Background

In March of 2009, Twin America, LLC was formed by Coach USA, Inc. and City Sights, LLC.  Coach USA and City Sights were operators of double-decker tour buses that had aggressively competed against each other to attract customers, which were and are for the most part, visitors/sightseers in New York city.  Indeed, the Antitrust Division’s complaint alleged that prior to the formation of Twin America, LLC, Coach USA, the long-standing market leader through its “Gray Line New York” brand, and City Sights, a firm that launched the “City Sights NY” brand in 2005, accounted for approximately 99 percent of the hop-on, hop-off bus tour market in New York City.  Between 2005 and early 2009, the two companies engaged in vigorous head-to-head competition on price and product offerings that directly benefited consumers.

According to the complaint, Coach and its corporate parent, Stagecoach Group PLC, knew that combining with Coach’s only meaningful competitor would allow the merged firm to raise prices and communicated this idea to City Sights during joint venture negotiations.  Therefore, the purpose of the joint venture was to end that head to head competition and to become the sole provider of hop-on, hop-off bus tours in the New York city market, which allowed the joint venture to immediately raise prices by 10%.  The transaction that formed Twin America LLC and monopolized the New York city hop-on, hop-off bus tour market was not required to be reported under the Hart-Scott-Rodino (“HSR”) Act.  Because it was a non-reportable transaction and no one alerted the Antitrust Division of any competition concerns, the Division did not learn about the joint venture until after its consummation.  Similarly, the State of New York did not learn of the illegal combination that resulted in Twin America, LLC until after it was formed.  The State of New York, however, learned of the illegal transaction and began an investigation and issued subpoenas in the summer of 2009.

After receiving the subpoenas, the Coach USA and City Sights delayed the State of New York’s antitrust investigation by belatedly filing the transaction with the federal Surface Transportation Board (“STB”) and asserting that the STB had exclusive jurisdiction.  The STB rejected the joint venture in early 2011 as not in the “public interest” and affirmed its ruling in early 2012, directing Coach USA and City Sights to either dissolve Twin America, LLC or terminate minimal interstate operations that provided the basis for STB jurisdiction.  Coach USA and City Sights removed the matter from STB jurisdiction and continued to operate the joint venture.

From 2009 to 2012, there was no new entry or expansion in the market, and Coach USA and City Sights were able to sustain the 2009 price increases.  Any new competitors must obtain bus stop authorizations from the New York City Department of Transportation (“NYCDOT”) at or sufficiently close to top attractions and neighborhoods to meaningfully compete with Twin America, LLC.  Apparently, NYCDOT is the city agency in charge of managing bus stop authorizations, which are required for hop-on, hop-off operators to load and unload passengers.  Both Coach and City Sights hold large portfolios of bus stop authorizations covering virtually all of Manhattan’s key attractions that they received from the NYCDOT years ago before many locations were at capacity so new entrants cannot obtain any competitively-meaningful bus stop authorizations in Manhattan.

On December 11, 2012, the Antitrust Division and the NY State AG filed a complaint in the U.S. District Court of the Southern District of New York alleging that the March 2009 joint venture that formed Twin America violated the antitrust laws and allowed the parties to raise prices to consumers.  The trial was set for February 23, 2015, however, Coach USA and City Sights adjourned the trial date to facilitate settlement discussions with the Antitrust Division and the NY State AG.

Settlement

The settlement resolves the Antitrust Division’s and NY State AG’s competitive concerns as it requires Twin America, LLC to relinquish all of City Sights’s Manhattan bus stop authorizations to the NYCDOT and disgorge $7.5 million in ill-gotten profits that Coach USA and City Sights obtained by operating Twin America, LLC, the illegally consummated joint venture, in violation of the antitrust laws.

The relinquished bus stop authorizations include highly-coveted locations such as the areas surrounding Times Square, the Empire State Building and Battery Park, where rival firms have been chronically unable to obtain competitive bus stop authorizations.  By increasing the NYCDOT’s inventory of bus stops and freeing up capacity at approximately 50 locations throughout Manhattan, the settlement will significantly ease the barrier to new rivals being able to meaningfully compete with Twin America.  Twin America will continue to hold Gray Line New York’s bus stop authorizations for its own hop-on, hop-off service.

