Remedying Deals With Antitrust Issues Has Gotten Harder

By Jim Lowe²

Since the implementation in 1978 of the Hart-Scott-Rodino Act (HSR Act), which requires the prior notification of most transactions above a certain size (currently $101 million), parties to transactions that raise serious antitrust issues have often sought to negotiate remedies with the government that would resolve the antitrust issues but also allow the transaction to proceed. In any given year, two dozen or more transactions have been allowed to proceed after the parties entered into consent decrees that allowed the transaction to go forward on the condition that the parties take certain actions or restrict their conduct in a way that the government concluded would resolve its concerns. The remedies the government seeks takes two possible forms: (1) structural relief, which usually requires the sale of the part of one of the businesses in the market that raises antitrust concerns or (2) behavioral (or conduct) relief, which involves the parties agreeing to certain conduct restrictions designed to prevent anticompetitive behavior by the combined company. In the United States there has always been a preference for structural remedies where possible; nonetheless, for many years the government has accepted behavioral remedies where structural remedies were not viable

In the past decade the U.S. antitrust enforcement agencies — the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) — have increasingly and consistently made clear that they will accept behavioral remedies only in rare circumstances, which has limited parties' options for resolving antitrust concerns where structural remedies are not available. And in the past year, senior enforcement officials at both agencies have more strongly objected to behavioral remedies and questioned whether even structural remedies are appropriate when the transaction raises particularly serious concerns or occurs in an already concentrated market. Parties to transactions that raise complex antitrust issues should consider at an early stage the regulatory risks posed by their potential transaction, and each party should try to limit or mitigate its own risk.

The History of Antitrust Remedies

Prior to the passage of the HSR Act, most merger enforcement occurred after the affected transaction had already closed. As a result, the government often was forced to seek complex remedies because the merging parties had often already integrated their operations, making it difficult to either force a total unwinding of the transaction or a remedial divestiture. The HSR Act provided the agencies the opportunity to review transactions before they were consummated. This allowed for the agencies to seek remedies—including barring a transaction—prior to closing and thus before any integration and competitive harm occurred. While the agencies do regularly seek to block transactions outright, in the vast majority of cases where the agencies have identified serious competitive concerns, the agencies have been willing to accept remedies in lieu of litigation, allowing the transaction to close and saving limited agency resources.

The type of remedies the government has sought has depended in part of the nature of the transaction. Most transactions that raise antitrust concerns are horizontal, that is, they are transactions between direct competitors, such as a merger of airlines with overlapping routes or a merger between two steel manufacturers. The other type of transaction that has caused the agencies to have serious antitrust concerns are those between parties at different levels of the same supply chain, for example, a merger between a manufacturer and the supplier of a key input for the manufactured good. These types of transactions are called vertical. Horizontal transactions that raise antitrust issues are usually resolved by the divestiture of one of the two overlapping businesses, thus eliminating the parties' competitive overlap.

Vertical transactions raise more complex issues. In a vertical transaction the parties do not compete, so there are not overlapping businesses to divest. In these transactions, the antitrust concern arises because the merger may result in competitive harm in either the market for the input or the market for the manufactured good (or occasionally both). For example, if the input supplier has a very high share of that input, competitors of the manufacturer may have trouble getting the input post-transaction if the merged firm decides to no longer make the input available to the manufacturer's competitors. A divestiture of the input supplier is not a viable option as that is the business the manufacturer is interested in, and any purported efficiencies derived from the transaction result from the integration of the input supplier and the manufacturer.

In the past, the agencies have regularly been willing to at least consider behavioral remedies for many vertical transactions and even some horizontal transactions. For example, a behavioral remedy for the input supplier/manufacturer merger might be a legally enforceable commitment that the combined firm will continue to make the input available to all potential customers on commercially reasonable terms and will put in place firewalls at the input supplier so that it does not provide the manufacturer with information on its competitors. In the case of a horizontal transaction, a behavioral remedy could require the merged firm to make intellectual property available to all customers on fair, reasonable and non-discriminatory terms or could prevent a firm from retaliating against customers who do business with a competitor.

Behavioral remedies became fairly common in a few markets, most notably in the defense industry where there has been significant horizontal and vertical consolidation. Until quite recently, most vertical transactions in that industry that raised antitrust concerns were resolved by behavioral remedies including firewalls, non-discrimination provisions, and/or mandatory licensing.

The Shift Away From Behavioral Remedies

For more than two decades, U.S. antitrust enforcement officials have expressed their preference for structural remedies. The agencies raise three primary concerns with behavioral remedies:

• Behavioral remedies require ongoing monitoring that the agencies, which view themselves as primarily law enforcement rather than regulatory bodies, are not well structured to undertake.
• Violations of behavioral provisions have proven hard to punish and slow to rectify, resulting in competitive harm while the enforcement process is underway.
• It is questionable whether, at least in some cases, the required behavioral remedies prevented the competitive harm identified by the agency at the time of the settlement.

