For opening remarks, Rebecca Kelly Slaughter, the Acting Chair of the FTC, declared: “Aggressive enforcement using the FTC’s existing authority can and should be complemented by this committee’s work to sharpen antitrust laws and to impose broader market-wide restrictions that address pervasive anticompetitive conduct and conditions. I believe the FTC must push antitrust law forward through bold agency action.” Slaughter said, we must lay the groundwork for success for new theories and more aggressive enforcement.  Here, she touted the FTC’s recently announced working group to build a new approach to pharmaceutical mergers.  She suggested the FTC should consider bringing standalone Section 5 claims more frequently and called on more resources for the agency.

Slaughter conveyed her disappointment in the FTC’s decisions and actions on not suing Google back in 2013. “It’s incumbent on the FTC to bring hard cases in all areas, not just in tech, not just in platforms,” Slaughter stated. After her comments on harsher punishments for big companies that seem to weasel their ways out of antitrust laws, Slaughter called for higher tolerance for litigation risk, more specifically, declining a settlement that doesn’t entirely correct harm. She also communicated how we all must construct the basis for success in new models and more aggressive enforcement to be enacted.

The second witness, Judge Diane P. Wood stressed three crucial points in her argument. First, antitrust laws have always been concerned with intense economic power that congests flourishing competition and innovations. Second, exclusionary practices must be enforced. Third, it’s time to consider legislative changes in the remedies area of the statutes. Colorado Attorney General Phillip Weiser shared his thoughts on how courts have been hesitant in enforcing antitrust laws as well as enforcers showing an unwillingness to bring cases forward due to the Chicago school of antitrust, which only focuses on over-enforcement. This mindset is incorrect, according to Weiser, and he recommends having more enforcement cases and legislative action.

Commissioner Phillips underlined that today the antitrust agencies are engaged in vigorous enforcement and highlighted the number of enforcement actions in 2020, the highest number in decades. Today’s discussion concerns whether the law suffices.  Phillips stressed that antitrust laws protect competition.  They are not designed to address every problem large companies create.  “As you consider reform,” he told the subcommittee, “…I urge you to consider the impact on all business.”  And Phillips warned of unintended consequences.  He said government intervention is sometimes necessary but it can also get in the way.  “We can and do stop the bad ones [mergers], but over-regulating will also stop the good ones.”

After hearing from the witnesses and their remarks, the hearing went into a question and answer session for both sides of the hearing. The question and answer began with Representative David Cicilline speaking about a recent Politico report on the FTC’s choice to desert the Google case in 2013. He asked if we shouldn’t allow this to happen again, which Acting Chairwoman Slaughter retaliated that she asks for a complaint to be filed. Slaughter’s focus is further on the dangers of under-enforcement and inaction. With Slaughter as acting Chairwoman, the concern is that she will make some questionable enforcement decisions that push the envelope.

Representative David Cicilline fired at Commissioner Noah Phillips’s vote against FTC’s Facebook complaint. “My quibble with this case begins with the fact that these are transactions (Instagram and WhatsApp) that were brought to the attention of the FTC before I was there. No argument of fraud or anything like that. And for years the company was allowed to make decisions. So, a big part of this comes back to the integrity of the process,” Phillips retaliated.  He suggested that for the government to come back in, years later – and the longer you wait, the more investments the companies make – that presents a real issue.  “I can’t undo the fact that the agencies did what it did,” he said.  Phillips went further saying “I also think on the merits there are some questions to do with market definition and effects under Section 2 but I do think this broader framing is really important.  I wasn’t there when this happened – but it did happen.”

Neguse (D-CO) asked Commissioner Phillips whether he believes that the FTC’s approach to pharmaceutical mergers is working. Phillips was measured in his reply: “Some have suggested that it isn’t.  What I am interested in hearing is, what are the harms that folks think we’re missing?  Because I think if they exist, we should figure out what they are, figure out how to bring a case on them, and bring those cases.  That’s why I support the Chairwoman’s effort to convene a group of enforcers to think about what those additional harms may be.”  Neguse was less than thrilled with this answer.  He expressed his own view that the FTC’s approach to pharma deals is not working, which is why he shares Phillips’ enthusiasm about the working group convened recently by the FTC.  Asked to expound on that matter, Slaughter said she intends to look at innovation broadly and not just at pipeline products, for example.  Another area of concern is conduct: when two large companies that engage in anticompetitive conduct merge, what happens?  Slaughter is excited about the opportunity to partner with sister enforcers.

The key takeaways from this hearing are:

Acting Chairwoman is all about more aggressive antitrust enforcement. She spoke about her desire for the FTC to “go all in on litigation, even risky and costly litigation.”  She said that more cases should be brought under Section 5 of the FTC Act.  Moreover, Slaughter also believes that this aggressive enforcement can and should be complemented by Congress’s work to “sharpen antitrust laws and to impose broader market-wide restrictions that address pervasive anticompetitive conduct and conditions.”

Commissioner Phillips, meanwhile, is much more measured about his views on current enforcement. He urged the use of a scalpel in reforming the antitrust laws and warned against unintended consequences.  Phillips also cautioned that antitrust is not the appropriate tool to cure all ills such as concerns about content moderation, for example.

Given bipartisan concerns about gigantic tech firms and Democratic control of both chambers of Congress, a middle path may prove ultimately unnecessary if broader reform gets the requisite support.  However, the law ultimately shakes out, the next four years should see a renewed emphasis in challenging mergers.

By Lizzy Bensend, Spring Intern at Doyle, Barlow & Mazard PLLC.

The discussion began with revisiting the tragic siege of the United States capitol that took place on January 6, 2021. Before the siege, on many different platforms (Twitter, Facebook, etc.) President Donald Trump continued to post disputes about the presidential election, specifically mentioning voter fraud. With there being no evidence to verify these disputes, Trump’s campaign for president for a second term was over. Yet it took a violent storming of our nation’s capital to make the world realize that the words on social media and the internet do, in fact, have an effect and insight riots and violence. Any different social media platforms suspended or banned Donald Trump’s account from their sites including Twitter, Facebook, and Instagram. Thus began the great deplatforming.

Why this deplatforming is legal for big tech companies like Google and Apple is because these companies are not in affiliation with the government. This means that the First Amendment is not valid if not stated in their terms of service. If the said company feels that their terms of services have been broken by an individual or feels that said individual is a threat to others, companies have the right to deplatform them. When first signing up on the platforms, every user must agree to the companies terms of services, many just seem to not read them beforehand.

Using Twitter as an example, after being questioned about if it was legal to permanently suspend Donald Trump’s account, Twitter explains their terms of services and the reasoning behind these actions. After analyzing the tweets that Donald Trump was posting and how others were receiving them, they came to the conclusion that they would permanently suspend his account due to the risk of further violence that could be invoked.

