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The cost of playing hide-and-seek with the premerger notification requirements of the Hart-Scott-Rodino Act has increased exponentially. In United States v. The Hearst Trust, [FOOTNOTE 1]the defendants paid a $4 million civil penalty, the largest ever by a single company, for violating the premerger notification provisions of the HSR Act; and in a related case FTC v. The Hearst Trust, [FOOTNOTE 2]the defendant agreed to divest the business it unlawfully acquired and disgorge $19 million of alleged monopoly profits it earned during the nearly three years it owned the offending assets. [FOOTNOTE 3] Portentously, Hearstis the first competition case ever filed by the Federal Trade Commission (FTC) pursuant to �13(b) of the FTC Act seeking postacquisition divestiture and other equitable relief, including disgorgement. [FOOTNOTE 4] THE FACTS IN ‘HEARST’ In Hearstthe FTC, usually a procedurally staid institution, abandoned its conventional practices of seeking civil penalties for HSR Act violations, with the assistance of the Department of Justice (DOJ), in federal court pursuant to �7A(g)(1) of the Clayton Act [FOOTNOTE 5], and instituted an administrative proceeding to redress alleged substantive violations of the antitrust laws under �5 of the FTC Act. [FOOTNOTE 6]The alleged predicate acts that culminated in this quantum procedural departure and the extraction of such extraordinary relief consisted of a confluence of conduct, including a merger to monopoly, [FOOTNOTE 7]Hearst’s exercise of postacquisition market power [FOOTNOTE 8]and, most irksome to the FTC, Hearst’s alleged failure to produce a handful of documents required by Item 4(c) of the HSR premerger notification and report form that would have presaged Hearst’s anticompetitive strategy. [FOOTNOTE 9] According to the FTC’s complaint, Hearst and the acquired person, J. Bruce Laughrey, had filed their respective HSR notification and report forms in connection with Hearst’s acquisition of Medi-Span as of Dec. 15, 1997. [FOOTNOTE 10]The filings started the statutory 30-day premerger waiting period. As part of its filing, Hearst submitted one document and did not list any privileged documents responsive to Item 4(c). [FOOTNOTE 11] The HSR Act is the foundation, and Item 4(c) the cornerstone, of the government’s merger enforcement program. [FOOTNOTE 12]Item 4(c) of the premerger notification form requires persons to provide the FTC and DOJ with: all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) … for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. [FOOTNOTE 13] An evaluation of documents provided to the FTC and DOJ in response to Item 4(c) is, in many cases, determinative of whether the government will extend and expand its antitrust investigation by issuing a request for additional information. [FOOTNOTE 14] A request for additional information was not issued in connection with the Hearst premerger filing. [FOOTNOTE 15]Hearst closed its $38 million acquisition of Medi-Span on or about Jan. 15, 1998. [FOOTNOTE 16] Based upon Hearst’s postacquisition pricing behavior ( it “dramatically” increased prices) and customer complaints, the FTC opened an investigation of the transaction almost two years after its consummation. [FOOTNOTE 17]Hearst’s submission of documents and information during the post-transaction investigation included six documents that the FTC alleged should have been produced by Hearst in accordance with the requirements of Item 4(c) with its December 1997 premerger filing. [FOOTNOTE 18] After being informed of the alleged deficiency with its December 1997 premerger filing, on Aug. 21, 2000, Hearst amended its response to Item 4(c). [FOOTNOTE 19]The amended filing included three of the six documents identified by the FTC and listed six other documents that were responsive to Item 4(c) but withheld based upon attorney-client and work-product privileges. [FOOTNOTE 20] THE FTC’S COMPLAINT Unable to reach a negotiated settlement, on April 5, 2001 the FTC filed a five-count complaint against Hearst. [FOOTNOTE 21]The first count alleged that Hearst’s failure to submit the required Item 4(c) documents and information “deprived the Commission of significant information relevant to its premerger analysis of the Acquisition.” [FOOTNOTE 22]As a result, Hearst’s acquisition of Medi-Span contravened the premerger notification and waiting-period provisions of the HSR Act subjecting Hearst to a “continuous violation” of the HSR Act since Jan. 15, 1998. [FOOTNOTE 23]The second count of the complaint alleged that Hearst’s acquisition violated �7 of the Clayton Act and �5 of the FTC Act. [FOOTNOTE 24]The third and fourth counts of the complaint alleged acts of monopolization and