Information Sharing by Competitors: Minimizing Antitrust Liability

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Information Sharing by Competitors: Minimizing Antitrust Liability Avoiding Gun-Jumping in Mergers and Competitor Collaborations TUESDAY, APRIL 10, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: William Blumenthal, Partner, Clifford Chance, Washington, D.C. Robert Schlossberg, Partner, Freshfields Bruckhaus Deringer, Washington, D.C. Joseph G. Krauss, Partner, Hogan Lovells, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Information Sharing by Competitors: Minimizing Antitrust Liability Information Sharing in the Premerger Context: Avoiding Gun-jumping Robert Schlossberg -- April 10,

6 Applicable Statutes to Premerger Activities Antitrust laws govern the pre-closing conduct of parties to mergers, acquisitions, and joint ventures Merging firms are not yet a single entity Must be careful to maintain separate identities and behave in a competitive manner until a transaction closes Merging firms have legitimate interest in engaging in certain forms of coordination Raises question of how much information parties can exchange in due diligence and transition planning Limits the amount of control that the acquiring company can exert contractually or otherwise over the other party prior to closing HSR Act, Section 5 of the FTC Act and Section 1 of the Sherman Act apply to preconsummation activities: For covered transactions, HSR Act prohibits acquisitions of beneficial ownership without first filing premerger notification and observing required waiting period Sec. 1 of the Sherman Act prohibits collective actions that adversely affect competition Sec. 5 of the FTC Act prohibits unfair methods of competitions as well as unfair or deceptive acts or practices 6

7 Premature Control Prior to closing of a transaction, the parties must continue to compete with one another Acquiring party generally should not exert control over the acquired party However, the acquiring party also needs to be comfortable that the value of the acquired company is not materially diminished while the merger is being reviewed The tension often manifests in drafting and executing the terms of the merger agreement Drafting a merger agreement that walks the line of avoiding control while still protecting the interests of the acquiring company can be challenging 7

8 Beneficial Ownership & Premature Control Indicia of Beneficial Ownership : The right to obtain the benefit of any increase in value or dividends The risk of loss of value The right to vote the stock or to determine who may vote the stock The investment discretion (including the power to dispose of the stock) Factors analyzed by the antitrust enforcement agencies: Access to confidential information and control over key decisions Ability to reverse any key decision if the merger does not close Whether key decisions made by the target pre-closing were reached unilaterally, mandated by the acquirer, or some point in between Attempts by the acquiring firm to hire away key employees, appropriate proprietary knowhow, negotiate with important customers, or otherwise preempt attractive opportunities during pre-closing period 8

9 Computer Associates / Platinum Technology (2002) Computer Associates (CA) exercised unlawful operational control over significant and important aspects of the target s business during the pre-consummation period The Merger Agreement and implementing provisions altered the status of the merging parties as separate and independent economic actors Although some provisions/restrictions in the Merger Agreement were customary and reasonable, others imposed extraordinary conduct of business limitations not normally found in merger agreements, which severely restricted Platinum s ability to engage independently and competitively Civil Penalty: $638,000 fine imposed against CA Injunctive Relief: CA also enjoined from entering into future merger agreements that allowed it to establish product/service prices, receive bid information, or approve customer contracts prior to consummation 9

10 Computer Associates / Platinum Technology (2002) Permitted Conduct: Provisions requiring firms to carry on business in the ordinary course in substantially the same manner as heretofore conducted Restrictions ancillary to a merger agreement if intended to prevent a seller from taking actions that could seriously impair the value of what the acquiring firm had agreed to buy Conduct establishing unlawful control : Imposing pre-consummation restrictions on the target s operations, pricing, information management, and employees in the purchase agreement Restricting the target company s ability to offer discounts to customers and retaining sole arbiter rights to prior approval of discount and consulting contracts Installing employees in the seller s facilities to review discount requests and contracts Systematically obtaining competitively sensitive information relating to competitive bids and customer information Changing the target s method of booking revenues Exercising approval authority over the target s participation at industry trade shows 10

