Tronox/Cristal Merger Fight Highlights the FTC/DOJ Divide in U.S. Merger Control Proceedings

06633 - Royall, M. Sean ( Dallas )Featured Expert Column: Antitrust & Competition Policy — Federal Trade Commission

By M. Sean Royall and Richard H. Cunningham, Partners with Gibson, Dunn & Crutcher LLP, and Justin Epner, an Associate in the firm’s Washington, DC office.  The authors would like to thank Jasper Hicks, who is an Associate in Gibson Dunn’s Denver, CO office, for his substantial contributions to this post.

In early 2017, Mississippi-based titanium dioxide (TiO2) pigment producer Tronox Limited (“Tronox”) agreed to purchase the TiO2 business of one of its rivals, Saudi Arabian producer Cristal (“Cristal”).  Alleging a horizontal competitive effects theory, the Federal Trade Commission (FTC) voted in December 2017 to challenge the deal in its internal administrative court.  Roughly two months after the FTC initiated the administrative challenge, however, the litigation took an interesting and unusual turn—Tronox filed a federal lawsuit of its own against the Commission in the Northern District of Mississippi. 

The suit alleged that the FTC was engaging in delay tactics by not filing a parallel suit in federal district court to preliminarily enjoin the transaction.  Tronox sought a declaratory judgment that the FTC had violated the Administrative Procedures Act, that it must sue Tronox in federal court, and that the Commission could not prevail on the substantive antitrust arguments against the deal.  The court declined Tronox’s request to expedite the proceedings and Tronox voluntarily dismissed its lawsuit on March 7, before the FTC was obligated to reply, abandoning the effort to force the FTC to litigate in federal court.

The proceedings in this matter underscore a key difference between the legal procedures used by the FTC and the Department of Justice (DOJ) when challenging a proposed merger or acquisition.  Had the DOJ reviewed the Tronox-Cristal transaction, the litigation would have necessarily proceeded in federal court because the DOJ, unlike the FTC, does not possess an administrative adjudicative capability.  As Tronox’s decision to seek a declaratory judgment reflects, the parties to a transaction often perceive the differences between federal court and the FTC’s administrative litigation process to be significant.

The FTC’s Administrative Challenge

The FTC formally filed an administrative complaint against Tronox and Cristal on December 5, 2017.  The FTC’s complaint alleges that Tronox’s proposed acquisition of Cristal’s TiO2 business stands to increase the likelihood of anticompetitive coordination in the TiO2 industry, as well as incentivize Tronox to curtail TiO2 output, thereby leading to increased prices.  TiO2 is an inorganic pigment commonly used in plastics and other industrial products to increase whiteness, brightness, and opacity.  According to the FTC’s complaint, a handful of firms worldwide, including Tronox and Cristal, account for the majority of production of TiO2.

The FTC did not file a parallel federal lawsuit to seek a preliminary injunction.  FTC attorneys explained this decision in the administrative proceeding by stating that the European Commission has not approved the deal, creating a situation in which a preliminary injunction is unnecessary because Tronox and Cristal could not yet consummate the deal even absent a preliminary injunction.

In response, Tronox asserted in its administrative answer that the government’s decision to litigate in its “home court,” as opposed to in federal court, is merely a tactic to harness “time-consuming” administrative proceedings to “run out the clock” on the deal.  Under the purchase agreement in effect at that time, the Tronox-Cristal deal was set to expire on May 21, 2018.  The administrative litigation’s amended scheduling order provides that trial will begin on May 18, and a ruling from the FTC’s administrative law judge might not occur for another 70 days after completion of the trial.  As such, if it were the case that the acquisition agreement’s expiration could not be extended, the timeline of the administrative litigation would have permitted the FTC to block the deal without securing a ruling from either a federal court or its administrative law judge.

Tronox Sues the FTC

On January 23, 2018, about seven weeks after the FTC filed its administrative complaint, Tronox filed a lawsuit of its own against the FTC in the Northern District of Mississippi.  Tronox’s lawsuit sought a judicial declaration that the FTC, by deciding to challenge the Tronox-Cristal deal exclusively in an administrative proceeding, violated provisions of the Administrative Procedures Act requiring government agencies to act “within a reasonable [period of] time … to conclude a matter presented to it” and to refrain from unlawfully withholding or delaying actions.  Tronox also sought an order compelling the FTC to bring a request for injunctive relief under Section 13(b) of the FTC Act by February 15, 2018.  Finally, Tronox sought an order that the FTC could not prevail on the merits in Section 13(b) proceedings, and that no legal impediment therefore exists preventing the Tronox and Cristal deal from closing.

Tronox’s arguments in support of its request that the court force the FTC to sue in federal court were twofold.  First, as mentioned above, Tronox argued that the FTC is engaging in tactical litigation to “run out the clock” on the Tronox-Cristal purchase agreement and, by so doing, threatens to deny Tronox its “day in court.”  Second, Tronox contended that the FTC’s exclusive reliance on administrative proceedings (without a parallel preliminary injunction action in federal court) is unfair because the DOJ, which cannot utilize administrative proceedings to block deals, could not have proceeded in the same manner.

