On September 3, 2020, the Department of Justice Antitrust Division (the Division) published a Merger Remedies Manual (Remedies Manual), with an updated policy framework for the structuring and implementation of remedies in proposed mergers that the Division has determined may substantially lessen competition. Among other changes, the Remedies Manual formalizes the Division's recent emphasis on structural remedies, such as divestitures, and rejection of conduct remedies as inappropriate except in narrow circumstances. The Remedies Manual emphasizes that structural remedies are preferred because "they are clean and certain, effective, and avoid ongoing government regulation of the market."1 Consequently, the Division will accept a stand-alone conduct remedy, in vertical as well as horizontal mergers, only when the parties can satisfy a new and stringent four-part test.
The Division published its first comprehensive guide to merger remedies in 2004, when it released the Antitrust Division Policy Guide to Merger Remedies (2004 Merger Remedies Policy). In 2011, the guidance (2011 Merger Remedies Policy) was updated to indicate, among other changes, a greater amenability to conduct remedies in both vertical and horizontal mergers. In September 2018, however, in a speech about planned measures to shorten the duration of merger reviews, Assistant Attorney General Makan Delrahim announced the withdrawal of the 2011 Merger Remedies Policy, pending release of what became the Remedies Manual.2
The Remedies Manual Provides a Roadmap to Merging Parties Outlining the Division's Intentions Regarding Enforcement of the Antitrust Laws as They Apply to Proposed Transactions
The Remedies Manual lays out six guiding principles for merger remedies, many of which are consistent with longstanding DOJ policy:
- remedies must preserve competition;
- remedies should not create ongoing government regulation of the market;
- temporary relief should not be used to remedy persistent competitive harm;
- the remedy should preserve competition, not protect competitors;
- the risk of a failed remedy should fall on the parties, not consumers; and
- the remedy must be enforceable.
Of these, the second and third points, emphasizing the need to avoid "regulatory" solutions and eschewing temporary measures, are the most marked changes from previous articulations of Division policy, and echo recent Division leadership statements strongly disfavoring conduct remedies. Although most of the Remedies Manual's substantive guidance is consistent with recent Division practice, notable novel points include:
- Providing a list of five remedy "red flags" to be avoided;
- Declaring that standalone conduct remedies may be appropriate only if merging parties satisfy a strict four-part test;
- Clarifying that conduct remedies may still be used to facilitate structural remedies;
- Highlighting the role of Division oversight in the purchaser-approval process;
- Expressing a preference for private equity buyers in certain circumstances;
- Codifying enforcement-related "standard provisions" appearing in recent DOJ consent decrees; and
- Providing guidance specific to remedies in post-consummated transactions.
Evaluation and oversight of all the Division's remedies will reside in a newly created office within the Division: the Office of Decree Enforcement and Compliance. The new office will have primary responsibility for enforcing judgments and consent decrees in civil matters, and will also advise the Division's criminal sections when parties seek credit at the charging stage for their corporate compliance programs. 3
A. Remedies should be structured to avoid "red flags"
The Remedies Manual highlights certain characteristics that increase the risk that the proposed remedy will not be effective in preserving competition.
- Divestiture of less than a standalone business. Because an existing business usually contains all assets necessary to compete effectively—such as management structure, personnel with knowledge of the business' activities, and intangible assets—divestiture of less than the whole business may not effectively preserve competition.
- Mixing and matching assets of both firms. A proposed divestiture package mixing and matching assets of both firms that have never operated together also raises risk. For example, when interoperability or brand are important, mixing and matching assets from both firms may require some reconfiguration, increasing friction and challenges to the efficient operation of the mixed assets.
- Allowing merged firms to retain rights to critical intangible assets. Allowing the merged firm to retain access to divested intangible assets may lead to lack of product differentiation or the reduction of the purchaser's incentive to invest in the business.
- Other ongoing entanglements. Other ongoing entanglements, such as supply agreements or technical assistance agreements, may also lead to an increased risk that the remedy will not preserve competition. Arrangements of this sort may result in the purchaser's reliance on the merged firm to effectively compete, or facilitate collusion.
- Substantial regulatory or logistical hurdles. A divestiture that requires substantial regulatory or logistical hurdles to be completed may imperil competition to the extent the purchaser is unable to deploy the assets during the interim period.