The disgorgement of $7.5 million in profits that Coach USA and City Sights obtained from the operation of their illegal joint venture was in addition to $19 million that they already agreed to pay to a class of consumers to settle related private litigation brought after the filing of the Antitrust Division’s complaint.  The Antitrust Division and the New York State AG, however, believed that disgorgement was appropriate because the facts of this case relate to a consummated merger involving an anticompetitive price increase and deliberate attempts to evade antitrust enforcement.  The Antitrust Division and the State AG believe that the payment of $7.5 million in disgorgement will deprive the defendants of ill-gotten profits they retained even after the class settlement and deter future antitrust law violations.  In addition to disgorgement, Coach USA further agreed to reimburse the United States $250,000 in attorney’s fees and costs to resolve claims that Coach failed to meet its document preservation obligations.

The settlement of the lawsuit also requires Coach and Twin America to establish antitrust training programs and that they provide the government with advance notice of any future acquisition in the New York City hop-on hop-off bus tour market that is not otherwise reportable under the HSR Act.

Antitrust Division’s Previous Use of Disgorgement

In 2010, the DOJ obtained disgorgement related to a financial derivative contract entered into between KeySpan Corporation and Morgan Stanley, a financial services company, that gave KeySpan a financial interest in the electricity capacity sales of its largest competitor, Astoria, and incentivized KeySpan withhold capacity to increase prices in the electricity capacity market in New York.  The anticompetitive effects of the agreement lasted from January of 2006 until March 2008, when regulatory conditions eliminated KeySpan’s ability to affect the market price of electricity capacity.

At the time, the settlement was noteworthy because it was the first time in history that the Antitrust Division sought disgorgement of profits as a remedy for a civil antitrust violation of the Sherman Act.  The Antitrust Division traditionally sought only injunctive relief in the civil cases that it brought. Normally, the Division seeks to rescind the anticompetitive arrangement or enjoin the anticompetitive conduct. The injured parties usually must recover damages through private, civil actions. In its Competitive Impact Statement, the Division indicated that it sought disgorgement because it believed the filed rate doctrine would have limited consumers ability to recover antitrust damages.  That being said, the Sherman Act expressly authorizes the DOJ only to “prevent and restrain” violations of the Sherman Act, in addition to bringing criminal prosecutions. 15 U.S.C. §§ 1, 4. The Division’s approach in the KeySpan case reflected a shift in the DOJ’s policy with the aggressive interpretation of the DOJ’s civil enforcement authority. In Twin America, however, a class of consumers actually sued and settled for $19 million.  The DOJ and the New York State AG, however, believed that the parties’ ill-gotten gains were above the $19 million settlement so they pursued an additional disgorgement of profits.

Lessons Learned

The Antitrust Division’s challenge and settlement is noteworthy for several reasons. First, the challenge reiterates that the Antitrust Division is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Second, it demonstrates that completed deals that slip beneath the Antitrust Division’s radar screen initially are fair game even if the Antitrust Division learns about them later. Third, the fact that a deal is not HSR reportable does not mean that no antitrust issues exist with the combination. Fourth, the Antitrust Division can and will challenge a consummated deal if it determines that the deal is anticompetitive. Fifth, the Antitrust Division has a particular interest in post-acquisition competitive effects of consummated mergers.  Finally, and most importantly, the Antitrust Division, for the first  time, sought and obtained disgorgement of ill-gotten profits, required the parties to introduce antitrust training programs, and obtained attorneys fees and costs related to a consummated merger.

Therefore, parties to a consummated deal that raise significant antitrust issues and avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct.  Moreover, 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; reorganizing to the government’s demands of possible divestitures even after integration has taken place; paying off private plaintiffs for their injuries; and disgorging profits gained from the alleged anticompetitive merger.

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

Law Regarding Pre-Merger Coordination

There is a lot of excitement when companies plan a merger.  Company executives do not want to lose any time because there is pressure to integrate and achieve the synergies of combining operations as soon as possible.  Merging parties, however, must temper that enthusiasm, otherwise, they risk not only losing the transaction, but also being punished by the Antitrust Division.