The same day it filed suit, Tronox moved to expedite the litigation to make it more likely that the case would wrap up by the transacting parties’ May 21, 2018 deadline.  The court, however, denied Tronox’s motion to expedite.  Tronox soon filed a renewed motion to expedite, which the court also denied.

Thirty-three days after receiving the court’s ruling denying its renewed motion to expedite the proceedings, Tronox voluntarily dismissed the case.  Shortly before doing so, Tronox announced an extension of its merger agreement with Cristal, pushing the drop-dead date from May 21 to June 30.  The new agreement further allows for automatic extensions of the deadline through March 31, 2019, by which time the administrative litigation will almost certainly be complete.

The FTC never filed a response to Tronox’s complaint or even appeared in the federal case. 

Not Quite the First of Its Kind

Tronox’s lawsuit garnered attention for being out of the ordinary, but it was not completely without precedent.  Whole Foods Market similarly attempted in late 2008 to force the FTC to litigate exclusively in federal court to block the company’s acquisition of Wild Oats Market.  Whole Foods filed a declaratory judgment action in federal district court seeking an injunction forbidding administrative litigation and mandating federal court litigation.  The FTC responded to the complaint by arguing for dismissal of the case or, in the alternative, a transfer of it to a federal circuit court of appeals.  The FTC pointed out that the relevant statute (the FTC Act) grants federal circuit courts with exclusive appellate review of final FTC actions, meaning that a federal district court could not lawfully terminate an ongoing FTC administrative action.

Before the court ruled on the FTC’s motion to dismiss, Whole Foods chose to voluntarily dismiss its lawsuit in early 2009.  Whole Foods and the FTC settled the antitrust litigation shortly thereafter.  Thus, as occurred in Tronox, the merging parties’ effort to force the FTC into an Article III court did not gain traction, but was abandoned at an early stage.

Policy Questions Raised by the FTC’s Tactics

The Tronox matter raises an important policy question about the FTC’s review of proposed transactions—is it appropriate for the FTC to leverage factors exogenous to its review (such as a delay in clearance in another jurisdiction) to avoid litigating in federal court—a forum that some antitrust practitioners view as more favorable for the merging parties?

Proponents of the FTC’s strategy to litigate only in its administrative court whenever possible likely would argue that Congress established administrative adjudications for the specific purpose of allowing administrative review by an agency specialized in antitrust law, and that administrative review of mergers by the FTC is an important and fundamental function that the agency should pursue whenever it is offered the opportunity to do so.  FTC proponents might further argue that, given the FTC’s specialization and its much lighter docket (relative to federal courts’ dockets), an administrative action is arguably the preferable venue for resolving these contested deals from a policy perspective.

Critics of the FTC’s Tronox strategy, in contrast, might point out that allowing the FTC to litigate HSR-reportable (and other non-consummated) deals through administrative proceedings arbitrarily leads to differential treatment of deals depending on whether they are reviewed by the FTC or DOJ and whether the cross-border nature of the deal (or some other factor) creates a barrier to consummation unrelated to the HSR process.  As Tronox illustrates, FTC administrative litigation can proceed much more slowly than is common in merger litigation in federal court.  This difference in timing arguably exacerbates other differences between administrative and judicial merger review, including a perceived greater level of objectivity in federal court relative to the FTC’s administrative process.

A bill currently pending before Congress is intended to address these differences.  The Standard Merger and Acquisition Reviews Through Equal Rules, or “SMARTER” Act as it is also known, would close these real or perceived gaps by harmonizing how the FTC and DOJ challenge proposed deals.  As Acting FTC Chairman Maureen K. Ohlhausen wrote in 2015, the SMARTER Act “generally would implement two reforms”: “First, [it] would harmonize the preliminary injunction (PI) standards that the FTC and DOJ must meet in federal court when challenging proposed mergers or acquisitions.  Second, [it] would remove the FTC’s ability to pursue so-called Part III administrative litigation with respect to such proposed transactions.”  Whether the SMARTER Act will become law remains to be seen. 

Conclusion

Observers may note that Tronox’s “run out the clock” argument was premised on a deal timeline that Tronox and Cristal could (and did) control.  However, it may not always be the case in future matters that the parties can extend the drop-dead date specified by the merger agreement.  Changes in the marketplace that affect the parties’ perception of the deal’s value, shareholder demands, or other factors may prevent the extension of a pending proposed transaction.  And, even if most merging parties can alter their agreement to permit time for an extended FTC administrative litigation, that does not address the fundamental policy question regarding whether there should be materially different merger control proceedings at FTC and DOJ, particularly in light of the fact that deals are allocated between the agencies in a somewhat haphazard and non-transparent “clearance” process.

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