The Antitrust Attorney Blog

Considering a Merger or Acquisition? Avoid these 10 Minefields in your HSR Filing to the Antitrust Agencies

August 21, 2018 | Bona Law PC

This 1942 sculpture by Michael Lantz, 17-feet long, is meant to suggest a heroic figure (the FTC) restraining violent and untamed American commerce.

Author: Steven Levitsky

If you liked the old computer game, “Minesweeper,” then you’re ready to take on Hart-Scott-Rodino (HSR) filings for antitrust review of mergers & acquisitions. Both have rules. And both can produce unexpected catastrophes even if you think you’re following the rules. In fact, major clients, advised by major law firms, have been hit with hundreds of thousands of dollars in fines for mistakes that no one thought of at the time.

Let’s start with the 50,000 foot view of HSR compliance. You might know the basics: (a) you need to make an HSR filing when one side of the transaction has sales or assets of at least $16.9 million; (b) the other side has sales or assets of at least $168.8 million; (c) the transaction size is greater than $84.4 million; and (d) no exemptions apply. (These are 2018 figures).

An example to consider

Here’s an example of how things can work out badly. Let’s assume you get a call from the CEO of your client, Alpha Co. Alpha Co. is a small and relatively new company and the CEO tells you:

Alpha’s annual sales and assets are $15 million.
Alpha plans to buy $80 million of the voting securities of Bravo Ltd. (Alpha’s borrowing $65 million to do the deal.)
Based on this, he wants to know if they need to make an HSR filing.

Applying what you know, you conclude that the “size-of-person” and “size-of-transaction” tests are both not met, so no HSR filing is required. Alpha Co. goes ahead and closes the deal.

Three months later, your client hears from the FTC. The FTC tells them that they violated the HSR Act by not filing, and that the fine is $41,484 per day, or $3,733,560 in all. What went wrong? (We’ll explain in detail in Point 2.)

But generally, what went wrong is that the 50,000 foot view is not enough. HSR rules are extremely technical and, some would say, not exactly logical. A lot of HSR terms don’t have a common sense meaning. You need to check and cross-reference the definitions and rules. And these, by the way, are not organized in any friendly or rational way, but seem to read like the Tax Code.

Here are some basic HSR concepts that might help you avoid the worst minefields.

What are the basic HSR tests?

There are two tests to see if a filing is required.

First, “size-of-person.” Normally, you don’t need to file for the antitrust enforcers unless one side of the deal has sales or assets of at least $16.9 million and the other side has sales or assets of at least $168.8 million. (This are 2018 figures; these numbers change every February.)

But, as we’ll see soon in Point 2, the size-of-person test does not mean the size of the transaction party. Instead, it means the size of the buyer’s entire business group, or everything under the control of its highest entity (see §5). Don’t fall into the trap of measuring an incomplete control group.

Second, the “size-of-transaction” must be over $84.4 million (again, this is 2018; the numbers change every February). But there are several other filing thresholds that cover more purchases in the same target and could require successive filings. These include $168.8 million; $843.9 million; 25% of the target — but only if the size-of-transaction is more than $1.688 million; and 50% of the target — or control. Once you get control, you can buy as much more of the target as you want without ever filing again.

But, as we’ll see soon in Point 2, the “size-of-transaction” does not really mean the size of the transaction. Instead, it means (1) the combination of existing holdings and planned acquisitions, (2) that the entire buyer control group will have in the target control group after the deal closes (see §2). This includes voting stock acquired years before, that has to be analyzed at its current value. Don’t fall into the trap of measuring the wrong amount.

What is an “ultimate parent entity” and why does it matter?

The “ultimate parent entity” is the top controlling entity of an entire business group.

The “ultimate parent entity” matters to your antitrust filing for the following reason. The purpose of the HSR filing system is to let the antitrust agencies know of significant shifts in competitive power. As a result, they don’t care about the names on the contract, which may be only small subs or special purpose vehicles. The antitrust agencies want to know what is really happening in terms of changes of competitive power.

