pricing practices.
10. Rule-Out of Public Education or Publisher Policy Remedies
    Proposals such as nationwide campaigns or forced changes to publisher policies were rejected as unrelated to monopolistic acts.
11. No Anti-Retaliation or Self-Preferencing Clauses
    The judge found these provisions vague or unsupported in evidentiary record.
12. Technical Committee and Timeline
    A six-year remedy term will take effect 60 days after the final judgment, with a Technical Committee appointed immediately to oversee enforcement.

At-a-Glance Table

Analysis

1. “Slap on the Wrist”?

Google avoids structural break-ups and retains flexibility to pay for placement—meaning its dominance in search is likely to persist.

2. But Not Toothless

The restrictions on exclusive contracts and the mandated data sharing add meaningful friction to entrenched practices. These could empower startups and AI-based rivals to gain footholds.

3. Generative AI Changes the Equation

Judge Mehta explicitly noted that the rise of generative AI—such as ChatGPT and Perplexity—factors into the calculus, making overly drastic remedies more dangerous and unnecessary.

4. DOJ and Advocates Push Back

Though the DOJ hailed the ruling as a critical step toward reigniting competition, advocates like DuckDuckGo CEO Gabriel Weinberg critiqued it as inadequate, warning consumers will still “suffer.”

Meanwhile, groups like the American Economic Liberties Project lambasted the court’s approach as a failure of enforcement.

5. Echoes of Microsoft Case

The ruling evokes the 2001 Microsoft settlement: no breakup, but behavioral constraints plus a compliance committee.

Conclusion

Judge Mehta’s remedies against Google represent a measured middle ground — disrupting key anti-competitive behaviors while preserving existing infrastructure. Whether this balance suffices to revive competition in search hinges on how well rivals can leverage access to Google’s data and syndication offerings—and whether antitrust enforcers and Congress step in if results disappoint.

Google and the DOJ may appeal, but the decision allows both sides to claim a victory. It could be years before the remedies take full effect. And, as an aside, Apple, who benefits from sharing revenue with Google can also claim victory.

Andre Barlow

abarlow@dbmlawgroup.com

202-589-1838

The decision followed a bench trial that began in September 2024 and lasted 15 days, with closing arguments in November 2024. It marks the second major antitrust loss for Google in less than a year, following a separate ruling on its search monopoly.

Remedy Trial Timeline

The remedies phase, which will determine how to address Google’s anticompetitive behavior, is scheduled to begin as a bench trial on September 22, 2025, in the same court before Judge Brinkema. Both parties proposed this date shortly after the liability ruling, and it was confirmed by the court in early May 2025. The trial is expected to focus on evidence and arguments for specific remedies, with a decision potentially following in the months after.

Proposed Remedies to Resolve the Judge’s Concerns

The remedies aim to dismantle Google’s integrated ad tech monopoly, restore competition, and prevent future anticompetitive practices as outlined in the ruling (e.g., tying, exclusive deals, auction manipulation, and data advantages). Proposals from the U.S. Department of Justice (DOJ) and plaintiff states are more aggressive, emphasizing structural changes, while Google’s counterproposals focus on behavioral adjustments. Key proposals include:

• DOJ and States’ Proposals (Structural and Behavioral Remedies):
  • Divestiture of Key Assets: Force Google to sell off significant portions of its ad tech business, such as Google Ad Manager (which includes the DFP ad server and AdX exchange). This would break up the “walled garden” that gives Google end-to-end control over ad transactions.
  • Data and Bidding Restrictions: Ban Google from using first-party data from its own products (e.g., YouTube, Search, or Android) to gain unfair advantages in ad bidding or pricing. This addresses concerns about Google’s ability to leverage its ecosystem for preferential treatment.
  • Auction and Pricing Reforms: Prohibit manipulative practices like “last look” advantages in auctions (where Google could adjust bids after seeing competitors’) and require fair, non-discriminatory auction rules to prevent rigging.
  • Interoperability and Non-Exclusivity: Mandate that Google’s tools be compatible with rivals’ products, end exclusive contracts with publishers and advertisers, and allow easier switching to competitors.
  • Oversight and Compliance: Implement monitoring by a court-appointed trustee for up to 10 years, with potential fines for violations.
• Google’s Counterproposals (Primarily Behavioral):
  • Avoid divestitures, arguing they exceed the scope of the ruling and could harm innovation and users. Instead, propose tweaks to auction mechanics (e.g., “rigging ad auctions a little less”) and limited changes to product tying without breaking up assets.
  • Focus on transparency enhancements, such as better data sharing with competitors or minor adjustments to fee structures, to mitigate monopoly effects without structural separation.

The DOJ argues that behavioral remedies alone have proven insufficient in past cases (e.g., Microsoft’s antitrust settlement), necessitating divestitures to fully resolve the integration that fueled Google’s monopoly. The court will weigh these during the September trial, with potential appeals likely regardless of the outcome.

The complaint alleges that Amazon “fair pricing policy” requires third-party sellers who sell products through Amazon to agree to what is really a most-favored-nation (“MFN”) provision. According to the complaint, this fair pricing policy restrains third-party sellers, which wish to sell on Amazon’s platform, from selling their products on other websites, including their own websites, at prices lower, or on better terms, than offered through Amazon. This fair pricing policy replaced Amazon’s price parity provision, but the claim is that this new policy has the same effect as Amazon’s old policy.  It is considered a platform most-favored nation agreement and allows for Amazon to penalize third parties found in violation of these policies. Allegedly, the provisions have the effect of creating a price floor with Amazon’s prices being the lowest. Because these third-party sellers incorporate Amazon’s fees – which can be up to 40% of the product’s price – into their prices, they are forced to inflate their product prices on other platforms since they must account for the fees in their sale price. The claim of the Office of the Attorney General is that this policy suppresses competition and unnaturally inflates prices for consumers across all online retail platforms. The complaint asserts that these unreasonably high fees are built into prices market wide, due to the alleged price floor caused by the most-favored nation provisions.

According to the complaint, Amazon allegedly violates D.C. antitrust law in a variety of ways. First, Amazon is alleged to be engaged in unlawful horizontal agreements because Amazon horizontally competes with many third-party sellers (i) as online retailers, and (ii) in particular products. Second, Amazon is alleged to be engaged in unlawful vertical agreements because the most-favored-nation provisions eliminate competition in online retail. Third, Amazon, accounting for 50-70% of all online retail sales and benefiting from network effects, is alleged to monopolize and attempt to monopolize the online retail sales market.

D.C. Attorney General Karl Racine has stated that the lawsuit is an attempt to end Amazon’s illegal use of price agreements which destroy competition and harm the company’s two million third-party sellers. The complaint states that these pricing agreements “are facially anticompetitive and allow Amazon to illegally build and maintain monopoly power in the online retail market in violation of the District of Columbia’s Antitrust Act.”

In 2019, Amazon faced scrutiny from the U.S. Congress and regulatory agencies regarding a clause in their contracts with third party sellers that was known as a price parity provision. Though the company removed this provision, it was then replaced with the similar fair pricing policy that is under scrutiny today.

Amazon has responded to the lawsuit stating that “the D.C. Attorney General has it exactly backwards – sellers set their own prices for the products they offer in our store.” While the complaint seeks to enjoin Amazon from engaging in this allegedly anticompetitive behavior, Amazon has stated that such relief “would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.”

This case is noteworthy because there is not much litigation that has examined the anticompetitive effects of MFNs.  Without precedent indicating that price parity provisions or MFNs are anticompetitive, the DC AG, as the plaintiff, will have a difficult time showing how Amazon’s pricing policies result in anticompetitive effects.  Amazon will likely argue that the company’s pricing practices are pro-competitive or have no competitive effect.  MFN clauses are common in business. MFN clauses can be advantageous to a purchaser in that they eliminate the purchaser’s risk in negotiating a bad deal under unstable pricing conditions and are generally benign when the purchaser does not have market power.  But, Amazon’s MFN has been under scrutiny in the European Union so the DC AG is not on its own in scrutinizing the policy.  Indeed, when a monopolist or a firm with market power uses MFN clauses in its contracts, they can be illegal if they result in anticompetitive effects that harms the competitive process and results in increased prices overall.  For these reasons and more, MFN clauses alone are subject to the rule of reason—a lenient standard that requires a rigorous market analysis.  The difficulty in DC’s case is proving that Amazon has market power.  Market analysis or evidence needs to show that Amazon controls more than 50% of ecommerce.  Many third-party sellers are increasingly using other online platforms run by Etsy, Shopify, Facebook, Walmart Inc., eBay Inc., Target Corp., and others to reach new consumers in the wake of the pandemic.

Moreover, the lawsuit adds to increasing scrutiny over Amazon’s relationship with its third-party sellers, including a probe launched by the FTC in concert with the attorneys general around the country.  It is unclear why the District of Columbia’s lawsuit was filed before the other antitrust enforcers have completed their investigations other than politics.  In fact, D.C. Attorney General Racine is rumored to be in the running to be nominated to chair the Federal Trade Commission.  Even though this case currently involves only the D.C. AG, it still has important implications for the legal future of big tech companies and platforms. Facebook, Google, Apple, and Amazon have been under increased antitrust scrutiny in the United States for the past few years, indicating that federal and state antitrust enforcers will continue to scrutinize their conduct, actions and policies.

By Rachel Sims

The Northern District’s opinion stated that “[t]he argument misses the point of plaintiff’s alleged injury: Plaintiff alleges she suffered depressed wages.” The court added that “[p]laintiff’s claim is akin to a supplier who sells at a reduced price due to the anti-competitive behavior of a cartel of buyers.”  The court also found that complaint sufficiently supported the claim that the policy’s effects could be isolated from broader economic conditions like the unemployment rate.  The court added that “[p]laintiff’s causation allegations are plausible due to basic principles of economics.”  Indeed, “[i]f fewer employers compete for the same number of employees, wages will be lower than if a greater number of employers are competing for those employees.”  So, the case will move forward.

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

According to the New York Times, the smaller rivals, which have largely been publicly quiet until the hearing, finally stepped up to the plate and sounded off on big tech at a hearing in Boulder, Colorado.  The Congressional subcommittee heard stories of technology giants wielding their massive footprints and platforms as weapons, allegedly copying smaller competitors’ features or tweaking their algorithms in ways that stifle competition.

The pleas for regulatory relief resonated with lawmakers, led by Rep. David N. Cicilline (Democrat – Rhode Island), the chairman of the House’s antitrust subcommittee. Cicilline noted that “it has become clear these firms have tremendous power as gatekeepers to shape and control commerce online.”

The executives sounded off on big tech and the bipartisan committee encouraged them to testify about their stories.  The founder and CEO of PopSockets, explained how his company clashed with Amazon over policies that made it hard to sell his products on his preferred terms and prices.