All parties to transactions that meet certain jurisdictional thresholds are required to file premerger notifications with the Federal Trade Commission (the “FTC”) and Antitrust Division.  The premerger notification filing triggers a mandatory waiting period under the HSR Act, which is normally 30 days. A “gun-jumping” violation of the HSR Act occurs when a buyer attempts to exercise “beneficial ownership” or operational control over a seller’s business prior to expiration of the HSR waiting period. Gun-jumping increasingly draws the scrutiny of the Antitrust Division and the FTC and, in several cases, has lead to significant monetary penalties.

When merging companies “jump the gun” and prematurely coordinate their activities, they are subject to antitrust exposure under two different theories: first, a collusive agreement that violates Section 1 of the Sherman Act, 15 U.S.C. § 1; second, a transfer of beneficial ownership that violates Section 7A of the Clayton Act, 15 U.S.C. 18a (“Section 7A” or “Hart-Scott-Rodino Act” or “HSR Act”).  A threshold question under both theories is whether the two parties are separate entities.

Most importantly, the parties to a transaction must ensure that they do not inadvertently run afoul of the prohibitions on price fixing and market and/or customer allocations under Section 1 of the Sherman Act.  Violations of Section 1 can be treated harshly, with multi-million dollar criminal fines and jail sentences, as well as with treble damages awards and injunctions.  Fortunately, it is comparatively easy to avoid violations of this type.  The parties to the merger discussions must simply keep in mind that they remain independent firms until after the transaction is consummated.  They must continue to compete, just as they did before the negotiations began.

In addition to potential violations of Section 1 of the Sherman Act, merging parties must try not to violate the HSR Act.  Indeed, the HSR Act requires that the merging parties observe a mandatory waiting period before proceeding with the transaction.  If the government determines that a transaction violates the antitrust laws, it may seek to block that transaction before the waiting period expires.  Each party is subject to a maximum civil penalty of $16,000 per day for each day they violate the HSR Act.

The federal antitrust agencies consider it a violation of these requirements if the parties “jump the gun”, and the acquiring company begins to exercise control over the operations of the acquired company, or begins to enjoy “the benefits of ownership”, before the end of the HSR waiting period.

DOJ’s Views Regarding Proposed Merger and Alleged Illegal Activity

On September 30, 2014, Flakeboard and SierraPine abandoned their proposed acquisition.  Reportedly, the Antitrust Division forced the parties to abandon the transaction after it expressed concerns about the transaction’s likely anticompetitive effects in the production of medium-density fiberboard (“MDF”).  MDF is a manufactured wood product widely used in furniture, kitchen cabinets, and decorative mouldings.

The Antitrust Division’s October 1, 2014 press release provided some details regarding its reasoning for challenging the deal on the substance.  Flakeboard and SierraPine are two of only four significant suppliers of MDF to the West Coast.  Both companies operate MDF mills in Oregon—Flakeboard in Eugene; SierraPine in Medford—and the nearest competing mill is several hundred miles away.  For many customers, Flakeboard and SierraPine are each other’s closest seller of MDF.  The proposed merger would have given the combined firm a fifty eight percent (58%) market share for the thicker and denser grades of MDF that Flakeboard and SierraPine sell on the West Coast.  Accordingly, the Antitrust Division had substantive concerns that the transaction likely would have substantially lessened competition in the market for the production of MDF sold to customers in the West Coast states of California, Oregon, and Washington.  An increase in the price of MDF would likely have resulted in significant harm to MDF consumers on the West Coast.

Here, the Antitrust Division was concerned that the acquisition would have eliminated significant head-to-head competition between Flakeboard and SierraPine.  In addition, the Antitrust Division was concerned that if Flakeboard obtained control over SierraPine’s MDF mill, Flakeboard would have been in a better position to raise prices by restricting the amount of MDF available to the West Coast.  In addition, the Antitrust Division was concerned that the acquisition would have enhanced the risk of coordination between Flakeboard and its few remaining rivals on output and prices of MDF on the West Coast.

While the Antitrust Division was successful in forcing the parties to abandon their transaction, the Antitrust Division was not done with the merging parties.  On November 7, 2014, the Antitrust Division filed a civil antitrust complaint alleging violations of the HSR Act (Section 7A of the Clayton Act) and Section 1 of the Sherman Act along with a settlement agreement that resolves the lawsuit in U.S. District Court for the Northern District of California.