To give the agencies that information, you must identify the entire control group of your transaction party. You do this by tracing control upwards from the transaction party (Alpha Co., in our case) to the very highest control level of the business group. That entity at the top, that isn’t controlled by anyone else, is the “ultimate parent entity,” which can be a company or an individual. The “ultimate parent entity” makes the filing. Its collective size and holdings affect the “size-of-person” and “size-of-transaction” tests we discussed in Point 1.

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Antitrust News: The European Commission imposes fines for the first time in 15 years as a result of online retail price restrictions (RPM)

August 10, 2018 | Bona Law PC

Author: Luis Blanquez

On July 24, 2018, the European Commission fined manufacturers Asus, Denon & Marantz, Philips and Pioneer for over €111 million for restricting the ability of online retailers to set their own retail prices for a variety of widely-used consumer electronics products.

Background

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Antitrust News: Fifth Circuit Stays FTC Administrative Action in Louisiana Real Estate Appraisers Case

July 18, 2018 | Bona Law PC

Author: Jarod Bona

The United States Court of Appeals for the Fifth Circuit agreed on July 17, 2018 to stay the FTC’s Action against the Louisiana Real Estate Appraisers Board.

The Fifth Circuit’s one-line decision rejects the FTC’s opposition to the Board’s requested stay and allows immediate appellate review of the FTC’s significant state-action-immunity rejection.

You might recall that we wrote about the FTC’s state-action-immunity decision the day it occurred, concluding that then Commissioner Ohlhuasen’s opinion was well-reasoned and thorough.

You can review the documents in the FTC administrative action against the appraisal board here.

This FTC administrative action arises out of allegations that a Louisiana board of appraisers required appraisal management companies to pay appraisers what it described as a “customary and reasonable” fee for real estate appraisal services. The FTC argues that this is illegal price-fixing, which, of course, violates Section 5 of the FTC Act.

What is particularly interesting about this case is that it addresses one of the most significant applications of the active supervision prong of the state-action-immunity doctrine since the US Supreme Court decided NC Dental.

You might recall that, in most cases, entities that want to claim state-action immunity must satisfy both prongs of the Midcal test: (1) the challenged restraint must be clearly articulated and affirmatively expressed as state policy; and (2) the policy must be actively supervised by the state itself.

You can read our analysis of active supervision and related FTC guidance on the requirement here.

As we described in our prior article, Commissioner Ohlhausen effectively addressed important factual and legal issues that make up the active-supervision standard, offering useful guidance to boards and those that challenge them under the antitrust laws.

For example, the FTC applied three elements that it held—in this case—form part of active supervision: (1) the development of an adequate factual record; (2) a written decision on the merits; and (3) a specific assessment of how the private action compares with the substantive standard from the legislature.

While the Fifth Circuit’s stay decision is not good news for the FTC’s current action, it may be good news for state boards and others that want guidance on the active-supervision requirements of state-action immunity.

The Supreme Court’s NC Dental decision offered some parameters of what doesn’t constitute active supervision, mostly from prior cases. But at this point, the law is light on the specifics. A federal appellate decision that fully engages on these issues will help state boards, victims of state boards, district courts, and, in fact, the Federal Trade Commission.

Besides the substantive active supervision issue, this case presents the drama of the Louisiana governor trying to get around the state-supervision deficiencies through executive order in response to the FTC’s initial antitrust complaint. The board argued that the executive order made the FTC’s case moot. The FTC, of course, rejected that argument.

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Loving—And Using—The Weaponized First Amendment: The Supreme Court’s decisions in Janus and NIFLA

July 16, 2018 | justia.admin

Author: Robert Everett Johnson, The Institute for Justice

Robert Everett Johnson litigates cases protecting private property, economic liberty, and freedom of speech. He is also a nationally-recognized expert on civil forfeiture. Bona Law has a strong relationship with The Institute for Justice, going back to Jarod Bona’s clerkship with the group after his first year of law school. We highly recommend that you check out the wonderful work they do for freedom and liberty.

You may have heard: The First Amendment has been weaponized.