Executives at Sonos, a high-end audio company, and Basecamp, which makes web-based product management tools allege that Google undermines smaller rivals. Sonos has sued Google, alleging patent infringement.  David Heinemeier Hansson the co-founder of Basecamp explained that its competitors have been purchasing ads on Google against the company’s own name, meaning people who search for Basecamp see rivals unless they scroll down their results page.  In other words, Hansson says that Google requires companies “to pay protection money” — or risk obscurity.

Tile makes Bluetooth trackers that can be attached to your personal possessions to help you keep track of them.  A Tile executive explained how Apple rolled out the “Find My” device tool — built into its operating system — that resembled Tile’s app used to find devices making it more difficult for Tile to compete.  From Tile’s perspective, it created a helpful tool for consumers, which was then copied by Apple and then Apple made its app the default on its devices, purposely hurting Tile’s business by making it more difficult for iPhone users to change their default settings, thus creating hurdles for Tile’s app that does not apply to Apple’s app. Tile wants a level playing field.

Along the lines of Tile wanting Apple to simplify what it claims is a too-complicated process right now, Apple shared a statement as part of the congressional hearing suggesting that a fix to this is coming soon. Per the statement shared by a CNBC reporter, Apple noted that:  “When setting up a new device, users can choose to turn on Location Services to help find a lost or misplaced device with ‌Find My‌ ‌iPhone‌, an app that users have come to rely on since 2010. Customers have control over their location data, including the location of their device. If a user doesn’t want to enable these features, there’s a clear, easy to understand setting where they can choose exactly which location services they want enabled or disabled. “…We’re currently working with developers interested in enabling the ‘Always Allow’ functionality to enable that feature at the time of setup in a future software update.”

Democrats and Republicans at the hearing sympathized with the executives.  There was little push back against the testimony of the small rivals.  Indeed, small rivals are encouraged to approach the DOJ Antitrust Division, FTC, and Congress about how the tech giants have used their powerful positions in search, e-commerce, online ads and smartphones to squeeze them out.

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

Most recently, on November 6, 2019, the Federal Trade Commission (“FTC”) issued an Opinion and Final Order in which the Commission upheld the Administrative Law Judge’s (“ALJ”) decision that Otto Bock HealthCare North America, Inc.’s (“Otto Bock”) acquisition of FIH Group Holdings, LLC (“Freedom”) was anticompetitive and that Otto Bock must divest Freedom’s entire business with the limited exceptions granted by the ALJ.  The Commission’s order was approved by all five commissioners and continues the trend of unwinding consummated acquisitions that are deemed to be anticompetitive.

Accordingly, buyers must be aware of the risks of closing a non-reportable transaction that eliminates competition.  Here are a couple of points to keep in mind:

First, Non-Reportable Transactions That Eliminate a Competitor May Raise Antitrust Scrutiny

Indeed, corporate executives that enter into non-reportable acquisitions of their competitors must be aware that in some cases these deals entail significant antitrust risk.  Just because the deal is not reportable under the HSR Act does not mean that the federal or state antitrust agencies won’t investigate, challenge, and unwind it.

Second, Size of Transaction Does Not Matter

The antitrust agencies can investigate and unwind a deal, no matter the size of the transaction.  The antitrust agencies have challenged consummated deals valued as low as $3 million (see George’s/Tysons,  Complaint, United States v. George’s Foods, LLC, No. 5:11-cv-00043 (W.D. Va. May 10, 2011).  Other small deals challenged by the agencies include Renown Health’s $3 and $4 million deals; a $5 million transaction (Complaint, United States v. Election Sys. & Software, Inc., No. 1:10-cv-00380 (D.D.C. Mar. 8, 2010); Magnesium Elektron/Revere Graphics, a $15 million deal; Charlotte Pipe/Star Pipe, a $19 million deal; Dun & Bradstreet’s $29 million deal;  BazaarVoice/Power Reviews; and the list goes on.

Third, Length of Transaction Has Been Closed Does Not Matter

The FTC has challenged a consummated transaction more than eight years after the transaction closed (see Complaint, Graco Inc., No. 101 0215 (F.T.C. Apr. 17, 2013).

Fourth, Disgorgement of Profits Is Possible

The agencies have sought disgorgement of profits earned from post-merger price increases to remedy the anti-competitive effects of a consummated merger.  For example, under the terms of the consent order in FTC v. Hearst Trust, Hearst agreed to disgorge $19 million in profits earned from price increases following its acquisition of MediSpan, Inc. (Final Order, FTC v. Hearst Trust, No. 1:01CV00734 (D.D.C. Nov. 20, 2001)).  In another example from the DOJ, U.S. v. Twin America, LLC, et. al, Twin America, Coach, and City Sights together were required to pay $7.5 million in disgorgement to remedy alleged violations of Section 7 of the Clayton Act, Section 1 of the Sherman Act, as well as New York State law, including the Donnelly Act (see Proposed Final Judgment, United States v. Twin America, LLC, Civil Action No. 12-cv-8989 (ALC) (GWG) (March 16, 2015)).  In one case, the DOJ and New York State sought disgorgement of defendants’ illegal profits earned from increased prices charged after the formation of an illegal joint venture that eliminated competition and created a monopoly in “hop-on, hop-off” bus tours in New York City.

How Does the Government Learn of Non-Reportable Anticompetitive Mergers?

In the absence of an HSR notification, the agencies become aware of possibly anticompetitive mergers through the companies own press releases, news reports, complaints from competitors or customers, information from other investigations, or, in some cases, self-reporting by the parties.

Background of Otto Bock/Freedom Deal

On September 22, 2017, Otto Bock and Freedom simultaneously executed a merger agreement and consummated their merger.  The transaction did not require a pre-merger notification filing in the United States so the FTC did not have a chance to evaluate whether the acquisition was anticompetitive prior to the closing.  But, shortly after the deal Otto Bock issued an ill advised press release that highlighted that the deal combined the #1 and #3 players in the field of prosthetics in the United States, led to market share gains and strengthened its leading position.  Believing that “antitrust issues had already been clarified”, they closed the deal and then Otto Bock took steps to integrate Freedom’s business, including personnel, intellectual property, know-how, and other critical assets.

Shortly after the closing, the FTC started an investigation and within three months took action by filing an administrative complaint seeking to unwind the merger.  At the same time, Otto Bock agreed with the FTC to hold the businesses separate during the litigation to preserve the acquired business from Freedom.  According to the FTC’s administrative complaint, the merging parties were head-to-head competitors in the manufacture of microprocessor prosthetic knees (“MPKs”) and the deal eliminated head-to-head price and innovation competition, removed a significant and disruptive competitor, and entrenched Otto Bock’s position as the dominant supplier of MPKs.

Otto Bock made a number of arguments in its defense.  First, it offered a divestiture of Freedom’s MPK assets to an identified buyer, which it argued eliminated the FTC’s allegations of purported harm.  The FTC, however, rejected the remedy as insufficient.  It also argued that the efficiencies would outweigh the procompetitive effects and that Freedom was a failing firm.

ALJ Decision in Otto Bock

On April 29, 2019, the ALJ upheld the FTC’s administrative complaint finding that the transaction substantially lessened competition in the relevant market for the sale of MPKs to prosthetic clinics in the United States.  The deal eliminated competition between Otto Bock and Freedom that spurred innovation and lower prices.  The ALJ found that Otto Bock’s divestiture remedy was insufficient and found that the appropriate remedy was the divestiture of all the assets acquired with the possible exception of certain foot products that are not necessary to competition in the relevant MPK market.  On May 8, 2019, Otto Bock filed a notice of appeal stating that it would appeal the entirety of the ALJ’s initial decision and order. 

Commission Opinion and Order

The Commission found that there was a presumption of harm based on high market shares and concentration levels.  In addition, the Commission found that the record evidence of competitive harm was compelling.  The evidence confirmed that Otto Bock possesses the leading share of U.S. MPK sales with the C-Leg 4 and showed that Otto Bock and Freedom vigorously competed against each other in terms of price and innovation competition.  Internal documents showed that they would respond against each other with price promotions and discounts.  If one came out with a new generation, the other would try to “leap frog” the other.  The evidence further demonstrated that Otto Bock viewed Freedom as a direct competitive threat and demonstrated that one of the reasons for the acquisition was to eliminate the development of Freedom’s new MPK, the Quattro, that had the nickname the “C-Leg Killer”.  Part of the reason for the acquisition was to make sure that no other competitor acquired Freedom’s Quattro.  In summary, the Commission upheld the ALJ’s decision that the acquisition substantially lessened competition and that to fully restore the competition lost from the acquisition, Otto Bock must divest Freedom’s entire business with the limited exceptions granted by the ALJ.

Lessons Learned

The FTC’s investigation, challenge, and successful litigation serve as a reminder to corporate executives and antitrust counsel that antitrust risks do not end once a deal closes, and that a transaction is not free of antitrust risks simply because the transaction is not reportable under the HSR Act.  The Commission’s Opinion and Order unwinding the merger further demonstrates the risks of closing a deal that presents significant antitrust concerns and makes clear that such challenges will continue to be pursued by the FTC.  The Commission’s Opinion and Final Order requiring a complete divestiture of the business that was acquired also makes clear that when the FTC is evaluating a proposed remedy that its goal is to fully restore competition.  When a buyer proposes to sell a carve out of assets instead of a whole business to a divestiture buyer, it must show how the partial divestiture of assets to the divestiture buyer restores competition.

Corporate and private counsel should be aware of the likely consequences and the risks of consummating transactions that raise significant competitive issues.  The risks may include: defending against costly and lengthy government investigations as well as government and private litigation; unwinding the merger through either complete or partial divestitures even after integration has taken place; and disgorging profits gained from the alleged anticompetitive merger.  Accordingly, before competitors execute a transaction agreement, counsel should conduct a preliminary assessment of whether the proposed transaction gives rise to substantive antitrust issues no matter the deal’s size.

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

Coalition Opposing the Merger

The coalition includes Families USA, Public Citizen, U.S. PIRG Education Fund, Service Employees International Union, American Federation of State, County, and Municipal Employees, UNITE HERE, Consumer Action, American Federation of Teachers, Alliance for Retired Americans, American Family Voices, Doctors for America, End AIDS Now, Prescription Justice, Social Security Works, the Other 98, Treatment Action Group, and NextGen California.  It is asking the FTC to conduct a thorough investigation and to block the merger if the facts support it and a remedy cannot be devised to restore competition.  The coalition highlights the competitive problems arising from continued consolidation in the pharmaceutical industry and requests that the FTC include in its investigation ongoing anticompetitive conduct by the parties, such as the use of rebate walls, which will have an even more profound anticompetitive effect if this merger is consolidated, as well as past abuse of the patent system.

The letter makes three points.

First, the merger of AbbVie and Allergan will continue a tremendous trend of consolidation and the evidence shows that consumers are paying higher prices and losing out on access and choice because of less innovation by big pharma companies.  Mergers result in fewer choices for consumers, and drug companies are increasingly spending their money on acquisitions instead of research and development.

