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The government so infrequently litigates its merger challenges (consent decrees and abandoned deals providing the far more common solution) that it is easy to forget about the role of the courts in these cases. Behind the scenes, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) indulge in highly creative, economically laden analyses and entertain some unusual arguments by the merging parties. Once in court, however, the agencies must offer evidence that satisfies a judge’s need for reliable proof in making a prediction-where by definition no direct evidence exists-about the likely effects of the merger. Three pairs of cases highlighting three different issues in merger analysis demonstrate this point. The reliability of the evidence offered to prove the product market in U.S. v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Calif. Sept. 9, 2004), compared to that in Federal Trade Commission v. Staples Inc., 970 F. Supp. 1066 (D.D.C. June 30, 1997), helps illuminate what courts want to see. In Oracle, DOJ attempted to define the market as software for human relations management (HRM) and financial management systems (FMS) able to meet the needs of large and complex enterprises. The shorthand for this verbose construction was high-function HRM and FMS software. Based on the reported decision, the Oracle court was faced with little it found reliable on which it could support DOJ’s market definition. The products are not readily observable, and the proof at trial from industry participants and technical experts revealed ambiguity in industry terminology and in the uses and contours of the products themselves. Even the technical experts disagreed on their characteristics. It was consistently made clear, however, that the market was heavily affected by innovation and migration to new, more sophisticated platforms that made it difficult to draw precise lines around product groupings. When the court turned to customer testimony and econometric evidence, it fared no better. The court stated that the customer witnesses’ speculation was not backed up by serious analysis, and concluded that their unsubstantiated apprehensions did not substitute for hard evidence. And as for the econometric evidence-well, as the court wistfully noted, there was none. The court declined to enjoin the merger. In Staples, in contrast, the court granted the FTC’s request for a preliminary injunction in a merger of the two largest office-supply superstore chains. The FTC alleged a relevant product market limited to the sale of consumable office supplies through office superstores. The defendants, predictably, argued that the market encompassed the overall sale of office products. The court agreed with the FTC. Given the retail format of these stores, the FTC was able to present extensive pricing evidence showing that the prices of each of Staples and Office Depot in geographic markets where these two superstores faced competition from a third superstore were lower than in those markets where the two competed only with nonsuperstore office-supply vendors. This pricing evidence, based on actual data that predated the litigation, provided the sort of “natural experiment” on which a court could rely. In addition to the econometric evidence, and unlike the products in Oracle, office-supply superstores are observable. Undertaking the sort of exercise that makes litigators cringe, the court made site visits to the different types of retail formats under debate to gain first-hand knowledge of the size of superstores, the type of customers they attracted and targeted, and their depth and breadth of inventory. The court concluded, paraphrasing Justice Potter Stewart, “Superstores are simply different in scale and appearance from the other retailers. No one entering a Wal-Mart would mistake it for an office superstore . . . .You certainly know an office superstore when you see one.” 970 F. Supp. at 1079. Proving competitive effects Unilateral effects occur when a merger eliminates direct competition between two merging firms, resulting in price increases, even if all other firms in the market continue to compete independently. According to the DOJ/FTC Horizontal Merger Guidelines, “Substantial unilateral price elevation in a market for differentiated products requires that there be a significant share of sales in the market accounted for by consumers who regard the products of the merging firms as their first and second choices, and that repositioning of the non-parties’ product lines to replace the localized competition lost through the merger be unlikely.” See www.ftc.gov/bc/docs/horizmer.htm. Federal Trade Commission v. Swedish Match, 131 F. Supp. 2d 151 (D.D.C. Dec. 14, 2000), was the first reported decision to embrace the unilateral-effects analysis set forth in the guidelines. The court granted the FTC’s request for preliminary injunction where Swedish Match A.B., the largest manufacturer of loose leaf tobacco in the United States, intended to acquire the loose leaf tobacco brands of National Tobacco Co., the third-largest manufacturer in the United States. The court received detailed evidence of product usage and qualities, such as texture and smell, target age group and brand and product preferences. It ruled that loose leaf tobacco constituted a market by itself and was not in the same market as moist snuff, another form of smokeless tobacco. But that evidence only identified the relevant product market when unilateral effects were to be examined. How was the court to satisfy itself that adverse price effects were in fact likely? The Swedish Match court found persuasive the marketplace characteristics showing that the acquisition would eliminate Swedish Match’s primary direct competitor. Nor did the court believe that the other competitors of Swedish March would be able to check a price increase by repositioning their brands-that is, by introducing new brands, expanding existing brands or increasing promotion and advertising of existing brands. The court stated that strong brand loyalty, legal restrictions on advertising and shrinking shelf space-all virtually irrefutable facts-made it highly unlikely that current loose leaf competitors could