Justice Kagan said so in Janus v. State, County and Municipal Employees, where her dissent accused the majority of “weaponizing the First Amendment, in a way that unleashes judges, now and in the future, to intervene in economic and regulatory policy.” Justice Breyer agreed, dissenting in NIFLA v. Becerra and complaining that (contrary to the majority opinion) “professionals” should not “have a right to use the Constitution as a weapon.” And the New York Times took up the cry, publishing a front-page Sunday article titled “How Conservatives Weaponized the First Amendment.”

All of this sounds frightening, but the truth is more reassuring. Courts are doing what they are supposed to do: As the amount of economic regulation has increased, it has inevitably restricted freedom of speech, and now courts are restoring the balance. Lawyers should embrace this newly vibrant First Amendment, and should ask themselves how it can serve the interests of their clients.

**Rights Are—And Should Be—Weapons**

The truth is, the First Amendment has always been a weapon. After all, that’s exactly what constitutional rights are—weapons to be used against the government. When critics say the First Amendment has been “weaponized,” all they really mean is it is being enforced.

The First Amendment has been used, time and time again, as a weapon to resist government power. When the NAACP invoked the First Amendment to protect their right to solicit clients for civil rights litigation, they used the First Amendment as a weapon. When unions invoked the First Amendment to protect the right to picket their employers, they used the First Amendment as a weapon. And when students invoked the First Amendment to protect their right to protest the Vietnam War, they also used the First Amendment as a weapon.

What is the alternative to a “weaponized” First Amendment? We could retire the First Amendment from active service and hang it on the wall like a soldier’s antique gun. We could continue to protect speech with little real-world impact—protests at funerals and animal crush videos come to mind—while exempting speech that threatens the status quo. That kind of neutered First Amendment would be a shiny object to admire, but it would not secure freedom of speech in any meaningful sense. Fortunately, the First Amendment is more than a shiny object on the wall.

Economically-Motivated Speech Is Still Speech

While the First Amendment has always been a weapon, something has changed in recent years. When people say the First Amendment has been “weaponized,” they really mean it has been applied to uphold free speech rights in the context of economic regulation. But that is as it should be: Speech does not become any less valuable because it is associated with economic activity.

There is no question that the Supreme Court is increasingly willing to uphold First Amendment claims that arise in the economic context. This Term, Janus upheld the right of employees not to contribute money to a public union, and NIFLA rejected the argument that speech receives less protection because it is uttered by a “professional.” Other recent cases have applied the First Amendment to regulations of credit card pricing schemes, as well as restrictions on the sale of drug prescription information. There is no reason to think any of that will change with the nomination of Judge Kavanaugh to the US Supreme Court, as he has previously applied the First Amendment to regulations of internet service providers.

This is a good thing. As Justice Kennedy put it, writing in 1993 in Edenfield v. Fane: “The commercial marketplace, like other spheres of our social and cultural life, provides a forum where ideas and information flourish.” Indeed, speech in the commercial marketplace often touches on some of the most important facets of human life: Doctors speak to patients about matters of life and death; financial professionals speak to clients about their financial security; and even your local grocer can convey information critical to your health. The importance of these subjects only makes the free flow of information all the more vital to a free society.

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Antitrust News: Supreme Court Says that Federal Courts, Not Foreign Governments, Decide Foreign Law

July 5, 2018 | Bona Law PC

Author: Jarod Bona

In an antitrust case deciding a non-antitrust-specific issue, the US Supreme Court held in Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co. (the Vitamin C Antitrust Litigation) that to determine foreign law in federal courts, judges are not strictly bound by that foreign government’s statements.

The judge should “accord respectful consideration to a foreign government’s submission,” but it is his or her call in making the ultimate decision.

The Supreme Court in this case is interpreting Federal Rule of Civil Procedure 44.1, which states that when deciding foreign law—sometimes that is necessary in federal court—a judge may “consider any relevant material or source . . . whether or not submitted by a party.”

