Complaint

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

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

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

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

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

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

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

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

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

Arbitration

The Antitrust Division has agreed with defendants to refer the matter to binding arbitration should certain conditions be triggered.  The arbitration would resolve the issue of product market definition.  The arbitration would take place pursuant to the Administrative Dispute Resolution Act of 1996 (5 U.S.C. § 571 et seq.) and the Antitrust Division’s implementing regulations (61 Fed. Reg. 36,896 (July 15, 1996)).  This would mark the first time the Antitrust Division is using this arbitration authority to resolve a matter.  The head of the Antitrust Division, Makan Delrahim, said that “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.  Alternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers.”

Lessons Learned:

Here, the transaction is presumptively anticompetitive because a large dominant player with 60% of a concentrated market is acquiring a new disruptive entrant.  What is noteworthy is the use of the arbitration procedure agreed to by Novelis and the DOJ.  The DOJ and Novelis clearly are debating the product market definition.  If the DOJ is right on the product market definition, the merger is anticompetitive in the North American market for aluminum auto body sheet and it would require a fix.  The merging parties can then negotiate a divestiture remedy that would resolve the competitive concerns.  As Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division put it, “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.” He added that “[a]lternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers.”  So, this may be the start of a trend to obtain settlements without the need for a full trial on the merits.

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The DOJ 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 DOJ 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.

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

Complaint

The DOJ alleges that Sabre and Farelogix compete head-to-head to provide booking services to airlines.  Booking services are IT solutions that allow airlines to sell tickets and ancillary products through traditional brick-and-mortar and online travel agencies to the traveling public.  The DOJ alleges that the acquisition would eliminate competition that has substantially benefited airlines and consumers in both the traditional and online markets.  The complaint further alleges that the transaction would allow Sabre, the largest booking services provider in the United States, to eliminate a disruptive competitor that has introduced new technology to the travel industry and is poised to grow significantly.

As alleged in the complaint, Sabre is the dominant provider of booking services in the United States with over 50% of airline bookings through travel agencies.  Sabre operates a global distribution system (“GDS”), which is a digital platform that provides booking services to airlines in addition to other functionality.  The DOJ characterizes Farelogix as an innovative technology company that has stepped in to address the needs of airlines and their customers.  The DOJ says that Farelogix has injected much-needed competition and innovation into stagnant booking services markets by developing new technology {new distribution capability} that empowers airlines to make a wider array of offers to travelers who book tickets through travel agencies.  This new technology enables airlines to make more varied and personalized offers to consumers who book through travel agents, including bundles of ancillary products such as wi-fi, lounge passes, entertainment options, and meals – choices not available to travelers through Sabre’s legacy technology.

The DOJ also points to some hot docs in its complaint.  The DOJ alleges that Sabre executives acknowledged that acquiring Farelogix would eliminate a competitive threat and further entrench Sabre in booking services.  For example, on the day Sabre announced its intention to buy Farelogix, Sabre’s chief sales officer texted a colleague that one major U.S. airline would “hate” it.  The colleague replied, “Why, because it entrenches us more?”  Similarly, a Farelogix executive observed that buying the company would allow Sabre to “tak[e] out a strong competitor vs. continued competition and price pressure.”  Sabre’s internal documents show that Sabre’s attempt to acquire Farelogix follows many other attempts by Sabre to neutralize its competitor, including a campaign to “shut down Farelogix.”  Indeed, Farelogix has long complained about Sabre’s tactics, alleging that Sabre has sought to stifle competition.  For example, in 2013, Farelogix’s Chief Executive Officer alleged that “Sabre has wielded its monopoly power in an attempt to destroy Farelogix and prevent competition….”  Moreover one Sabre sales executive noted after the announcement of the acquisition that the airline’s “FLX [Farelogix] bill is going up big time.”

The DOJ’s complaint alleges that Sabre has used a broad range of contractual and technical barriers to prevent entry or expansion by suppliers that could threaten its control over bookings through travel agencies. For instance, Sabre’s contracts include provisions that inhibit airlines’ use of an alternative supplier like Farelogix, even when doing so would be less expensive for airlines.  As recently as 2018, Farelogix denounced these restrictions, complaining that airlines’ GDS contracts “effectively prohibit working with third parties or make doing so cost prohibitive.”  In January 2019, a Sabre senior vice president acknowledged that airlines view Sabre’s restrictions as “abusive but there’s nothing they can do because they need the distribution and they are tied with a contract.”

The DOJ alleges that the two relevant markets are highly concentrated but acknowledges that Farelogix’ share is very small.  The DOJ alleges, however, that Farelogic’s market share understates its competitive significance in the current and in future markets.

