What Past Agency Actions Say About Complexity in Merger Remedies, With an Application to Generic Drug Divestitures

• Publication year: 2018
• Author: By Eric Emch, Thomas D. Jeitschko, and Arthur Zhou

WHAT PAST AGENCY ACTIONS SAY ABOUT COMPLEXITY IN MERGER REMEDIES, WITH AN APPLICATION TO GENERIC DRUG DIVESTITURES

By Eric Emch, Thomas D. Jeitschko, and Arthur Zhou¹

I. INTRODUCTION

Traditionally, antitrust agencies have drawn a hard line between "structural remedies" for merger harm, which are favored when available, and "behavioral remedies," which generally are not. A recent speech from the Assistant Attorney General Makan Delrahim echoed this longtime stance, and arguably drew an even harder line between the two approaches

. . . at times antitrust enforcers have experimented with allowing illegal mergers to proceed subject to certain behavioral commitments. That approach is fundamentally regulatory, imposing ongoing government oversight on what should preferably be a free market. And, as 11 Senators wrote to the Attorney General earlier this year, the "lack of enforceability and reliability of such conditions [can] render them insufficient" to protect consumers. As we reduce regulation across the government, I expect to cut back on the number of long-term consent decrees we have in place and to return to the preferred focus on structural relief to remedy mergers that violate the law and harm the American consumer.²

In the antitrust context, "structural remedies" refers to remedies involving the sale of key assets³ by the merging firms to a third firm in order to create a new competitor to replace the competition lost by the merger.⁴ "Behavioral remedies," also known as "conduct remedies," refers to restrictions on the post-merger conduct of the merged firm designed to prevent the exercise of market power.⁵ Behavioral remedies have historically been seen as more difficult to design, implement and monitor, and ultimately as less likely to be effective, than structural remedies.⁶ Structural remedies, in contrast, have been seen as requiring only a targeted intervention to create a market structure that prevents the exercise of post-merger market power. Structural remedies are seen as having the virtue of not legislating a firm to act against its interests, and not requiring substantial ongoing monitoring by the agencies.⁷

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The thesis of this article is that this distinction is not as clear as it has been made out to be. A look back at past settlements by the agencies shows that though it is helpful as a general guide, the simple dichotomy of structural versus behavioral does not illuminate the greyer area into which most remedies, containing both structural and behavioral elements, fall (for case examples, see section II). A better categorization of the workability of remedies may be their overall complexity, rather than whether they are nominally "structural" or "behavioral." Structural remedies usually require some behavioral components to operate effectively and be deemed acceptable by the agencies. These may include, for instance, supply agreements in which the merging parties provide key inputs to the purchaser of divested assets until the purchaser can line up suppliers on its own, contract manufacturing agreements in which the merging party manufactures the divested product for the purchaser until manufacturing processes can be transferred and proper approvals obtained, restrictions on interfering with movement of personnel to the purchaser, or agreements to transfer know-how and help defend against future intellectual property (IP) infringement-related suits based on that know-how, among other provisions. Each of these components of a nominally "structural" remedy involves some of the same definitional and monitoring issues as a purely behavioral remedy. If anything, these behavioral elements of structural remedies have become more common over time.

As a guide to what remedies are most effective, it may be better to think less in terms of structural versus behavioral and more in terms of greater or lesser "complexity." Complexity might be increased by the sheer number of harms to be remedied. For instance, in 2016, former Assistant Attorney General Bill Baer declared in response to divestiture proposals put forward by the parties in the proposed Halliburton-Baker Hughes merger that the merger was "unfixable."⁸ This was likely due at least in part to the inherent complexity of any proposal designed to remedy harms in the 23 distinct yet linked markets of harm that the complaint alleged.⁹

