Setting the terms of a break-up: the convergence of federal merger remedy policies.

• Author: Strock, Jessica C.

TABLE OF CONTENTS INTRODUCTION I. DIVESTITURE AS A PREFERABLE ANTITRUST REMEDY A. Background B. Allocation of Investigations Between the FTC and DOJ 1. The Hart-Scott-Rodino Antitrust Improvements Act 2. Attempted Reforms to the Clearance Process II. THE SUCCESS OF THE FTC's DIVESTITURE POLICY A. The 1999 FTC Divestiture Study B. Agency Involvement Has Led to Divestiture Success C. Past "Unsuccessful" FTC Divestitures III. CONVERGENCE OF THE FTC's AND DOJ's DIVESTITURE POLICIES A. Common Ground Between the Agencies B. Structural Differences Between the Agencies C. Areas in Which the Agencies' Policies Diverge 1. Fix-It-First Remedies 2. Up-Front Buyers 3. Crown Jewel Provisions D. Antitrust Community Concerns About the Differences Between the Agencies" Divestiture Policies IV. THE FTC's POLICY IS STRONGER AND THUS SHOULD BE ADOPTED BY THE DOJ A. Consistency Between the Agencies Is Essential B. The FTC's Policy of Active Involvement in Divestitures Lowers Risk to Consumers CONCLUSION INTRODUCTION

Since the passage of the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) in 1976, (1) firms planning mergers of a certain value are required to notify the antitrust agencies in order to make the agencies aware of combinations that may cause competitive issues. Either the Federal Trade Commission (FTC) or Department of Justice Antitrust Division (DOJ) (collectively, "the agencies") will analyze the proposed merger, and if the agency has reason to believe the merger will be anticompetitive, (2) it may consider modifications to the deal that would eliminate competitive concerns or seek an injunction to keep the parties from consummating their merger. (3) The agencies and parties typically seek to modify the deal to preserve or restore the competitive landscape that existed before the merger (4) by creating a viable competitor to replace the acquired or merged firm. (5)

If the agencies and parties agree on an acceptable modification, they may enter into a binding final judgment, or consent decree, that memorializes their agreement. (6) Courts have the power under the Tunney Act to determine whether a final judgment that the DOJ proposes is "in the public interest." (7) Because courts do not have the power to conduct their own analyses beyond whether a proposed divestiture will be in the public interest, it is the realm of the antitrust agencies to build divestiture packages that will not only be in the public interest, but that will also adequately remedy competitive problems caused by a merger. (8) When the FTC and DOJ allow a merger to go through with a divestiture, they aim to use the divestiture to recreate the pre-merger competitive landscape. (9) In creating a divestiture package, the policy of both agencies has been to find an acceptable buyer who is financially viable and can use the divested assets to replace the amount of competition lost in the merger. (10) However, "It]he view persists that the two antitrust agencies approach the issue of merger remedies differently." (11)

Although the agencies tend to downplay the differences in their policies and preferences regarding the level of agency involvement in building a divestiture package, they behave differently in several notable respects. The agencies have different policies on: implementing "fix-it-first" remedies, which allow the parties to restructure their deal before consummating the merger without entering into a consent order; (12) requiring the divesting party to find an "upfront" buyer before agreeing to a consent order; (13) and using "crown jewel provisions," by which the agency requires the merging firms to agree to divest a particular high value asset that in and of itself may not be necessary to restore competition but is more likely to attract desirable buyers. (14) The DOJ's recently published 2011 Policy Guide to Merger Remedies seems to have closed some of the gaps between the agencies' policies, indicating convergence of FTC and DOJ practices, but differences remain. (15)

This Note argues that the agencies should adopt the same approach to divestitures. Consistency between the agencies would allow merging firms more certainty during a process that can be risky and expensive. Federal antitrust enforcement has a major impact on the economy because businesses have a significant financial stake in how their mergers are analyzed. Given the amount of time the agencies spend immersed in a particular product market learning about the adequacy of different firms as competitive forces, the FTC's hands-on approach to divestiture remedies (16) is more effective than that of the DOJ. (17) The agencies should be active and involved when creating a divestiture package that will adequately replace lost competition to ensure that any proposed remedy will be effective. To this end, the agencies should focus their divestiture policies on reducing the risk that a divestiture will be unsuccessful and on trying to eliminate the possibility that consumers will suffer higher prices or lower quality products as a result.

