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Companies about to engage in mergers involving broad global markets face an initial series of thorny jurisdictional questions: How far does the merger review authority of the U.S. antitrust agencies reach? How will the agencies approach a transaction that presents a truly worldwide product market? To what extent should (or must) the agencies limit their focus to the U.S. effects of the transaction? The U.S. antitrust authorities at the Department of Justice and Federal Trade Commission tend to analyze global merger transactions from a worldwide perspective whenever possible. This approach guarantees that the agencies will address any possible competitive threats to U.S. citizens. It also grants the agencies considerable leverage in negotiating potential settlements with the merging parties. In some circumstances, however, such a broad approach may be inconsistent with statute and case law — the Federal Trade Antitrust Improvements Act (FTAIA) and the Supreme Court’s 2004 decision in F. Hoffman La Roche v. Empagran S.A. These authorities suggest that the agencies do not have the authority to address potentially harmful competitive effects in an international market when the harm would not affect the U.S. portion of that market. The agencies have agreed that these principles will govern their extraterritorial reach. Moreover, the agencies’ initial broad approach relies heavily on the U.S. antitrust authorities receiving assistance and cooperation from antitrust authorities in other jurisdictions. When such assistance is not forthcoming — particularly in areas in which antitrust law is not highly developed — the agencies usually must focus more precisely on the specific effects of the proposed transaction in the United States. Counsel and companies engaged in mergers with global implications often find that working with the U.S. antitrust agencies to obtain approval for a merger involves negotiation of a number of such jurisdictional questions, as well as consideration of the legal and practical constraints on the agencies’ reach. We will discuss the agencies’ typical broad approach to mergers involving global markets. We will also address the legal and practical constraints on agency authority and how such constraints have operated to narrow agency focus in recent complex merger cases. Finally, we caution counsel to think carefully about the parameters of the U.S. portion of their sales, because determining such issues is not always as obvious as it appears. LIMITS ON U.S. REVIEW The reach of U.S. antitrust laws is limited to regulating effects on U.S. commerce. Where that line is drawn with respect to merger review remains somewhat murky, however. The FTAIA as applied by the Supreme Court’s Empagran decision provides some guidance. The FTAIA states that the Sherman Act shall not apply to foreign trade or commerce (other than imports) unless “such conduct has a direct, substantial and reasonably foreseeable effect” on U.S. commerce, U.S. imports, and/or the export business of entities in the United States. This broad exception is commonly referred to as the “domestic-injury exception to the general rule.” The Supreme Court clarified the domestic-injury exception in Empagran, holding that it does not cover claims that rest “solely on . . . independent foreign harm.” According to the Supreme Court, the FTAIA “remov[es] from the Sherman Act’s reach, (1) export activities and (2) other commercial activities taking place abroad, unless those activities adversely affect domestic commerce, imports to the United States, or exporting activities of one engaged in such activities within the United States.” The FTAIA does not, however, explicitly apply in the context of the Clayton Act, which governs merger review. The FTAIA is limited to the Sherman Act and private lawsuits. Nevertheless, the U.S. antitrust authorities have indicated that they will apply to merger review the same “direct, substantial and reasonably foreseeable effect” standard applied in the FTAIA. That is, the authorities will assess whether a given transaction would be likely to present direct, substantial, and reasonably foreseeable harm to U.S. domestic or import commerce. As the agencies explained in the jointly adopted Antitrust Enforcement Guidelines for International Operations, the FTAIA “sheds light on the type of effects Congress considered necessary for foreign commerce cases,” even though it did not expressly amend the Clayton Act. Agency officials have confirmed this position in various speeches. Although the agencies have publicly stated that they will follow the FTAIA, the issue of whether it applies to mergers has never been explicitly resolved by a statute or court decision. Moreover, some have made a public-policy argument that the agencies should have broader authority under the Clayton Act than the FTAIA provides under the Sherman Act. This argument contends that the agencies’ responsibility to anticipate and pre-empt probable future harm to U.S. commerce supports broader authority. Recent antitrust commentary cites instances such as the 1997 merger between Boeing and McDonnell Douglas and General Electric’s attempt in 2001 to acquire Honeywell, which was approved by the United States but rejected by Europe. Because the U.S. authorities did not agree with the decisions in other jurisdictions, these instances are given as examples of how the regulatory process might be better served by a broader U.S. regulatory reach that would concentrate more decision-making in the United States. AN EXPANSIVE APPROACH When confronted with a merger involving a global market, the agencies often initially take an expansive approach, rather than focusing solely on sales into or in the United States. They may begin by examining whether the elimination of a competitor in the global market for “Product X” would increase the price of Product X in that global market. The agencies’ document requests from merging parties routinely require production from foreign operations that have little to do with sales into the United States. Taking such a broad view guarantees that the agency will address all of the possible harmful effects. It also gives the agency negotiation leverage during the course of its investigation and in any possible settlement discussions. This expansive approach may be partly fueled by the lack of a direct controlling authority that governs the agencies’ jurisdictional reach, notwithstanding the agencies’ internal determination that they will be limited by the FTAIA’s standards. This approach also implicitly depends on the cooperation of competition authorities in other jurisdictions. For example, if a merger affects commerce in both the United States and the European Union, the European Commission and the Justice Department are likely to examine the same broad issues. Under such circumstances, if the Justice Department identifies a global market and the potential for harm created by the elimination of a competitor, it may rely on the European Commission to investigate and focus on effects in the European Union. The Justice Department and the European Commission often share information in these types of cases, and they may even have a better idea of where competitive concerns lie than the parties do. Given the involvement of the European Commission, merging parties gain little by arguing that the U.S. agencies do not have the authority to address any harmful competitive effects outside the United States or by attempting to isolate the agencies’ focus on the U.S effects of the merger. Indeed, if competitive concerns truly are isolated to the European Union, the Justice Department can proceed with its broad approach and eventually simply hand off the issue to the European Commission to block the transaction. PRACTICAL CONSTRAINTS When a U.S. agency does not have the benefit of support from a foreign competition authority, however, there are substantial practical constraints on an expansive “global” approach. In this situation, the U.S. agency must often narrow its analysis and deal precisely with only the commercial effects in the United States. This often occurs in mergers that affect commerce in areas outside the United States where strong competition authorities do not exist — for example, a merger affecting commerce in the United States and Indonesia. In that circumstance, the parties may be helped by arguing that the merger will not have any harmful competitive effects in the United States. Without the support of antitrust authorities overseas, even if the U.S. agency is certain that the merger would have some harmful effects somewhere in the world, as a practical matter it may be required to identify harmful competitive effects specific to the United States to block the transaction. Ironically, it is precisely when there may be effects in areas that lack strong antitrust enforcement authorities that a U.S. agency may feel the need to reach beyond traditional limits of U.S. merger authority to protect U.S. consumers from possible harm in the future. THE U.S. PIECE Because gaining approval may hinge on persuading the agencies to concentrate only on the U.S. piece of a market, merger counsel should think carefully at the outset of a transaction about how to analyze what the U.S. portion of the market is. Such questions are not always as obvious as they may appear at first glance. In applying the FTAIA to Sherman Act cases, a number of courts have held that it is the location of the effects, not the location of the conduct, that governs. Under these decisions, the issue is not citizenship of the affected parties, their location, or even where products may be delivered. The issue that a U.S. regulatory agency must address is whether a proposed transaction might have a harmful effect on the U.S. portion of a worldwide market. The agencies typically agree that U.S. sales alone constitute the U.S. portion of a worldwide market. Nevertheless, since the agencies examine the effects on U.S. commerce, they look beyond what merging parties actually sell to U.S. customers to decide what constitutes U.S. sales. For example, in the recent National Oilwell-Varco transaction reviewed by the Justice Department, both of the merging parties manufactured drilling equipment for offshore drilling rigs. National Oilwell and Varco both had headquarters in the United States, but much of the equipment they sold was manufactured, sold to customers, and delivered to shipyards outside the United States for installation onto drilling rigs. Once a rig is built, however, it can move to anywhere in the world and, in fact, regularly does move into and out of various jurisdictions. Here, the Justice Department seemed to identify equipment sold to rigs that would be working in the U.S. Gulf of Mexico in the near future as the “U.S. portion” of the worldwide drilling equipment market. Those sales looked very different from the set of sales to U.S. consumers or U.S. drilling contractors. Parties contemplating a merger and their antitrust counsel must be prepared for the agencies to take a broad approach to any transaction that affects a global market. Understanding the limits of the agencies’ legal authority and practical reach and persuading them to focus on the U.S. portion of the market may be vital to success. And it behooves counsel to analyze thoroughly what may or may not be a sale that affects U.S. commerce in markets with a truly global dimension.
Elizabeth B. McCallum is a partner and Allen Bachman is a senior associate in the antitrust group of the D.C. office of Howrey. Howrey represented the merging parties in the National Oilwell-Varco matter.

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