The “conventional wisdom” in the antitrust bar holds that “private merger suits are unlikely to stop a merger.” Moreover, because of the major role played in merger enforcement by federal and state government actors, “the typical attorney client dialogue about M&A antitrust risks only rarely focuses on the possibility of private legal actions.” Recent developments have, if not changed this view, at least caused antitrust practitioners to pay more attention to private merger challenges. For example, a widely watched Fourth Circuit case recently characterized a successful private merger challenge as a “poster child for [post-closing] divestiture,” and the above quotes about the rarity of private challenges come from a 2012 article in this Magazine urging practitioners to pay them greater attention.
In the authors’ view, private merger challenges were intended from day one—that is October 15, 1914, the date of passage of the Clayton Act—to be an integral part of the merger enforcement scheme. Whether they have, as a practical matter, been rarely successful is perhaps in the eye of the beholder. One success took place in 1987, when a private party filed a post-merger challenge to a deal that had been reported under the Hart-Scott-Rodino Act (HSR) to both the Federal Trade Commission and the Antitrust Division of the Department of Justice, and for which the statutory waiting period had expired. The challenger obtained extensive discovery, and after a full evidentiary hearing obtained a “hold separate” order.
Regardless of how private merger enforcement has been characterized in the past, the reality is that the number of private enforcement actions has increased and will likely continue to grow. This comes at a time when the resources of federal and state enforcement agencies appear to be stretched to the limit by budgets that are not keeping pace with the increasing cost and number of merger challenges. As a result, practitioners should be aware of the increased likelihood of a private merger challenge to prospective transactions that may not be coextensive with federal or state enforcement.
In terms of statutory language, private enforcement has been a cornerstone of the antitrust laws in general, and merger enforcement specifically, ever since the Clayton Act was passed. Indeed, it is no accident that the same statute, the 1914 Clayton Act, created not only Section 7, the substantive law making illegal any merger which “substantially . . . lessen[s] competition” but also a new government agency to enforce it, the FTC, as well as a veritable army of “private attorneys general.”
The year 1914 was one of the few times in American history (today included) when antitrust issues were at the forefront of American life. President Wilson won the election of 1912 on a platform that placed antitrust reform front and center. Before that platform came to fruition in the Clayton Act, mergers were subject to challenge only to the extent the DOJ could characterize a transaction as either restraining trade or amounting to conduct that monopolized a market in violation of the 1890 Sherman Act. Merger enforcement under this regime was regarded as inadequate both in terms of the extent of the legal prohibition and in terms of limited enforcement by the DOJ’s exercise of prosecutorial discretion, which could be influenced by political pressure.
In response, Congress enacted the Clayton Act, which expanded merger control by specifically targeting mergers and augmenting enforcement both through an “independent agency”—the FTC—and private parties. The latter were empowered to “have injunctive relief . . . against threatened loss or damage by a violation of the antitrust laws,” including the merger provisions of Section 7, language that is virtually the same as that authorizing the DOJ to file suit “praying that [a violation of the antitrust laws] shall be enjoined or otherwise prohibited.”
Thus empowered, private parties were by no means viewed as second-class enforcers; rather, they were to act as “private attorneys general” thereby “‘opening the door of justice’ to individuals harmed by antitrust violations while at the same time penalizing antitrust violators.” As the Supreme Court noted in Reiter v. Sonotone Corp., “These private suits provide a significant supplement to the limited resources available to the Department of Justice for enforcing the antitrust laws and deterring violations.”
Yet despite this clear statutory language, private parties historically have not filed anywhere near the same number of merger challenges as have the two government agencies. One potential reason may be the Supreme Court’s decisions in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. and Cargill, Inc. v. Monfort of Colorado, Inc., which denied standing to horizontal competitors complaining about impairment from potential procompetitive effects of a merger. However, while these decisions barred a class of potentially disaffected private plaintiffs from bringing claims against merging parties, they did not prevent competitors from bringing claims related to anticompetitive effects of mergers. As discussed in greater detail below, claims by competitors related to anticompetitive effects from a merger—particularly in the context of foreclosure—now appear to be on the rise.