Part I discusses why the agencies view divestitures as the optimal remedy to a potentially anticompetitive merger and examines the background of divestiture remedies. Part II addresses the FTC's success in pursuing a more involved divestiture policy. Part III analyzes the basic similarities and differences between the antitrust policies of the FTC and the DOJ and discusses concerns the antitrust community has raised regarding those differences. Finally, this Note concludes that consistency between the agencies is essential and argues that because the FTC's policy is the stronger of the two, the DOJ should espouse the FTC's more aggressive policy.

1. DIVESTITURE AS A PREFERABLE ANTITRUST REMEDY

   1. Background

      When competing firms plan to merge, an antitrust investigation may reveal competitive concerns. When an antitrust agency expresses such concerns about a proposed merger, the agency and merging firms typically engage in negotiations in an attempt to modify the deal to reduce the risk that the merger will harm competition. (18) The typical modification to a potentially anticompetitive merger is the divestiture, or sale, of overlapping products or assets. (19) Structural remedies, especially divestitures, are usually favored over conduct-based remedies, (20) especially with mergers and acquisitions between large companies, because the competitively overlapping products often represent only a small part of the overall deal. (21) Conduct-based remedies, by contrast, are generally disfavored because they are more regulatory in nature, requiring greater scrutiny and monitoring. (22) In looking for a buyer for the assets to be divested, the agencies do not necessarily favor a certain type of buyer but simply accept a buyer who is ready, willing, and able to compete in the relevant market. (23) A "successful" divestiture may be defined as one that modifies the transaction to maintain the pre-merger level of competition. (24)

      Certain factors, like expediency, may sometimes outweigh the agencies' wish to create a divestiture package and find a buyer that will leave the competitive landscape exactly the same as it was before a proposed merger. For example, in the recent acquisition of the bankrupt Penn Traffic company by Tops Markets LLC, inflexibility by the FTC could have led to liquidation of Penn Traffic's assets by a bankruptcy court. (25) In this case, the FTC agreed to allow the deal to close on time, and Tops Markets agreed to keep open all Penn Traffic locations until the FTC completed a full investigation and at that point sell off any stores the FTC found necessary to solve competitive issues. (26)

      The agencies craft appropriate remedies on a case-by-case basis. In some markets, especially in declining markets, a buyer that can adequately compete in the post-merger market either does not exist or does not step up. (27) The FTC generally disfavors advance settlement agreements because of the amount of uncertainty and inflexibility that remains once the deal has gone through. However, there are situations in which a full investigation that might find a more appropriate remedy may be more cumbersome than helpful.

      An analysis of divestiture policy is important because the agencies favor divestitures over other types of merger remedies. (28) Without the divestiture option, the decision to approve a merger would essentially be binary--either permit the merger or block it. (29) Putting together an acceptable divestiture package is far easier, more certain, and less costly for merging firms than fighting the antitrust agencies in court; often the problematic asset is only a small part of the overall deal. (30)

      As shown by statistics assembled annually for Congress by the FTC and DOJ pursuant to the HSR Act, the majority of filed mergers with which the agencies take issue are resolved with some type of divestiture, whether by consent order or by the parties restructuring their deal to alleviate the agency's antitrust concerns. (31) Over the period of 2003-2007, of 144 reported mergers, 51 percent were settled with consent orders, with an additional 13 percent restructured after the DOJ informed the parties of its concerns. (32) Only 9 percent of challenged mergers were litigated, with the remaining 28 percent abandoned by the parties. (33) The agencies also take into consideration the litigation risks that deeming a proposed buyer unacceptable would create; as noted in the FTC's Divestiture Study, (34) sometimes the risks of litigation are high enough that the Agency may accept a proposal that is viable but not optimal. (35) Because divestitures are the most common remedy and because it is often unclear which agency will investigate a particular proposed merger, it is important to look at the notable differences in the agencies' divestiture policies.

   2. Allocation of Investigations Between the FTC and DOJ

      1. The Hart-Scott-Rodino...