This decision arose out of the Vitamin C Antitrust Litigation, which is an antitrust class-action lawsuit against four Chinese corporations that manufacturer and export, you guessed it, Vitamin C. Purchasers of the vitamin sued Chinese vitamin C sellers, alleging that they agreed to fix the price and quantity of Vitamin C exported to the United States from China. Price fixing, of course, is a per se antitrust violation.

(Read here if you want to learn more about defending an antitrust class action case.)

The Chinese vitamin C sellers argued that they are shielded from US antitrust law liability by the act-of-state doctrine.

But what is the act-of-state doctrine?

Good question.

US courts under the act-of-state doctrine should not judge the validity of an official act of a foreign government committed within that foreign government’s borders. This is a doctrine that extends beyond antitrust law.

In Animal Science Products, the defendants argued that China law required them to fix prices as part of a “regulatory pricing regime.”

The parties, however, disputed whether China law actually mandated the fixed prices. To help resolve that question, the Ministry of Commerce of the People’s Republic of China filed an amicus curiae brief supporting the Chinese vitamin C sellers’ argument that China law required defendants to fix prices.

(You can read our article here on the many reasons to file amicus briefs).

So the trial court had to figure out whether China law mandated price fixing. And to assist it, China’s Ministry of Commerce weighed in via amicus brief.

What would you do?

Would you just agree with whatever China says about its own law? Or would you do an independent examination and decide?

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Procedural Fairness in Antitrust and Competition Enforcement: DOJ and the ICN

June 5, 2018 | Bona Law PC

Author: Luis Blanquez

Makan Delrahim, Antitrust Chief for the United States Department of Justice, made news on June 1, 2018, when he announced that the United States will finalize and join the Multilateral Framework on Procedures in Competition Law Investigation and Enforcement.

Delrahim explained why due process is a priority for antitrust and competition enforcement: “With more than 140 competition agencies, and increased international commerce, including digital commerce, it is more and more critical that we share a common set of principles that affords due process to individuals and businesses in investigation and enforcement.” (p.2).

We applaud this effort and agree that companies—including those that do business on several continents and governed by multiple enforcers—should receive fair treatment worldwide by competition authorities.

In his speech, Delrahim mentioned the International Competition Network (ICN), among other groups, as likely substantive sources for the multilateral framework.

It just so happens that the ICN recently addressed this issue at its 17^th annual conference, hosted by the Competition Commission of India on March 21-23, 2018. Indeed, the ICN adopted new guiding principles for procedural fairness in competition agency enforcement.

For those that are not familiar with it, the ICN is a network of 104 competition agencies, enriched by the participation of non-governmental advisors (representatives from business, consumer groups, academics, and the legal and economic professions), with the common aim of addressing practical antitrust enforcement and policy issues. The ICN promotes more efficient and effective antitrust enforcement worldwide to the benefit of consumers and businesses.

Because antitrust and competition agencies are now prioritizing due process, we will do a deep dive into the specific due process issues that the ICN described in its report.

One of the ICN’s several working groups is the Agency Effectiveness Working Group (AEWG). The AEWG aims to identify key elements of well-functioning competition agencies, including good practices for strategy, planning, operations, enforcement and procedures. To that end, the AEWG recently developed an ICN Guidance on Investigative Process paper, which offers helpful tips on investigative transparency and due process. This paper follows previous reports on Investigative Tools, Competition Agency Transparency Practices, and Competition Agency Confidentiality Practices.

Following these guidance reports, the AEWG has now produced new Guiding Principles for Procedural Fairness, together with some recommendations for internal agency practices and implementation tips for good agency enforcement process.

You can access the ICN report here.

Following the two-day conference in India, the AEWG adopted the following Guiding Principles for procedural fairness in competition agency enforcement:

Impartial Enforcement

Competition agencies should conduct enforcement matters in a consistent, impartial manner, free of political interference. Agency officials should not have relational or financial conflicts in the matters on which they work. Agencies should not discriminate on the basis of nationality in their enforcement.

The AEWG highlights that agency officials should not have relational or financial conflicts of interest relevant to the investigations and proceedings they participate in or oversee. To ensure the impartiality of investigations and decision making, agencies should have ethics rules to prevent potential conflicts. And they should consider a systematic process to check for potential conflicts for all personnel working on a specific investigation.

