Experts Discuss Today’s Global Antitrust And M&A Practice

Friday, November 18, 2011 - 17:42

The Editor interviews Alicia J. Batts, Partner and Colin Kass, Partner, Proskauer Rose LLP.

Editor: Please tell us about your background and experience.

Batts: In addition to prior law firm experience in M&A and antitrust litigation, I served at the FTC as an antitrust advisor, which provided invaluable insight into the inner workings of the agency. My current practice at Proskauer focuses primarily on antitrust counseling and antitrust transactional advice. I advise clients on antitrust matters involving the Department of Justice, FTC and state attorneys general including mergers, investigations and policy matters. In addition, I represent parties in plaintiffs’ opt-out litigation and defend parties in antitrust and related litigation.

Kass: My practice covers the full spectrum of antitrust matters with a significant regulatory, litigation and counseling component. This includes mergers and acquisitions, government anticompetitive practices investigations, criminal cartel matters, defense- and plaintiff-side litigation matters and the full range of compliance distribution and pricing practices issues.

Editor: What is the current environment for M&A?

Kass: The M&A market is not as active as it was a few years ago, but it is improving slowly and steadily. Currently, we are seeing more strategic mergers, which involve antitrust issues, and expect more deals will be announced as people gain confidence in the economic recovery.

Editor: Please talk about the due diligence process. What are the key determinants of possible monopoly power?

Batts: Corporate and antitrust due diligence processes often intersect. With the advent of private equity firm involvement in antitrust matters, financial buyers have become more common players and due diligence will adapt accordingly. Critical areas for investigation include barriers to entry, regulatory and IP issues and structural changes that result in the formation of a dominant player.

Recent cases reflect that the FTC and DOJ are very concerned about the innovation market and have focused their investigations on how the market will be affected in the future. In preparing arguments as to why a deal is pro-competitive, antitrust counsel should evaluate alternative deal structures for transactions that may raise competitive concerns as well as consider the possibility that regulators may file suit to enjoin a transaction.

Kass: The main determinant of monopoly power is market share, which begs the question of market definition. As reflected in the recent DC District Court’s decision in the H&R Block merger, courts are still inclined to define narrow markets; however, there are many industries in which the merging parties can make a compelling case – even when the resulting market share is high – particularly if they can show strong customer support. In these situations, due diligence involves understanding the client’s goal, gathering evidence and forging an effective legal argument as to why the merger will benefit consumers.

Editor: Do you counsel clients on specific business activities, such as sales and marketing or distribution? 

Kass: Clients continue to seek legal guidance on pricing practices, joint ventures and competitor collaborations, which frequently require industry expertise. In the consumer goods industry, for example, resale price maintenance is going down the same path as price discrimination – from a significant threat, to a major counseling matter and, eventually, to a dead letter. With price discrimination, it is essentially a dead letter, with the legal risks of supposed discrimination paling in comparison to business risks of not getting pricing just right. We are starting to see the same thing with respect to resale price maintenance. Despite numerous messages from state attorneys general, the real risk of substantial liability is quite small and getting smaller.

Editor: On what issues and industries are U.S. antitrust enforcement agencies placing primary emphasis? Do you employ different strategies for managing matters involving the FTC versus the DOJ?

Kass: The agencies are substantially more aggressive than they were two or three years ago, and they continue to focus heavily on healthcare and financial services. Cartel enforcement has been fairly constant over the last decade, with the next wave of inquiry likely to focus on the auto parts industry.

I approach the FTC and DOJ with the same overall strategy: be transparent, assertive and proactive. The staff attorneys at both agencies are reasonable and are trying to reach a just result, albeit sometimes with a different perspective. So counsel is well-served by getting to the heart of the matter quickly, and developing a strong case on the key areas of concern as soon as possible. Certainly, there are procedural differences among the agencies.  But ultimately, both agencies – at least today – have similar mindsets.

Batts: There are jurisdictional issues that may affect which agency reviews a transaction. For example, the DOJ, by statute, exclusively handles transportation, telephone and banking matters arising from the Department of Transportation and the FCC. Beyond these areas, the agencies have concurrent jurisdiction, and matters will be assigned according to which of them has the most recent or relevant experience. Also, for certain Hart-Scott-Rodino issues, the agency choice is clear, while for others, agencies will negotiate for the right to handle clearance on a particular transaction. While this process can impede the merger’s progress, experienced antitrust counsel can use industry expertise to manage the jurisdictional gray areas. The FTC and DOJ differ somewhat in the way they manage and decide cases. For example, FTC decisions are made by a panel of five commissioners with equal voting power, while DOJ matters are managed by one person in a more linear fashion. These differences can trigger legal strategies, which must be mindful of satisfying the particular interests of one DOJ official versus persuading a group of FTC commissioners. In addition, the FTC has its own statute that allows the agency to pursue legal action for “unfair business practices” that may not meet the more stringent requirements of a Sherman Act claim.