According to the complaint, before the proposed acquisition, SierraPine operated particleboard mills in Springfield, Oregon, and Martell, California, that competed directly with Flakeboard’s particleboard mill in Albany, Oregon.  Particleboard is an unfinished wood product that is widely used in countertops, shelving, low-end furniture, and other finished products.  The Springfield and Martell mills were included in the proposed acquisition along with a third SierraPine mill that produced MDF.  The complaint alleges that after announcing the proposed acquisition on Jan. 14, 2014, and before the expiration of the HSR Act’s mandatory premerger waiting period, Flakeboard, Arauco, and SierraPine illegally coordinated to close SierraPine’s particleboard mill in Springfield, Oregon, and move the mill’s customers to Flakeboard.

The Antitrust Division alleges that this coordination led to the permanent shutdown of the Springfield mill on March 13, 2014, and enabled Flakeboard to secure a significant number of Springfield’s customers for its Albany mill.  The Antitrust Division alleges that defendants’ conduct constituted an illegal agreement to restrain trade in violation of Section 1 of the Sherman Act, and prematurely transferred operational control, and therefore beneficial ownership, of SierraPine’s business to Flakeboard in violation of the HSR Act.

Settlement

The complaint alleges that the defendants’ HSR Act violation occurred from January 17, 2014, when Flakeboard and SierraPine began coordinating on the closure of the Springfield mill, until the expiration of the waiting period on Aug. 27, 2014.  The Antitrust Division also notes that the companies voluntarily provided it with evidence of their unlawful premerger conduct.  Because the companies cooperated with the investigation, the Antitrust Division significantly reduced the maximum HSR penalty to $3.8 million.  The Antitrust Division also explained that the $1.15 million in disgorgement was a reasonable approximation of the ill-gotten profit Flakeboard received as a result of the parties’ coordination to close Springfield and move the mill’s customers to Flakeboard.  In addition to the civil penalties, both Flakeboard and SierraPine must establish antitrust compliance programs.

Lessons Learned

The Antitrust Division’s action underscores the federal antitrust authorities’ considerable concern about the transfer of beneficial ownership and control prior to the expiration of the HSR waiting period. The purpose of the HSR Act and the waiting period, in particular, is to give the government notice so that it has an adequate opportunity to investigate proposed mergers and take action before companies actually combine their operations.  Accordingly, companies should avoid any appearance of combining their operations, by restricting the flow of confidential competitive information between them and making sure that independent business decisions are not coordinated prior to the expiration of the waiting period.

The HSR waiting period keeps the parties separate, thereby preserving their status as independent economic actors during an antitrust investigation. Consistent with this purpose, an acquiring person may not, after signing a merger agreement, exercise operational or management control of the to-be-acquired person’s business until the waiting period has expired.

The Antitrust Division’s fines against the merging parties for illegally jumping the gun serves as a reminder that pre-consummation coordinated behavior during the pendency of an antitrust investigation is risky.  The potential for violating Section 7A of the Clayton Act during this critical pre-consummation time period is heightened because the merging parties already are actively engaged in information exchanges as part of the merger negotiations and the required due diligence preceding the acquisition.  Additionally, if the acquisition involves competitors, certain information about the other party may be of significant competitive value–whether or not the transaction is consummated.  The DOJ keeps a vigilant eye on the pre-consummation activities of merging parties in order to ensure free, unfettered competition for every industry at all times, including during planned acquisitions.  The rules are clear, not only as a matter of theory, but also because the Antitrust Division consistently takes action against this sort of conduct.

Companies involved in merger discussions must observe certain antitrust guidelines during their merger negotiations, and until the transaction is actually consummated to avoid “gun jumping”.  The key point to keep in mind is that until the transaction is closed, the parties to the discussions remain independent companies.  While certain pre-closing due-diligence and transition activities are perfectly appropriate, other activities may raise questions under the antitrust laws.  The antitrust risks are particularly acute if the parties to the discussions are competitors.  Under these circumstances, until the closing, the parties should be particularly careful to avoid reaching agreements or exchanging competitively sensitive information in any way that might undermine the vigor of competition between them.

Here, the alleged conduct of closing a plant and allocating customers during the antitrust investigation of a merger that raises substantive issues was clearly anticompetitive.  As a result, the Antitrust Division required the companies to pay substantial civil penalties for violating the HSR Act and Flakeboard is forced to pay back its ill gotten gain for violating the antitrust laws.  Accordingly, companies proposing to merge must remain separate and independent until closing.

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