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For the past quarter-century, since passage of the merger reporting laws, federal antitrust agencies have focused their efforts almost entirely on enjoining proposed, rather than consummated, mergers. This makes sense: It’s a daunting task to unravel a merger once “the eggs have been scrambled.” Yet in the past three years the Federal Trade Commission has reversed course and challenged many completed mergers. Almost all the case law for consummated mergers comes from the 1960s and 1970s. Like one’s LP collection, these cases offer nostalgic reminders of a simpler era, but often bear little relevance to the critical issues of today. To quote an old Janis Joplin tune, the FTC enforcers might be singing, “I’d trade all my tomorrows for one single yesterday.” The most difficult issue, practically, legally, and economically, in dealing with consummated mergers is that of appropriate remedies. If the remedy is too harsh, will valuable assets be destroyed? If the remedy is too cautious, will it have any curative effect at all? One reason that Congress enacted the Hart-Scott-Rodino Act in 1976 to require pre-merger reporting was that successful post-consummation challenges often produced pyrrhic victories. The case law on consummated-merger remedies offers at best general principles: Divestiture is preferred, but relief cannot be punitive. In the halcyon era of merger enforcement in the ’60s and ’70s, when the government seemingly always prevailed, courts were very deferential to the government’s remedy requests. They typically required divestiture of the acquired property. In some cases, such as Reynolds Metal Co. v. FTC, 309 F.2d 223 (D.C. Cir. 1962), courts required divestiture of after-acquired property as well. In others, the FTC demanded divestiture of additional facilities outside the relevant market where those facilities were necessary to create an adequate package of assets. In one case, Diamond Alkali Co., 72 FTC 700 (1967), the FTC actually forced the merged firm to withdraw from the market. The firm had dismantled one set of facilities prior to the FTC’s challenge, leaving no way to restore the status quo. Because the agency still required a divestiture, the firm had to leave the market. And then Hart-Scott-Rodino was enacted. FTC challenges to consummated mergers became very rare. The reluctance to challenge was exacerbated by the glacial pace of FTC administrative litigation. Merger challenges would typically take around three years to move their way through administrative litigation. During the Clinton administration, the agency challenged less than a handful of consummated mergers — and none went to trial. REWRITING HISTORY Now the FTC has “rediscovered” the consummated merger. There are several reasons for this. First, the merger wave of the 1990s and the resultant strain on agency resources are over. Quite simply, the FTC has the resources for the first time in more than a decade to examine transactions that have closed. Upon their arrival, enforcement officials in the current Bush administration warned that the FTC intended once again to challenge consummated mergers and acquisitions that raised “substantial competitive issues” and that merged companies would bear “the risk of unscrambling the eggs, if necessary.” These cautions have been backed up with a willingness to litigate and seek substantial remedies. Second, the increase in the Hart-Scott-Rodino “size of transaction” test — it was raised in 2001 from a minimum of $15 million to a minimum of $50 million — means that more economically significant mergers are not being reported before the fact. On April 5, 2001, the FTC challenged the Hearst Corp.’s acquisition of Medi-Span. United States v. The Hearst Trust and the Hearst Corp., Civ. No. 01-2119 (D.D.C. Oct. 10, 2001). According to the complaint, First Data Bank, a wholly owned Hearst subsidiary, competed with Medi-Span in the sale of software and data detailing drug prices, descriptions, interactions, and dosages. The case was settled with a substantial divestiture and disgorgement of the company’s allegedly unlawful profits. On Oct. 10, 2001, the FTC challenged the MSC.Software Corp.’s acquisitions of Universal Analytics Inc. and the Computerized Structural Analysis & Research Corp., both of which fell below the Hart-Scott-Rodino reporting limit. In re MSC.Software Corp., Docket No. 9299. MSC was the dominant supplier of specialized engineering simulation software known as Nastran, and the purchased companies were the only others supplying advanced versions of Nastran. After a year of aggressive pretrial sparring, the case settled. MSC was required to divest the licenses for all software products from the two acquisitions and at least one clone copy of its own Nastran software (including the source code) by making available perpetual, worldwide, royalty-free, nonexclusive licenses. A BRIDGE TOO FAR But the most important recent consummated-merger case is the FTC’s challenge of the acquisition of the Water and Engineered Construction Divisions of Pitt-Des Moines Inc. (PDM) by the Chicago Bridge & Iron Co. (CB&I). That acquisition allegedly gave the combined firm a monopoly or near-monopoly in the market for thermal vacuum chambers and liquefied natural gas tanks and a dominant market position in the market for two other types of liquid gas storage tanks. In re Chicago Bridge & Iron Co. N.V., Chicago Bridge & Iron Co., and Pitt-Des Moines Inc., Docket No. 9300. After a lengthy trial, the administrative law judge found a violation, but fashioned a remedy that both the FTC staff and the respondents disliked. The judge mandated a particularly broad divestiture, ordering the relinquishment of all assets acquired from PDM, along with assets that had since been purchased in order to replace or maintain the assets acquired from PDM. These included the PDM Water Division, even though the Water Division did not make products within the affected lines of commerce. The divestiture included intellectual property rights as well. To free up important human capital, CB&I was prohibited from granting incentives to its employees and enforcing noncompete clauses in its employees’ contracts so as to stop them from being hired by a new acquirer of the PDM-related assets. However, the judge rejected the FTC’s request to order divestiture of those CB&I customer contracts entered into post-acquisition or a portion of CB&I’s backlog of work, and refused to order the transfer of a number of CB&I’s employees, stating that employees are not assets that may be divested. The judge also refused to appoint a monitor trustee, as the FTC requested, and did not agree to mandate that CB&I provide technical assistance to the future acquirer, stating that the FTC had not shown that technical assistance