Fixing merger litigation "fixes": reforming the litigation of proposed merger remedies under section 7 of the Clayton Act.

• Author: Horton, Thomas J.

1. INTRODUCTION

   Before the Antitrust Division or the Federal Trade Commission sues to block an allegedly anticompetitive merger, the merging parties frequently seek to negotiate a merger remedy (sometimes referred to as a "fix" or "fix-it-yourself" solution) acceptable to the government. (1) Such negotiations often are complex and intense. (2) Understandably, the buyer may not wish to divest a successful ongoing business it either has built through considerable effort or acquired at great expense. (3) On the other hand, the government legitimately may be concerned about post-merger strategic behavior by the buyer that may tend to reduce output and increase prices. (4) Although the government's concerns frequently are resolved through such negotiations, (5) the government and the merging parties occasionally reach an impasse and the government threatens to sue to block the merger. (6)

   On several notable occasions since 2000, instead of abandoning the proposed merger when the government filed suit, the merging parties have asked the courts, during the ensuing litigation, to bless their proposed merger remedies over the government s opposition. (7) With little or no rigorous analysis of the serious legal and evidentiary issues raised, (8) the district courts have been increasingly receptive to allowing defendants in Clayton Act section 7 merger cases to present evidence of proposed unilateral "fixes." (9) The fixes unilaterally proposed by defendants have run the gamut from structural remedies, (10) to the proposed licensing of new entrants, (11) to promises not to raise post-merger prices for a period of time. (12) Although the Antitrust Division and the Federal Trade Commission consistently have pursued aggressive motions in limine seeking to preclude the introduction of such evidence, (13) no district court has yet ruled in the government's favor. (14)

   This article reviews the increasing receptivity of the courts and commentators (15) to the admission and consideration of evidence of proposed unilateral fixes after an antitrust complaint has been filed, and analyzes whether there is a sound basis on jurisdictional, justiciability, evidentiary, and effectiveness grounds for crediting such evidence. (16) Section II first discusses the cases allowing merger defendants to present evidence of unilateral remedies or fixes as defenses. The author points out how the original precedents cited by the courts to justify their consideration of such evidence emanated almost entirely from a single mooted district court decision that itself cited no legal authority. The author concludes that the precedential support for such judicial review is shaky at best.

   Section III then analyzes the jurisdictional and separation of powers issues raised under Article III of the United States Constitution. In section III.A, the author balances the arguments for allowing such evidence to be considered as an appropriate" exercise of a district court's flexible equity jurisdiction in Clayton section 7 merger cases against the legislative histories of the Clayton (17) and Federal Trade Commission Acts, (18) as well as the more recent Hart-Scott-Rodino Antitrust Improvements Act of 1976. (19) The combined legislative histories and statutory language raise material questions about the jurisdictional propriety of the courts' increasing judicial interjections into essentially extra-judicial settlement negotiations between executive branch enforcement agencies and merging companies. Section III.B reviews the substantial body of earlier Supreme Court decisions presciently warning against judicial overreaching in merger cases. (20) Section III.C considers whether the receptivity of the courts to such arguments and evidence may additionally undermine the carefully-crafted separation and balance of powers in merger cases re-emphasized by Congress through the Tunney Act (and other antitrust legislation). (21)

   Section IV turns to the evidentiary issues raised when courts allow merger defendants to litigate their proposed fixes. Section IV.A considers the various cases in which merger defendants have sought to introduce post-acquisition evidence in support of their acquisitions, (22) and discusses whether such evidence, like evidence of the voluntary cessation of illegal activities by defendants in response to litigation, is inherently suspect. (23) Section IV.B then addresses whether the consideration of such evidence is consistent with Federal Rule of Evidence 408, (24) and whether allowing such evidence unnecessarily complicates and slows down Clayton Act litigation, and overrides the substantial interest in keeping merger cases as simple as possible.

