On December 1, the Federal Trade Commission ("FTC") issued an administrative complaint challenging Laboratory Corporation of America's ("LabCorp") consummated acquisition of rival Westcliff Medical Laboratories, Inc. ("Westcliff"). The FTC alleged that the acquisition, which was completed in June, would substantially lessen competition among providers of capitated clinical laboratory testing services to physician groups in Southern California.
The suit is the most recent example of the FTC's heightened scrutiny of non-reportable consummated mergers. It is particularly noteworthy, however, because the sale of Westcliff to LabCorp, which took place pursuant to the bankruptcy process, previously had been approved by a bankruptcy court. The FTC rejected the parties' "failing firm" defense – a very limited defense for acquisitions of failing companies that otherwise raise competitive concerns – on the grounds that, but for the transaction, other buyers without antitrust concerns would have purchased Westcliff, albeit at a lower price than LabCorp was willing to pay. The lawsuit serves as an important reminder that even non-reportable transactions with court-approved buyers in a bankruptcy proceeding are not protected from antitrust scrutiny.
Background
LabCorp and Westcliff are clinical laboratory testing companies that perform testing services at the request of patients' individual physicians in Southern California. In California, physician groups typically contract to pay for laboratory tests performed for patients in health maintenance organizations. Typically, a physician group will contract on a per-member, per-month basis, known as "capitation."
In May, LabCorp agreed to acquire Westcliff for $57.5 million. As part of the acquisition, Westcliff filed for Chapter 11 bankruptcy, which subjected the acquisition to the bankruptcy court's approval. In June, after a hearing at which no other bidder topped LabCorp's offer, the court approved the sale of substantially all of Westcliff's assets to LabCorp.
The FTC alleged that LabCorp's acquisition of Westcliff would lessen competition for clinical laboratory testing services in Southern California by eliminating Westcliff as a meaningful independent competitor. LabCorp and Westcliff, along with Quest Diagnostics Inc. ("Quest"), served the vast majority of the physician groups in the region. According to the Complaint, Westcliff was an "upstart competitor" that had been expanding its share of physician group business and had priced its capitated laboratory testing services more aggressively than LabCorp and Quest. As a result of the transaction, LabCorp and Quest would control approximately 89 percent of the Southern California market. Accordingly, the FTC alleged that LabCorp's acquisition of Westcliff would allow it to raise capitated lab testing services prices either unilaterally, through the exercise of its own market power, or in coordination with Quest, its only remaining significant competitor.
The FTC rejected the parties' defense that Westcliff was a "failing firm." The "failing firm" defense is a very limited defense for acquisitions of failing companies that otherwise raise competitive concerns. The antitrust agencies, however, will only accept the defense if there are no other alternatives to the acquisition other than the seller's assets exiting the market altogether. In this case, the FTC alleged that Westcliff was generating operating profits at the time of the acquisition and that there were other potential buyers available to purchase Westcliff that raised fewer antitrust concerns as compared to LabCorp. Moreover, the FTC alleged that Westcliff's bankruptcy was a specific condition imposed by LabCorp as part of the acquisition and that LabCorp was installed at the bankruptcy auction as a stalking-horse bidder. The FTC concluded that the absence of other bidders at the bankruptcy hearing proved only that there were no bidders willing to pay the stalking-horse price of $60 million or more for Westcliff. The FTC believed, however, that there were a number of other firms, posing less antitrust risk, that were willing to purchase Westcliff for a consideration above liquidation value.
The FTC has also filed a motion in federal court to prevent LabCorp from integrating the Westcliff assets while the case is being tried before an FTC administrative law judge.
Implications
This lawsuit is further evidence of the antitrust agencies' increased scrutiny of consummated mergers, after having challenged at least a dozen such transactions in the last two years. This lawsuit also marks a relatively-infrequent challenge to a bankruptcy-approved sale.
Regardless of the merits of the FTC's case (Commissioner Rosch issued a dissenting statement criticizing the capitated contracts-based market definition), this suit illustrates the different goals of the bankruptcy and antitrust laws – the former attempt to maximize value for creditors, while the latter seek to protect competition. The FTC's latest allegations should serve as an important reminder to all companies that even if the seller is in bankruptcy and the buyer has been approved by a bankruptcy court, the transaction will not be shielded from antitrust review and challenge.
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