With the first Amendment, it becomes very difficult to regulate the dissemination of information in the United States, especially since the government has not created regulations for tech. The only privacy regulator in the United States is the Federal Trade Commission, yet it does not have any real privacy authority. It focuses mainly on deception and unfair business practices.

Section 230 was created to allow internet platforms to grow and to protect platforms from lawsuits if a user posts something illegal with exceptions for copyright violations, etc. This section has also allowed for disinformation campaigns to be spread around the internet and push society apart. With the increased spread of disinformation, creating a privacy statute, revisions of antitrust laws, and reconsidering section 230 need to be on the table to help our society move forward in a positive light.

The question of what the future of technology and democracy will be like since the great deplatforming is still a mystery. Since the capital siege as well as President Joe Biden taking office, Congress has brought forward the idea of reevaluating section 230 to help avoid the further spread of disinformation.

Link to Facebook Live: https://www.facebook.com/georgetownlaw/videos/117256850273091

Lizzy Bensend

Doyle Barlow & Mazard PLLC

Background

Eldorado agreed to acquire Caesars for $17.3 billion on June 24, 2019. Eldorado is a provider of casino entertainment and hospitality services, operating 23 casino gaming properties. Caesars is a similar provider, operating 53 casino gaming properties in 14 states and in 5 countries outside the United States.

The FTC determined that Eldorado’s proposed acquisition of Caesars would likely cause substantial competitive harm to the casino services markets in South Lake Tahoe, Bossier City-Shreveport, and Kansas City.

In the South Lake Tahoe area market, Eldorado currently operates the MontBleu Casino and Spa (“MontBleu”), while Caesars operates Harrah’s Lake Tahoe Hotel and Casino and Harveys Lake Tahoe Hotel and Casino. All three casinos are located in Stateline, Nevada.  In the Bossier City-Shreveport market, Eldorado operates the Eldorado Shreveport Casino (“Eldorado Shreveport”). In the same market, Caesars offers casino services at two properties, Horseshoe Bossier City Hotel and Casino and Harrah’s Louisiana Downs. In Kansas City, Missouri, Eldorado operates the Isle of Capri casino and Caesars operates Harrah’s Kansas City Hotel and Casino.

The FTC found that Eldorado and Caesars are close competitors in the three markets and that the acquisition would substantially lessen this competition and incentivize Eldorado to raise prices while also diminishing its incentive to improve the quality of its services and amenities. These effects would be detrimental to casino customers in these markets.

The FTC also concluded that significant entry barriers exist, so entry is unlikely to be timely. Regulations limit the number of available casino licenses and inhibit the expansion of gaming operations. Obtaining regulatory approval is a lengthy and costly process. Additionally, Louisiana and Missouri have issued all available casino licenses. For this reason, entry in those markets is currently restricted.

Consent Agreement

The proposed consent agreement sets forth that Eldorado must divest its MontBleu casino and its Eldorado Shreveport casino to Twin River Worldwide Holdings, Inc. (“Twin River”). Further, the divestitures must conclude by the earlier of 12 months from the closing of the acquisition; or 30 days from the date Twin River receives all regulatory approvals.

Independently from its acquisition of Caesars, Eldorado is selling its Isle of Capri casino in Kansas City, Missouri. According to the consent agreement, Eldorado must consummate the sale of Isle of Capri within 60 days of the closure of the acquisition. If this condition is not met, the FTC has the option to require Eldorado to divest Isle of Capri to an approved buyer within 12 months.

Additionally, Eldorado and Caesars are required to abide by the Order to Separate and Maintain Assets until the divestitures are completed. Eldorado and Caesars are thus required to maintain the viability, marketability, and competitiveness of their assets while the divestitures are in progress. A monitor will ensure the parties comply with the Order to Hold Separate and Maintain Assets, the consent agreement, and the divestiture agreements. After the divestiture, the parties are required to provide transitional services to the acquirer of the assets for up to 12 months.

According to the FTC, complying with the consent agreement would result in no changes to market concentration in the three areas and prevent competitive harm.

Commissioner Chopra’s Dissent

In his dissent, Commissioner Chopra expressed that he views the acquisition as risky and having no benefit to competition, casino customers, and those working in the casino services market. While Commissioner Chopra agrees that the acquisition is unlawful, he believes the FTC should not enter into agreements with prolonged divestitures.

According to Commissioner Chopra, an agreed upon divestiture must fully restore competition and the new competitor must be ready and able to compete on day one. He notes this is not possible under the proposed consent agreement. The prolonged divestitures of Eldorado’s two casinos to Twin River can be completed at the earliest of 12 months after acquiring Caesars, or 30 days after Twin River receives regulatory approval. Commissioner Chopra expressed that prolonging the divestiture necessitates adding other risky provisions to the consent agreement. Additionally, he disapproves with the FTC’s proposal to have Commission-appointed property managers operate the casinos until the buyer is ready to take over. Chopra believes this appointment is outside of the FTC’s role. Potential anticompetitive harms are also evident to Chopra with the FTC appointing a monitor, as the appointed managers will be compensated by the prior owner and there is no clear procedure for the manager’s removal or discipline at the hands of the appointed monitor and the FTC.

Moreover, Commissioner Chopra believes the FTC failed to adequately analyze Twin River before approving it as the divestiture buyer. Recently, two hedge funds have accumulated major ownership stakes in Twin River. Commissioner Chopra is concerned that the FTC did not consider the plans of these hedge funds and that ultimately Twin River is not a long-term competitor.  He also argues that Twin River will not restore competition on day one given.

Thoughts

The FTC majority decision is in line with the FTC’s past decisions to allow mergers of casino companies on the condition that the buyer divests overlapping casinos that raise competition concerns.  In the past, the FTC approved mergers with settlement agreements that did not identify an upfront buyer.  In this case, the FTC has actually done more than it has in the past as it identified the divestiture buyer, had an opportunity to vet the buyer, and required a comprehensive remedy to make sure that the divested assets are protected while the divestiture buyer obtains necessary licenses.  That being said, Commissioner Chopra raises significant concerns about the FTC’s process and review of divestiture buyers.  He is right that in the FTC should always strive to require divestiture remedies that restore competition on day one.  Whenever there is a delay in the sale of the divested asset, there is an increased risk that the divestiture buyer may fail may in effectively maintaining competition.  Also, given past failed divestiture remedies, he is right to question a divestiture buyer’s motives and incentive, and divestiture buyers must be thoroughly vetted before allowing an anticompetitive merger to be consummated.

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

And

Alexandra Taylor

The FTC has a long history of scrutinizing transactions in the pharmaceutical industry, but Commissioners’ statements demonstrate that they are not on the same page with regards to the analytical approach of analyzing pharmaceutical mergers and how to remedy the competitive problems that are identified.