11 United States v. Gemstar-TV Guide Intl. (2005) Competitors in provision of interactive TV program guides Parties were found to have ceased acting as separate economic entities by discussing and agreeing on a number of coordination steps during the pre-closing period Civil Penalty: $5.67 million total fine imposed (maximum civil penalty of $11,000 per day per party) Injunctive Relief: Parties prohibited from entering into future agreements that would combine or transfer operational or decisionmaking control of product marketing and distribution; and/or exchange information related to current or future prices 11

12 United States v. Gemstar-TV Guide Intl. (2005) Evidence of Gemstar s premature de facto acquisition of TV Guide included: Pre-consummation implementation of standard price and term-setting agreements Draft customer contracts sent by TV Guide for Gemstar s proposed changes and approval Agreements to allocate customers and phase out competing marketing operations Agreements to slow-roll negotiations for long-term agreements with major customers until the merger was consummated 12

13 QUALCOMM Inc. / Flarion Technologies (2006) The DOJ alleged that Qualcomm acquired beneficial ownership of Flarion s assets by obtaining premature transfer of operational control Violation of HSR Act resulted from aggregation of potentially problematic provisions in the Merger Agreement (imposed with a purpose of restricting Flarion s commercialization of products), plus day-to-day management control over pre-closing business decisions that were not required in the Merger Agreement Civil Penalty: $1.8 million fine imposed jointly on QUALCOMM and Flarion No ongoing antitrust monitoring requirements or restrictions of future conduct The maximum possible fine was mitigated as a result of the parties voluntarily reporting the gun jumping issues and taking remedial measures 13

14 QUALCOMM Inc. / Flarion Technologies (2006) The merger agreement -- Flarion required to obtain Qualcomm s prior written consent before undertaking certain business activities, including: entering into agreements to license intellectual property to third parties (core of Flarion s business) entering into agreements involving the obligation to pay or receive $75,000 or more in a year or $200,000 or more in the aggregate entering into agreements relating to the disposition or acquisition of intellectual property rights (except for shrinkwrap software licenses purchased for less than $10,000) Conduct following the merger agreement -- Flarion also sought Qualcomm s involvement and followed any guidance given by the buyer (even when the merger agreement did not purport to require Flarion to do so), including: routine hiring of employees in the ordinary course of business review and consent before marketing products and services to current and potential customers (including Qualcomm s review of entire drafts of customer proposals) requests for approval of price quotations and discounts (including review of Flarion s margins on certain products) strategic decisions on whether to pursue business opportunities 14

15 Best Practices for Avoiding Premature Control Enforcement agencies recognize that an acquiring party has legitimate commercial and practical interests, and will expect and allow reasonable post-signing covenants designed to protect the target s value Cause for concern arises where a purchase agreement limits a target s pre-closing conduct, inhibits the target s ability to retain its competitive and operational independence, and/or effectively transfers operational control of the seller to the buyer Parties must carefully consider covenants in merger agreements that impose restrictions on premerger conduct and/or require buyer approval to ensure that ordinary course competition is not restricted (Omnicare) No business integrations may begin until after clearance is obtained; parties cannot allow for even the appearance or suggestion that parties have started to act as a single entity Clear guidelines should be issued early in the transaction process 15

16 Best Practices What is Considered Permissive Conduct? Conduct generally considered permissible by Antitrust Authorities: Agreements to operate in the ordinary course of business consistent with past practices Certain restrictions on conduct that would cause a material adverse change in the target s business Joint conduct considered lawful independent of the proposed merger Joint marketing/advertisements that generally promote the transaction (with appropriate guidelines and controls) Joint customer calls to discuss general benefits of the merger Disclosure of confidential business information related to competing products in the context of litigation or settlement discussions (subject to a protective order) 16

17 Best Practices - What is Considered Prohibited Conduct? Conduct generally to be avoided: Agreements to exit certain businesses pending completion Agreements to slow roll (or delay negotiations) with certain customers Obtaining the other party s pre-clearance for routine business decisions Coordinating business strategies, production, sales, distribution or discount policies Covenants in the merger agreement that entitle the buyer to review or approve the seller s ordinary course of business activities in areas in which the companies compete Relocating staff to other party s premises Joint bidding for contracts when the normal industry practice does not allow for this activity Attending joint meetings with customers or other party s internal meetings Discussion of post-merger conduct of either party in relation to sales/marketing prospects or mutual customers 17

