Briefing
What the Federal Trade Commission’s defeat in FTC v. RAG-Stiftung means for companies, in-house lawyers, and dealmakers
Summary
- On January 24, 2020, a federal district court rejected the Federal Trade Commission’s (FTC) preliminary injunction motion seeking to block a merger between chemicals companies Evonik and PeroxyChem.
- Before this decision, the FTC had won the last seven merger cases it had litigated – a string of victories that stretched back to 2015.
- The Evonik/PeroxyChem case offers several key takeaways:
- it shows that it is possible for merging parties to defend their transactions against the U.S. government in court and win;
- it shows the value of careful deal planning and coordination with counsel to avoid imprecise document drafting that could threaten a deal;
- it shows the importance of cross-border coordination to leverage merger approvals in one jurisdiction to contest allegations in another; and
- it shows how courts will evaluate supply-side substitution considerations when analyzing the appropriate relevant product market
Background to the case
In November 2018, Evonik and PeroxyChem announced a $625 million merger. The companies are two of five hydrogen peroxide suppliers in North America. On August 2, 2019, the FTC filed a lawsuit in its administrative court alleging the merger would substantially lessen competition in two geographic markets: the Pacific Northwest and the South and Central United States. The FTC also sought a motion to preliminary enjoin the merger in federal district court pending the administrative hearing. The district court held a two-week trial in November 2019. On January 24, 2020, Judge Timothy J. Kelly issued a decision denying the FTC’s preliminary injunction motion.[1]
Why the FTC lost
Judge Kelly’s decision identified several reasons why the FTC lost.
- The FTC failed to prove its relevant product market. The court held that the FTC oversimplified its description of the hydrogen peroxide industry. Hydrogen peroxide products have a variety of end uses, ranging from pulp and paper bleaching to cleaning microchips. The FTC argued that almost all hydrogen peroxide products should be included in a single product market despite evidence that customers would not substitute between those products. Without evidence of product substitution, the FTC turned to a supply-side theory that, although discussed in the FTC/DOJ’s merger guidelines, had never been tested in court. Under this supply-side approach, to group products together in one product market, nearly all suppliers need to be able to easily and profitably manufacturer those products. After reviewing the evidence, the court found that the FTC failed to show such substitution occurs across different hydrogen peroxide products.
- The FTC failed to prove its relevant geographic market. The court found that the FTC failed to meet its burden in establishing one of its relevant geographic markets. The FTC’s “Southern and Central United States” market included a group of 35 states from California to Delaware and Florida to Wisconsin. The court held that the FTC had not shown that this geographic market was appropriate for a narrower product market based on hydrogen peroxide products for specific end-uses. Instead, the evidence indicated the Southern and Central United States would not be the appropriate area in which to assess competition.
- The FTC failed to show coordinated or unilateral effects are likely. Despite the FTC’s failure to prove its alleged relevant markets, the court considered evidence of the merger’s potential effect on competition. The court first found the merger was unlikely to increase the risk of coordination among hydrogen peroxide suppliers because key industry features impede such coordination. In particular, the court pointed to the blind bidding nature of competition; that hydrogen peroxide is sold through large and long-term contracts; that hydrogen peroxide buyers are sophisticated and powerful; that prices are mostly opaque; and that there is a hydrogen peroxide supplier well-positioned to disrupt any potential coordination. In addition, the court held that the FTC failed to provide sufficient evidence to demonstrate the merger likely would result in harm to consumers as a result of lost head-to-head competition between Evonik and PeroxyChem,
- Absence of deal documents showing intent to raise prices post-merger. The court relied on qualitative evidence showing that unilateral effects were unlikely because Evonik and PeroxyChem were not close competitors and other suppliers would continue to constrain Evonik’s post-merger pricing. In fact, the court found that Evonik and PeroxyChem had complementary businesses. The court also found that there were no contemporaneous deal documents suggesting Evonik planned to raise prices after the merger, unlike in other recent merger challenges where internal documents played a central and damaging role at trial.
- Canadian divestiture resolved one FTC allegation entirely. In the FTC’s proposed Pacific Northwest geographic market, which encompassed five U.S. states and four Canadian provinces, the court concluded that Evonik had resolved any potential anticompetitive issues by agreeing with the Canadian Competition Bureau (CCB) to divest a small plant in western Canada. Importantly, the court was persuaded, in part, that the divestiture was likely to occur because Evonik showed that the CCB had approved the divestiture assets and the divesture buyer.
Why is the Evonik/PeroxyChem decision important to U.S. antitrust law?
1. Because it shows that companies can successfully defend horizontal mergers in litigation against the U.S. government.In the United States, the antitrust agencies cannot block a proposed merger without first persuading a federal judge that the deal likely would cause substantial harm to competition. Before the court’s decision in the Evonik/PeroxyChem merger, the FTC had won the last seven merger cases it had litigated. This case demonstrates that companies can achieve favorable results when defending their transactions in court.
2. Because it confirms the importance of coordination across the transactional process to ensure that imprecise drafting cannot be used against the deal
When analyzing the merger’s likely effects, the court emphasized that there were no internal documents suggesting that the parties intended to raise prices after the deal was complete. This contrasts with other recent cases where the presence of imprecise drafting or even colorful language was used by the government as incriminating evidence that threatened the deal. The Evonik/PeroxyChem merger illustrates the importance of getting the antitrust team involved early in deal planning, and the benefits of training employees to use precise language in all written communications.
3. Because it demonstrates the importance of cross-border collaboration
In cases involving multi-jurisdictional reviews, seamless cross-border collaboration is vital to securing a successful outcome. The benefits of that type of coordination are apparent in this decision, where the U.S. court relied in part on the divestiture remedy negotiated and approved by the Canadian Competition Bureau in order to reject one of the FTC’s allegations for why the merger would substantially lessen competition.
4. Because it clarifies the standards for market definition analysis
Market definition almost always turns on demand-side analysis (i.e., substitution between products from a customer perspective). The court’s decision in the Evonik/PeroxyChem merger is the first case to apply the framework for supply-side substitution described in the FTC and DOJ’s merger guidelines. The court’s thorough review of the evidence will inform future efforts to define markets using a supply-side substitution analysis.
If you are interested in discussing the implications of the case – or any other M&A or regulatory matter – please speak to any of the contacts listed below.
Justin Stewart-Teitelbaum, Counsel
Laura Collins, Senior Associate
[1] Freshfields advised Evonik on all antitrust aspects of the merger. Partner Eric Mahr, a former Director of Litigation at the U.S. Department of Justice, led the Freshfields team that challenged the FTC’s attempt to block the transaction. Eric has now won merger trials both as a prosecutor litigating to block deals on behalf of the DOJ, and as a private practitioner defending a transaction against the government. The DOJ’s last three merger litigation successes came during Eric’s tenure.