could not be obtained from other sources. Both the FTC and CB&I have appealed the decision. There was very little testimony on the subject of relief, a fact highlighted by CB&I in its appeal. The judge was generally unsympathetic to that argument, relying on the old case law that divestiture is the “usual and proper remedy,” and requiring no evidence that divestiture would be an effective remedy. In fact, the judge held that the presumption is in favor of divestiture, and that the parties have the burden of demonstrating that any other remedy would adequately redress the violation and restore competition to its pre-acquisition state. BRAVE NEW WORLD As noted, the general principles setting forth the remedy for consummated mergers are relatively straightforward. These principles, however, are based on cases brought before the enactment of Hart-Scott-Rodino. In those cases, the courts typically were dealing with mergers that had been consummated several years earlier, often in situations where the parties had deliberately tried to avoid government review. Moreover, antitrust law generally was very different than it is today. For example, there were strong presumptions in the case law that even minor increases in concentration created a presumption of anti-competitive effects. More importantly, the FTC either largely ignored the role of efficiencies in merger analysis or used potential efficiencies as a reason to challenge a merger. The case law also dealt primarily with smokestack industries; the high-tech markets that are central to today’s economy present different problems. In addition, the issue of consummated mergers is more complex today because of the lack of agency experience. Since the enactment of Hart-Scott-Rodino, the agencies have challenged at most one or two consummated mergers a year. Thus, the current staff has relatively little personal expertise in how to approach the issue of remedies in these situations. What are the potential solutions to this time-warp problem? THINKING IT THROUGH AGAIN First, the issue of remedies should be fully examined in the adjudication of each individual consummated-merger case. In Chicago Bridge, the parties have challenged the judge’s decision on the ground that no remedy hearing was held. And recall that the U.S. Court of Appeals for the D.C. Circuit reversed the decision to break up the Microsoft Corp. in part because of the failure to hold a hearing on remedies. A proper remedy hearing should include not only expert testimony but also extensive testimony from customers on whether particular remedies are necessary and appropriate to fix the competitive harms caused by the merger itself. This would ensure that parties are not punished for market conditions unrelated to the merger. Judge Learned Hand reminded us long ago that successes due to “superior skill, foresight, and industry” are consistent with vigorous competition. United States v. Aluminum Company of America, 148 F.2d 416 (2d Cir. 1945). It should be anathema to ignore the possibility that an entity’s post-merger prowess is attributable to factors beyond the merger itself. A causal connection between the consummated merger and current competitive problems in a market should be established as a prerequisite to any discussion of remedy. This is especially true in high-tech industries, where rapidly developing technologies place the competitive contours of a market in flux. The D.C. Circuit in United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), wisely observed that “[r]apid technological change leads to markets in which firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.” The District Court in United States v. SunGard Data Systems Inc., 172 F. Supp. 2d 172 (D.D.C. 2001), quoted this same passage in denying the government’s request for an injunction to prevent an acquisition of computer services assets. Second, the FTC should launch a study of remedies for consummated mergers. Like the agency’s 1999 Divestiture Study, it should examine how such remedies can be effective. Specifically, the FTC might survey potentially competitive products at the time of a given merger (products that were newly patented or being developed) to find out whether these products in the pipeline eventually panned out, and thus whether the merger had encouraged or discouraged innovation. Also, the FTC could look at whether the use of intellectual property licensing in certain industries has enhanced competition. This might suggest something about the effectiveness of alternative nonstructural remedies in preserving or increasing competition. Third, the agency should consider the use of interim relief in many consummated-merger cases. For example, the FTC and the parties could enter into an immediate agreement with some form of behavioral relief. During the pendency of the administrative litigation, they could then determine whether that relief would be useful in the long term. This would obviate the need for a divestiture. Finally, the FTC should strongly consider the greater use of nonstructural relief, especially in high-tech markets. Although the agency will no doubt claim that the case law mandates divestiture as the preferred remedy, relief short of divestiture may be as effective without causing other types of harm. This was the approach taken by the FTC in the 1996 merger of pharmaceutical giants Ciba-Geigy Ltd. and Sandoz Ltd., in which the agency permitted licensing rather than divestiture. Indeed, licensing may be a more effective remedy in many cases. Due to the constantly changing nature of high-tech markets, a firm may acquire a technology that is already outdated and lacking in market value. Improving this obsolete technology to make actual divestiture possible might be very inefficient. Instead, granting third parties access through licensing agreements may achieve the same competitive benefits without the associated costs — and it might even help to preserve the merger efficiencies contemplated in the first place. Ultimately, although old case law provides the FTC with broad powers to demand very substantial relief even after mergers have been completed, it must recognize that the courts have not rigorously considered these issues in almost three decades. Thus, the FTC must build a solid economic and factual basis for its approach to consummated-merger remedies in order to preserve competition in this more challenging antitrust era. David A. Balto and George L. Paul are partners in the D.C. office of White & Case and members of the firm’s worldwide antitrust practice. Balto was director of the office of policy and evaluation in the FTC’s Bureau of Competition during the Clinton administration. They can be reached at [email protected] and [email protected], respectively.

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