The elephant in the courtroom: litigating the premerger fix in Arch Coal and beyond.

• Author: Ambrogi, Katherine A.

INTRODUCTION

In FTC v. Arch Coal, Inc., (1) Judge Bates described the proposed remedy (2) to an allegedly anticompetitive acquisition as the "elephant in the room." (3) When the Federal Trade Commission (FTC) sought in district court to enjoin Arch Coal, Inc.'s (Arch Coal) acquisition of Triton Coal Co. (Triton) in 2004, (4) Arch Coal attempted to introduce evidence of its intent to sell a coal mine to a third party to resolve FTC antitrust concerns. (5) The FTC, however, and not the courts, traditionally possessed authority for evaluating and ordering remedies in administrative trials. (6)

The U.S. District Court for the District of Columbia, which was jurisdictionally authorized to decide whether a preliminary injunction should be granted, was left with a dilemma. By denying evidence of the proposed divestiture, the court would analyze the case without hearing critical aspects of the transaction. By choosing to admit evidence of the proposed divestiture, the court would strip the FTC of powerful tools in antitrust enforcement. (7)

Prior to Arch Coal, some courts considered evidence of proposed remedies but concluded that the transactions should still be enjoined. After one such decision, an antitrust attorney observed prophetically: "[F]or years, parties have contemplated presenting the court with a different deal. There is going to be a case where the parties are going to offer a deal that the FTC rejects and a court accepts." (8) Arch Coal was such a case.

District courts must balance their duty to examine the actual transaction with preserving the authority carved out for the FTC in statutes and case law. Courts can achieve this balance by admitting evidence of a proposed fix only when parties construct FTC-enforceable divestitures, demonstrate good-faith efforts to negotiate with the FTC, and present viable, effective divestitures. This Note will discuss the Arch Coal transaction, the standards used by courts to determine whether they ought to examine proposed sales of assets, and the policy considerations for considering such evidence.

Part I will examine the FTC's review of Arch Coal's Triton acquisition, including the FTC's motion in limine to exclude evidence of the proposed Buckskin sale. Part II will discuss jurisdictional aspects of enforcement; specifically, it will explore from where the FTC derives authority to challenge mergers and how the FTC's burden under the Clayton Act differs from the burdens of the Department of Justice (DOJ) or of private plaintiffs. This Part will argue that although the legislature affords the FTC special enforcement and adjudicative measures, the practical implications of FTC suits for preliminary injunctions are often identical to the implications of other public and private suits. Part III will analyze the substantive differences involved when courts decide whether to consider evidence of a proposed fix, and it will argue that a strict standard of good faith and proven closeness to the initial transaction should be employed. Finally, Part IV will discuss policy implications for those impacted by antitrust enforcement: the general public, which benefits from an efficient economy; the FTC and the DOJ; private parties; and consumers. This Part will argue that courts should afford significant deference to the FTC's expertise within the law's confines.

1. THE INITIAL TRANSACTION AND PROPOSED BUCKSKIN MINE SALE

   1. Background

      Arch Coal announced a definitive agreement to purchase Vulcan Coal Holdings, the parent of Triton Coal, on May 29, 2003, for $364 million. (9) Six weeks later, on July 11, 2003, Arch Coal and Triton submitted pre-merger notification filings to the FTC and the DOJ, (10) pursuant to the Hart-Scott-Rodino Act. (11) The FTC requested additional information (a "second request") from the parties in August 2003. (12) In December, Arch Coal informed the FTC of its plans to sell the Buckskin mine (which Arch Coal was acquiring from Triton) to Kiewit Mining (Kiewit). (13) On January 30, 2004, Arch Coal signed an agreement with Kiewit solidifying the sale. (14) On March 30, 2004, the FTC determined that the Buckskin sale failed to resolve its antitrust concerns, and the agency filed for a preliminary injunction to enjoin the Arch-Triton merger. (15)

      The FTC's complaint alleged that the Arch-Triton deal would result in a four-to-three reduction of coal producers in Wyoming's Southern Powder River Basin (SPRB) (16) (the FTC's alleged geographic graphic market) (17) that produce "8800 BTU SPRB coal" (18) (the FTC's alleged product market). (19) The complaint asserted that the ArchTriton transaction would "eliminate the existing substantial competition" between Arch Coal and Triton and would facilitate coordinated interaction among the remaining three firms. (20) The FTC further argued that the sale of Buckskin to Kiewit would not resolve antitrust concerns. (21)

