Andrea Agathoklis Murino,Wilson Sonsini Goodrich & Rosati
(Editors note: The Legal Pulse would like to (belatedly) congratulate Andrea on her promotion to partner, the announcement for which at the end of last year escaped our discovery)
As expected, on April 11, 2014, the Federal Trade Commission (“FTC”) announced the resolution of their investigation and administrative court challenge into the $1.7 billion acquisition of Saint-Gobain Containers, Inc. (“St. Gobain”) by Ardagh Group SA (“Ardagh”). In order to allow the transaction to proceed and resolve the pending administrative trial, Ardagh agreed to sell six of its nine glass container manufacturing plants in the United States to an FTC-approved buyer within six months, including all tangible and intangible assets, and customer contracts. (All pleadings and filings for all parties, including the original complaint, which argued that the acquisition would harm competition in the markets for glass containers used to package beer and spirits, are available online.)
The fact that this litigation was resolved via a divestiture of brick-and-mortar facilities in an industry like glass manufacturing is not news of note to this FTC observer. What is worthy of pause, however, is that the vote to approve this consent was not unanimous (it was 3-1) and that the efficiencies defense stands front-and-center in the dispute between the majority and minority.
For the majority, Chairwoman Ramirez and Commissioners Brill and Ohlhausen, found that the transaction as originally structured would have resulted in a violation of Section 7 of the Clayton Act. When presented with a carefully crafted remedy, these Commissioners believed that the remedy would “fully replace[ ] the competition that would have been lost in both the beer and spirits glass container markets had the merger proceeded unchallenged.” Thus, they voted to accept the settlement.
Commissioner Joshua Wright, however, disagreed and issued a pointed dissenting statement explaining that the transaction should be consummated without imposition of a remedy. Commissioner Wright explained that “there is no reason to believe the transaction violates Section 7 of the Clayton Act because any potential anticompetitive effect arising from the proposed merger is outweighed significantly by the benefits to consumers flowing from the transaction’s expected cognizable efficiencies.” In fact, Commissioner Wright’s “own analysis of the record evidence suggests expected cognizable efficiencies are up to six times greater than any likely unilateral price effects.”
This of course begs the question—how “cognizable” do these cognizable efficiencies really need to be? In assessing efficiencies at the FTC today, Commissioner Wright believes there may exist an asymmetrical burden whereby the “merging parties [must] overcome a greater burden of proof on efficiencies in practice than does the FTC to satisfy its prima facie burden of establishing anticompetitive effects[.]” His dissent explains the many ways in which merger analysis today incorporates proper tenants to answer this question as well as some areas where further study is warranted.
The majority, for their part, disagree and do not believe they have “imposed an unduly high evidentiary standard” on the parties in analyzing the efficiency claims. Nor do they agree with Commissioner Wright’s “concern that competitive effects are estimated whereas efficiencies must be ‘proven,’ potentially creating a ‘dangerous asymmetry’ from a consumer welfare perspective. Rather, in the majority’s view, “[b]oth competitive effects and efficiencies analyses involve some degree of estimation. This is a necessary consequence of the Clayton Act’s role as an incipiency statute.”
I cannot recall another recent instance where efficiencies took so central and defining a role in the FTC statements surrounding a settlement. As I reflect on this, the history of silence is stark. Yet if you asked 10 antitrust lawyers on the street if efficiencies matter in a merger review, I’m willing to bet that all 10 would respond “yes, if they are robust and cognizable” or something to that effect. So, given the prevailing view that if there are cognizable efficiencies, most anticompetitive effects in a proposed transaction can be neutralized, the dearth of dialogue from the FTC (and its sister agency, the DOJ) shows a gap in the public discourse that, this observer believes, must be filled.
Well, what’s to be done? Quite a bit! In my own mind, I would like to see the FTC and DOJ work together and retroactively study the instances where efficiencies were credited and where they were not, what factors were persuasive and what factors were not. Unlike other kinds of retrospective studies, this would not require them to seek outside information; only re-examine that which is already in their files. Once they understand the metes and bounds of this shared history, I would encourage them to issue additional efficiency-specific guidelines and anecdotes. Efficiencies are of course addressed in the 2010 Horizontal Merger Guidelines and in roughly 13 pages of the 2006 Commentary on the Horizontal Merger Guidelines. But for something that can be so decisive in a merger review, it strikes me that more, much more, is needed. Efficiency guidelines that accurately reflect the current state of play will provide private parties contemplating transactions with a firmer understanding of the kind of evidence that is persuasive and the kind of evidence that is not. This can only help everyone involved in a merger review.
Like many settlements, the specifics of the Ardagh glass settlement will fade in time. But the real legacy of this Ardagh settlement, may very well be the way in which it sparks a debate in and around the appropriate contours of the efficiencies defense.