Second, the merger will reduce competition in a number of markets where the companies directly overlap with each other.  The coalition underlines an overlap between AbbVie’s blockbuster, Humira, which already treats 10 indications including Crohn’s disease and ulcerative colitis, and its new IL-23 blockbuster, Skyrizi, which is currently marketed to treat moderate to severe psoriasis but is being investigated to treat Chron’s disease and ulcerative colitis, with Allergan’s brazikumab, an IL-23 inhibitor that is currently being investigated to treat Crohn’s disease and ulcerative colitis.  The coalition further points out that the FTC’s policy is to accept divestitures of actually manufactured pharmaceutical products over pipeline products.

Third, the merger will exacerbate competitive problems that already exist in the pharmaceutical drug industry relating to rebate walls and patent abuses.  The coalition requests that the FTC not limit its investigation to direct product overlaps because the combination of AbbVie’s and Allergan’s blockbuster drugs will enable AbbVie to engage in a whole range of potentially anticompetitive conduct to hamper the ability of rivals to compete.  Indeed, both manufacturers have previously engaged in anticompetitive behavior to prolong their monopolies, suppress competition and raise prices.  The coalition points out, for example, that the merger would enable AbbVie to increase its bargaining leverage over payors to use exclusionary practices such as rebate walls to limit the ability of rivals to expand and enter.  It underscores that both AbbVie and Allergan have used rebate walls to stifle competition in the past.

Families USA, one of the groups that signed onto the letter, said, “The proposed acquisition of Allergen by AbbVie will combine two companies that independently engage in anticompetitive practices that make prescription drugs unaffordable for families into one mega corporation.  We urge the FTC to carefully consider the impact of this proposed drug company merger on competition and prices and protect access to critical medicines for consumers.”  And Peter Maybarduk, Access to Medicines Director for Public Citizen, said, “Two leading price gouging patent manipulators unite.  AbbVie is notorious for manipulating its patent power over the blockbuster medication Humira and AIDS drugs like ritonavir, keeping affordable generics off the market and even slowing innovation.  Allergan is notorious for hiding its patents behind the sovereign immunity of a Mohawk tribe.  Unless the FTC steps in, we can look forward to new efforts to destroy competitive markets by the pharma giant that emerges from this deal, in an industry increasingly focused on monopolizing yesterday’s inventions instead of creating new ones.”

Rebate Walls

Pharmaceutical manufacturers have implemented a new strategy to block and delay entry of biosimilars and other drugs from the market through a contracting practice that creates what is known as a “rebate wall” or “rebate trap”.   A rebate wall occurs when a manufacturer leverages its market-dominant position to secure preferred formulary access for its products by offering lucrative incentives to pharmacy benefit managers (“PBMs”) and health insurers in the form of volume-based rebates.  These rebates are often offered across multiple products, indications, and therapeutic specialties, the breadth of which cannot be matched by new and innovative therapies.  The Trump Administration earlier this year sought to eliminate rebates from the Medicare prescription drug program because pharmaceutical rebates raise more profound competitive problems than discounts in other industries.  In fact, the coalition notes that there is increasing evidence that rebates actually inflate prices (as opposed to decreasing them) and that these rebates, unlike typical discounts, do not ultimately benefit consumers.

FTC is Currently Investigating Rebate Walls

On July 29, 2019, Johnson & Johnson (“J&J”) disclosed that the FTC issued a civil investigative demand regarding its investigation of whether J&J’s contracting practices related to its rebates for Remicade (infliximab) amount to exclusionary conduct illegal under the antitrust laws.

In 2017, Pfizer Inc. (“Pfizer”) filed a lawsuit against J&J for its contracting practices that protect Remicade’s position in the market and deny patients access to Pfizer’s infliximab biosimilar, Inflectra.  The lawsuit is still in the discovery phase.

Biosimilar developers have been urging the FTC to weigh in on whether exclusionary contracts for brands based on aggressive rebating strategies are legal and the agency has chosen a high-profile example to investigate.

Pfizer applauded the FTC’s investigation in a statement: “We believe the [FTC’s] decision to open an investigation into the competitiveness of the biosimilar is an important step, which we hope will lead to a robust, competitive marketplace for patients and physicians to access biosimilar medicines.”

Rebate Wall Concerns Were Raised in the FTC’s Investigation of Bristol-Myers/Celgene

On January 11, 2019, Rep. Peter Welch (D-VT) and Rep. Francis Rooney (R-FL) wrote a letter to the FTC, urging the agency to investigate Bristol-Myers Squibb Company’s (“Bristol-Myers”) acquisition of Celgene Corporation (“Celgene”).  The letter asked the FTC to examine how the acquisition allows Bristol-Myers to increase its drug portfolio and leverage over PBMs when negotiating preferred drug placement on formularies.  The letter argued that the larger the firm, the more it can use rebate walls to block more affordable and, in some cases, more efficacious products’ access to formularies.

Thoughts

The AbbVie/Allergan merger gives the FTC an opportunity to investigate the questionable contracting practice in the pharmaceutical drug industry known as a “rebate wall”.  Payors such as PBMs and health insurers obtain rebates on prescription drugs from pharmaceutical manufacturers that have actually inflated the price of drugs and stifled the ability of rival drug manufacturers to effectively compete.  This practice is recognized by both the administration and industry players as anticompetitive.  Department of Health and Human Services Secretary Alex Azar has noted that rebate walls can prevent competition and new entrants into the system.  Moreover, major drug manufacturers such as Pfizer, Shire, and Sanofi have filed antitrust suits challenging rebate walls as antitrust violations.  In theory, rebates could have a positive impact on the prescription drug market if they led to lower prices and benefitted consumers.  But, in practice, this is simply not the case.  Rebate walls distort the workings of the free market, result in higher drug prices, and reduce patients’ access to affordable branded drugs.

While rebates and discounts can be procompetitive if they lead to lower prices for consumers, some drug manufacturers are structuring discounts to limit competition from rivals in an effort to protect their monopolies.  The FTC understands that when a rebate wall is successfully erected by a market-dominant manufacturer, a payor faces strong financial disincentives to grant access to new and innovative therapies, as doing so would result in the loss of hundreds of millions in guaranteed rebate dollars for the payor.  This condition creates a “trap” for payers who would otherwise be inclined to grant formulary access to therapies that are newer and more innovative, yet lack established volume and subsequent potential for rebate revenue.  In many cases, these actions prevent patients and physicians from seriously considering new medications at competitive prices.

Given the competitive risks that rebate walls pose, the coalition has asked the FTC to investigate how this transaction may make the situation related to this suspect contracting practice worse.  Competition works when new rival drugs (biosimilars, branded drugs or generics) are allowed open and fair access to the market and consumers have access to cost saving treatments.  And while the FTC has not publicly acknowledged examining mergers between drug manufacturers under this type of theory before, the issue is now in front of the staff.

The notion that antitrust enforcement is motivated by politics has hung over the Trump administration since the Department of Justice’s failed attempt to block AT&T’s acquisition of CNN’s owner, Time Warner and some antitrust experts might point out that the Obama administration also influenced the DOJ’s decisions to sue or settle cases.

While politics has always played a role in setting the antitrust agenda, typically antitrust investigations and enforcement decisions are based on the facts.  Indeed, there is no credible evidence that the big tech firms have engaged in unlawful monopolization or that they have stifled innovation.  In fact, Iowa’s Attorney General Tom Miller, who is well known for his role of leading 20 states in the DOJ’s antitrust suit against Microsoft, said this past July that “[w]e are struggling with the law and the theory,” to bring a case against the big tech firms.

But, this didn’t stop the state AGs from entering the fray.  Republicans are concerned that the tech platforms have suppressed conservative viewpoints, Democrats are worried that these tech companies are simply too big and powerful.  But the announcements of the state AG investigations into Google and Facebook have two things in common: a lack of substance as they can point to no consumer harm and publicity to tout their efforts.

The latest announcement of the state AGs’ investigation of Google – from the steps of the Supreme Court no less – demonstrates just how political antitrust enforcement is becoming.  This type of high-profile activism may benefit state AGs’ political aspirations, but it could impose enormous costs on consumers.  Indeed, the mere threat of numerous investigations could have a chilling effect on innovation and competition for as long as these probes last.

Some state AGs appear to be conflating antitrust and other politically popular pet causes, raising the specter of using antitrust enforcement for political gain.  On the same day of his announcement of the Google investigation, Texas Attorney General Ken Paxton sent a fundraising request in an email to his supporters touting his efforts to take on “Silicon Valley titans.” And, according to a copy of the email shared with POLITICO, Paxton asserts “Texans are put at risk” by Google because of the company’s market dominance and privacy practices, and because its “executives clearly display anti-conservative and anti-Republican bias, subtly controlling what Americans see when they search for information about national political issues.”  But political concerns have no place in an antitrust investigation and using antitrust investigations to punish speech raises profound First Amendment concerns.

As the federal antitrust authorities and the state AGs begin their investigations, they must be mindful that companies like Google and Facebook have delivered a tremendous amount of innovation enabling the launch of new products and services that have resulted in many benefits to consumers such as free online search, email, messaging, and artificial intelligence services all while competing in a highly competitive advertising market with the likes of AT&T, Disney, CBS, and Comcast/NBCU.  These multichannel competitors have been locked in the stone age for years, are now finally innovating to compete against the new digital advertising entrants such as Google, Facebook, and Amazon.

In addition to competing with the large entertainment companies for users’ eyeballs and time, Google fiercely competes with Facebook, Amazon, and Apple in various ways, including the development and launch of new products and services such as digital assistant devices, internet of things platforms, and virtual reality products, providing consumers with an abundance of choices and convenience.  In short, the big tech platforms are not successful because they are big and powerful – they are big and powerful because they have been successful.  And that success stems from the nature of a free market economy that provides incentives of firms to innovate and grow.

Without question, this type of efficiency and competition should be preserved.  What’s more, utilizing antitrust enforcement as a political tool is a threat to the rule of law.  Antitrust enforcement should not be turned into a political enterprise to police unrelated, and unsubstantiated, “harms” based on subjective moral and social judgments.  Instead, it must continue to be primarily based on sound theories, objective economic criteria, and evidence of consumer harm.  For years, enforcement decisions were based on the consumer welfare standard – not on populist standards that change with the political winds.

Remember the antitrust laws are focused on consumers and whether any company is disadvantaged by Google’s business practices is not at issue – the central issue to a court will be, do consumers pay more.  And although there may be pockets of disgruntled rivals, there is little to no evidence that consumers have paid more because of the way that Google conducts its business.

Andre Barlow

202-589-1838

Background

On October 2, 2017, Shire sued Allergan for its bundling and exclusive dealing arrangements with Medicare Part D plans that deny patients access to Xiidra® – Shire’s best-in-class, breakthrough drug to treat DED.