In summary, the DOJ alleges that Sabre controls over 50 percent of bookings through traditional and online travel agencies in the United States, so airlines must sell tickets through Sabre to reach a broad set of U.S. travelers. Sabre has used this power to suppress Farelogic’s entry and expansion.  Nevertheless, Farelogix’s presence in these markets has led to lower prices and increased innovation that would be lost if the merger is not blocked.

Lessons Learned

The DOJ’s block of Sabre’s proposed purchase of Farelogix demonstrates that it is willing to challenge large dominant companies that seek to acquire small nascent rivals in technology markets that are highly concentrated.  Sabre’s proposed acquisition of Farelogix is a dominant firm’s attempt to take out a disruptive competitor that is an important source of competition and innovation.  The DOJ is taking the position that acquisitions of small disruptive rivals in highly concentrated markets can result in higher prices, reduced quality, and less innovation regardless of the target’s low market share.  The DOJ views the transaction as part of an emerging trend of large technology firms acquiring nascent competitors to keep them from emerging as full-fledged rivals.

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Here, the hot docs in Sabre’s text messages, documents, emails, and corporate filings support the DOJ’s decision to block the merger. Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The DOJ will focus on supposed “hot docs” to support its case because the buyer appears to be touting the intended anticompetitive consequences of the acquisition.  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.  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

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

The vertical merger, which combines AT&T’s video distribution platform with Time Warner’s programming, could be the first such deal litigated in almost 40 years.

According to the DOJ’s Antitrust Division, the acquisition would substantially lessen competition by resulting in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals.

To support its case, the DOJ littered the Complaint with the merging parties’ own words and relied less on market and empirical evidence:

• “As AT&T has expressly recognized … distributors that control popular programming ‘have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition.’”
• “Specifically, as DirecTV has explained, such vertically integrated programmers ‘can much more credibly threaten to withhold programming from rival [distributors]’ and can ‘use such threats to demand higher prices and more favorable terms.’”
• “Indeed, AT&T/DirecTV describes the traditional pay-TV model as a ‘cash cow’ and ‘the golden goose.’”
• “In sum, as DirecTV itself has explained: ‘[V]ertical integration of programming and distribution can, if left unchecked, give the integrated entity the incentive and ability to gain an unfair advantage over its rivals. This ultimately results in higher prices and lower quality service for consumers.’”
• “AT&T/DirecTV [said it] intends to ‘work to make [online video services] less attractive.’”
• “AT&T itself has previously stated that access to some of the most popular television programming is ‘critical to preserve and promote competition and diversity in the distribution of video programming.’”
• “Following this merger, using a bargaining model similar to the one previously endorsed by DirecTV, the eventual price increases to the merged firm’s competitors for Turner networks due to the merged company’s increased power would likely be at least hundreds of millions of dollars.”
• “[Turner’s] CEO has stated that it has ‘leverage’ over Dish, whose online Sling TV service ‘is shit without Turner.’”
• “In a presentation prepared for a meeting with Time Warner executives related to this merger, AT&T noted that, after the merger, the merged company and just three other companies would control a large portion of all three levels of the industry: television studio revenue, network revenue, and distribution revenue. AT&T went on to explain that—given these high levels of concentration— its ‘Core Belief #1’ is that, notwithstanding the emergence of online video distributors, ‘[t]he economic incentives of major pay-TV players will encourage stability as the ecosystem evolves.’”

There does not appear to be any magic bullet here.  These “Hot Docs” appear to be dated, taken out of context, and clearly don’t tell the full story.  Nevertheless, the DOJ has historically used merging parties’ own words against them when drafting complaints so this one is no different.  Traditionally, 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.

Nevertheless, the DOJ still has a lot of hurdles to prove its case as economics plays a huge role in merger cases.  The DOJ’s theory demonstrates a lack of understanding of the current and rapidly evolving market for content and distribution.  The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible.  Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to charge higher prices for Time Warner content or to cut off rival video distributors. After all, such a strategy would be risky. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive.

Observation:

The DOJ will use merging parties’ past words against them when challenging their deal. The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and the judge.  The DOJ will focus on supposed “hot docs” to support its case when some market analysis and empirical evidence may be missing.  At the end of the day, however, a “smoking gun” document regarding anticompetitive intent, which apparently does not exist in this case, as it was not cited, will be rejected by a judge unless the DOJ provides the foundations of an antitrust cases through market analysis and empirical evidence.  The DOJ still has time to put together its case, but the complaint falls short on quantitive data.

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