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The U.S. Federal Trade Commission is adding a new weapon to its merger enforcement arsenal — disgorgement of profits. Agency lawyers want to require New York-based Hearst Corp. to forfeit $19 million in profits earned from an illegal 1998 merger, according to a tentative settlement released last week. Such disgorgement of profits would be a first in a merger case. Phillip Proger, a partner at Jones, Day, Reavis & Pogue in Washington, D.C., said disgorgement is yet another signal that the antitrust agencies take Hart-Scott-Rodino compliance very seriously. “This is an attempt to let the business community and the legal community know that they have teeth,” Proger said. Another Washington antitrust lawyer said the decision to seek disgorgement is especially troubling because the FTC during the Bush administration has shown an increased willingness to attack completed mergers rather than focus on deals that have not yet closed. Forfeiture of profits is only possible for a completed transaction. The five FTC commissioners will vote on the Hearst settlement next month. It stems from First DataBank Inc.’s 1998 acquisition of Medi-Span Inc. First DataBank is a unit of Hearst Corp. The FTC charged the merger was illegal because Hearst violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 by failing to disclose so-called 4c documents. These are memos and studies that outline the state of competition and the potentially competitive effects of the merger. By law, they must be given to the antitrust agencies. Hearst submitted a single 4c document with its HSR filing. Based on that information, the FTC cleared the merger. It later received complaints from customers that First DataBank had hiked prices dramatically. An investigation uncovered five additional 4c documents that would have alerted the agency that this merger would create a monopoly in the drug database market. The agency filed suit in April. First DataBank issued a statement confirming that it supports the settlement and noting that it is not admitting any wrongdoing. A spokeswoman declined to comment further. Disgorgement is highly controversial in antitrust circles. Nothing in the law explicitly grants the antitrust agencies the power to seek forfeiture of profits. But in the 1980s, then-consumer protection bureau director Timothy J. Muris pioneered the use of disgorgement in consumer fraud cases. Muris is now FTC chairman. In a previous interview, Muris said he would not rule out seeking disgorgement of profits from an illegal merger. Disgorgement was used two years ago for the first time in an antitrust case, though this dispute with regulators did not involve a merger. The FTC charged Mylan Pharmaceuticals Inc. with engaging in anticompetitive practices regarding generic drugs. It ordered the company to forfeit $100 million in profits earned by improperly inflating the cost of the key ingredient for generic anti-depressants. In that November 1999 case, FTC commissioners Thomas B. Leary and Orson Swindle dissented. Both are Republicans; they also opposed filing a federal suit in the Hearst Corp. case. In their Mylan statement, the commissioners rejected use of disgorgement but left the door open to using it in future cases. Proger of Jones Day said there is no need for the FTC to seek disgorgement. Existing enforcement tools, including civil penalties and forced divestitures, are more than sufficient, he said. The second lawyer, requesting anonymity, said the FTC action is a waste of resources because customers have the ability to sue the company to recoup overcharges. “There is a history in the antitrust bar of leaving the damages to the private parties,” the lawyer said. Such may be the case here despite the FTC involvement. In an unusual arrangement, the $19 million will go into a pool that will be drawn down to pay off class action suits filed against First DataBank by its customers. Besides the disgorgement of $19 million, the settlement requires First DataBank to divest Medi-Span to Lippincott Williams & Wilkins Inc., a unit of the Netherlands-based Wolter Kulwer NV. Last month, Hearst Corp. agreed to pay a record $4 million in civil penalties. The FTC typically does not disclose settlements until they are approved by the commission. In this case, FTC deputy competition bureau director Susan Creighton said the agency believe it was in the “public interest” to let interested parties comment on the proposed settlement before it is put to a vote. Comments are due by Dec. 3. Copyright (c)2001 TDD, LLC. All rights reserved.

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