The three Republican Commissioners in the majority adhere to the traditional framework, which examines actual competition between existing treatments and potential competition between existing and pipeline treatments, and then tailors very narrow remedies to address those competitive overlaps.

Background

AbbVie and Allergan compete in the manufacture and sale of pancreatic enzyme therapies for exocrine pancreatic insufficiency (“EPI”).  AbbVie’s Creon is a pancreatic enzyme therapy for EPI, a condition that results in the inability to digest food properly.  Creon is the market leader.  Meanwhile, Allergan’s Zenpep (pancrelipase) was a strong competitor in a concentrated market where the other two players have only one or two percent share.  Indeed, AbbVie and Allergan together control 95 percent of the market for these drugs.  As a result, the FTC concluded that the merger lessened competition in the market for treatment of EPI.

AbbVie and Allergan have investigative biologic drugs working their way through the U.S. Food and Drug Administration (“FDA”) approval process that are indicated to treat moderate to severe Crohn’s disease and ulcerative colitis.  AbbVie’s Skyrizi, an IL-23 inhibitor, is already on the market to treat moderate-to-severe psoriasis, but Skyrizi and Allergan’s IL-23 inhibitor, brazikumab, will potentially compete in the future.  The FTC alleges that the acquisition would eliminate future direct competition between AbbVie and Allergan in the development and sales in the United States of IL-23 inhibitor drugs for treatment of moderate-to-severe Crohn’s disease and moderate-to-severe ulcerative colitis.

Consent Agreement

Under the proposed consent agreement, AbbVie and Allergan are required to divest to Nestlé, S.A. (“Nestlé”) Allergan’s assets related to EPI drugs Zenpep and Viokace.  AbbVie and Allergan also are required to transfer to AstraZeneca plc (“AstraZeneca”) Allergan’s rights and assets related to brazikumab — its IL-23 inhibitor that is in development to treat moderate-to-severe Crohn’s disease and ulcerative colitis.

Commissioner Chopra and Slaughter‘s Dissents

Commissioners Rohit Chopra and Rebecca Slaughter, the two Democrats, continue to call for a fundamentally different approach to analyzing pharma mergers especially when the merger combines two firms that have engaged in a laundry list of egregious anticompetitive practices that have resulted in higher prices and less consumer choice.  Commissioner Chopra remains skeptical that the FTC’s traditional framework identifies the complete set of harms to patients and favors taking a more expansive approach to analyzing the full range of competitive consequences of pharmaceutical mergers.  Commissioner Slaughter agrees with Chopra’s dissent but also expresses concern about the lessening of innovation that occurs from a massive pharmaceutical merger.

Commissioner Chopra criticizes the FTC’s myopic approach to analyzing pharmaceutical mergers as he points out that “he agency’s default strategy of requiring merging parties to divest overlapping drugs is narrow, flawed, and ineffective”.  He added that “it misses the big picture, allowing pharmaceutical companies to further exploit their dominance, block new entrants, and harm patients in need of life-saving drugs.”

However, the main focus of his dissent is on the FTC’s willingness to accept “risky or questionable buyers”.  He questions whether Nestlé, the maker of candies such as KitKat is a suitable buyer for a prescription drug and whether the divestiture of a pipeline drug to AstraZeneca would actually restore competition.

His main complaint about Nestlé is that the company is not a pharmaceutical manufacturer so it lacks the experience necessary to succeed.  And, while the divestiture of brazikumab rids the overlap, AstraZeneca is getting the asset for nothing and Allergan will continue to pay for the development costs of the drug so AstraZeneca gets a “windfall”, has no financial stake in the development of brazikumab, and will have little to no financial incentive to market the product aggressively when and if it is ever approved.

Commissioner Chopra also notes that the FTC failed to account for the hurdles that AstraZeneca will face if brazikumab is ever approved.  AstraZeneca would have to contend with AbbVie’s rebate wall.  Chopra specifically states: “the Commission could have also taken steps to reduce a key barrier to entry and expansion for AstraZeneca by restricting AbbVie and Allergan’s contracting and rebating practices.  This would make it more likely that AstraZeneca would exercise its option to develop and bring brazikumab to market.  Importantly, in the immunology space, a key feature of competition is the ability for a market player to engage in ‘portfolio contracting’ and ‘bundled rebates’ across its portfolio of drugs.  The evidence in the investigation suggests that AbbVie currently uses its bargaining leverage from its blockbuster drug Humira to preference its other immunology drugs.  AbbVie’s rebating practices are suspicious in their own right, and certain aspects of these practices might be unlawful.”

Majority Statement

On the flip side, the majority took on Commissioner Chopra’s dissent with a very aggressive tone.  The majority said Chopra’s dissent “makes misleading claims about the staff’s investigation, the state of competition in the pharmaceutical industry, and the commission’s enforcement record in this industry,” and that it “relies on false assertions, misapplication of law, and specious logic.  It appears to have fully embraced the adage to “never let the truth get in the way of a good story”.  The majority points out that while Nestlé is the world’s largest food and beverage company, it has “tremendous financial resources”, a substantial U.S. sales infrastructure, and “contrary to Commissioner Chopra’s assertions — Nestlé is no stranger to the healthcare space.”  Additionally, the majority took on the part of Commissioner Chopra’s dissent, which raised concerns regarding the potential that the merged firm could use rebating practices to disadvantage AstraZeneca in bringing brazikumab to the market.  To that end, the majority stated that “in the context of a merger investigation, the role of a divestiture is to restore competition to the state that it would have been absent the merger, not to provide the divestiture buyer with advantages that Allergan would not have had.” Basically, the majority is saying that behavioral remedies are inappropriate because Allergan would have had similar hurdles to overcome.

Truth be told, the FTC has an enormous amount of flexibility in crafting remedies to ensure that competition is fully restored.  Here the majority takes a very narrow approach of simply transferring pipeline assets to a divestiture buyer without regard to whether the product will ever be marketed.  The decision is curious given that former Director of Bureau of Competition Bruce Hoffman publicly stated in a speech in 2018 that pipeline drug divestitures face a “startlingly high” rate of failure and as Chopra points out in his dissent, the FTC has a history of using behavioral conditions to support divestiture buyers.

That said, the majority believes that the consent fully resolves competitive harm from the merger because the divestitures handle the overlaps, both firms are strong in different areas, and there is no evidence the deal will result in higher prices and lost innovation.