DED occurs when the eye does not produce enough tears or when tears are not of the correct consistency. The disease is evidenced by inflammation and damage to the ocular surface, resulting in blurry or fluctuating vision and eye fatigue. About one million Americans receive prescription drug treatment for DED. Shire’s Xiidra® and Allergan’s Restasis® are the only FDA-approved prescription drugs on the market for treatment of DED. There are no reasonable over-the-counter substitutes for treating DED. The FDA approved Shire’s Xiidra for treatment of both the symptoms and signs of DED. Restasis® was approved only for treatment of a specific symptom of DED—reduced tear fluid volume—which affects only 10 percent of those with DED.

Shire alleged that Allergan economically coerced Medicare Part D prescription drug plans to exclude Xiidra and maintain Restasis on a preferred formulary tier through financial incentives including rebates bundled across several Allergan Glaucoma drugs including Lumigan, Combigan, and Alphagan P.  These drugs have FDA approval for the treatment of high eye pressure in patients with glaucoma or ocular tension.

Medicare Part D is a prescription drug program for senior citizens. Participants in Part D can choose from a variety of health insurance plans. The list of drugs covered by a Medicare Part D plan is called the plan’s “formulary.” Formularies offer drugs in tiers that dictate the patient’s copayment. Drug manufacturers routinely provide rebates to obtain a preferred position on a plan’s formulary.  If a drug is not listed on a formulary, then it is considered “not covered” under the Medicare Part D plan.

Xiidra is approved to treat more signs and symptoms of dry eye disease than Allergan’s Restasis and also does not need to be used in conjunction with a topical steroid, which Allergan’s Restasis often does.  Shire also alleged that many patients using Restasis had adverse reactions or did not improve.

Despite the advantages of Xiidra, Shire alleged that payors did not have the economic incentive to switch to the new drug because they would lose rebates not just on Restasis, but on the rest of Allergan’s bundled drug portfolio that included glaucoma drugs.  As one plan told Shire, “You could give [Xiidra] to us for free, and the numbers still wouldn’t work.”

Shire also alleged that Allergan engaged in an exclusive dealing contract with another plan which barred the plan from offering Shire’s DED drug on its formulary. These contracting practices allowed Allergan’s Restasis to maintain a roughly 90% market share despite the entry of a new and improved drug. In a nutshell, the conditional rebates gave Allergan’s Restasis protection from competition and allowed Allergan to maintain its monopoly.

District Court Dismisses Shire’s Lawsuit

The federal district court, however, dismissed Shire’s lawsuit for two reasons. First, the district court held that Shire failed to plead a proper relevant market because the Medicare Part D dry eye disease market is “unduly narrow because it excludes others, notably commercial payers, to whom Plaintiff can sell Xiidra”. Second, Shire’s allegations that Allergan had agreements where it bundled its DED medication with other drugs and entered into exclusive agreements were insufficient to make out a case of anticompetitive conduct. Shire failed to allege that Allergan has “monopoly power over the” glaucoma drugs it allegedly bundled with Restasis or that Shire “did not have other available products that it could offer … as part of a bundled rebate” to Medicare Part D plans. As a result, Shire’s Sherman Act claims were dismissed.

 Thoughts:

Rebates offered across multiple prescription drugs to obtain preferred or exclusive position on a drug formulary can create a barrier to competition known as a rebate wall or trap.  Rebate walls block competition by coupling volume-based discounts across multiple products with punitive measures.  Contracts between drug manufacturers and payors that include bundling can be extremely effective at blocking competition and limiting formulary access to newer and more innovative therapies. However, as the district court put it, a fact sensitive analysis is required because “neither bundled rebates nor exclusive dealing contracts are inherently anticompetitive. In fact, both can be procompetitive.”  The judge is correct that the general rule is that bundled discounts are procompetitive, but the product in question relates to prescription drugs where patient choice is paramount.  Any threat to withhold rebates on the condition that Part D plans exclude Xiidra entirely from formularies would appear to be unlawful exclusionary conduct.  There is no procompetitive justification for the payment of rebates by a first-tier drug manufacturer for the complete exclusion of a competing drug from the formulary.

Prohibiting rebate walls is critical to providing seniors with access to more affordable medication that may be more efficacious.  Ultimately, patients lose access to choices of superior and more effective prescription drugs and, in some cases, are being delayed or denied the opportunity to obtain the most effective treatments for their individualized needs.  In addition, the district court judge was not impressed with the relevant product market.  But certainly, the sale of DED drugs to Medicare Part D plans is an important market to protect.  Competition in the Part D market is critically important as it serves a vulnerable population, our nation’s seniors, many of whom are on fixed incomes.

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

Background

On February 21, 2017, Tronox inked a deal to buy Cristal for $1.67 billion and a 24% stake in the new entity. The transaction would have created the largest TiO2 company in the world, based on titanium chemical sales and nameplate capacity.

Tronox Limited operates three titanium dioxide TiO2 pigment plants in the United States, Netherlands and Australia. Tronox has a TiO2 plant in Hamilton, Mississippi. Cristal operates eight TiO2 manufacturing plants in the USA, Brazil, United Kingdom, France, Saudi Arabia, China and Australia. Cristal has two TiO2 plants in Ohio.

Administrative Complaint

On December 5, 2017, the Federal Trade Commission (“FTC”) issued an administrative complaint challenging Tronox Limited’s proposed acquisition of Cristal, a merger of two of the top three suppliers of chloride process titanium dioxide (“TiO2”) in the North American market.  The FTC was challenging Tronox’s acquisition of Cristal over significant concerns that the deal would substantially lessen competition for chloride-process titanium dioxide in the United States and Canada.  Titanium dioxide is an industrial chemical primarily used as a white pigment in paints, coatings, and specialty paper products.  Titanium dioxide is manufactured using either a chloride process or a sulfate process. The vast majority of titanium dioxide sold in the United States and Canada is made using the chloride process, which produces brighter, more durable coatings than the sulfate process. The FTC alleges that in the North American market, sulfate titanium dioxide is not a viable substitute for chloride process titanium dioxide. The FTC also alleges that major customers for titanium dioxide in the North American market, principally coatings manufacturers, could not easily or cost-effectively shift away from chloride process titanium dioxide in favor of sulfate process titanium dioxide.

FTC Has Taken Issue With Consolidation in the TiO2 Market Before

In 1999, the FTC blocked E.I. du Pont de Nemours & Co.’s (“DuPont”) acquisition of Imperial Chemical Industries (“ICI”). At the time, DuPont (25%) and ICI (10%) combined produced 35% of the global supply. DuPont was the leading supplier, both in the United States and the world, of TiO2 pigments and ICI was the second-largest supplier in the world, with plants located in the United States and abroad. The deal was structured so that DuPont would acquire ICI’s TiO2 facilities outside North America, and NL Industries (“NL”), another competitor, would acquire ICI’s TiO2 assets in the United States. The DuPont/ICI transaction, therefore, avoided a production overlap in North America. Nevertheless, the FTC’s concern was that the elimination of an important import competitor like ICI could facilitate or increase the likelihood of coordination. The parties abandoned the deal in January of 1999 when faced with a lawsuit.

The FTC Alleged A Coordinated Interaction Theory

The FTC’s administrative complaint alleges that the combination would reduce competition in the North American market for chloride process titanium dioxide. The FTC alleged that if the deal is consummated, it would increase the risk of coordinated action among the four remaining competitors, and increase the risk of future anticompetitive output reductions by Tronox. The FTC alleges that without a remedy Chemours and the merged firm would have 80% of the chloride process titanium dioxide market with Venator and Kronos making up the rest of the share.

Under this theory, the FTC needs to prove that the elimination of a competitor may create or enhance the ability of the remaining firms to more easily (either explicitly or through more subtle means) coordinate on price, output, and/or capacity.  The FTC alleges that the NA chloride TiO2 industry has a number of characteristics that make it vulnerable to coordination such as commodity like product; concentrated industry with small number of competitors; transparency into the strategic decisions of competitors; customers with long term contracts makes it easy for competitors to detect deviations from past practices; low elasticity of demand; and history of interdependent behavior and allegations of collusion.

Recent Collusion Case

The FTC cites a history of restricting production to support higher prices and past collusive conduct to support its coordinated interaction theory. In its Complaint, it made reference to the September 14, 2017 Third Circuit Court of Appeals decision in Valspar Corp. v. E.I. DuPont de Nemours and Co., 873 F.3d 185 (3rd Cir. 2017), where the court observed that the U.S. titanium dioxide industry has high entry barriers and is dominated by a few firms that closely track one another’s activities and the class action case brought against the entire industry several years ago in a federal court located in Maryland.

Valspar, a large-scale titanium dioxide purchaser, broke away from the class and brought its own claims against the industry for price fixing and settled with everyone except DuPont. Valspar filed its case in Delaware and alleged that the suppliers conspired to increase prices, beginning when DuPont—the largest American supplier—joined the Titanium Dioxide Manufacturers Association (TDMA) in 2002.  During a 10 year period, DuPont announced price increases 31 times, which were matched by the other suppliers. The Third Circuit affirmed the summary judgment in favor of DuPont because it found that Valspar’s characterization of the suppliers’ price announcements “neglects the theory of conscious parallelism” and is contrary to the doctrine that in an oligopoly “any rational decision must take into account the anticipated reaction of the other . . . firms.”  The Third Circuit noted that price movement in an oligopoly is interdependent and frequently will lead to successive price increases, because oligopolists may “conclude that the industry as a whole would be better off by raising prices.”  Valspar did not show that the suppliers’ parallel pricing went “beyond mere interdependence [and was] so unusual that in the absence of advance agreement, no reasonable firm would have engaged in it.” While this all sounds good for DuPont, which is Chemours today, it does not sound so good for Tronox at the FTC. Long story short, the FTC alleges that the proposed merger would make that situation even worse.

According to the FTC, the transaction would “combine two of the three largest producers” and result in “increase[d] concentration in an already concentrated market.”  The FTC alleged that the deal would increase the likelihood of coordination in an oligopolistic market and allow Tronox to “discipline its output” to influence supply and increase prices.  Id.  The administrative trial  was completed on June 22, 2018, but Administrative Law Judge D. Michael Chappell has not yet issued a ruling.

All Global Antitrust Agencies Have Cleared the Deal

Despite a challenge in the United States, the European Commission cleared the deal on July 4, 2018, contingent on Tronox’s agreement to divest its global titanium oxide operation for pigment used in paper laminate.  The transaction also has received approvals in Australia, China, Colombia, New Zealand, Saudi Arabia, South Korea and Turkey.  The United States is the only outstanding jurisdiction where clearance is required.

D.C. District Court Opinion: Internal Company Documents Support FTC’s Market Definition and Chinese Entry Would Not Occur Soon Enough to Prevent Anticompetitive Harm

On July 10, 2018, the FTC filed its complaint in federal court seeking a preliminary injunction because it was concerned that the companies would close the transaction “as soon as July 16, 2018”.  Complaint, FTC v. Tronox Ltd., No. 18-1622, at 2 (D.D.C. July 10, 2018).  After an evidentiary hearing, Judge McFadden announced his decision to preliminarily enjoin the transaction until the FTC’s administrative law judge issues his opinion.