18 Information Sharing in the Premerger Context Parties to a transaction need to exchange information for many reasons Value assets Conduct due diligence Transition planning Preserve value of deal during HSR waiting period Government wants to ensure that potential transactions do not lessen competition while they are being contemplated or if they do not proceed: Maintain competition between the merging parties prior to closing Avoid transfer of information that would harm competition during merger negotiations or that would harm the ability of the company being acquired to compete should the merger fall through or be blocked Drawing a precise line between lawful due diligence and unlawful information sharing can be challenging 18

19 Omnicare / UnitedHealth Group (7 th Cir., January 2011) Omnicare is an institutional pharmacy that provides services to long-term care (LTC) facilities; it negotiates contracts with health insurers who provide coverage to senior citizens in those LTC facilities Senior citizens pay their premiums to health insurers; health insurers then reimburse Omnicare at a pre-negotiated rate In 2005, two health insurers UnitedHealth and PacifiCare entered into merger talks, conducted due diligence, signed a merger agreement, and ultimately merged During the period of due diligence, UnitedHealth and PacifiCare each negotiated separate contracts with Omnicare Following the merger, UnitedHealth (the acquiring company) abandoned its contract with Omnicare and joined PacifiCare s more favorable contract Omnicare sued alleging a conspiracy (and fraudulent scheme) between UnitedHealth and PacifiCare to coordinate their strategies for negotiating with Omnicare prior to consummating their merger and to depress their reimbursement rate 19

20 Omnicare / UnitedHealth Group (7 th Cir., January 2011) District Court for the Northern District of Illinois granted summary judgment to UnitedHealth Court of Appeals for the Seventh Circuit affirmed the judgment of the District Court by finding that: Early exchanges were restricted to aggregated pricing data, sample regions, high level review, and estimates Price information was shared among a limited number of high-level executives (less likely to be involved in the negotiation with Omnicare) Information shared outside the bounds of the Confidentiality Agreement, without further evidence of concerted action, was not enough to support an inference of conspiracy Detail of due diligence pricing information was necessary to due diligence and was performed in a reasonably sensitive manner Communications after signing and before closing focused on long-term strategic planning and were always with an eye towards integration of services after the merger is completed Information exchange process was monitored by outside antitrust counsel 20

21 Best Practices on Information Sharing The Omnicare decisions reaffirmed commonly given advice, including: Companies should consult with antitrust counsel to manage risks when obtaining necessary information for diligence and integration purposes Careful planning and process documentation can reduce the risk of an allegation of improper information sharing Companies should avoid exchanging any information beyond what is necessary for valuing the transaction and setting the stage for post-merger integration Detailed, current competitive information presents the highest risk Creating a limited due diligence team with personnel who are not responsible for pricing and marketing decisions is strongly advised For necessary but extremely sensitive information, aggregation or using third-party vendors to review and summarize the information should be considered Negative covenants (e.g., providing the acquiring party a right to review high-threshold, material assumption of liability) have legitimate purposes. But care should be exercised in determining their scope and potential carve-outs Counsel should be involved in both drafting and implementing such provisions 21

22 Asahi / CoTherix (California Court of Appeal, March 2012) Asahi, a Japanese pharmaceutical company, entered into a licensing agreement with CoTherix for developing and marketing Fasudil, a drug for pulmonary arterial hypertension (PAH) Actelion merged with CoTherix and discontinued the development of Fasudil Asahi sued CoTherix alleging a conspiracy between Cotherix and Actelion in violation of the Cartwright Act, the California antitrust statute Asahi alleged that Actelion conspired with CoTherix for anticompetitive purposes to eliminate an upstart competitor for PAH treatments Trial Court granted summary adjudication for defendant and the Court of Appeal affirmed. The Court found that: Cartwright Act does not apply to a merger but only to situations in which the parties improperly collude and continue as separate, independent entities The Court relied on the 8 th Cir. decision, International Travel Arrangers, which approved the following jury instruction: If you find that [the parties] lacked independent economic consciousness after they had decided to merge and before the merger was completed, they were not capable of conspiring together at that time 22