Concluding Thoughts

The philosophical divide between the Republican and Democrat Commissioners is not a surprise given some of their past votes on merger approvals.  The fundamental conflict goes to the very heart of how the FTC should evaluate pharmaceutical mergers.  The majority – as well as the FTC staff – continues to use the standard traditional analytical framework.  They are making an evidentiary-based analysis as to whether the specific merger before them is likely to substantially lessen competition in a line of business.  The majority is concluding that the transaction should be allowed with narrowly tailored divestiture remedies that resolve the specific competitive concerns and shies away from using a broader and more comprehensive approach.

The Democratic Commissioners, on the other hand, believe that the FTC’s analytical approach is myopic and fails to address wide-ranging issues of competitive harm.  They believe that the healthcare markets are not competitive and that the FTC’s approach has led to increased consolidation and higher prescription drug prices so a change in approach may be necessary.  And to the extent that the FTC is going to accept divestiture remedies of specific products, the Democratic Commissioners believe the FTC should require divestiture buyers that will fully restore competition.

Here, Commissioner Chopra raises serious issues about both buyers.  There is certainly always a concern when the divestiture buyer does not replace the competitive intensity that is lost from the merger, and here, Nestlé’ is no Allergan.  The evidence also very clearly suggests that AstraZeneca is not financially committed to the pipeline drug that it is acquiring for “no money” and that certain conduct in the industry may prevent AstraZeneca from effectively marketing brazikumab.  Specifically, Commissioner Chopra shines a light on how AbbVie’s rebating and bundling practices may actually be monopolistic conduct that is anticompetitive, and he rightly questions whether the conduct should have been prohibited in the consent order.  While the Commissioners disagree on a lot, they certainly all should be in agreement that consumers should not have to bear the risk of a failed remedy.

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

Consumer Group Concerns Regarding Rebate Walls and the Proposed Divestiture

The letter expresses concerns that the proposed divestiture to AstraZeneca of Allergan’s brazikumab, a drug in development, is inadequate to address the clear anticompetitive effects of the AbbVie/Allergan merger.  The letter makes the following points:

First, the divestiture of Allergan’s IL-23 inhibitor, brazikumab, a drug in the pipeline, to AstraZeneca is unlikely to fully restore competition.  The divestiture is being proposed to resolve the horizontal overlap between AbbVie’s IL-23 inhibitor, Skyrizi, and Allergan’s brazikumab for potential biologic treatments for Crohns diseas and ulcer colitis.  The group argues that the divestiture raises a number of serious concerns because it goes against the Commission’s policy of requiring divestitures of on market drugs instead of pipeline drugs.  Indeed, the FTC has required divestitures of on market drugs in Bristol Meyers/Celgene and Amneal/Impax because the Commission generally believes that consumers should not bear the risk that a divestiture may fail.

Second, the consumer groups contend that AstraZeneca is a questionable buyer for brazikumab.  AstraZeneca is not committed to the assets because it gave up on them just three years ago and according to the parties’ press releases announcing the deal, won’t be investing in the development costs to obtain FDA approval.  In fact, Allergan is expected to pay for the development costs.  Without having a significant financial stake in the development of brazikumab, it becomes less likely that AstraZeneca will ever launch the products and compete with AbbVie’s Skyrizi in the markets for Crohn’s disease and ulcerative colitis.

Third, for any divestiture to be effective, it is crucial to impose restrictions on AbbVie’s use of rebate walls (contracts that foreclose rival drugs from getting on drug formularies) that could inhibit any buyer of the pipeline assets from being an effective competitor in the future.  AbbVie’s use of rebate walls creates substantial barriers to AstraZeneca’s commercial success in bringing brazikumab to the market and the success of competing products in these therapeutic categories. AbbVie has and is currently engaged in restrictive contracting practices that have enabled the creation of so called “rebate walls” to protect its blockbuster drugs, Humira and Skyrizi, that not only lead to higher prescription drug prices, but foreclose rival drugs from obtaining access to payors’ formularies, resulting in reduced consumer choice.

Rebate Walls Raise Serious Antitrust Concerns

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 By Nine Senators in the FTC’s Investigation of Bristol-Myers/Celgene and AbbVie/Allergan

On September 19, 2019, nine senators (Klobuchar, Booker, Baldwin, Smith, Hirono, Sanders, Harris, and Warren) wrote a letter to the FTC expressing their concerns that “[p]ost-merger, the combined firm would have greater ability to condition buyers’ access to these multi-billion dollar drugs on purchases of less popular drugs in their portfolios. They could also use their increased leverage to secure favorable positions on buyers’ drug formularies by offering volume-based rebates that competitors with rival products cannot match; these “rebate traps” or “rebate walls” can have the effect of preventing alternative drugs, including more affordable biosimilars and generics, from competing.”

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 trap”.  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.  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.  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 the rebate wall may undermine the proposed divestiture.  Competition works when new rival drugs  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 rebate walls, the issue is now in front of the staff.

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.

On the same day, Assistant Attorney General Makan Delrahim of the Antitrust Division of the U.S. Department of Justice (“DOJ”) said the DOJ is working with a group of more than a dozen state attorneys general as it investigates the market power of major technology companies.  Delrahim said at a tech conference that the government is studying acquisitions by major tech companies that were previously approved as part of a broad antitrust review announced in July of major tech firms with significant market power.  “Those are some of the questions that are being raised… whether those were nascent competitors that may or may not have been wise to approve,” he said.

On July 23, the DOJ said it was opening a broad investigation into whether major digital technology firms engaged in anticompetitive practices, including concerns raised about “search, social media, and some retail services online.”  The investigations appear to be focused on Alphabet Inc.’s Google, Amazon.com, Inc. and Facebook, Inc. (“Facebook”), as well as potentially Apple Inc.

More than a dozen states are expected to announce in the coming weeks that they are launching a formal probe.  “I think it’s safe to say more than a dozen or so state attorneys general (that) have expressed an interest in the subject matter,” Delrahim said.  In July, eight state AGs met with U.S. Attorney General William Barr to discuss the effect of big tech companies on competition, and various antitrust actions.

On August 19, the New York Attorney General’s office said it is continuing to “engage in bipartisan conversations about the unchecked power of large tech companies.”  North Carolina Attorney General Josh Stein is also “participating in bipartisan conversations about this issue,” his office said.  The DOJ is looking not only at price effects, but also at innovation and quality, and the next steps in its broad antitrust review would be seeking documents and other information.  Delrahim also said that after the July announcement, the companies under investigation “immediately reached out to work with us in a cooperative manner to provide information that we need as far as the investigation.  In June, the FTC told Facebook it had opened an antitrust investigation.  Last month, the FTC resolved a separate privacy probe into Facebook’s practices after the company agreed to pay a $5 billion penalty.