On September 12, Judge McFadden released a redacted version of the decision, which finds that the FTC has shown that the Tronox-Cristal merger will likely result in high concentration in the North American chloride-process TiO2 market and that the merger will increase the merged firm’s incentives to engage in strategic output withholding.  Moreover, the district court agreed with the FTC’s market definition of North American chloride-process titanium dioxide.  Judge McFadded rejected Tronox’s argument that the market definition should be expanded to include worldwide chloride-process and sulfate-process titanium dioxide.  Judge McFadden was persuaded by Tronox and Cristal internal company documents, which supported the existence of both a separate chloride-process submarket and a distinct North American regional market.  Judge McFadden found that internal documents and the economic realities of the market favored the FTC’s market definition.

Tronox also argued that competition from Chinese producers would reduce or negate any anticompetitive effects from increased market concentration.  Judge McFadden rejected this argument because the Chinese producers are really not in the U.S. market and there was no evidence that their entry would be quick enough to prevent a merged Tronox-Cristal firm from reducing output or increasing prices in the interim.

Conclusion

The FTC’s successful challenge of the Tronox/Cristal merger in federal court demonstrates that President Trump’s FTC will take action to preserve competition and protect consumers when the facts support a lawsuit.  The case is interesting because the federal court hearing only delays the Tronox deal for a short time and allows for the administrative trial process to be completed.  Indeed, the parties after completing post-trial briefs and oral arguments, are now simply awaiting the decision from the administrative law judge.  The district court opinion, however, confirms that internal company documents are the best evidence to support market definition and that merging parties that want to use entry as a defense need to have evidence that the entry is likely and can occur quickly.  When defendants argue against their own internal company documents and against market realities they are likely to lose that argument in front of the antitrust agencies and a district court.

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

Background on Pfizer/J&J

In September 2017, Pfizer filed an antitrust lawsuit under Sections 1 and 2 of Sherman Act alleging J&J engaged in exclusionary anticompetitive practices to keep Pfizer out of the market for infliximab products.

In 1999, J&J introduced the first infliximab product under the brand name Remicade, a biologic, which treats a variety of immune-mediated diseases. In 2016, Pfizer launched Inflectra as the first biosimilar to Remicade.

According to Pfizer’s allegations, within a week of Inflectra’s launch, J&J began to deploy its “Biosimilar Readiness Plan,” which allegedly involved a multi-pronged anticompetitive scheme including exclusive contracts and bundle rebates and multi-product bundling.   Pfizer’s allegation was that J&J threatened to withhold rebates (which often grow larger as performance metrics such as market share or volume rise, or which may be bundled together with rebates for other products) from insurers unless they agreed to exclude biosimilars from their formularies.  This is what Pfizer refers to as a “rebate trap”.

Exclusive Contracts: Pfizer alleges J&J sought and secured contractual commitments from commercial insurance companies to exclude Remicade biosimilars, such as Inflectra, from their plans.  These contracts made Remicade the exclusive infliximab product available to patients covered under those plans. At least 70% of commercially insured patients in the U.S. fall under plans that have adopted these express or de facto agreements to exclude Inflectra and other biosimilars.  As of September 2017, J&J maintained market share of over 96% of infliximab unit sales in the United States.

Bundling Rebates: Pfizer alleges J&J enticed insurers into accepting exclusive contracts via a rebate program that would provide discounts off Remicade’s increasing list price—but only so long as new patients are also given Remicade rather than Pfizer’s biosimilar, Inflectra. (bundling of new (contestable) and existing (noncontestable) patients)

Multi-Product Bundling: Pfizer alleges J&J bundled rebates across multiple products such that if an insurer refuses to grant exclusivity to Remicade, the insurer would be forced to pay a higher price on other J&J products in addition to Remicade.

Impact on Prices and Competition:

Pfizer alleges that both J&J’s net price accounting for rebates and other discounts continued to rise despite insurers and providers now having a lower-cost alternative in Pfizer’s Inflectra.  As a result, Pfizer claims that it has been prohibited from competing for at least 70% of all commercially insured patients in the United States.

Biosimilars:

Biosimilars are expected to be a key factor in efforts to contain prescription drug costs.  Biologics are complex, large-molecule medicines derived from living organisms and are used to treat a range of serious conditions, including rheumatoid arthritis, plaque psoriasis, Crohn’s disease, lymphoma, leukemia, breast cancer, and diabetes.  Biologics are among the most expensive prescription drugs in the United States and account for an increasing share of U.S. prescription drug costs.

The development of biosimilars is still a nascent industry.  But many industry experts and former Commissioner Gotlieb of the Food & Drug Administration (“FDA”) have expressed their views that increased competition from biosimilars could result in enormous benefits to the tune of $54 billion in savings between 2017 to 2026 for the U.S. healthcare system so making sure that biosimilars are allowed to compete on fair terms with higher priced branded biologic medicines is vitally important.  Some have indicated that the savings could be approximately $150 billion under the right conditions.  Exclusionary tactics through the use of a rebate wall threatens to stifle biosimilar competition and reduce patients access to affordable life saving drugs.

District Court’s Opinion

In J&J’s motion to dismiss, J&J argues that Pfizer failed to plead facts that constitute an antitrust injury.  J&J also identified a number of alternative reasons why Pfizer’s launch failed other than J&J’s conduct.  The district court found that Pfizer’s complaint sufficiently and plausibly alleges that it suffered an antitrust injury because it contained detailed allegations regarding J&J’s exclusionary terms with the nation’s largest insurers; the incentive structure that forces end payers and providers into accepting those terms; Pfizer’s efforts to compete (e.g., guarantee that Inflectra would cost less than Remicade); and showed how market participants on many levels are injured from J&J’s ability to sell Remicade without any competition.  With regards to bundled rebates, the district court noted that bundled rebates pose antitrust concern when a defendant forecloses competition from its product in a competitive market by linking it to a product on which it faces no competition. LePage’s Inc. v. 3M, 324 F.3d 141, 156 (3d Cir. 2003); SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1065 (3d Cir. 1978).The district court cited, SmithKline, noting the Third Circuit affirmed as an antitrust violation the defendant’s rebates based on the purchase of multiple products because the bundle, in effect, “insulated its product from true price competition.” 575 F.2d at 1065.  The district court noted the same was true in LePages’s, where the defendant “used its monopoly in transparent tape, backed by its considerable catalog of products, to squeeze” its competitor from the market. 324 F.3d at 157. Similar to exclusive dealing agreements, bundled rebate claims are analyzed under a rule of reason framework.

J&J relying on Eisai argued that Pfizer did not suffer antitrust injury because Pfizer did not allege that it was incapable of offering its own multi-product bundle and that bundling contestable and noncontestable patients cannot be an antitrust violation.  The district court rejected both arguments basically saying that discovery will show if Pfizer will have the facts to prove the theory of harm and Eisai lost on summary judgment because of a lack of factual support.

Takeaways:

Pfizer’s win is big step in the right direction.  Indeed, the ultimate outcome of this case will help define the scope of antitrust protections for biosimilars for years to come and may even determine the viability of the biosimilar industry.  This case demonstrates how some pharma manufacturers engage in contracting practices that create what is known as a rebate wall or trap.  This conduct may be anticompetitive if they block and delay the entry of biosimilars. When a rebate wall is successfully erected, an insurer faces strong financial disincentives to grant access to new and innovative therapies such as biosimilars, as doing so would result in punitive action that would result in the loss of hundreds of millions in guaranteed rebate dollars for the payor. This condition creates a “trap” for insurers which would otherwise be inclined to grant formulary access to biosimlars.

In many cases, these rebate traps prevent patients and physicians from seriously considering new medications at competitive prices.  The conditional rebate penalizes insurers if they use biosimilars because they would lose their rebates not only on the incumbent branded drug, but on all the products in which the rebate is bundled together.  Accordingly, these rebates are not discounts that benefit customers rather they are exclusionary tactics designed to stifle the entry of rivals.

In summary, rebate walls distort the workings of the free market, result in higher prices, and reduce patients’ access to affordable drugs.  Even worse, if J&J’s rebate trap is successful, it will provide other pharma manufacturers a roadmap on how to stifle stifle biosimilar competition and pharma manufacturers will have less incentives to develop biosimilars in the future.

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

According to Sparton, during the review of the proposed merger by the United States Department of Justice (“DOJ”), the United States Navy (“Navy”) expressed the view that instead of the parties proceeding with the merger, each of Sparton and Ultra should enhance its ability to independently develop, produce and sell sonobuoys and over time work toward the elimination of their use of the companies’ ERAPSCO joint venture for such activities. DOJ staff then informed Sparton and Ultra that it intended to recommend that the DOJ block the merger. The parties expected the DOJ would follow this recommendation and seek an injunction in court to block the merger. As a result of the view of the Navy and the DOJ’s position, Ultra and Sparton determined it was in the best interests of the parties to proceed to terminate the merger agreement.

Also according to Sparton, the parties understand that the DOJ intends to open an investigation to evaluate their ERAPSCO joint venture. Sparton said that based on historical practice, the company anticipates the Navy will assist in funding Sparton’s transition to independently develop, produce and sell sonobuoys.

Regulatory Backdrop

On September 22, 2017, the DOJ issued a Second Request for additional information in connection with the transaction. One month later Ultra and Sparton entered into a timing agreement with the DOJ, pursuant to which they agreed not to consummate the merger until 90 days following the date on which both companies shall have certified compliance with the Second Requests.  On January 31, 2018, Sparton said it expected that the merging companies will have certified compliance with the Second Requests on or before February 8, 2018.  The Committee on Foreign Investment in the United States (CFIUS) cleared the deal back on November 20, 2017.

ERAPSCO Joint Venture

ERAPSCO is a 50/50 joint venture between Sparton and UnderSea Sensor Systems, Inc. (“USSI”). USSI’s parent company is Ultra, based in the United Kingdom. Sparton and USSI are the two only major producers of U.S. derivative sonobuoys – signaling systems that are launched from aircraft and ships during anti-submarine warfare (“ASW”). They are used in support of multiple underwater missions for detection, classification, and localization of adversary submarines during peacetime and combat operations. This JV supplies the Navy, as well as foreign governments that meet Department of State licensing requirements, with sonobuoys.

ERAPSCO has been in existence since 1987 and, historically, the agreed upon products included under the venture were generally developmental sonobuoys. In 2007, the JV expanded to include all future sonobuoy development and substantially all U.S. derivative sonobuoy products for customers outside of the United States. The JV was further expanded three years later to include all sonobuoy products for the Navy beginning with the Navy’s 2010 fiscal year contracts.

According to publicly available information, the joint venture serves as a pass-through entity maintaining no funds or assets.  The Board of Directors of ERAPSCO has the responsibility for the overall management and operation of the JV. The six-member board consists of equal representation (full-time employees) from both JV partners for three-year terms.  In some instances, either Sparton or USSI handles the complete production and delivery of sonobuoys to ERAPSCO’s customer. In other instances, either Sparton or USSI starts the production and ship completed subassemblies to the other party for additional processing before being delivered to the customers.