23 We are mindful that many forms of premerger coordination are reasonable and even necessary and that care needs to be taken not unduly to jeopardize the ability of merging firms to implement the transaction and achieve available efficiencies William Blumenthal, 2005 (then) General Counsel, Federal Trade Commission 23

24 The EU Perspective The new section on Information Exchanges between competitors of the EC Horizontal Guidelines of December 2010 sets a low bar for an antitrust infringement in case of information exchange between competitors The Guidelines are particularly wary of information sharing involving: Price data Quantity data Competitors market strategies Other relevant factors include: Age of the data (no clear threshold on when data becomes historic) Aggregation of the market data Whether the information is genuinely public or private Frequency of the exchange Structure of the market (concentration, transparency and stability) 24

25 Biography Robert Schlossberg Partner, Washington, DC T E robert.schlossberg@freshfields.com Bob represents clients on a full range of antitrust matters before the FTC and the Antitrust Division of the Justice Department. He has considerable experience in M&A and has guided scores of national and international transactions through antitrust review to a successful conclusion. He works with a variety of industries, including chemicals, consumer goods, energy, industrial machinery, medical devices, pharmaceuticals, publishing, software and transportation. Bob is past chair of the ABA Antitrust Section s M&A Committee and editor of the 3 rd edition of its treatise on US antitrust law as applied to M&A. Global Counsel, Euromoney and The International Who s Who of Competition Lawyers list him as a leading lawyer. Bob is also a non-governmental adviser to the International Competition Network. Bob clerked for the US Court of Appeals for the Ninth Circuit. He received his JD from George Washington University where he was Articles Editor of the Law Review and a member of the Order of the Coif. 25

26 Freshfields Bruckhaus Deringer US LLP 2012 This material is for general information only and is not intended to provide legal advice. 26

27 Information Sharing Between Competitors April 10, 2012 Strafford CLE Webinar William Blumenthal

28 This Presentation Focus on legitimate collaborations among competitors Standards generally more permissive when arrangements do not involve competitors Excludes issues arising from cartels and naked restraints Important, but not today s presentation Distinction from today s issues sometimes blurs Information Sharing Between Competitors April 10,

29 Two Broad Families of Issues Gunjumping before merger closing or JV formation Just addressed in Bob Schlossberg s presentation Information sharing / diligence strand Distinct from premature control strand Ancillary restraints and collateral effects in the context of ongoing cooperation Examples on next slide Information Sharing Between Competitors April 10,

30 Ongoing Cooperation: Examples Joint ventures Where co-venturers compete with each other outside the venture Where a co-venturer competes with the venture Joint activity often not performed through entities Joint development arrangements Joint marketing and promotion Joint purchasing Standard-setting organizations Information Sharing Between Competitors April 10,

31 Ongoing Cooperation: Examples 2 Trade association data collection and dissemination Benchmarking Distribution by vertically integrated firms Where a manufacturer sells through independent distributors and through own distribution arm Where a component manufacturer sells to independent downstream firms and transfers in internal manufacturing operations Information Sharing Between Competitors April 10,

32 Main Legal Principles in US Information exchange as discussed here is subject to rule of reason treatment Certain content is riskier than other content Price information is riskier than cost and other non-price information Detailed information is riskier than aggregated information Multiplicity of sources Granularity of content Future information is riskier than stale information Information Sharing Between Competitors April 10,

33 But Differences Emerging in Europe Increasingly more restrictive in application than standards in US Broadening interpretation of prohibitions on restriction of competition by object Capture disclosure of intended future prices or quantities, regardless of justifications or effect Flexibility shown for historical information Some flexibility shown for certain classes of agreements such as R&D, joint production, joint purchasing Information Sharing Between Competitors April 10,