In addition to the financial and healthcare industries, the agencies are focusing on technology and innovation markets. Although many of these investigations are not made public, Congress instructs the FTC to investigate certain industries, including, among others, the oil and gas industry.

Editor: In general, are decisions of U.S. courts in antitrust matters becoming less plaintiff-friendly?

Kass: A few years ago, the answer would have been a decisive yes, but today, I think we have started to reach a plateau. Certainly, bringing a case today requires satisfying the higher pleading standard established in Twombly, navigating the difficulties of defining antitrust standing and accommodating changes in antitrust substantive liability. But while we continue to see a fairly high, steady rate of dismissal at the early stage of a case, that dismissal rate is not as dramatic as it was.

First, plaintiffs are responding to recent court trends by developing better strategies. Second, courts have finally reached a tipping point. While they haven’t retreated, they seem less willing to take the Chicago School of Antitrust Economics to its logical conclusions and have stopped short of saying that the market does not need to be policed. Thus, antitrust law continues to be a major constraint on business behavior and a significant weapon for consumers, class action lawyers, government agencies and competitors.

Editor: Please discuss the judicial standards for class certification in antitrust cases.

Kass: The leading case continues to be the Third Circuit’s decision in the Hydrogen Peroxide antitrust litigation, which correctly tasks the court with analyzing the facts and determining whether damages can be proven on a class-wide basis. As a result, plaintiffs have a more difficult job and there are very few cases in which class certification will be a foregone conclusion – even in direct purchaser class actions involving commoditized products. Indeed, there are some cases – such as price discrimination or resale price maintenance – where the risk of class certification is practically non-existent. On the other hand, class certification remains a viable option in some indirect purchaser price-fixing cases, especially those filed in state court. Of course, the risk of class certification in indirect purchaser suits is still much less than in the direct purchaser scenario.

Editor: What is the current status and impact of global implementation of antitrust laws?

Batts: The trend is toward international enforcement and antitrust agency comity. Global antitrust enforcers are communicating with one another; countries like China are enacting antitrust statutes, further evidencing global coordination of these efforts; and the DOJ and FTC are focused on building international reporting mechanisms. U.S. antitrust efforts are increasingly matched, and sometimes exceeded, by EU laws. While international mergers often involve complex filing processes, the common goal is to foster competitive markets that function well.

Editor: How does the presence of intellectual property affect M&A deals?

Batts: In general, IP protections can create barriers for companies to enter a particular market. In some pharmaceutical and agricultural mergers, companies may enter into agreements about IP, with one party becoming a licensee once the transaction is completed. This way, the newly formed company has seamless access to the IP and can immediately enter the market.

While serving at the FTC, the IP aspect of a merger or divestiture deal was always considered very closely because, for example, there is no sense in divesting a particular factory or a line of business if the parties don’t have access to the necessary IP that made the business successful in the first place.

Kass: IP is driving a lot of deals, particularly in the Internet and high-tech fields, where patents can play a significant offensive and defensive strategic role. Antitrust agencies are grappling with where to draw the line in IP-driven mergers because, by its very nature, IP rights grant a mini monopoly within the scope of the innovation. The agencies appear to be headed towards a middle ground, looking not just at whether the acquirer has a better ability than the seller to exploit a lawfully granted IP monopoly, or whether combination of a buyer’s and seller’s IP is greater than the sum of its parts. Instead, they are looking at whether the acquisition of IP forecloses new forms of competition that would have existed in the absence of the combination. In that regard, IP-driven mergers have a lot in common with vertical mergers, where the emphasis is on foreclosure and behavioral remedies, such as licensing and non-exclusivity.

Editor: Do you have any final comments?

Batts: The current M&A environment includes strategic deals in which companies see an opportunity to expand their footprint or break into a different type of product. Right now, those clients appear to be cash-rich; thus, we are seeing cash tender offers within strategic deals, and there are more financial buyers, which tend to involve opportunistic acquisitions. Going forward, deal volume hopefully will increase, either after the U.S. presidential election or post resolution of the European debt crisis.

Please email the interviewees at abatts@proskauer.com or ckass@proskauer.com with questions about this interview.