B. Conduct Remedies
As noted above, the Remedies Manual strongly disfavors standalone conduct remedies for both horizontal and vertical mergers. The 2011 Merger Remedies Policy had described conduct remedies as an effective method for addressing likely anticompetitive effects of vertical mergers. This reflected established DOJ and FTC practice.4
Although the Remedies Manual does not completely foreclose the possibility that conduct relief may be necessary as a standalone remedy, it nonetheless provides that such remedies are appropriate only when a strict four-part test is met: "(1) a transaction generates significant efficiencies that cannot be achieved without the merger; (2) a structural remedy is not possible; (3) the conduct remedy will completely cure the anticompetitive harm, and (4) the remedy can be enforced effectively."5
In contrast to standalone conduct remedies, the Remedies Manual expressly allows that conduct remedies intended to "facilitate" a successful divestiture may be appropriate. For example, a temporary supply agreement may be beneficial in circumstances when the purchaser is unable to manufacture the product during the transitional period, and a temporary restriction on re-hiring personnel of a divested business may also facilitate a divestiture.
The Remedies Manual disfavors "firewall" provisions designed to limit dissemination of information that could facilitate coordination or collusion on the grounds that "no matter how well crafted, the risk of collaboration in spite of the firewall is great."6 It does, however, allow for the possibility of a firewall to facilitate structural relief "or where significant efficiencies could not be achieved without the merger or through a structural remedy."7 Considerations the Remedies Manual identifies as pertinent are whether a firewall is likely to be fully effective, the time and effort needed to identify which information should be restricted and how to restrict it, and the need for effective monitoring and enforcement.
C. Evaluating Prospective Buyers
The Remedies Manual also emphasizes the importance of identifying an appropriate buyer for divestiture assets and describes certain criteria the Division will apply in evaluating and approving proposed divestiture buyers.
Approval hinges on three conditions. First, the divestiture "must not itself cause competitive harm." Second, the buyer will "use the divestiture assets to compete in the relevant market." And third, the Division will analyze the "fitness" of the prospective buyer to determine whether it is capable of competing in the relevant market. That determination will be made on merit, and not by comparisons with other potential buyers.
Regardless of how the Division chooses to review a proposed purchaser, the Remedies Manual specifically notes that in certain circumstances a private equity purchaser may be preferred, which previous guidance did not. It cites to a study conducted by the Federal Trade Commission (FTC) finding that, in some cases, private equity firms or other investment firms were important to the success of the remedy because of their flexibility in investment strategy, commitment to the divestiture, and willingness to invest more when necessary.8
D. Consent Decrees
A point of emphasis in the Remedies Manual, and the Division's related messaging, is ensuring that merger remedy consent decrees must be enforceable. To that end, the Remedies Manual provides that such decrees must also include certain "standard" provisions, all of which are aimed at increasing enforceability. These provisions include the following: (1) in a decree enforcement proceeding, the Division may establish a violation and appropriateness of the remedy by a preponderance of the evidence; (2) the Division may apply to the court for a one-time extension of the decree's term if a court finds that a party has violated the decree; (3) the Division may terminate the decree when no longer necessary or in the public interest after notice to the parties and the court; (4) the court retains jurisdiction to enforce the decree's provisions; and (5) parties must reimburse the Division for costs incurred in connection with a successful enforcement effort. In this respect, the Remedies Manual codifies an approach the Division has been pursuing for the past few years.
E. Post-consummation Remedies
The Remedies Manual also introduces a new discussion specific to remedies for consummated mergers. When the Division reviews a consummated transaction, its analysis of competitive effects does not differ from the traditional analysis of a proposed transaction. Although crafting a remedy to address perceived anticompetitive harm in consummated transactions may be difficult, the Division has expressed its intention to pursue such cases to address any perceived anticompetitive effects flowing from the merger. The Division identifies three types of interventions that may be necessary in a post-consummation scenario. First, it may seek to unwind the transaction. In specific cases, it also may seek disgorgement where the merged firm may still be able to retain profits earned as a result of anticompetitive effects of the transaction. Second, it may seek divestiture of more than the acquired assets "to restore the divested business to the same competitive position it had held prior to the transaction."9 Third, it may seek divestiture of less than the acquired assets to restore competition.