34 And Uncertainties Remain in US How to treat public disclosures? Valassis and analyst calls Airline Tariff Publishing and posted prices When are buffers required? Internal firewalls Third-party intermediaries How is competitive effect to be assessed? Who has the burden of proving effect? How are benefits and adverse effects to be measured? Information Sharing Between Competitors April 10,

35 And Uncertainties Remain in US 2 What is required as to efficiencies? When must they be shown? By whom? How proven? When presumed? Even antagonists recognize potential procompetitive benefits and efficiency gains Information Sharing Between Competitors April 10,

36 Some Key US Authority on Jointness Leading historical Supreme Court cases on price information Maple Flooring (1925) Cement Manufacturers Protective Ass n (1925) Container Corporation (1969) United States Gypsum (1978) Some other key Supreme Court cases on competitor arrangements National Society of Professional Engineers (1978) Broadcast Music (1979) Maricopa County Medical Society (1982) NCAA v. University of Oklahoma (1984) Information Sharing Between Competitors April 10,

37 Some Key US Authority on Jointness 2 Three lower court cases worth mention Addyston Pipe (6th Cir. 1898), aff d (1899) United States v. Morgan (S.D.N.Y. 1953) United States v. Brown University (3d Cir. 1993) Major government policy statements Health Care Statements (1996) Guidelines on Competitor Collaboration (2000) Various business review letters Information Sharing Between Competitors April 10,

38 Some Authority on Jointness in the EU European Commission, Guidelines on Horizontal Co-operation Agreements (2011), available at :PDF Organisation for Economic Co-operation and Development, Policy Roundtable: Information Exchanges Between Competitors under Competition Law (2010), available at Information Sharing Between Competitors April 10,

39 Information Sharing Between Competitors William Blumenthal Clifford Chance, 2001 K Street NW, Washington DC USA Clifford Chance US LLP

40 Information Sharing by Competitors: The Sigma Case Joseph Krauss Hogan Lovells US LLP Washington, DC April 10, 2012

41 In the Matter of Sigma Corporation On January 4, 2012, the Federal Trade Commission filed complaints against the three largest U.S. suppliers of ductile iron pipe fittings, which are used in municipal water systems around the United States. The FTC charged that the three companies, McWane, Inc., Star Pipe Products, Ltd., and Sigma Corporation, illegally conspired to set and maintain prices for pipe fittings, and that McWane illegally maintained its monopoly power in the market for U.S.-made pipe fittings. Sigma settled the FTC's charges and has agreed not to engage in similar anticompetitive tactics in the future. The complaint against McWane and Star will be heard before an administrative law judge later this year. Complaint included allegations that the exchange of information by the companies through a trade association facilitated the price fixing agreement 41

42 The Information Exchange Allegations Between January 2008 and January 2009, Sigma allegedly conspired with McWane and Star to increase the prices at which imported DIPF were sold in the United States. In furtherance of the conspiracy, and at the request of McWane, Sigma changed its business methods to make it easier to coordinate price levels by exchanging information documenting the volume of its monthly sales, along with McWane and Star, through an entity known as the Ductile Iron Fittings Research Association ( DIFRA ). The complaint alleged that the DIFRA information exchange played a critical role in the 2008 price fixing conspiracy, first as the quid pro quo for a price increase by McWane in June 2008, and then by enabling Sigma, McWane and Star to monitor each others adherence to the collusive arrangement through the second half of

43 Did the Information Exchange Meet Prior Guidance? The Commission articulated a safe harbor for exchanges of price and cost information in Statement 6 of the 1996 Health Care Guidelines. See DEP T OF JUSTICE & FEDERAL TRADE COMM N, STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE, STATEMENT 6: ENFORCEMENT POLICY ON PROVIDER PARTICIPATION In EXCHANGES OF PRICE AND COST INFORMATION (1996). Statement 6 states: The Agencies will not challenge, absent extraordinary circumstances, provider participation in written surveys of (a) prices for health care services, or (b) wages, salaries, or benefits of health care personnel, if the following conditions are satisfied: (1) the survey is managed by a third-party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association); (2) the information provided by survey participants is based on data more than 3 months old; and (3) there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider's data represents more than 25 percent on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider. 43