Competition Concern

Ultra Chief Executive Officer Douglas Carter says that the Navy wants to increase competition in the production of sonobuoys as demand rises along with heightened geopolitical tensions, in particular a bigger threat to the U.S. East Coast.

Significantly, Sparton is the only U.S. producer of sonobuoys, and the worldwide market is a duopoly between Sparton and Ultra. International regulations create a strong barrier to entry; in fact, when the Navy contract was last up for renewal in 2014, the ERAPSCO JV was the only bidder.

According to Sparton’s Form 10-K, “while the ERAPSCO agreement provides certain benefits to Sparton, the company does not believe that it is substantially dependent upon this agreement to conduct its business.” If in the future, Sparton determines that this commercial arrangement is no longer beneficial, the company has the ability to terminate the joint venture in relation to future business awards and return to independent bidding for Navy and foreign government sonobuoy contracts. Similarly, if USSI were to terminate this JV, Sparton would be required to return to independent bidding and production for both the Navy and other foreign governments that meet the State Department licensing requirements. If this were to happen, Sparton says its future results could be negatively impacted.

Takeaways

The market for sonobuoys has limited opportunities for competition as well as significant barriers to entry. In this context, blocking the merger of the only two producers of U.S. derivative sonobuoys can hardly come as a surprise.

What is surprising in this case, however, is that the combining firms were already 50/50 joint venture partners with respect to the relevant product market, specifically.

Though the Navy at present purchases sonobuoys from the Ultra/Sparton JV, the DOJ and the Navy are opposed to the full-fledged integration of these two suppliers that could potentially compete with each other in the future. According to the DOJ, “The transaction threatened to permanently combine the only two qualified suppliers of sonobuoys to the U.S. Navy.” (Emphasis added.)

In other words, the DOJ is drawing a line in the sand between temporary, if prolonged, partnership on the one hand, and all-out combination on the other.  Clearly, the fact that two firms already cooperate via a 50/50 JV does not guarantee that a merger of those same two firms will be approved. Moreover, the fact that CFIUS approves a deal does not suggest that the DOJ and the U.S. military will approve the deal.

Here, the DOJ plans to conduct a further review of ERAPSCO and will likely require Ultra and Sparton to operate independently going forward. Beyond merely eliminating a future potential anticompetitive effect of a proposed transaction preemptively, the DOJ seems to be looking to undo an existing “partnership” between two rivals – that together happens to be the sole supplier of critical equipment to the Navy.

Indeed, the fact that the customer most likely to lose out in a potential merger of Ultra and Sparton – and clearly most likely to benefit by the unraveling of the joint venture – is the Navy is hard to ignore.

A joint venture between competitors can have procompetitive effects when it can create efficiencies and economies of scale, leading to lower costs, higher quality products, and increased innovation. On the other hand, a JV can be anticompetitive if it presents as a JV in name only.  Here, Sparton openly admits that it could compete, bid, and produce independently so there does not appear to be any specific need for the JV to continue.

The DOJ’s recommendation to sue to block the deal and open a separate investigation into the ERAPSCO JV demonstrates how aggressive the DOJ is willing to be when it uncovers information suggesting that the merging parties were not acting appropriately prior to the merger review.  Within the past couple of years, the DOJ has opened criminal investigations into the packaged tuna industry and hop-on/hop-off bus tour markets, as well as a civil investigation into DirecTV’s conduct related to the LA Dodgers after uncovering evidence of bad behavior during merger reviews.

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

Smucker currently owns the Crisco brand, and by acquiring the Wesson brand, it would control at least 70% of the market for branded canola and vegetable oils sold to grocery stores and other retailers.  Smucker and Conagra both manufacture and sell a wide range of food products, including canola and vegetable oil, other types of oils, and shortening.  The FTC also claims that other branded canola and vegetable oils available in the United States, such as Mazola and LouAna, each control only a small share of the market, and do not hold the same brand equity.  Furthermore, building sufficient brand equity to expand would require substantial investment and take at least several years.

Under the proposed acquisition, Smucker would obtain all intellectual property rights to the Wesson brand, as well as inventory and manufacturing equipment.

The complaint alleges that the acquisition is likely to increase Smucker’s negotiating leverage against retailers, especially traditional grocers, by eliminating the vigorous head-to-head competition that exists between the Crisco and Wesson brands today.

According to the complaint, internal documents from both parties, as well as other evidence, indicate that Crisco and Wesson compete intensely for sales to retailers.

• In , Smucker’s Region Sales Manager for described a
  Wesson advertisement for gallons of canola, vegetable, and corn oil as “downright irresponsible trade spending by our friends at Con Agra.” Smucker’s Director of , responded, “that’s clearly irresponsible trade spending,” and stated, “if you feel some of the recent Wesson tactics are going to materially impact your fiscal year projections, we’ll want to talk about it
  sooner than later.  Again, we’re hopeful that our tactical spending and innovation will help offset any of Wesson’s targeted tactics.”
• In August 2016, Conagra’s recaps from a meeting about the Wesson brand included: “Crisco is running deeper price points at major retailers (i.e. ); Crisco’s pricing strategy is irrational; Crisco did not follow [Wesson’s list] price increase; [and] Tom is asking to grow share having lost volume [by] pulling out trade [funding].”

Smucker’s own internal documents acknowledge that eliminating price competition between Crisco and Wesson is a central part of its rationale for the acquisition.

• In a document submitted with Smucker’s Hart-Scott-Rodino
  filing, Smucker stated that a “strategic rationale” for the Acquisition is that it “[t]akes [a]competitor [Wesson] out of the marketplace and allows us to more effectively manage
  pricing/trade.”
• In Smucker’s view, this price competition is
  a “race to the bottom” that “unnecessarily tak[es] dollars out of the category.”
• Smucker admits that it will increase prices: “Once we close the deal, our plan would be to execute a price increase on Wesson consistent with our latest Crisco pricing action.”

The FTC alleges that the transaction would give Smucker the ability to raise prices to retailers, ultimately leading to higher prices for U.S. consumers for branded canola and vegetable cooking oil.

The FTC also authorized its staff to seek a temporary restraining order and a preliminary injunction in federal court to prevent the parties from consummating the merger, and to maintain the status quo pending the administrative proceeding.  The FTC vote to issue the administrative complaint was 2-0.  The administrative trial is scheduled to begin on August 7, 2018.

Lessons Learned:

This complaint demonstrates that the FTC 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 FTC routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The FTC will focus on supposed “hot docs” to support its case because the buyer appears to be touting the intended anticompetitive consequences of the acquisition.  At the end of the day, however, a “smoking gun” document regarding anticompetitive intent  will be rejected by a judge unless the FTC provides the foundations of an antitrust case through market analysis and empirical evidence.

Nevertheless, 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.  Ambiguity or exaggeration in memoranda, marketing presentations, or board presentations may convey the erroneous impression that the company is more dominant or powerful than it is or that the acquisition will injure competition.  All such documents should be written clearly and carefully in order to avoid misinterpretation.  Documents that contain careless and inappropriate language may make a perfectly legal merger appear anticompetitive.  Facetious or ironic comments may seem funny and be understood by other insiders at the time of the comments, but invariably can be misinterpreted after the fact by a government agency or a court.  A good rule of thumb is to write every document so that neither you nor the company would be embarrassed if it appeared on the front page of the Wall Street Journal.

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

Background

On November 21, 2017, the U.S. Department of Justice’s (“DOJ”) Antitrust Division filed a complaint in federal court block AT&T’s acquisition of Time Warner Inc. (“Time Warner”).

On February 16, 2018, the DOJ and AT&T faced off at a hearing in front of Judge Leon regarding AT&T’s discovery requests related to internal communications between the White House and the DOJ and its identification of Makan Delrahim, the Assistant Attorney General (“AAG”) of the DOJ’s Antitrust Division, on its witness list for trial. AT&T’s discovery requests were in line with one of the company’s affirmative defenses in its Answer to the Complaint, namely that: “Plaintiff’s claim reflects improper selective enforcement of the antitrust laws.”

In front of Judge Leon, AT&T simply asked for a privilege log of communications between the DOJ and the White House, if any exist. The DOJ could have ended the discovery dispute by simply answering that no communications exist. But, the DOJ claimed that the discovery requests were actually broader and made a legal argument that the discovery is barred.

AT&T’s selective enforcement defense asserts that the DOJ singled out its deal.  First, the DOJ hasn’t litigated a vertical merger in 40 years. Second, in 2011, the DOJ approved Comcast’s JV with NBCUniversal, a vertical deal that raised largely the same concerns at issue in AT&T/Time Warner. Of course, that deal was resolved through behavioral remedies, which happens to be a pet peeve of Delrahim. The DOJ is not interested in resolving the current deal without a structural remedy.

The DOJ raised the issue of filing a motion to strike the selective enforcement defense, objecting to the discovery demands and objecting to Delrahim being put on the witness list. The DOJ argued that under the law, it is a high hurdle to obtain such discovery. First, AT&T has not been singled out. Despite not litigating a vertical merger case in 40 years, the antitrust agencies have challenged numerous vertical mergers over the years and have forcing parties to abandon their deals or enter into settlement agreements resolving the antitrust concerns.  Moreover, AT&T compares its case to Comcast/NBCU, which the DOJ actually challenged.

Judge Leon’s Ruling:

Judge Leon did not rule on the DOJ’s motion to strike the selective enforcement defense.  However, he might as well have.  He denied AT&T’s motion to compel the DOJ to provide privilege logs of communications between the White House and the DOJ and quashed AT&T’s discovery requests for those same communications.

Judge Leon focused on the Supreme Court’s decision in United States v. Armstrong to determine if the defendants should be able to obtain discovery related to the selective enforcement defense. Judge Leon said the D.C. Circuit has recognized that “prosecutors have broad discretion to enforce the law, and their decisions are presumed proper absent clear evidence to the contrary.” United States v. Slatten, 865 F.3d 767, 799 (D.C. Cir. 2017)(citing Armstrong). Order at 3. Judge Leon noted that it is a rigorous standard that defendants must meet to obtain discovery.  Under the standard, defendants must put forward evidence of discriminatory effect and intent. Order at 4.

Judge Leon stated that defendants “fall far short” of the necessary demonstration of selective enforcement. He went further to say that “it is difficult even to conceptualize how a selective enforcement claim applies in the antitrust context,” because of the uniqueness of each merger enforcement action. Order at 5. He noted that comparing Comcast/NBCU to A&T/Time Warner was unavailing given that the DOJ actually filed an enforcement action against Comcast and while there was a remedy for that deal, the FCC was involved to monitor it. Order at 5. He then hammered the defendants for trying to claim that the DOJ’s action against a vertical merger was somehow discriminatory when it is clear that this is not the first time the government has brought a vertical case. “While it may, indeed be a rare breed of horse, “it is not exactly a unicorn.” Order p. 6.