In the press, in defense briefs, and even in dicta in judicial opinions, one often sees a reference to the government’s decision not to challenge a merger as an “approval” of that merger, as if the government had the last word and there were no private enforcement. Of course, there is in fact no procedure for the government to “approve” a merger, and the government’s failure to challenge a merger in advance of the expiration of the HSR waiting period, or at any time, does not prevent a private party from filing its own suit. Indeed, the purpose of HSR is simply to inform the government of mergers before they happen for the sensible reason that if the government wants to challenge them, the most logical time to do so is prior to consummation. That said, the government can and does file post-closing challenges, in one famous case doing so 30 years after the fact, and within the last few months seeking to unwind Facebook acquisitions that previously were “cleared” in the HSR process.
Private merger enforcement may become more prominent if the federal antitrust agencies leave a gap due to limited resources or prosecutorial discretion. Several commentators have noted that resources for the DOJ and FTC are limited and in need of substantial increases. A report by the Washington Center for Equitable Growth found that appropriations for the antitrust agencies in 2018 were 18 percent lower than in 2010 and that the agencies had slightly fewer resources in 2018 than they had in 2001. In testimony at the Antitrust Subcommittee’s hearing on Proposals to Strengthen the Antitrust Laws and Restore Competition Online, former Assistant Attorney General Bill Baer reported that the DOJ ended fiscal year 2019 with just 594 employees compared to 795 employees 10 years earlier. The FTC had roughly the same number of employees in FY 2019 as it did ten years earlier. In contrast, Gross Domestic Product has increased 37 percent from 2010 to 2018, and HSR merger filings increased by 81 percent from FY 2010 to FY 2018. While HSR merger filings have increased, the number of Second Requests and merger challenges have not changed significantly during the same period.
Do these statistics for declining resources, increased HSR filings, and a stable number of merger challenges suggest that merger enforcement by the federal antitrust agencies might have been higher but for limited resources? Perhaps. Other explanations include a shift of enforcement policy, or simply that the number of procompetitive (or competitively benign) transactions increased during the period while the number anticompetitive mergers remained constant. Nevertheless, the possibility that limited resources have led to under-enforcement cannot be excluded.
Although Congress increased the FTC’s budget by $20 million and the DOJ’s budget by $17.8 million for FY 2021, these modest increases may not be sufficient to meet the agencies’ needs for their merger enforcement programs. Litigating modern merger challenges is extremely resource intensive. For instance, in 2016, the DOJ successfully challenged two proposed mergers in the health insurance industry (Anthem/Cigna and Aetna/Humana ), and those two matters alone required 25–30 percent of the Division’s professional staff. In the same year, the FTC litigated four merger challenges (Cabell/St. Mary’s, Staples/Office Depot, Hershey/Pinnacle, and Advocate/Northshore ). According to Baer, that “inevitably meant other matters were understaffed.”
Moreover, merger enforcement is only one part of the agencies’ missions. Putting aside the authorities of the DOJ and FTC over criminal antitrust and consumer protection, respectively, both agencies are also charged with civil non-merger antitrust enforcement, and are in the midst of litigating landmark cases against Google and Facebook. The Google trial will not occur until 2023, and both cases have been compared to the DOJ’s resource-intensive 2001 case against Microsoft. The Texas Attorney General’s request for appropriations in connection with its case against Google highlights the significant resources needed to litigate these types of cases. As lead for a group of states in a separate antitrust suit against Google, the Texas AG requested $43 million for expert witness expenses, to which the chair of the Texas Senate Finance Committee responded that she was “doubtful” the amount would be sufficient.
Other cases and programs will also undoubtedly drain the agencies’ resources. Both agencies continue to investigate, and may bring enforcement actions against, the other two major technology platforms: Apple and Amazon. Furthermore, the FTC is currently undertaking several competition-related 6(b) studies, including: a Certificate of Public Advantage (COPA) study; a study on prior acquisitions by large technology companies; and a retrospective of physician acquisitions. While most of these studies are largely undertaken by FTC economists, these are the same staff economists needed for the bread-and-butter work of FTC staff during ongoing merger investigations and enforcement actions.
State AGs have no doubt become more active in antitrust enforcement and have sought independent enforcement actions apart from their federal counterparts. For instance, the California and Washington AGs brought antitrust suits against Sutter Health and CHI/Franciscan, and a coalition of ten states sought to block the merger of T-Mobile/Sprint entirely after the DOJ and the FCC had settled the case with conditions. Nevertheless, state AG resources are also limited. While some state AG offices such as New York may have as many as a dozen antitrust lawyers, many states only have one (or no) antitrust lawyer.