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Antitrust News: New FTC Commissioner Rohit Chopra Calls Out Repeat Offenders for Harsher Penalties

May 19, 2018 | Bona Law PC

Author: Jarod Bona

As you may have heard, the Senate recently approved a new slate of FTC Commissioners. Among them is new Commissioner Rohit Chopra, who is a former assistant director at the Consumer Financial Protection Bureau and former advisor to the Secretary of Education.

Commissioner Chopra was sworn in on May 2, 2018 and quickly announced one of his early priorities: On May 14, 2018, he issued a public memorandum to the other FTC Commissioners and the FTC Staff describing how he believes the FTC should handle repeat offenders of FTC violations.

Let’s dig into this a little bit.

Commissioner Chopra describes the problem of corporate recidivism as generally resulting from significant management dysfunction, which requires “serious remedies that address the underlying issues.”

After describing several non-antitrust examples of this corporate recidivism, particularly involving large financial institutions, Commissioner Chopra points out, bluntly, that “FTC orders are not suggestions.” He says that—“to deter violations and maintain [the FTC’s] credibility as law enforcers”—the FTC “should carefully consider ways to build on its existing enforcement regime to make clear to market participants that our orders are to be taken seriously.”

For flagrant violators of district court orders, he believes that the agency should consider “contempt proceedings, referral to criminal authorities, and remedial injunctive relief.” Companies that violate FTC administrative orders should face additional injunctive relief and meaningful civil penalties.

Notably, Commissioner Chopra expresses a desire to go after individual executives that participate in FTC order violations, even if those individuals weren’t named in the original orders. So if a company is subject to an FTC order and violates that order, Commissioner Chopra would like to target the people that created the violation.

Structural Remedies Following Order Violations and an Important Caution

Finally, in what I believe is the most newsworthy part of this memorandum, Commissioner Chopra describes the structural remedies that he believes the FTC should explore for FTC-order violators.

His purpose in proposing these remedies is to address “the true causes of noncompliance.” Commissioner Chopra believes that certain companies may “engage in risky business practices to demonstrate to investors and capital markets that they are meeting or surpassing expectations for earnings and growth.” He also believes that “executive compensation practices might inadvertently create incentives for practices that might harm consumers or competition.”

We are, of course, treading on dangerous territory here. Businesses necessarily take risk—that is a feature not a bug. What are “risky business practices”? That is for the market—in its brutal truth and honesty—to reveal. It isn’t up to a government official or entity, without Skin in the Game, to make these determinations.

That isn’t to say that the FTC shouldn’t enforce antitrust, competition, and consumer protection laws. Nor is it to say that the FTC shouldn’t raise the penalties for repeat offenders. But protection of competition moves silently and dangerously to market distortion and harm when it decides that it is smarter than the market itself.

Those that enforce the antitrust laws with government power must do so humbly for the line between removing the barriers to competition and, frankly, screwing-up competition is a fine one that we rarely see clearly. It is best that those with power stay firmly on one side, so they don’t cross this line.

With those cautions, here are the structural remedies that Commissioner Chopra proposes the FTC consider invoking in response to order violations:

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Antitrust News: FTC Issues Significant State Action Immunity Decision in Louisiana Real Estate Appraisers Case

April 10, 2018 | Bona Law PC

Author: Jarod Bona

On April 10, 2018—the eve of my panel on state action immunity issues at the ABA Antitrust Spring Meeting in DC, the FTC granted, in essence, partial summary judgment against the Louisiana Real Estate Appraisers Board on state action immunity. You can read the FTC decision—hot off the press—right here.

I won’t go into a lot of detail here as you can read the decision, but here is short summary:

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Lithium Ion Batteries, Indirect Purchaser Antitrust Class Actions, and the Reality of Pricing

March 15, 2018 | Bona Law PC

Author: Jarod Bona

It isn’t easy to be an indirect purchaser antitrust class action plaintiff.