Observations:

According to Judge Leon, the selective enforcement defense may not be applicable in antitrust enforcement cases.  Undoubtedly, all antitrust defendants feel like they are being singled out as they point to past deals within the same industry that were approved by the antitrust agencies. But, the antitrust agencies have made it clear that each merger raises its own unique set of facts.

In raising the selective enforcement defense, AT&T was questioning the DOJ’s prosecutorial discretion. It had little, if anything, to do with the substantive claims that are being brought against the company. Antitrust is about law enforcement. The case is brought in front of a federal judge, and the court will decide whether the deal is anticompetitive.

The DOJ does not typically need to explain why it brings an enforcement action other than the deal raises competitive concerns that may substantially lessen competition. It can choose to challenge one merger but not another even when they raise similar issues. Further, it is entirely permissible for a new administration to change its merger enforcement priorities as well as how it remedies problematic mergers. The decision to sue-to-block rather than adopt conduct remedies is up to the DOJ’s own discretion even though that decision may have the appearance of being essentially ideological or political.

Judge Leon understands that every merger is unique to its own facts, not all mergers within the same industry should be treated similarly, and remedies used in one merger may not be appropriate in the next merger. Moreover, he was not about to compare AT&T to Comcast when he has not had the opportunity to study the facts related to the merger at hand. Based on the law, he made the right decision to keep everyone focused on the substantive antitrust issues.  Judge Leon is going to decide this case based on the economic realities of the video distribution and content markets and not on President Trump’s public battle with CNN.  While Trump’s political campaign promises may cast a shadow over the DOJ’s motivation for bringing the case, it should not influence the court’s decision on whether the acquisition is illegal or not.  Judge Leon will make the ultimate decision on whether the deal is anticompetitive and is unlikely to be distracted by the political noise.

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

The FTC alleges that three distributors agreed to boycott buying groups, which sought discounts and lower prices for dental supplies and equipment on behalf of solo and small-group dental practices.  The FTC further alleges that the agreement deprived solo and small-group dental practices from the benefits of participating in buying groups.

Benco and Henry Schein allegedly entered into an agreement whereby both distributors would refuse to provide discounts to or compete for the business of buying groups.  The complaint details email, phone, and text communications between executives of the two companies evidencing the agreement, as well as attempts to monitor and ensure compliance with the agreement.  On Oct. 1, 2013, a Benco executive called his counterpart at Henry Schein and “reaffirmed Benco’s commitment against buying groups.” After the call, neither distributor bid on a buying group contract.  The FTC’s complaint also alleges that Patterson joined the illegal agreement.

In 2014 and 2015, the communications confirmed the existence of a conscious commitment to a common scheme.

• In June 2014, a Patterson executive wrote in a text message: “[W]e’ve signed an agreement that we won’t work with GPO’s.”
• In May 2015, a Benco employee rejected a buying group and said in an internal email: “The best part about calling these [buying groups] is I already KNOW that Patterson and Schein have said NO.”
• In June 2015, Benco’s informed a Benco sales representative: “We don’t allow [volume discount] pricing unless there is common ownership. Neither Schein nor Patterson do either.”

The complaint charges Benco, Henry Schein and Patterson of conspiring in violation of Section 5 of the FTC Act.  The complaint further alleges that on multiple occasions, Benco invited Burkhart Dental Supply – a regional distributor and the fourth largest full-service distributor in the United States – to join the conspiracy against buying groups. The FTC’s complaint does not allege that Burkhart accepted the invitation or that any agreement was formed.  Nevertheless, as a result of this invitation to collude, which would not otherwise be reached under the antitrust laws, the FTC separately alleges a count against Benco under Section 5 of the FTC Act.

The complaint seeks no monetary penalties, but calls for a “cease and desist” order barring the companies from “distorting prices” and undermining the ability of independent dentists to obtain lower prices. The remedy period would be effective for 15 years.

Typically, these conduct investigations result in negotiated settlements whereby the defendants agree to a cease-and-desist order, a remedy that is designed to stop the harmful conduct and prevent it from happening again.  Here, the defendants do not find it in their interests to settle, even though the ultimate remedy if the FTC wins would be an order to prevent the harmful conduct from occurring in the future.  The administrative trial is scheduled to begin on Oct. 16, 2018.

Observations:

The case demonstrates the FTC will use Section 5 to pursue unlawful conspiracies as well as unilateral conduct that falls short of an unlawful agreement, including invitations to collude.  Section 5 of the FTC Act is broader than the Sherman and Clayton Acts because it captures conduct that violates “the spirit of the antitrust laws.”  Here, some of the allegations and the detail provided in the complaint related to the conspiracy and unlawful agreement appear to support per se violations of Section 1 of the Sherman Act.  In such situations, the FTC typically relies on the same standards that would be applied under the antitrust laws for those allegations.  This is not the case when it comes to invitations to collude.  Historically, the FTC has aggressively enforced invitations to collude under Section 5, however, all of these cases have been resolved through negotiated settlements meaning that they were not litigated.  The FTC has taken the position that invitations to collude are per se violations of Section 5 because they serve no legitimate business purpose and are inherently suspect meaning that they are presumed to be anticompetitive.  If this case actually gets litigated, the decision should provide more clarity regarding the FTC’s powers under Section 5.

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

It is common practice in the early stages of litigation to be overly inclusive when identifying witnesses for trial, and just because Delrahim is named does not necessarily mean that he will testify. However, when alleging selective enforcement as a defense, AT&T will necessarily need to put on proof of the improper discrimination behind the DOJ’s decision to block its deal with Time Warner, and presumably no one would be in a better position to testify as to the DOJ’s decision than the actual decision maker: Delrahim.

In addition to its witness list, AT&T has also requested internal communications between Delrahim’s office and Attorney General Jeff Sessions, including emails, phone calls and other communications between the White House and officials at the DOJ.

The DOJ can certainly object to providing this information, and will likely do so. Putting an attorney on the stand is fraught with potential privilege and attorney work-product issues.   More importantly, the DOJ likely will move to strike AT&T selective enforcement defense, which should render Delrahim’s testimony and communications irrelevant.

Selective enforcement is notoriously difficult to prove, or even allege. The DOJ has extremely broad “prosecutorial discretion” in deciding to challenge a deal. If the DOJ challenges AT&T’s selective enforcement defense, AT&T will need to offer some form of proof that the DOJ based its decision to challenge this deal on some improper, discriminatory motive. AT&T is relying on President Trump’s opinionated tweets and public statements and arguably, the tweets here could support an argument that the DOJ is retaliating against CNN for exercising First Amendment rights.  Indeed, AT&T’s selective enforcement defense asserts that Delrahim, for political purposes, singled out its deal, in contrast to the DOJ’s 2001 decision to approve Comcast’s deal with NBCU, which raised similar vertical concerns. However, Judge Leon could just as easily rule that the President’s mere tweets, without more, is not enough to support a claim for selective enforcement because the DOJ has broad prosecutor discretion and has legitimate competition concerns about AT&T’s acquisition of Time Warner.  In that scenario, Judge Leon would block Delrahim from being called to testify, and further block production of his office’s communications with the White House.

However, this is not to say that AT&T strategy is not sound. Even if its defense of selective enforcement is stricken, it adds yet another ground for potential appeal. Furthermore, it undoubtedly puts unwanted pressure and publicity on the DOJ and the White House questioning the motives in challenging the deal. No one at the DOJ wants even the merest chance of a Court digging through its communications and second guessing its decisions in deciding which deals to challenge.   And in the current political climate, insinuations questioning the DOJ’s objectivity and bias could have a lasting negative impact on the DOJ, even if only in the court of public opinion.

A new Administration is entitled to change its merger enforcement priorities and how it remedies problematic mergers. The DOJ’s decision to sue-to-block rather than adopt conduct remedies is a matter of its own discretion, and does not constitute “selective enforcement” even where it may have the appearance of being ideologically or politically motivated. The federal courts have made clear that it is permissible for the executive branch to change enforcement views and priorities to reflect the changing politics of different presidential administrations.

The Antitrust Division is not the only part of the DOJ that has been making changes in its enforcement of the laws. Other parts of the DOJ have been aggressively enforcing the immigration and drug laws that were going unenforced. Even the Federal Trade Commission is making changes to how it resolves anticompetitive pharmaceutical mergers. For example, Bruce Hoffman, acting director of the Bureau of Competition at the Federal Trade Commission (FTC), recently announced that the FTC will no longer accept divestitures of inhalant and injectable pipeline drugs in pharmaceutical mergers. Going forward, to resolve competitive concerns raised by actual drugs potentially competing with pipeline drugs, the FTC will require the merging parties to divest the actual inhalant and injectable drugs that are currently being marketed. Historically, the FTC had accepted divestiture of pipeline assets to remedy potential competition concerns.

The selective enforcement defense is a distraction to the DOJ and to AT&T.  AT&T needs to keep its defense focused on the substantive antitrust issues where it is on solid ground. Consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV, Youtube Live, and PlayStation Vue as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive. And the lines between MVPDs, virtual MVPDs and SVODs are blurring. AT&T should stay focused on the dynamic market that currently exists and is continuing to evolve.  For example, Youtube Live has now signed an agreement with Time Warner for content.

Judge Leon will make the ultimate decision on whether the deal is anticompetitive.  Judge Leon is unlikely to rule in favor of A&T with regards to the selective enforcement defense, unlikely to have Delrahim testify and unlikely to force the DOJ to provide AT&T with discovery relating to the defense.

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

FTC Seeks to Unwind Merger of Prosthetic Knee Manufacturers

On December 20, 2017, the FTC filed an administrative complaint to unwind the merger of Otto Bock HealthCare North America, Inc., (“Otto Bock”) and FIH Group Holdings, LLC (“Freedom”), two manufacturers of prosthetic knees equipped with microprocessors that adapt the joint to surface conditions and walking rhythm.  In September 2017, the parties simultaneously signed a merger agreement and consummated the merger without the FTC having an opportunity to review the deal.  Apparently, the merger was not HSR reportable.  According to the FTC, the merger eliminated direct and substantial competition between head to head competitors that engaged in intense price and innovation competition.  While the litigation is ongoing, the parties agreed to a Hold Separate and Asset Maintenance Agreement, which prevents them from continuing the integration of the two businesses.  The FTC did not allege any violation of the HSR ACT.

DOJ Requires a Divestiture Remedies in Consummated Asset Deal

On December 21, 2017, the DOJ announced a settlement that required TransDigm Group Inc. (“TransDigm”) to divest two airline passenger restraint businesses that it had acquired from Takata Corp. in February of 2017 for $90 million.  Due to the transaction’s structure, it was not HSR reportable so the DOJ did not have the opportunity to review the deal.  Nevertheless, the DOJ investigated the transaction and found that it had eliminated the only meaningful competitor to TransDigm in the market for commercial airplane restraint systems, including traditional two-point lap belts, three-point shoulder belts, technical restraints, and more advanced inflatable restraint systems such as airbags.  According to the DOJ, competition between the two companies led to lower prices and more innovation in the industry.  To resolve the concerns, the DOJ required a structural remedy to an already approved consortium.