The federal antitrust agencies frequently decline to challenge a merger based on prosecutorial discretion. In addition to resources, prosecutorial discretion may factor in policy considerations (e.g., the likelihood of deterrence) and assessment of litigation risk. For instance, the DOJ’s case against AT&T/Time Warner showed the difficulty in successfully challenging vertical mergers. Subsequently, in the United/DaVita matter, the FTC sought enforcement action in Nevada, a market that raised both horizontal and vertical competitive concerns. However, the FTC declined to challenge the merger in Colorado, a market that presented only vertical issues, with two of the commissioners citing litigation risk as a reason for not seeking enforcement action. Notwithstanding the FTC’s decision, the Colorado AG obtained a consent decree to settle its allegation that the vertical merger in Colorado was anticompetitive. In DFA/Dean, the DOJ obtained a consent decree that addressed markets presenting only horizontal overlaps. While the DOJ (and North and South Carolinas AGs) declined to pursue enforcement action in North and South Carolina—a market that presented vertical-only issues—private plaintiffs challenged the merger, and the litigation was subsequently settled.
Both United/DaVita and DFA/Dean are instances in which the federal antitrust agency declined to take action against a vertical merger, but that did not foreclose a state AG or private plaintiffs from pursuing relief.
Whether or not government enforcement of Section 7 has been limited due to lack of resources, it appears that private merger challenges are on the rise. By our count, there have been 35 private merger challenge cases filed since 2015 compared to 19 such cases filed the previous five years (from 2010 to 2014). Moreover, ten of the recent complaints were filed since 2020 alone. Several recent private merger challenges appear to have proved “successful” from a review of the public record. Those cases provide valuable lessons about competitor standing to seek injunctive relief, the availability of divestiture as a remedy, the risk of post-closing challenges, and the importance of foreclosure as a theory of harm.
A number of private merger challenges filed by competitors since 1985 were able to overcome the standing requirement that stymies many private plaintiffs in antitrust damages cases. The Supreme Court laid out the standing requirement for private plaintiffs in Brunswick and Cargill. In those cases, competitors were barred from seeking damages under Section 4 and injunctive relief under Section 16. Courts have noted that the standard for injunctive relief is lower than that for damages. Competitor challenges since 2000 in which plaintiffs have survived a motion to dismiss for lack of standing include Sprint v. AT&T and Omni Healthcare v. Health First.
Steves v. Jeld-Wen, where the plaintiff was both a competitor and a customer, shows the practical viability of post-closing injunctive relief. Steves and Sons, Inc. and Jeld-Wen, Inc. sold interior molded doors, but Jeld-Wen was also one of three manufacturers that made doorskins, the primary input for finished doors. The DOJ investigated Jeld-Wen’s acquisition of Craftmaster International (CMI), another vertically integrated door manufacturer, twice and took no action. During the DOJ’s first investigation, Steves informed the DOJ that it did not oppose the merger; Steves and Jeld-Wen had recently entered into a seven-year supply agreement based on Jeld-Wen’s costs. After disputes between Steves and Jeld-Wen regarding whether Jeld-Wen was honoring the terms of the supply agreement, Steves brought suit under Section 7 and secured a jury award of $12 million in past damages and $46.5 million in future lost profits, both subject to trebling. In a subsequent remedy proceeding, the judge also ordered Jeld-Wen to divest a Pennsylvania factory, a first for a private merger challenge.
On appeal, Jeld-Wen argued that Steves had waited too long to file the challenge, but the Fourth Circuit upheld the divestiture order, calling the case a “poster child for divestiture.” Finding the merger had resulted in a duopoly that threatened Steves’ survival, the court found it “reasonable to expect that a third supplier—even one that’s vertically integrated—will promote competition, as CMI did before the 2012 merger.” The court vacated the future damages award finding that “claim wasn’t ripe for adjudication.” Jeld-Wen filed a petition for a rehearing en banc arguing that the panel erred “by treating breach-of-contract claims as antitrust claims” and citing procompetitive benefits from integration that would be lost if divestiture occurs and the “eggs are unscrambled.” Jeld-Wen’s petition was denied.