Differences Between DOJ and FTC Policy on Merger Remedies
Although FTC policy10 on merger remediation is largely consistent with the Remedies Manual framework, some differences are notable. First and foremost, the FTC is more accepting of conduct remedies in vertical mergers, including the use of firewalls to prevent the anticompetitive use of sensitive information,11 about which the Remedies Manual expresses skepticism.
Allowing the merging firm to retain certain rights to critical intangible assets is another point of difference from the policy in the Remedies Manual. FTC remedy policy guidance does not foreclose the merging firm from licensing intellectual property instead of divesting it, and when divesting intellectual property, it may allow the divestiture buyer to license the intellectual right back to the merging firm as long as the licensing arrangements can be shown not to impair the competitiveness of the divestiture buyer.
While the FTC also has a strong preference for divestitures to include the entirety of a pre-existing business unit, the FTC's policy guidance, at least, is more flexible about the merging parties' ability to create an acceptable divestiture asset package of less than an entire business if they can show that the package contains all the necessary assets for the buyer to be an effective long-term competitor.
Finally, while the Division's Remedies Manual reflects a favorable view of private equity buyers for divested assets in some instances, at least one current FTC Commissioner, Rohit Chopra, has expressed concern about their willingness to incur higher levels of debt financing, which he asserts may result in greater risks of solvency. He also pointed out that private equity buyers may engage in "opportunistic asset sales," thereby reducing long-term competitiveness.12
The Remedies Manual reflects recent Division policy and practice regarding remedies and consents, which—with some noteworthy exceptions—is largely consistent with the approach of previous administrations. A key question is whether a change in administration would bring with it a walking back from some of the newer policy positions codified in the Remedies Manual. The Division's repudiation of standalone conduct remedies, in particular, brings challenges in enforcement relating to vertical mergers and represents the greatest departure from prior Division policy statements. As such, it raises the greatest question as to whether it will remain a long-term policy.
1 Press Release, U.S. Dep't. of Justice, Antitrust Div., Justice Department Issues Modernized Merger Remedies Manual (Sept. 3, 2020).
2 Makan Delrahim, Assistant Attorney General, U.S. Dep't. of Justice, Antitrust Div., It Takes Two: Modernizing the Merger Review Process, Remarks as Prepared for the 2018 Global Antitrust Enforcement Symposium, 12 (Sept. 25, 2018).
3 Press Release, U.S. Dep't. of Justice, Antitrust Div., Assistant Attorney General Makan Delrahim Announces Re-Organization of the Antitrust Division's Civil Enforcement Program (Aug. 20, 2020).
4 DEP'T OF JUSTICE, ANTITRUST DIV., POLICY GUIDE TO MERGER REMEDIES, 20 (Oct. 2004).
5 DEP'T OF JUSTICE, ANTITRUST DIV., MERGER REMEDIES MANUAL, 16 (Sept. 2020) (hereinafter 2020 Manual).
6 Id. at p.15.
8 See FED. TRADE COMM'N, THE FTC'S MERGER REMEDIES 2006-2012, A REPORT OF THE BUREAUS OF COMPETITION AND ECONOMICS (Jan. 2017).
9 2020 Manual at p.19.
10 Richard Feinstein, Statement of the Bureau of Competition of the Federal Trade Commission, Negotiating Merger Remedies (Jan. 2012).
11 See, e.g., Decision and Order, In re Northrop Grumman Corp., No. C-4652 (F.T.C. June 5, 2018), (establishing firewall to address concerns regarding purchasing firm's ability to disadvantage its competitors by denying access to purchased firm's missile components or misusing confidential information, among other remedies); Decision and Order, In the Matter of Sycamore Partners II, No. C-4667 (F.T.C. Jan. 25, 2018), (establishing firewall between merging parties to address concerns that access to sensitive reseller customer data could give acquiror a competitive advantage); Decision and Order, In the Matter of Broadcom Limited and Brocade Communications Systems, Inc., No. C-4622 (F.T.C. Aug, 17, 2017), (establishing firewall to address competitive concerns that acquiring company may have access to competitor's information and raise prices for fibre channel switches).
12 Statement of Commission Rohit Chopra, In the Matter of Linde AG, Praxair, Inc. and Linde PLC, Commission File No. 1710068 (Oct. 12, 2018).
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