Thoughts

The states joining the DOJ’s and FTC’s investigations are not a surprise.  As many as 39 states have been raising antitrust concerns about the big tech firms with both the DOJ and FTC.  They have similar concerns regarding big tech as the federal antitrust agencies.  The issues relate to whether the markets for online advertising, search, social media, app sales and certain retail sectors are currently competitive.  The state AGs involvement in these investigations adds another layer of complexity for Google, Facebook, and Amazon.  This action by the state AGs should remind everyone that sound antitrust enforcement is not just a federal affair.  Indeed, many of the seminal antitrust cases including cases creating key principles of monopolization and merger law were brought by state attorneys generals.

State attorneys generals use the power under federal and their own state statutes to protect consumers against anticompetitive and fraudulent conduct in credit card, pharmaceutical, computer and many other markets crucial to consumers.

States have significant advantages over federal enforcers.  They are closer to the market and consumers and recognize the direct harm to consumers.  They have the ability to secure monetary damages.  States are often customers and victims of anticompetitive behavior.  State enforcers can bring combined antitrust and consumer protection cases.  And although each state has limited antitrust and consumer protection resources, states increasingly are using multi-state task forces to investigate and prosecute unlawful conduct.

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

Complaint

The FTC is alleging the merger of the chemical companies would substantially reduce competition in the Pacific Northwest and the Southern and Central United States for the production and sale of hydrogen peroxide, a commodity chemical used for oxidation, disinfection, and bleaching.

Most hydrogen peroxide produced in North America is sold to pulp and paper customers for bleaching pulp and de-inking recycled paper, according to the complaint.  Hydrogen peroxide is also used to sterilize food and beverage packaging, and in chemical synthesis, fracking, water treatment, and electronics.  For most end uses, there are no effective substitutes, the complaint alleges.  Because of high transportation costs, customers prefer nearby suppliers.

The complaint alleges that the acquisition would harm competition in at least two ways.  First, it would increase the likelihood of coordination in a market  that already functions as an oligopoly and has a long history of price-fixing including guilty pleas and litigation settlements.   The markets are highly concentrated, with significant transparency among rival firms, and long-term, stable customer-supplier relationships, low elasticity of demand, and a history of strong interdependent behavior, the complaint states.  Evonik has high market shares of approximately 50% in both geographic markets.  Second, the acquisition would eliminate significant head-to-head competition between Evonik and PeroxyChem in the Pacific Northwest, where it would leave only one other hydrogen peroxide producer, and in the Southern and Central United States, where it would leave three other producers.  The complaint alleges that customers have benefitted from competition between Evonik and PeroxyChem in the form of lower prices.

New competitors or expansion by existing firms is unlikely to be timely or sufficient to offset anticompetitive harm, due to the massive investment necessary to build a new hydrogen peroxide plant.

The FTC vote to issue the administrative complaint and file the agreed-upon request for a temporary restraining order in the U.S. District Court for the District of Columbia was 4-0-1.  Chairman Joseph J. Simons was recused.  The administrative trial is scheduled to begin on January 22, 2020.

Lessons Learned

The FTC’s challenge of the merger is demonstrates that the FTC will take action to preserve competition and protect consumers when the facts support a lawsuit.  The FTC action shows that  firms that propose a merger or acquisition in a concentrated industry with a history of past collusion should expect increased scrutiny. As the FTC noted in its Complaint, evidence of past collusion is important to the FTC’s coordinated effects analysis. Merging parties should be prepared to show that market conditions have changed since the past collusion has occurred. Here, the parties were not able to do that and the FTC alleged that the market is vulnerable to coordination.  Besides relying on a coordinated effects theory, the FTC alleges that the merger eliminates head to head competition, which will likely lead to higher prices.

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

The letter asks the FTC to examine how the transaction may harm competition with respect to horizontal overlaps and even complementary drugs.  Specifically, the letter points out that the acquisition allows BMS to increase its drug portfolio and leverage over pharmacy benefit managers (“PBMs”) when negotiating preferred drug placement on formularies and bundled discounts that can create “rebate walls”.

The transaction gives the FTC an opportunity to investigate a questionable contracting practice in the pharmaceutical drug industry known as a “rebate wall” or “rebate trap”.  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 and Shire 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 benefit 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.

Given the competitive risks that rebate walls pose, Congressmen Welch and Rooney have 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 are allowed open and fair access to the market and consumers have access to cost saving treatments.  The FTC has not publicly acknowledged to examining mergers between drug manufacturers under this type of theory before, but the issue is now in front of the staff.  Rebate walls may be anticompetitive in certain circumstances, but it will be interesting to see if the FTC focuses on this issue in a Second Request investigation.  The FTC is now on the clock.

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

The staff attorneys who run investigations and negotiations at the Commission are out of the office, which means that parties are simply waiting while everything is on hold.  HSR waiting periods will continue to run during a government shutdown.  DOJ and FTC staff will continue to review premerger filings and conduct investigations to determine whether to challenge reported transactions under the antitrust laws.  Second Requests will continue to be issued and, if engaged in merger litigation, FTC and DOJ attorneys will notify opposing parties and the courts of the government shutdown and attempt to negotiate timing extensions and suspensions. If such relief is not available, they will continue to litigate the matter.

The DOJ and the FTC both issued contingency plans indicating that certain employees connected to antitrust enforcement within the Antitrust Division of the DOJ and the Bureau of Competition at the FTC will be excepted from the furlough and will continue to conduct antitrust enforcement activities.

While difficult to predict, there may be delays in review of certain strategic transactions (including increased risk of a “pull and refile” scenario, or a higher likelihood of a Second Request being issued). Transactions with substantive antitrust issues will likely still receive scrutiny by the agencies, and the shutdown is unlikely to decrease the likelihood of a Second Request or challenge if the agencies believe circumstances warrant such action. If anything, some parties who file during the shutdown may be more likely to get a Second Request than they would have been if there was no government shutdown because they will not have the full 30 days to provide information to address an agency’s initial questions.

In the current DOJ Contingency Plan, of the 655 Antitrust Division employees, a total of 264 (40%) are excepted from furlough in the case of a government shutdown. In the current FTC Contingency Plan, of the 306 total Bureau of Competition employees, a total of 132 (43%) are excepted from the furlough. Moreover, within the Bureau of Economics, of the 105 employees, 10 (9%) are excepted from the furlough.

The FTC is suspending all Second Request and non-merger investigations currently underway during the shutdown. According to the DOJ contingency plan, the DOJ will operate with limited staffing to those employees necessary to launch or continue merger investigations or litigation where it cannot obtain a continuance or extension of a statutory deadline.  

At the FTC, Second Requests will be issued and, once issued, the staff will go back to being furloughed. The five Commissioners are still working.  There is not much merging parties can do to speed up the process so the FTC investigations will be delayed. The DOJ is operating at more strength and the front office is still at work.  Both agencies, however, will try to work to achieve certain transaction deadlines.