Despite these concerns, the agencies continued to use behavioral remedies on occasion, particularly to resolve competitive issues with vertical transactions. For example, the DOJ required complex behavioral remedies when Comcast acquired NBCUniversal in 2011, and in 2018 the FTC required detailed behavioral commitments in order to clear Northrop Grumman's acquisition of Orbital ATK.

However, not long after the Northrup settlement, the rhetoric regarding behavioral remedies became sharper. In early 2020, Barry Nigro, then the Principal Deputy Assistant Attorney General in the Antitrust Division, noted that the Division vastly preferred structural remedies, even in vertical cases: "[A] competitive market tends not to result from behavioral remedies, which are inherently regulatory, but from structural remedies.... [A] behavioral remedy is inefficient because it mutes the benefits of the free market, in which the competitive process, and not the government, ought to guide the actions of firms.... [A] behavioral remedy substitutes the enforcer's decision making for that of the players."

Shortly thereafter the Division issued a revised Merger Remedies Manual (available here). The Manual states that behavioral remedies "are inappropriate except in very narrow circumstances." Further, "[a] consent decree temporarily regulating conduct, on the other hand, does not effectively redress persistent competitive harm resulting from an indefinite change in market structure. Regulating conduct is inadequate to remedy persistent harm from a loss in competition." The Manual instructs agency staff that "[s]tand-alone conduct relief is appropriate only when the parties prove that: (1) a transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm, and (4) the remedy can be enforced effectively." This is a much higher standard for obtaining behavioral relief than had existed in prior versions of the Manual. The Manual does say that certain forms of behavioral relief may be acceptable but usually only to assist in the success of a divestiture.

More recently, the Division has gone further. In a speech earlier this year, Assistant Attorney General Jonathan Kanter said, "I am concerned that merger remedies short of blocking a transaction too often miss the mark. Complex settlements, whether behavioral or structural, suffer from significant deficiencies. Therefore, in my view, when the division concludes that a merger is likely to lessen competition, in most situations we should seek a simple injunction to block the transaction. It is the surest way to preserve competition." This implies hostility to both behavioral and, in some cases, structural remedies. The Division recently brought its first challenge to a vertical merger in more than four years and in doing so apparently rejected both structural and behavioral remedies offered by the parties.

The FTC has also indicated its increased opposition to behavioral remedies and an increased desire to litigate to block transactions it views as illegal. Its opposition to behavioral remedies is clear in three challenges to vertical mergers it has brought in the past year. In at least two of them the parties offered behavioral remedies that the FTC rejected. In some ways the most surprising was the FTC's challenge to Lockheed Martin's proposed acquisition of Aerojet Rocketdyne. As noted above, competitive concerns in defense industry transactions have often been resolved by behavioral remedies. The presence of the Department of Defense as the primary, if not sole, customer makes remedy enforcement much easier than when there is a plethora of customers and sales channels. And the parties have made clear that they offered remedies similar to those that have been approved in the past. Nonetheless, the FTC brought suit to block the transactions, and the parties then abandoned it.

Implications

Until recently it was often possible for parties to determine, at least within a range, what it would take to resolve competitive concerns arising from a proposed transaction. Both antitrust agencies were regularly willing to settle their concerns through consent decrees. Settlements most often involved divestitures, but on occasion, particularly with vertical transactions, the agencies were willing to accept strict behavioral remedies that were consistent with prior settlements. The agencies usually only took transactions to court when there did not appear to be a feasible remedy short of blocking the transaction (e.g., where the transaction involved the acquisition of a single facility) or where the parties concluded the remedy proposed by the agency was uneconomic or unjustified.

Today parties face antitrust enforcement agencies that are far more skeptical about settlements than in the past and are particularly doubtful that behavioral remedies are ever an acceptable option. Accordingly, risk calculation for transactions that raise antitrust issues has become more complex and risk allocation can become a bigger issue than it has been in the past since there may now be a greater risk that the transaction will face litigation and/or will be unable to close for regulatory reasons. Accordingly, parties should consider the following:

• Determine early in the deal process whether the proposed transaction raises significant antitrust risk and whether there is a meaningful risk of a challenge.
• Analyze whether there could be an economically viable settlement to resolve any antitrust concerns and determine the likelihood that such a settlement would be accepted in the current environment.
• For sellers in an auction process, consider the relative antitrust risk posed by each bidder and consider making acceptance of that risk (including a reverse termination fee for failure to close) a requirement for a successful bidder.
• Particularly for vertical transactions, do not assume that behavioral remedies will be accepted in the U.S. even if they would be accepted elsewhere.
• For buyers, carefully consider risk tolerance in the face of seller demands for antitrust risk protections including hell-or-high-water clauses and reverse termination fees.
• Do not assume that antitrust risk can be addressed post-signing; parties that do so often find themselves in litigation against both the government and each other.

Footnote

2 Jim Lowe is a partner in Sidley's Washington, D.C. office who focuses his practice on merger and civil and criminal non-merger investigations. The views expressed in this article are those of the author and do not necessarily reflect the views of the firm, its other lawyers or its clients.

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