attempted monopolization in violation of �5 of the FTC Act, respectively. [FOOTNOTE 25]Pursuant to �13(b) of the FTC Act the FTC asked for relief, including “divestiture and other permanent equitable relief to undo the Acquisition” and “disgorgement of profits.” [FOOTNOTE 26] The commission voted 3-2 to file the complaint. [FOOTNOTE 27]Commissioners Leary and Swindle dissented, questioning whether the “extraordinary remedy” of disgorgement should be sought when “existing private remedies are adequate to ensure that respondents do not benefit from any possible wrongdoing and that their customers can be made whole.” [FOOTNOTE 28]Apparently, Hearst was prepared to pay a substantial civil penalty and promptly divest Medi-Span in exchange for the FTC abandoning its claim for disgorgement. On Oct. 11, 2001 the FTC announced that it had reached a settlement with Hearst relating to Hearst’s alleged violation of the HSR Act. [FOOTNOTE 29]Pursuant to the settlement, Hearst would pay a $4 million civil penalty, the largest payment by a single firm for an HSR Act offense. [FOOTNOTE 30]The FTC continued to prosecute the �7 and �5 counts of its original complaint, seeking remedies, including divestiture and disgorgement. On Dec. 14, 2001 the FTC announced a settlement with Hearst addressing the remaining counts of its �13(b) complaint. [FOOTNOTE 31]Pursuant to the settlement, Hearst agreed to divest Medi-Span and “pay $19 million as disgorgement of unlawful profits.” [FOOTNOTE 32]The $19 million payment would be “distributed to injured consumers as part of the settlement of a private class-action suit alleging unlawful overcharges by Hearst.” [FOOTNOTE 33]The FTC voted 5-0 to accept the settlement. Commissioner Leary issued a separate statement regarding the settlement concurring in part and dissenting in part. [FOOTNOTE 34]Commissioner Leary said that disgorgement was unnecessary and not additive to the settlement of the private action and that the FTC would have better served the public interest by seeking a larger civil penalty. [FOOTNOTE 35] Internecine quibbling aside, with the Hearstcase the FTC has unleashed disgorgement as a possible remedy in merger cases. Granted, the three commissioners supporting the complaint stated, “the remedy of disgorgement should be sought by the Commission in competition cases only in exceptional circumstances.” [FOOTNOTE 36]However, they then characterized the allegations of Hearst’s intent to monopolize, its withholding documents revealing such intent and its postacquisition pricing behavior as meeting this acme and concluded that simply restoring competition would be inadequate if Hearst was able to profit from its alleged unlawful acts. [FOOTNOTE 37] Signaling that its seeking disgorgement in the Hearstcase was not an aberration, on Dec. 19, 2001 the FTC invited public comments regarding the use of “disgorgement as a remedy for violations of the … HSR Act, FTC Act and Clayton Act. [FOOTNOTE 38]Specifically, the FTC asked that the comments address questions, including what conduct warrants the use of disgorgement, how the FTC should calculate the amount of disgorgement, what relevance and weight the FTC should give to certain factors such as the effect seeking disgorgement may have on settlement negotiations and whether potential or pending private or other government litigation should be considered. [FOOTNOTE 39]The FTC’s request for comments confidently, and expressly stated that “the Commission is not re-examining its statutory authority to seek disgorgement … in competition cases.” [FOOTNOTE 40] DISSUASIVE REMEDY A review of the progressive history of HSR Act enforcement actions and the government’s continual lament that the per diem statutory penalty of $11,000 is insufficient to deter violations of the premerger notification and waiting period requirements pointed inevitably to the FTC’s eventual use of �13(b) of the FTC Act to seek a more dissuasive remedy for HSR violations. Historically, the FTC took great pains to publicize its civil penalty actions hoping to deter parties from using aggressive transaction structures or HSR rule interpretations to avoid compliance with the premerger notification requirements. In 1990, there was also a legislative effort to increase the penalty provisions of the HSR Act to $100,000 per day. [FOOTNOTE 41] In 1996, the FTC launched a heightened campaign to “increase (HSR Act) compliance levels.” [FOOTNOTE 42]The FTC promoted its civil penalty action [FOOTNOTE 43]and administrative complaint against Sara Lee Corp. [FOOTNOTE 44]In Sara Lee, the FTC obtained more than the maximum penalty for the alleged HSR Act violation [FOOTNOTE 45]and required Sara Lee to divest assets to cure the �7 Clayton Act offenses. [FOOTNOTE 46] The FTC also