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

The first day of hearings was broken into three panel discussions which broadly discussed the current landscape of antitrust law, U.S. economic competitiveness, and consumer protection and data privacy. The discussions focused on process and substance and how best to reframe FTC priorities to deal with complex 21^st century issues.

Panelists drew lines in the sand when it came to whether the FTC is successfully navigating the landscape in an era of mega-mergers. Some panelists took the “populist” view that FTC’s merger guidelines are unhealthy for the overall economy and consumer welfare. The FTC has been guided by the “consumer welfare standard” when it comes to mergers, and has accommodated mergers that increase efficiencies and provide benefits in the form of lower prices to consumers.  Those in favor of the consumer welfare standard want to avoid a ‘big is bad’ mentality while keeping the interests of consumers in mind.  Proper antitrust enforcement is about protecting consumers, and protecting the competitive process, not about protecting competitors.  Some panelists argued, however, that the consumer welfare standard has failed to take into account important social concerns like privacy, rising social and income inequality, and decreased economic competition and dynamism. They pointed to recent studies seeming to vindicate the view that the FTC needs to reorient its enforcement procedures because the economy appears to be more concentrated and less dynamic than it used to be.

The key issue of divergence for the panelists was whether the growth of large firms would allow the accumulation of data so vast as to widen the chasm between incumbent firms and new entrants. This line of argument goes like this: firms, particularly tech firms, grow so large and are able to aggregate more data, which in turn provides those companies competitive advantages. Think about Amazon: its acquisition of companies in different sectors will allow it to accumulate vast and unique data about consumer habits, which it can then use to provide more personalized services and competitive variable pricing. While good for the consumer in the near-term, such an inherent advantage is a barrier to entry that new competitors simply cannot overcome. The jury is still out on whether data collection will provide diminishing returns or whether machine learning will ensure increasing returns for a firm that accumulates data. If the latter turns out to be true, then the largest firms will create a barrier that will bar new entrants from competing with incumbents. While the antitrust agencies have approved a number of mega-mergers recently, the FTC is now openly asking questions and allowing debate on whether it must reconsider its enforcement priorities and return to ‘big-is-bad’ enforcement style of early antitrust.

Related to data accumulation was the role of the FTC in protecting consumer privacy. Nearly every consumer device can be connected to the internet in order to provide data about consumer habits. Smart watches, cell phones, and even items like “smart” sneakers, can collect intimate details about an individual. This, in turn, requires the government to consider safeguards in order to ensure that such personal details are protected. The FTC does not have a clear principled policy for relief from harm done in these types of data breaches, for example in the case of Cambridge Analytica or the Ashley Madison breach; however, the discussion marked a clear understanding that the FTC is going to take privacy concerns seriously. Privacy law in the United States is a patchwork of various federal and state laws that do not offer a clear principle for protecting consumers. Panelists discussed how the federal government could model privacy protection laws based on Europe’s General Data Protection Regulation (“GDPR”) and California’s Consumer Privacy Act (“CCPA”). The key issue, as always, is the ability to enforce such commitments.

These inquiries proceed when suspicious conduct can be identified. But in doing so, let us avoid a ‘big is bad’ mentality and let us truly have the interests of consumers in mind. We learned long ago that proper antitrust enforcement is about protecting consumers, and protecting the competitive process, not about protecting competitors. We must not forget that guiding principle. Indeed, that principle is especially important in markets subject to large economies of scale, whether those scale economies are based on traditional production economies or based on network effects, which are often important in the tech sector.

The next hearing is currently slated to take place on September 21, 2018 at the FTC Constitution Center.

Key Provisions of the Model Timing Agreement

Concluding Thoughts

Parties still encouraged to reach out to staff early on in a Second Request investigation to negotiate a timing agreement. The FTC expects that most parties will enter into timing agreements that will conform to the new Model Timing Agreement. But as always, different circumstances will result in deviations from the Model. The Bureau of Competition’s Front Office will review all timing agreements before execution and will consider the justification for any changes or deviations from the Model.  Part of the goal of an effective timing agreement is to facilitate constructive feedback between staff and the parties by creating more certainty about the timing of an investigation.  The new Model allows parties to better anticipate the Bureau of Competition’s expectations in negotiating timing agreements.

It is expected that a lot of time will be devoted to the dominant digital two sided platforms (Google, Facebook, and Amazon) as well as the associated network effects.  The FTC is interested in learning more about how their conduct hinders competition and innovation or how their services actually benefit consumers and enhance competition and innovation.

The hearings and public comment process will provide opportunities for FTC staff and leadership to listen to interested persons and outside experts representing a broad and diverse range of viewpoints.  Additionally, the hearings will stimulate thoughtful internal and external evaluation of the FTC’s near- and long-term law enforcement and policy agenda.  The hearings may identify areas for enforcement and policy guidance, including improvements to the agency’s investigation and law enforcement processes, as well as areas that warrant additional study.

In advance of these hearings, public comments on any of the following topics may be submitted to the FTC:

(1) The state of antitrust and consumer protection law and enforcement, and their development, since the Pitofsky hearings in 1995;

(2) competition and consumer protection issues in communication, information, and media technology networks;

(3) the identification and measurement of market power and entry barriers, and the evaluation of collusive, exclusionary, or predatory conduct or conduct that violates the consumer protection statutes enforced by the FTC, in markets featuring “platform” businesses;

(4) the intersection between privacy, big data, and competition;

(5) the FTC’s remedial authority to deter unfair and deceptive conduct in privacy and data security matters;

(6) evaluating the competitive effects of corporate acquisitions and mergers;

(7) evidence and analysis of monopsony power, including but not limited to, in labor markets;

(8) the role of intellectual property and competition policy in promoting innovation;

(9) the consumer welfare implications associated with the use of algorithmic decision tools, artificial intelligence, and predictive analytics;

(10) the interpretation and harmonization of state and federal statutes and regulations that prohibit unfair and deceptive acts and practices; and

(11) the agency’s investigation, enforcement, and remedial processes.  The FTC will invite public comment in stages throughout the term of the hearings:

The FTC will accept public comments through August 20, 2018.

The hearings will begin in September 2018 and are expected to continue through January 2019, and will consist of 15 to 20 public sessions.  All hearings will be webcast, transcribed, and placed on the public record. A website for information about the hearings including the schedule as it evolves can be found at www.ftc.gov/ftc-hearings.

If you are interested in filing comments and need help, let me know.