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Alternatively, complexity might be increased by the extent and nature of behavioral components required to make a structural remedy work. For instance, the recent FTC evaluation of the success of past remedies found that generic drug divestitures, though largely successful, were much less successful when the divestiture involved a transfer of manufacturing to the buyer, with accompanying behavioral elements to ensure a smooth transition, rather than just re-contracting with an existing third-party supplier that could begin producing immediately for the buyer.¹⁰ More generally, that study found that divestiture of an "ongoing business," which is inherently less complex than divesting particular sets of assets that do not necessarily constitute a standalone business by themselves, "are most likely to maintain or restore competition."¹¹ Conversely, a proposed divestiture of piecemeal assets tends to be discouraged given that it can require the agencies, as noted in the proposed Halliburton-Baker Hughes merger, "to devote substantial resources over many years to supervise the remedy in an attempt to see that it works."¹²

In this paper, we discuss the components of remedy complexity, and how they have differed over time and across agencies. We examine in detail some of the behavioral elements more and less commonly used in structural remedies, and discuss some purely behavioral remedies that likely lie at the outer reaches of the level of complexity that might be acceptable to the agencies. In the final section, we focus on differences in generic drug divestitures as an illustration of the notion that simpler, less complex remedies are more likely to be both workable and acceptable to the antitrust agencies, and that even remedies that seem simple and "structural" on their surface can lead to unanticipated difficulties.

II. THE COMPONENTS OF REMEDY COMPLEXITY

The purpose of a merger remedy is to preserve the efficiencies of a merger while removing the sources of anticompetitive harm. The set of remedies that may be implemented are ones that are both acceptable to the merging parties as not too damaging to the underlying rationale of the merger and acceptable to the agencies as limiting the potential for anticompetitive harm.

As a basic matter, the more complex the remedy, and the more substantial it is relative to the size of the overall merger, the less likely it is to be acceptable to both the agencies and the parties. The agencies may worry about the administrability of a complex remedy, while parties may balk at a remedy that involves substantial portions of the assets involved in the merger. The most acceptable remedies to both sides are thus structural remedies of existing lines of businesses that are small relative to the size of the overall merger and that require few behavioral components to be effective In Regal Cinema's 2009 acquisition of Consolidated Theaters, for example, the DOJ required divestiture of four movie theaters in North Carolina with minimal behavioral components.¹³ Similarly, in the recent Emerson acquisition of switchbox manufacturer Pentair, the FTC required the divestiture of a standalone Pentair switchbox business unit to the already-identified buyer Crane Co. with minimal behavioral components.¹⁴ When these types of remedies are available, they can provide a relatively easy fix that is acceptable to both the parties and the agencies.

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On the other end of the spectrum are intricate behavioral remedies that potentially cover a wide range of disparate assets. When a purely behavioral remedy is the only option, either agency may question whether a remedy is viable at all, and may see blocking the merger as the only way to prevent anticompetitive harm.¹⁵ This presents a particular problem in vertical mergers, where there may be no real structural remedy available, and yet inherent efficiencies in combining complementary goods may mean that there is a good argument for trying to remedy the merger rather than blocking it entirely. For this reason, the agencies historically have tended to be most willing to accept purely behavioral remedies in vertical mergers, though the DOJ seems to have explicitly rejected this option in its recent consideration of the AT&T/Time Warner vertical merger.¹⁶

Below we discuss the components of remedies in increasing order of complexity: from the "standard" components of most structural remedies—which include some behavioral provisions—to non-standard structural remedies that sometimes add significant behavioral components, to intricate, purely behavioral remedies that form the outer reaches of what may be acceptable to the agencies.

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A. Standard Components of Structural Remedies

We reviewed all merger remedies imposed by both agencies in 2008—2009—the end of the Bush administration and the beginning of the Obama administration—and 2016—2017—the end of the Obama administration and the beginning of the Trump administration.¹⁷ Though there are some changes across the two time periods, there is a high degree of consistency both across agencies and over time in remedy design.

With few exceptions, consent decrees expire after 10 years.¹⁸ During that period, the agencies typically require some type of compliance reporting, though the DOJ and FTC differ in both the frequency and method in which this is required. The DOJ usually requires defendants to submit reports or respond to written interrogatories "upon request," or triggered by specific market events. The FTC, in contrast, often mandates that the defendants submit compliance reports after 30...