manifested its “increasing concern” that HSR filings were being made “without a full submission of the required 4(c) documents.” [FOOTNOTE 47]The FTC filed a civil penalty action against Automatic Data Processing Inc. (ADP) for “failure to provide all of the required 4(c) documents” because of its “wholly inadequate search.” [FOOTNOTE 48]ADP settled the action agreeing to pay $2.97 million. [FOOTNOTE 49]Subsequently, ADP agreed to divest the unlawfully acquired business to settle an FTC administrative complaint. [FOOTNOTE 50] The FTC left no doubt that it would “look more closely in the future at transactions in which no 4(c) documents are submitted.” [FOOTNOTE 51]The FTC’s objective was to “increase the risk of inadequate searches or certifications … to encourage stricter compliance with Item 4(c) requirements.” [FOOTNOTE 52]The FTC also trumpeted its position that: it is in the interest of the parties, the agencies, and consumers to have the antitrust analysis completed before consummation of the transaction. Inadequate compliance can lead to divestiture after consummation which is less efficient for all parties and wasteful of economic resources. [FOOTNOTE 53] CONCLUSION While the decision to file a �13(b) case seeking divestiture was made by a 3-2 majority, including former FTC Chairman Pitofsky, there should be no expectation that the FTC will reverse course under Chairman Muris. Aggressive HSR Act enforcement has occurred under Democrat and Republican administrations. A word to the wise is enough; disgorgement is a real risk of playing hide-and-seek with the HSR Act. Neal R. Stoll and.Shepard Goldfein are partners at Skadden, Arps, Slate, Meagher & Flom. ::::FOOTNOTES:::: FN1No. 1:01CV02119, 2001 WL 1478814, at *1 (D.D.C. Oct. 15, 2001)(the civil penalty action was filed as a companion case to the FTC’s pending Section 13(b) action, see FTC, infra, note 2. FN2No 1:01CV00734 (FTC Complaint, April 4, 2001) available at www.ftc.gov /os /2001/04/ hearstcmp.htm. FN3Press Release, Federal Trade Commission, Hearst Corp. to Disgorge $19 Million and Divest Business to Facts and Comparisons to Settle FTC Com plaint ( www.ftc.gov /opa /2001 /12/hearst. htm) (Dec. 14, 2001). FN4 See id. FN515 U.S.C. �18a(g)(1). FN615 U.S.C. �45. FN7 See FTC, supra note 2. FN8 See id. FN9 See id. FN10 See id. FN11 See id. FN12George S. Cary, Failure To Comply with the Hart-Scott-Rodino Act: Braveheart or Dead Man Walking ( www.ftc.gov /speeches /other /cary328. htm)(Mar. 28, 1996). FN1315 U.S.C. 18a. Instructions to Notification and Report Form, appendix to 16 C.F.R. Part 803. FN14 See Cary, supra note 12. FN15 See FTC, supra note 2. FN16 See id. FN17See id. FN18 See id. FN19 See id. FN20 See id. FN21 See FTC, supra note 3. FN22 See FTC,supra note 2. FN23 See id. FN24 See id. FN25 See id. FN26 See id. See also15 U.S.C. �53(b). FN27Press Release, Federal Trade Commission, FTC Charges Hearst Trust with Acquiring Monopoly in Vital Drug Information Market ( www.ftc.gov /opa /2001/04 /hearst. htm) (April 4, 2001). FN28 Id.Dissenting Statement of Comm’rs Swindle and Leary. FN29Press Release, Federal Trade Commission, The Hearst Corporation Settles Charges of Filing Incomplete Pre-merger Report ( www.ftc.gov /opa /2001/10 /hearst.htm) (Oct. 11, 2001). FN30 See id. FN31 See FTC, supra note 3. FN32 See id. FN33 See id. FN34 See id.(Statement of Comm’r Thomas B. Leary, www.ftc.gov /os /2001/12 /learystate. htm). FN35 See id. FN36 FTC v. Hearst Trust, Statement of Chairman Pitofsky and Comm’rs Anthony and Thompson, www.ftc.gov /os /2001/04 /hearstpitan tthom. htm. FN37 See id. FN3866 Fed. Reg. 67254, 67254 (Dec. 28, 2001). FN39 See id. FN40 Id. FN41S.995, 101st Cong., 1st Sess. �3(b)(4) (1989) FN42 Cary, supra note 12. FN43 United States v. Sara Lee Corp., Civ. Act. No. 1:96CV00196, 1996 WL120857 (D.D.C. Feb. 8, 1996). FN44 Kiwi Brands Inc., 118 F.T.C. 406 (1994). FN45Press Release, Federal Trade Commission, Sara Lee Agrees to Pay Record Civil Penalty to Settle Charges Over Shoe-Care Product Acquisition ( www.ftc.gov /opa /1996/9602 /sara.htm) (Feb. 6, 1996). FN46 See id. FN47 Cary, supra note 12. FN48Automatic Data Processing, Inc., F.T.C. Dkt. No. 9282 (FTC complaint Nov. 13, 1996) available at www.ftc. gov /os /1996 /9611 /d9282cmp. htm. FN49Press Release, Federal Trade Commission, ADP Agrees To Pay Maximum $2.97 Million Civil Penalty for Withholding Key Competitive Documents from Federal Antitrust Agencies ( www.ftc. gov /opa /1996/9603 /adpauto.htm) (Mar. 27, 1996). FN50 SeePress Release, Federal Trade Commission, ADP Settles FTC Charges Over AutoInfo Acquisition ( www.ftc .gov /opa /1997 /9706 /adpauto3.htm) (June 18, 1997). FN51 Cary, supra note 12. FN52 Id. FN53 Id.

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