Not only do you have to satisfy the difficult standards for class certification (discussed here), but you also have to prove that the direct purchasers passed on an overcharge from defendants’ alleged anticompetitive conduct.

Before we go further, let’s talk about how direct purchasers and indirect purchasers fit into antitrust class action cases.

Direct Purchasers, Indirect Purchasers, Class Actions, and Overcharges

The most common type of antitrust class actions involve allegations of price-fixing or some other per se antitrust violation that leads to higher prices than the but-for world without the anticompetitive conduct. The increase in prices from the antitrust violation is called the overcharge.

The “overcharge,” of course, isn’t real—it is a number that one or more economists create after combining equations with lots of data and a bunch of assumptions that may or may not be accurate. Everyone does their best and a judge or jury has to sort through it and try to figure out what is right.

Anyway, a “direct purchaser” is a person or entity that purchased products or services from one or more defendants that were accused of violating the antitrust laws. They usually have standing to sue under the federal antitrust laws because, if the allegations are true, they paid higher amounts than they should have for their purchase.

But sometimes these direct purchasers are not end users of the product. Instead, they may be, for example, distributors or retailers that purchaser the product from defendants and resell it to someone else. That someone else is what is called an “indirect purchaser.”

For reasons I won’t get into now, indirect purchasers usually don’t have standing to sue for damages under the federal antitrust laws (Illinois Brick). But many states allow indirect purchasers to obtain antitrust damages under their state antitrust laws.

So when something happens and there is an antitrust blizzard of antitrust complaints filed throughout the country, direct purchasers will sue under the federal antitrust laws and indirect purchasers will sue—also in federal court—under state antitrust laws for damages. (They may also sue for injunctive relief under federal antitrust law).

In addition to winning the antitrust lawsuit, class action plaintiffs must also achieve class certification. And if indirect purchasers want any damages, they have to show that the direct purchasers paid an overcharge resulting from defendants’ anticompetitive conduct and passed some or all of that overcharge to the indirect purchasers.

One final point, I have spent my career on the defendant side of antitrust class actions and, as of the date of this article, Bona Law is representing a defendant in the In re Capacitors Antitrust Litigation. So please note any potential biases.

Court Denies Renewed Class Action Certification Motion for In re Lithium Ion Batteries Antitrust Litigation

The background and introduction was to tell you about the Court’s recent decision in the Lithium Ion Batteries antitrust class action case. In April 2017, we wrote about the Court’s initial class certification denial without prejudice, which meant that plaintiffs could renew their class certification motion once they fixed the identified problems in the motions and expert reports.

Well, the indirect purchasers renewed their motion for class certification and the Court again rejected it. The Court also granted defendants’ motion to strike plaintiffs’ supplemental expert report. You can read the Court’s order here.

To support plaintiffs’ renewed motion for class certification, indirect purchasers submitted a supplemental expert report that attempted to address issues that led to the Court’s last class-certification rejection: updated analysis to address packer pass-through issue, added new data from third parties and new documentary evidence about pricing coordination, and attempted to address the effects of rebates, bundles, discounts, and focal point pricing on pass-through and damages.

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Good News! Concurrences Extends Voting for the 2018 Antitrust Writing Awards Through February 16

February 12, 2018 | Bona Law PC

Do you want to learn about antitrust? If so, now is a great time to do so. Concurrences, an international antitrust website with an outstanding reputation, is accepting votes for their 2018 Antitrust Writing Awards, which will be announced at the Awards Gala Dinner on April 10, 2018 (right before the ABA Antitrust Spring Meeting, where you may find me on a panel).

I haven’t been to the Awards Gala Dinner, but I can only assume it is similar to the Oscars, if the Oscars were run by antitrust lawyers. We can pause for a moment while you try to picture what that might entail.

Back to the Antitrust Writing Awards: A jury of distinguished antitrust experts selected articles from 2017 in several categories: Best Academic Articles, Best Business Articles, Best Soft Law, and Best Newsletters. Within each category are articles in several substantive antitrust and competition areas.

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