introduce new brands, reposition existing brands or reduce prices as contended by the defendants. Although market characteristics demonstrated the likelihood that Swedish Match could sustain a post-merger price increase, it did not help the court determine whether the magnitude of the price increase should cause concern. For that the court turned to econometric calculations, based on actual sales data, that estimated how many customers would switch to National’s brands if Swedish Match raised prices unilaterally, and thus the profitability of the price increase overall. The FTC’s expert estimated that the merger would result in a price increase for Swedish Match’s loose leaf brands of approximately 11% and a price increase for National’s brands of approximately 21%. In Swedish Match, the differentiated branded products, and the availability of retail sales data, made it possible to identify a market within which unilateral effects could be observed, and then to measure the predicted effects. Not so in Oracle, where the DOJ attempted to carve out a narrow market (a “node”) for high-function HRM and FMS software in the United States in which only Oracle and PeopleSoft competed. The court’s discomfort with this narrow market reflected the inconsistency of the evidence before it. The court seemed to suggest that it lacked a sufficient body of reliable evidence to demarcate a market in which Oracle and PeopleSoft were customers’ first and second choices. That, and the absence of econometric evidence based on sales data, left the court unable to undertake any further analysis of monopoly power over this “node” by a post-merger Oracle. While it appears from the Swedish Match decision that the evidence presented was more reliable and supported by econometric analysis, the Swedish Match court also gave the FTC the benefit of a presumption of market power from a showing that the merged entity would have a significant percentage of the relevant market. Combined, Swedish Match and National enjoyed 60% of loose leaf sales, which easily triggered the presumption. The Oracle court, because it did not accept DOJ’s market definition, never gave DOJ the benefit of the burden-shifting presumption. Moreover, the court declined to accept the presumptions underlying the provisions of the Merger Guidelines applicable to unilateral-effects cases. These determinations placed an even greater burden on the DOJ to present stronger evidence in support of its case, a burden it ultimately was unable to satisfy. Offering a court concrete evidence of a merger remedy is likely to have more evidentiary value than offering a remedy as a litigation tactic. This is evident from the Libbey and Arch Coal decisions. In Federal Trade Commission v. Libbey Inc., 211 F. Supp. 2d 34 (D.D.C. Apr. 22, 2002), Libbey Inc., the largest manufacturer and seller of food service glassware, sought to purchase the food service, retail and specialty/industrial glassware business of Anchor Hocking Co., the third-largest supplier of food service glassware. Approximately one month after the FTC voted in favor of seeking a preliminary injunction, Libbey and Newell Rubbermaid Inc., the parent of Anchor, amended their merger agreement to eliminate the purchase of Anchor’s food service business. The court concluded that it should evaluate the new agreement in deciding whether an injunction should be issued. The court, however, proceeded to find that the amended agreement posed the same potential anti-competitive effects as the initial merger agreement and granted the preliminary injunction. In response to the court’s opinion, Libbey and Newell made further changes to their proposed transaction and then asked the court to vacate the preliminary injunction. The court refused to consider the new agreement, stating that it posed the same anti-competitive concerns as the initial and first amended agreements. Federal Trade Commission v. Libbey Inc., 2002 U.S. Dist. Lexis 14523 (D.D.C. May 20, 2002). Although it did not explicitly state as much, it appears that the Libbey court was not willing to rely upon a twice-amended proposed remedy that has not yet been implemented. Arch Coal Inc. used a different strategy in its bid to acquire Triton Coal Co., including two of its mines. Arch informed the FTC that it intended to divest one of the acquired mines to another mining company, and entered into a firm asset purchase agreement with that company three months before the FTC voted to commence its action seeking a preliminary injunction. Federal Trade Commission v. Arch Coal Inc. 329 F. Supp. 2d 109 (D.D.C. Aug. 16, 2004). Here, the agreement to be considered by the district court was real, and not a mere proposal, as in Libbey. The court determined that the FTC must consider the entire transaction in question, which included the divestiture as well as the original purchase. It found that the divestiture reflected actual market conditions after the merger and, for this reason among others, declined to issue an injunction. Arch Coal Inc., Memorandum Opinion, Civ. No. 04-0534 (D.D.C. July 7, 2004). In sum, merger litigation is no different from any other injunctive litigation. Courts will not issue injunctive relief absent a sound evidentiary basis for doing so. The difference in the outcomes of recent antitrust merger cases is to a large extent influenced by the reliability of the evidence presented in each case. From these cases, we can discern the persuasive value of the “natural experiment”; of concrete, observable products; of customer testimony grounded in fact rather than opinion; of econometrics moored to industry data rather than simulation; and of business decisions that are not mere litigation tactics. Viewed from the perspective of the reliability of the evidence before the courts, the results in these cases should not be surprising. Molly S. Boast is a partner, and Tatyana A. Trakht is an associate, at New York’s Debevoise & Plimpton. Boast’s practice in competition law matters includes civil and criminal investigations and actions, private litigation, U.S. and foreign governmental review of domestic and international M&A, and counseling on a wide array of structures and arrangements.

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