44 Why the information exchanged failed to meet those Guidelines The DIFRA information exchange failed to qualify for the safety zone of the Health Care Guidelines for several reasons. Although the DIFRA information exchange was managed by a third party, the information exchanged was insufficiently historical, the participants in the exchange too few, and their individual market shares too large to qualify for the permissive treatment contemplated by the Health Care Guidelines. The FTC said that while failing to qualify for the safety zone of the Health Care Guidelines is not in itself a violation of Section 5, firms that wish to minimize the risk of antitrust scrutiny should consider structuring their collaborations in accordance with the criteria of the safety zone. 44

45 The Consent Order Paragraph II.C of the proposed order prohibits Sigma from participating in or facilitating any agreement between competitors to exchange Competitively Sensitive Information ( CSI ), defined as certain types of information related to the cost, price, output or customers of or for DIPF. Paragraph II.D of the proposed order prohibits Sigma from unilaterally disclosing CSI to a competitor, except as part of the negotiation of a joint venture, license or acquisition, or in certain other specified circumstances. 45

46 When Competitively Sensitive Information Can Be Exchanged A proviso permits Sigma to communicate CSI to its competitors under certain circumstances. Sigma may participate in an information exchange with its competitors in the DIPF market provided that the information exchange is structured in such a way as to minimize the risk that it will facilitate collusion among the Sigma and its competitors. The proposed order requires any exchange of CSI to occur no more than twice yearly, and to involve the exchange of aggregated information more than six months old. the aggregated information that is exchanged must be made publicly available, which increases the likelihood that an information exchange involving Sigma will simultaneously benefit consumers. 46

47 Market Share Thresholds Used The proposed order also prohibits Sigma s participation in an exchange of CSI involving price, cost or total unit cost of or for DIPF when the individual or collective market shares of the competitors seeking to participate in an information exchange exceed specified thresholds. The thresholds: Relating to price, output, or total unit cost, no individual Competitor s Input Data to any Industry Statistic represents more than twenty-five (25) percent of the total reported sales (whether measured on a dollar or unit basis) of the DIPF product. Relating to price, output, or total unit cost, the sum of no three Competitors Input Data to any Industry Statistic represents more than sixty (60) percent of the total reported sales (whether measured on a dollar or unit basis) of the DIPF product 47

48 Implications of the Sigma Case Reaffirms applicability of Statement 6 in Health Care Guidelines as applicable in all industries. Outside of transactional context, sharing of competitively sensitive information is high risk. Funneling the exchange through a third-party (such as a trade association) provides no free pass from antitrust risk. 48

49 Joseph G. Krauss, Partner Washington, D.C. Joe Krauss' practice is devoted entirely to the area of antitrust and economic regulation, with a particular emphasis on merger and acquisition counseling and litigation in all industries, and before federal, state, and foreign antitrust authorities. Joe has counseled clients in numerous matters relating to mergers and acquisitions, joint ventures, distribution issues, standard-setting, Sherman Act, and Hart-Scott- Rodino Act compliance. He has represented clients from a number of industries, including automotive, electric utility, manufacturing, health, natural resources, e- commerce, computer hardware and software, and telecommunications, before both the U.S. Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice in merger investigations, civil nonmerger investigations, and in compliance matters before the agencies. Joe served 11 years at the FTC. During his tenure at the commission, he served in a variety of capacities, including the Assistant Director of the Premerger Notification Office in the Bureau of Competition and Acting Assistant Director and Deputy Assistant Director of the Mergers II Division in the Bureau of Competition. His career at the commission also included serving two commissioners as an attorney advisor counseling on matters of antitrust policy and enforcement. Antitrust Counseling Civil Investigations and Litigation Joint Ventures Mergers and Acquisitions Joseph G. Krauss Partner, Washington, D.C. T joseph.krauss@hoganlovells.com Joe has also been profiled in a number of prestigious publications, including Chambers USA, which noted, "He has a cool head and a steady hand--he's solid counsel in merger matters." 49

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