   Section V reviews the additional justiciability issues raised when courts allow merging parties to "litigate the fix." The author discusses whether the courts are as well-suited as the Antitrust Division or the Federal Trade Commission to evaluate, monitor, and enforce proposed merger settlements or fixes that have not been memorialized through the formal consent decree process. Section V also addresses whether such informal "fixes" are likely to lead to post-acquisition strategic behaviors, and considers whether barring such evidence likely will lead to more and better Clayton Act settlements that will consume fewer judicial and regulatory resources.

   Based on the analyses above, the author concludes that by accepting and crediting merger defendants' unilaterally proffered "fix-it-yourself" solutions to illegal mergers, the courts are overstepping their constitutional Article III boundaries by rewriting the "case" filed by the government, and by encroaching upon the executive branch's congressionally delegated role in bringing and settling Clayton Act merger cases. The author consequently recommends in section VI a series of reforms for future Clayton Act section 7 merger cases brought by the United States or the Federal Trade Commission. First, it is recommended that merger defendants not be permitted to introduce evidence of their unilaterally proposed curative remedies in merger cases brought by the government. If Clayton section 7 defendants are allowed to offer such evidence, however, they should bear a heavy burden of proving no reasonable probability of post-acquisition anticompetitive impacts if the proposed fix is adopted. Moreover, the minimal threshold for allowing such evidence to be admitted and considered should be a full and effective divestiture of an ongoing business to a highly-qualified buyer. Furthermore, if such evidence is admitted and credited in allowing an otherwise illegal merger to go forward, no collateral estoppel or res judicata effects should bind the government in a subsequent divestiture suit if a serious threat of an anticompetitive impact arises after the proposed fix is adopted.

2. THE ORIGINS OF "LITIGATING THE FIX" IN CLAYTON SECTION 7 CASES

   While the recent rash of "litigating the fix" merger cases began in 2000 with United States v. Franklin Electric Co., (25) several cases prior to the "passage and unchallenged expansion of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ('HSR')" (26) allowed merger defendants to present evidence of proposed fixes in an effort to avoid liability. These cases, discussed below, were relied upon successfully by the defendants in Franklin Electric in arguing that

   [e]very court which has considered the issue has held that, in evaluating the "probable future" of competition in a relevant market, the court must look at the effects of the entire transaction on competition in the relevant market, not just that part of the transaction about which the government complains. (27) A close investigation of these cases, however, raises a substantial question as to their precedential value in support of permitting merger defendants to "litigate their fixes."

   1. PRE-FRANKLIN ELECTRIC CASES

      1. United States v. Atlantic Richfield Co.

         In United States v. Atlantic Richfield Co. (Atlantic Richfield I), (28) the United States sued "to enjoin the proposed merger of defendant Sinclair Oil Company (Sinclair) and defendant Atlantic Richfield Company (Atlantic) on the ground that the merger would violate Section 7 of the Clayton Act[.]" (29) The district court reviewed the potential anticompetitive effects of the proposed merger in four defined geographic markets, which included the Northeastern states, the Rocky Mountain and Central states, and the Southeastern states. Finding "that the Government ha[d] demonstrated reasonable probability of success on the issue of probability of substantial anti-competitive effects of the merger in the Southeast," (30) the district court enjoined the entire transaction even though it found no "reasonable probability of success at trial on the issue of probable anti-competitive effects" (31) in the other three relevant geographic markets. (32) Several weeks later, the companies agreed to a divestiture settlement with the United States, and the court lifted its preliminary injunction allowing the revised deal to proceed. (33)

         In assessing the potential anticompetitive effects of the merger in the Northeastern states, the court admitted evidence of defendants' unilaterally proposed "agreement for the sale by Atlantic of all of the Sinclair assets in the Northeast to B P (British Petroleum) for $300 [million] scheduled to be completed on the first day of the month following the month in which the merger takes effect." (34) The court held that the "sale of the Sinclair assets to B P would substitute a new and viable competitor for Sinclair in the Northeast." (35)

         The district court failed to cite a single case or other legal source in overruling the United States' objection to the admission and crediting of evidence concerning Atlantic's proposed sale of the Northeastern assets to B P. Instead, the court simply stated:

         The Government takes the curious position that the sale to B P should be completely...