   2. FTC's Motion in Limine To Exclude Evidence of the Buckskin Sale

      On June 3, 2004, the FTC filed a motion in limine in the district court to exclude evidence of Arch Coal's proposed sale of Buckskin. (22) The FTC asserted that the Buckskin sale constituted "permanent relief"--a structural remedy that the FTC alone should construct if necessary. (23) If the district court approved Buckskin's sale, that measure could damage the market's status quo during an administrative trial. (24) Arch Coal countered that the district court must consider the Buckskin sale; to do otherwise would result in "a purely hypothetical transaction of the Commission's making--that none of the parties are proposing." (25) The court denied the motion in limine, noting that the district court, not the FTC, bears responsibility for defining the transaction. (26) The court suggested that the Buckskin sale was not merely a remedy, and that the relevant dispute was "the set of two transactions involving the acquisition of Triton by Arch and the immediate divestiture of the Buckskin mine to Kiewit." (27)

      The court's decision to include the Buckskin sale as part of the transaction seriously impaired the FTC's ability to secure a preliminary injunction. (28) The court included Kiewit as one of the five remaining competitors in the SPRB and therefore changed the analysis from a five-to-four reduction in market participants to no reduction at all. (29) The court's decision to consider Kiewit as the new owner of Buckskin also lowered the Herfindahl-Hirschman Index (HHI) value--a tool used to determine market concentration by adding together the squared market shares of the companies participating in the market. (30) The court also seemed persuaded by evidence that Kiewit intended to increase production in the newly acquired Buckskin mine by "several million tons" each year. (31) Although it is impossible to determine definitively whether the district court would have denied the injunction without considering Kiewit's participation, the Buckskin sale was a significant factor in the court's analysis and conclusion. The next Part will examine whether the district court's jurisdiction permitted it to admit evidence of the proposed sale.

2. STATUTORY AUTHORITY IN ANTITRUST ENFORCEMENT

   1. FTC Enforcement

      The FTC asserted that federal statutes and case law holdings granted the agency sole power to consider evidence of the Buckskin sale, but the Arch Coal court disagreed. (32) This conflict resulted, in part, from different standards established in the Clayton Act and in the FTC Act. In section 11 of the Clayton Act, Congress outlined specific adjudicative mechanisms for the FTC, as compared to prosecutorial or other legal mechanisms for the DOJ or private plaintiffs. (33) Statutory language vests the FTC with authority to enforce elements of both the Clayton Act and the FTC Act through administrative trials, (34) whereas the DOJ must bring claims in district court.

      Although the Clayton Act states that the FTC determines whether an antitrust violation has occurred or will occur, a district court ultimately decides whether to grant a preliminary injunction. (35) Before granting an injunction, a district court must assess whether the FTC will prevail at the administrative proceeding. The court grants a preliminary injunction if it finds the action "would be in the public interest--as determined by a weighing of the equities and a consideration of the Commission's likelihood of success on the merits." (36) District courts can only determine the public interest impact after carefully analyzing the relevant transaction.

      Section 11 of the Clayton Act grants special adjudicatory provisions for enforcement actions brought by the FTC that are not available to the DOJ or to private plaintiffs. The Clayton Act decrees that the FTC will serve a complaint on a party, hear testimony in the FTC's office, "make a report in writing," and that the accused company must "cease and desist from such violations." (37) After this proceeding, a court of appeals may "affirm, enforce, modify, or set aside" the FTC's decision. (38)

      In Arch Coal, the FTC filed a motion in limine to narrow the district court's scope of review and to preserve evidence of the remedy for its administrative trial. In most cases, the district court interacts with the FTC only to grant or deny preliminary injunctions before the FTC conducts a trial on the merits. Under section 13(b) of the FTC Act, the FTC may sue in district court to enjoin a party that "is violating, or is about to violate" an FTC-enforced law, so long as enjoining the transaction promotes the "interest of the public" while the FTC administrative trial occurs. (39)

      The FTC may still proceed with an administrative trial if the district court denies the preliminary injunction, but its task becomes much more difficult. Prior to 1973, when Congress granted to the FTC the ability to obtain preliminary injunctions, the FTC could merely issue cease-and-desist orders after antitrust violations occurred. (40) In a letter to the...