DOJ Settles Parker-Hannifin Lawsuit

In September 2017, the DOJ challenged Parker-Hannifin’s consummated acquisition of CLARCOR Inc. alleging that it had eliminated head-to-head competition between the only two domestic manufacturers of fuel filtration systems and filter elements. The DOJ challenged the transaction after it had allowed the initial waiting period under the HSR Act to expire in mid-January 2017.  The HSR was filed during the holidays and expired around the inauguration.  There was no allegation that the parties withheld 4(c) documents or did anything unusual to prevent the DOJ from conducting a thorough review.  The DOJ had everything it needed to make a decision to issue a second request.  Apparently, the DOJ simply missed the overlapping businesses in the initial review period and allowed the waiting period to expire.  In December 2017, the DOJ announced a settlement with Parker-Hannifin that required a structural remedy, the divestiture of the fuel filtration assets.

Lessons Learned

No deal is ever done.  These enforcement actions demonstrate that the antitrust agencies are committed to challenging completed deals that substantially lessen competition.  These enforcement actions by the antitrust agencies send a strong message to corporate executives and antitrust counsel that antitrust risks do not end once a deal is consummated, and that a transaction is not free of antitrust exposure simply because the transaction is not reportable under the HSR Act or that the HSR waiting period was allowed to expire without contact from the antitrust agency.  Corporate and private counsel would like assurances that the HSR waiting period provides closure to the antitrust review.  Apparently, the expiration of the HSR waiting period does not end the antitrust review.  Given these examples, corporate executives must have its antitrust counsel assess the antitrust risk of closing a transaction that has some antitrust exposure for a post-closing investigation and challenge.  These examples show that consummating deals that raise serious antitrust concerns may lead to defending against lengthy and costly investigations; defending against litigation; and reorganizing to the government’s demands of divestitures even after some initial integration has taken place.

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

Background

On September 22, 2017, Otto Bock and Freedom simultaneously executed a merger agreement and consummated their merger.  Within four days of the acquisition, Otto Bock publicized to the world in its September 26, 2017 press release that “Otto Bock strengthens the leading position in prosethetics” and that the deal combined the #1 and #3 players in the field of prosethetics in the United States.  It further went on to state that the acquisition expands its market share and “antitrust issues have already been clarified” so they closed the merger and Otto Bock then took steps to integrate Freedom’s business, including personnel, intellectual property, know-how, and other critical assets.

Within three months of the closing, the FTC filed a complaint to unwind the deal.  According to the FTC’s administrative complaint, the merging parties are head-to-head competitors in the manufacture of prosthetic knees with microprocessors that adapt the joint to surface conditions and walking rhythm.  Specifically, the FTC alleges that Otto Bock and Freedom engaged in intense price competition as well as offered dueling improvements in innovation.  The deal eliminated head-to-head competition between the two companies, removed a significant and disruptive competitor, and entrenched Otto Bock’s position as the dominant supplier.

Microprocessor knees, which use microprocessors to adjust the stiffness and positioning of the joint in response to variations in walking rhythm and ground conditions, provide a stable platform for amputees. Prosthetists and doctors typically prescribe microprocessor knees to patients with above-the-knee amputations who have a relatively high degree of mobility. Compared to other products, microprocessor prosthetic knees reduce the risk of falling, cause less pain, and promote the health and function of the sound limb.

New entry or expansion by other manufacturers of microprocessor knees is not likely to be timely or sufficient to offset the anticompetitive effects of the merger. The complaint notes that it routinely takes firms more than two years just to develop a microprocessor knee, even when they are building on existing microprocessor knee technology.

Lessons Learned

The FTC’s administrative complaint serves as a reminder to corporate executives that antitrust risks do not end once a deal closes, and that a transaction is not free of antitrust risks simply because the transaction is not reportable under the HSR Act.  The complaint also demonstrates the risks of closing a deal that presents antitrust concerns and makes clear that such challenges will be pursued by the FTC.  The parties to the deal now are involved in costly litigation.  Accordingly, corporate and private counsel must be aware of the likely consequences and risks of consummating deals that raise significant antitrust concerns but for one reason or another avoided an antitrust review.  In strategic transactions, corporate counsel must reach out to experienced antitrust counsel for an antitrust assessment.

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

Background

In June of 2017, the FTC and the North Dakota Attorney General sued to block the merger of the two largest physician groups in Bismarck and Mandan, North Dakota.  The FTC alleged that the two groups had based on physician headcount at 75 percent of the physicians for adult primary care physician services, pediatric services, and obstetrics and gynecology services, and 100 percent of the general surgery physician services in the Bismarck-Mandan area.  The merger would eliminate competition between them and substantially lessen competition in the four markets.

Sanford Health operates more than 40 hospitals and 250 clinics, and employs more than 1,300 physicians in nine states. In the Bismarck area, it operates a 217-bed hospital and employs 160 physicians and 100 other health care providers. Mid Dakota is a multispecialty physician group that operates six clinics in Bismarck and employs 61 physicians and 19 advanced practice practitioners. Catholic Health Initiative (“CHI”), with whom Mid Dakota had a close referral relationship, operates the only other acute care hospital in the Bismarck-Mandan area.

FTC’s Case

The Court agreed with the FTC regarding the four product markets and the geographic: adult primary care physician services, pediatric services, obstetrics and gynecology services, and general surgery physician services in Bismarck-Mandan area of North Dakota. The FTC successfully put on evidence showing that patients viewed Sanford and Mid Dakota’s physician groups as substitutable with each other.

In general, competition in the health care provider market can be divided into two “stages.” In the first stage, providers compete with one another for access to insurance plans offered regionally by commercial health insurers.  In the second stage, providers compete to attract patients to their facilities. Competition in the first stage is mostly related to price or reimbursement rates that providers receive from insurers for health care services provided to patients.  Competition in the second stage is mostly related to service such as quality provided, availability of procedures, hours of operation, convenience of facilities, and innovative technology.

The FTC focused on whether the combined physician groups would have increased bargaining leverage over commercial health insurers.  In this case, the merging parties and the FTC’s economic experts both agreed that the merger would provide the combined firm with increased bargaining leverage.  The FTC was able to establish that commercial health insurers needed to have all four services in its health insurance plan and that the commercial health insurers would pay higher fees rather than market a plan without one of those services.

The Court agreed with the FTC’s evidence that showed that the merged entity would provide 85.7% of adult PCP services, 98.6% of the pediatrician services, 84.6% of the OB/GYN services, and 100% of the general surgeon services in the Bismarck-Mandan area.  With such high shares, the Court agreed that the transaction was presumptively unlawful in each of the four physician service lines.

The Court found anticompetitive effects flowing from the merger in both stages of health care competition.  The acquisition would eliminate competition between the two physician groups vying to be included in a health insurer’s network.  Obviously, the combination would eliminate the competition among physicians to obtain patients in the second stage of competition.

Buyer Power Defense

Once the FTC met its prima facie case, the defendants principal defense was that the presence of a powerful buyer, Blue Cross Blue Shield of North Dakota (“Blue Cross”) would offset any power obtained by the physician groups through the combination and would preclude any anticompetitive effects that might otherwise result.  The argument was that the realities of the market place was that Blue Cross had all of the bargaining power and the merged firm would not be able to negotiate higher reimbursement rates against Blue Cross.  The FTC countered that the powerful buyer defense is limited to situations where either a buyer is able to use its leverage to sponsor entry or vertically integrate, or where there are alternative suppliers post merger where the buyer is able to obtain lower prices.  The district court found that those situations were not present.  Instead, it noted that the evidence showed that Blue Cross could not market health plan in the Bismarck-Mandan area without the merged firm.  Accordingly, if Sanford Health were to request a rate increase post merger, Blue Cross “would have to choose between agreeing to the increase or no longer offering health plans in the Bismarck-Mandan area.”

Lessons Learned

The FTC continues to win preliminary injunctions in provider markets.  The FTC is likely to continue to challenge small local provider (hospitals and physician groups) transactions that eliminate competition and substantially lessen competition in narrow product and geographic markets.  While health insurers may wield a great deal of bargaining power, the buyer power defense is unlikely to convince the FTC or a district court judge that a deal that concentrates 75-100 of the physicians in a local area to one provider.  The buyer power defense is available when large sophisticated buyers or health insurers can exert countervailing power against the merged firm because they have the ability and wherewithal to shift a large proportion of their business to other health care providers or the health insurer has the ability to credibly threaten that it can vertically integrate or sponsor new entry.  Here, the evidence showed that the health insurer could not market a plan without the merged firm’s physicians.  Hence, the power buyer defense is unlikely to work in physician group mergers that concentrate most if not all the doctors in one firm going forward.

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

She said that antitrust enforcers adopted the Chicago School principles, which narrowed the scope of the antitrust laws and allowed mega-mergers to proceed resulting in many concentrated industries.  She believes that antitrust enforcers already have the tools to reduce concentrated markets and that they simply must start enforcing the law again.

Senator Warren’s recommendations included stronger merger enforcement, cracking down on anticompetitive conduct and increasing agency involvement in defending competition.

Senator Warren called for the blocking of mergers instead of negotiating weak settlements that allow deals to go through:

• The DOJ and the FTC need to block any mergers that “choke off competition” and take to court any large company that is impeding competition and innovation.
• “If we’re going to begin a new era of antitrust enforcement, we need to demand a new breed of antitrust enforcers. We need enforcers with steel spines who will stand up to companies with the best-dressed lobbyists, the craftiest lawyers, and the highest-paid economists.  Enforcers who will turn down papier-mache settlement agreements and actually take cases to court.”
• “To revive competition in our economy, vertical mergers, particularly mergers in already concentrated industries, should be viewed with the same critical eye that’s needed for mergers between direct competitors.”

Senator Warren called for a crack down on anticompetitive conduct:

• The DOJ and FTC should bring lawsuits against companies using anti-poaching and non-competition agreements among companies and franchises that prevent employees from obtaining jobs that could increase their pay.
• The DOJ and FTC need to “[g]row a spine and enforce the law.  No-poach agreements are a reminder that corporate concentration not only affects consumers by limiting choices and driving up prices. It also affects workers who can’t get the salary they would be able to get in a competitive economy.  It’s time to hold those corporations accountable for these competition-killing practices. And let’s be clear: holding everyone accountable means everyone….There is no exception in antitrust laws for big tech.”

Senator Warren called for all government agencies to participate in the protection of competition:

• “Sure, DoJ is law-enforcer-in-chief, but all government agencies should defend competition” and reduce monopoly power where they have the power to do so.  The FCC should enforce strong net neutrality rules.  The FDA can reign in pharmaceutical monopolies as it controls which drugs come to market and when.  The Federal Reserve and FDIC could make sure that banks are not to big to fail. The DOD could inject more competition in its defense contracting process by not limiting the number of bidders.