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

According to the complaint, Northrop is one of four companies capable of supplying the U.S. government with missile systems, including tactical missiles, strategic missiles and missile defense interceptors.  Orbital ATK is the premier supplier of solid rocket motors (“SRMs”), which propel missiles to their intended targets and are an essential input for missile systems.  The FTC’s complaint alleges that Northrop’s proposed acquisition of Orbital ATK would have reduced competition in the market for missile systems purchased by the U.S. government, resulting in less innovation and higher prices. The FTC was concerned that Northrop could raise prices on the motors on competitors or withhold them altogether, both of which the agency said would give the merged firm a clear advantage for missile contracts.  Additionally, “the acquisition creates a risk that the proprietary, competitively sensitive information of a rival (solid rocket motor) supplier supporting Northrop’s missile system business could be shared with Northrop’s vertically integrated SRM business.”

To resolve the vertical competition concerns, the FTC required several behavioral or conduct remedies.  First, Northrop was required to supply SRMs to competitors on a non-discriminatory basis.  Second, Northrop was required to separate the operation of its SRM business from the rest of the company’s operations with a firewall.  Third, the settlement agreement provides for the U.S. Department of Defense (“DOD”) to appoint a compliance officer to oversee Northrop’s conduct pursuant to the settlement.  Fourth, the FTC required the merging parties to implement a compliance program and create regular compliance reports, to be submitted to the FTC, the DOD and the compliance officer.  The FTC said that by ensuring that other missile suppliers can continue to compete, the settlement preserves the procompetitive benefits of the transaction while addressing the potential anticompetitive harms.

The FTC noted that while the Bureau of Competition typically disfavors behavioral remedies, given the special characteristics of the defense industry, it accepted such a remedy.  Specifically, the defense industry has a single buyer, DOD, with distinct procurement processes.  In addition, the DOD requires sophisticated products, such as SRMs, that are a part of complex systems subject to winner-take-all competition for programs that can last decades.  Because they can last decades, the consent decree term is 20 years.  The Bureau of Competition has issued a statement accompanying the decision that explains in more detail the context for the remedy and how it will preserve the procompetitive benefits of the transaction while also addressing the potential anticompetitive harms.

Observations

The enforcement action illustrates that, despite the FTC’s preference for structural remedies, the FTC is willing to consider conduct remedies in vertical deals under certain circumstances.  In particular, the FTC put a lot of weight on the fact that the federal government, the DOD, was the buyer.  The DOD has a lot leverage in negotiations and supported the transaction so that made the FTC more willing to accept behavioral conditions.  It is also worth point out that the FTC will not be the one monitoring compliance rather the DOD will be involved in the day to day monitoring of the behavioral conditions.  Efficiencies from the vertical combination also appear to be an important factor in the FTC’s review as it stated that the behavioral conditions will preserve the procompetitive benefits of the transaction.

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

The FTC concluded that the proposed acquisition would have reduced competition in three markets where both Amneal and Impax competed: (1) generic desipramine hydrochloride tablets; (2) generic ezetimibe and simvastatin immediate release (“IR”) tablets; and (3) generic felbamate tablets.

The FTC also concluded that the proposed acquisition would reduce future competition in seven markets where Amneal or Impax is a current competitor and the other would have been likely to enter the market absent the acquisition: (1) generic aspirin and dipyridamole extended release (“ER”) capsules; (2) generic azelastine nasal spray; (3) generic diclofenac sodium and misoprostol delayed release (“DR”) tablets; (4) generic erythromycin tablets; (5) generic fluocinonide-E cream; (6) generic methylphenidate hydrochloride ER tablets; and (7) generic olopatadine hydrochloride nasal spray.

Under the terms of the proposed settlement, ANI Pharmaceuticals, Inc. will acquire seven products (or in some cases the pipeline assets).  The FTC specifically noted “ANI’s track record in developing and bringing to market pipeline products suggests that the divested products will be placed in the hands of a firm with the same ability and incentive to bring the products to market.”  Perrigo Company plc will acquire Impax’s rights to two products that it had partnered with Impax to develop, manufacture, and sell.  And G&W Laboratories (“G&W”) will acquire Impax’s marketing rights to one product that G&W manufactures for Impax.

The FTC’s Analysis to Aid Public Comment provides further insight on how the FTC determined which of the merging parties’ products should be divested.  The FTC pointed to The FTC Merger Remedies Study, which states that “products made at third-party manufacturing sites are easier to divest and involve less risk than the technology transfer from in-house manufacturing to a new facility.”  The FTC’s goal is to ensure the success of divestitures so if one of the products is developed or manufactured by a third party, the FTC would rather that product be divested to the actual manufacturer.  The FTC also pointed out that “in mergers involving complex pharmaceutical products that are difficult to manufacture, the Commission generally will require the divestiture of an on-market product over a pipeline product to place the greater risk on the merging parties rather than the public, with exceptions for compelling and fact-specific reasons.”

The FTC applied the “easier-to-divest” principle where Impax sold products in partnership with a third party. Impax partnered with Perrigo to sell generic azelastine nasal spray and generic olopatadine hydrochloride nasal spray products and partnered with G&W to sell generic fluocinonide -E cream. Perrigo and G&W also were the Abbreviated New Drug Application (“ANDA”) owners for these products. The FTC also required Impax to return the rights and assets relating to Impax’s third-party partnership products to Perrigo and G&W.

While the FTC’s general rule is to require divestitures of manufactured products over pipeline products, the FTC carved out exceptions for compelling and fact-specific reasons during this merger review.  The FTC found exceptions in four product markets. In four overlap markets in which Amneal has an on-market product and Impax has a product in development, Impax will divest its rights and assets to ANI rather than requiring Amneal to divest its on-market, in-house manufactured products.  The FTC said that each product market had specific facts that warrant the divestiture of the Impax rights and assets rather than the Amneal product.

• For generic aspirin and dipyridamole ER capsules, Amneal is the only manufacturer with a marketed product. Impax received FDA approval for its ANDA in 2017, but had not yet launched a product. Because Amneal had the only generic product on the market, the FTC thought it was less risky for Impax to assign its manufacturing contract to ANI than to transfer technology from Amneal to another buyer for such a complex product.
• For generic methylphenidate hydrochloride ER tablets, the FTC applied the “easier-to-divest” Both Amneal and Impax had approved ANDAs. While Impax had not launched its product yet, the FTC required divestiture of Impax’s product because the ER tablets are complex products, and it would be less risky for Impax to assign its manufacturing contract to ANI than for Amneal to transfer technology to ANI.
• For erythromycin tablets, Amneal recently launched a product and it competed with one other player. Impax was developing erythromycin tablets. The FTC allowed Amneal to keep the marketed product to ensure an “ongoing and viable competitor to Arbor,” the only other competitor with a marketed product.
• For generic diclofenac sodium and misoprostol DR tablets, Amneal has an on-market in-house manufactured product, and Impax is partnered with Micro Labs to commercialize a competing product. Impax holds only marketing rights to the product; Micro Labs is responsible for development and manufacturing. Impax will transfer its marketing agreement with Micro Labs to ANI, and Micro Labs will manufacture the product for ANI for the current contract term.

 Observations:

The FTC’s enforcement action demonstrates that the FTC is being very thoughtful in its decisions regarding divestiture remedies in the pharmaceutical industry.  A couple of months ago, the FTC seemed to setting a hard and fast rule, but there does not appear to be any such thing.  In pharmaceutical mergers in which one party manufactures a pharmaceutical product that is difficult and complex to manufacture and the other party has a similar product in the research and development pipeline, there is a strong presumption that the FTC will require a divestiture of the product already being manufactured rather than the one in development.  The FTC will also require merging parties to divest the product that is easier to divest.  That being said, there will always be exceptions.  Before making any decisions, the FTC will examine the competitive landscape, the complexity in transferring technology, as well as the capabilities of third-party manufacturers or third-party partners.  The FTC’s goal is to make sure that the divested product or pipeline assets will be as competitive in the hands of the divestiture buyer as it would have been absent the deal so the FTC will have an open mind and use a fact specific approach when negotiating divestitures.

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

Background

CDK and Auto/Mate supply dealer management systems (“DMS”) software to franchise new car dealerships. Car dealerships use DMS software, a mission-critical business software to manage nearly every aspect of their business including payroll, accounting, financing and inventory.  They track their services, prices, and other crucial functionalities.  The top two DMS software providers, CDK, which had 41% and Reynolds & Reynolds (“Reynolds”), which had 29%, combined for about a 70% share of the DMS software market. The big two are the highest priced, and have similar business models, which include long-term contracts and significant initial and monthly fees for third-party applications (app) vendors to integrate with their respective DMS. Dealertrack, Autosoft and Auto/Mate also had competitive DMS offerings as well as others. Auto/Mate was a very small competitor with only 6% of the market.  After the deal, CDK’s market share would have been 47%.

Despite this market structure with numerous competitors and the target firm having a very small share, the FTC believed that Auto/Mate was on the cusp of becoming a “much more important and vibrant competitor” so the market share understated its current competitive and future competitive significance.  Indeed, the FTC alleged that Auto/Mate is an innovative, disruptive challenger to the two market leaders. It offers franchise dealerships low pricing, an agnostic platform for third-party applications, extensive OEM certifications, short contracts, free software upgrades and training, and a reputation for high-quality customer service. In recent years, Auto/Mate became a competitive threat in the franchise DMS market, including by specifically targeting CDK customers. Auto/Mate expanded its customer base and revenues through both aggressive pricing putting pressure on CDK’s pricing and margins. Auto/Mate was disproportionately taking customers and market share away from CDK.

Indeed, CDK’s internal documents identified Auto/Mate as a current and emerging threat. “We are so serious about acquiring new customers that we bought the DMS [Auto/Mate] that has been kicking our butts.” According to the complaint, CDK significantly increased its bid for Auto/Mate when it realized “that other well-financed, credible bidders recognized Auto/Mate’s competitive strengths and were seriously interested in buying the company,” perceiving that “if Auto/Mate fell into the hands of a well-financed buyer willing to invest additional resources, Auto/Mate would become an even more aggressive and effective competitor.” The parties abandoned the merger two days after the FTC’s complaint.

Lessons Learned

 The FTC’s block of CDK’s proposed purchase of Auto/Mate demonstrates that it is willing to challenge companies that seek to acquire small nascent rivals in technology markets.  The FTC viewed the transaction as part of an emerging trend of large technology firms acquiring nascent competitors to keep them from emerging as full-fledged rivals. Large technology firms have been buying start-ups or small competitors, which in some circumstances could be foreclosing the development of emerging rivals.   While we believe that the FTC may take these cases seriously going forward, we also tend to believe that the evidence in this particular case led the FTC to this decision.  The inquiry into whether a small nascent firm has the ability to become a stronger competitor in the future will need to be demonstrated through internal company documents and economic analysis.  There needs to be some basis to determine that the acquired firm will in a short time frame be a significant competitor.  Otherwise, the agencies would simply be making arbitrary decisions to block deals that shouldn’t be blocked.  Indeed, there are dangers to blocking an acquisition of a start-up with a good idea.  For instance, the larger company may have the wherewithal to actually help that start-up’s innovative product actually reach consumers.  So, we do not anticipate that the FTC will bring many of these types of cases without the strong evidence that existed in this challenge.

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

The two providers of ambulance services agreed to divest inter-facility air ambulance transport services in Hawaii to resolve FTC concerns that their proposed merger would likely harm competition among air ambulance transport services that transfer patients between medical facilities on different Hawaiian islands.

According to the FTC’s complaint, Air Medical Group and AMR Holdco are the only two providers of air ambulance services in Hawaii that transport patients between medical facilities on different islands.  Patients depend on these services when they need medical or surgical care that is not available in their local communities, according to the complaint.  Without a remedy, the acquisition is likely to lessen competition and will tend to create a monopoly in the market for inter-facility air ambulance services in Hawaii, in violation of U.S. antitrust laws.  The merger as proposed would also increase the likelihood that consumers, third-party payers, or government health care providers would be forced to pay higher prices or experience a degradation in service or quality, according to the complaint.  The FTC alleges that new entry into the market for inter-facility air ambulance transport services, or expansion by existing firms in adjacent businesses would not be likely, timely, and sufficient to restore the lost competition without a remedy.

Under the terms of the proposed settlement, AMR Holdco will sell its inter-facility air ambulance transport services business and supporting assets to AIRMD, LLC, which does business as LifeTeam.  AMR Holdco will divest to LifeTeam the four fixed-wing aircraft it uses for inter-island air ambulance transport services, support LifeTeam’s application for a Certificate of Need with the State of Hawaii to operate ground ambulances, and offer LifeTeam the option to purchase up to four ground ambulances to support its air ambulance transport services.

AMR Holdco is a wholly-owned subsidiary of Envision Healthcare. LifeTeam is a large, established company that currently operates the FAA-certified aircraft used by AMR Holdco to provide air ambulance transport in Hawaii.  LifeTeam has the experience to manage AMR Holdco’s assets and operations in that state.

The FTC worked closely with the State of Hawaii Department of Attorney General in investigating this matter.  The FTC vote to issue the complaint and accept the proposed consent order for public comment was 2-0.

Observations

The action demonstrates that the FTC will work closely with state AGs to protect competition in narrow local regional healthcare markets.  The FTC action also shows that it continues to block anticompetitive acquisitions that would raise healthcare costs to payors, and ultimately to patients.  In this instance, the deal is allowed to go forward, but only after a divestiture in a local market.  To resolve the competition concern, the FTC accepted a structural and behavioral remedy.

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