In Food Lion v. DFA, Maryland and Virginia Milk Producers Cooperative Association (a competitor) and Food Lion, LLC (a customer) challenged a consummated vertical merger between Dairy Farmers of America, Inc. and Dean Foods Company. The DOJ had investigated the merger and sought enforcement action only in markets with horizontal overlaps. Moreover, Dean had filed for bankruptcy, and the bankruptcy court approved the sale of Dean’s assets to DFA. The plaintiffs alleged that DFA’s acquisition of three Dean milk-processing facilities in North and South Carolina violated Section 7 based on a vertical theory of harm. The plaintiffs sought divestiture of at least one of the facilities. At the outset of the case, the court entered what was effectively a hold separate order, relieving the plaintiff of the need, as had taken place in Tasty Baking, to litigate that issue, and thus assuring the plaintiff of the right to be heard before the “eggs were scrambled.” DFA’s motion to dismiss (based on lack of standing, the failing firm defense, and failure to allege a proper relevant market) was later denied, and the case ultimately settled.
Plaintiffs in Food Lion v. DFA sought broader relief than what the DOJ obtained, similar to the plaintiffs in Blessing v. Sirius XM Radio Inc., where the DOJ declined to seek enforcement action but the parties made certain voluntary commitments to obtain FCC approval. Consumers wanted an even broader fix and filed a class action lawsuit alleging the merger violated Section 7 of the Clayton Act as well as Section 2 of the Sherman Act. On the eve of trial, the parties settled for $180 million and $13 million in attorneys’ fees.
Another recent competitor challenge that resulted in divestiture is St. Alphonsus v. St. Luke’s. In 2012, St. Luke’s main competitor, Saint Alphonsus Medical Center-Nampa Inc., along with Treasure Valley Hospital LP, filed a complaint alleging that St. Luke’s planned acquisition of the Salzer Medical Group violated Section 7 of the Clayton Act Section 7 and Section 1 of the Sherman Act. The FTC and Idaho AG intervened in the litigation in 2013 following their investigation. The private and government cases were subsequently consolidated. The district court ruled in favor of the plaintiffs in 2014 and ordered divestiture, and the Ninth Circuit affirmed.
Saint Alphonsus and Treasure Valley were eventually granted approximately $7.2 million and $335,000, respectively, in fees and costs for their roles in the judgment. St. Luke’s appealed these fees, arguing the private plaintiffs had not been the prevailing party in the suit since they lacked standing to bring the claims upon which the government ultimately prevailed. The private plaintiffs responded that the outcome they sought in bringing the case was achieved, and that the court acknowledged contributions from the private plaintiffs’ attorneys had been crucial for obtaining that judgment. St. Luke’s dropped its appeal in 2018.
There are several important takeaways from these recent private merger challenges. First, an injunction may be available to a private plaintiff even where standing issues would bar a damages claim. Second, the Steves case shows that divestiture, always a theoretically available remedy, can in fact be ordered by the courts, even post-closing, on the right facts. Third, post-closing challenges can remain a risk—Steves filed suit four years after the merger was consummated. Relatedly, agency inaction should not be viewed as inoculating a merger. In Steves, the Fourth Circuit adopted the arguments made by the DOJ in its amicus brief in holding that the DOJ’s “decision not to pursue the matter isn’t probative as to the merger’s legality because many factors may motivate such a decision, including the Department’s limited resources.” This is consistent with other cases where courts have rejected the argument that failure by the federal antitrust agencies “to object to the merger should be regarded as conclusive of its legality.”
It is also notable that, because the defendants in these three cases were vertically integrated, the plaintiffs’ theory of harm involved some form of foreclosure. Steves was both a competitor and customer, and the court found that by terminating the supply agreement, Jeld-Wen could foreclose Steves from access to doorskins, which in turn would benefit Jeld-Wen’s molded door business. In Food Lion, the plaintiffs pled that DFA’s acquisition of Dean facilities would allow the combined entity to foreclose access to Dean processing plants to plaintiff MDVA, which in turn would result in higher prices of processed milk to plaintiff Food Lion. And in St. Alphonsus, the private plaintiffs alleged that St. Luke’s acquisition of a rival primary care physician (PCP) group would allow St. Luke’s PCPs to foreclose referrals to rival hospitals such as the private plaintiffs. The district court did not address this theory of harm because it ordered the merger to be unwound based on the FTC’s case.
There is no evidence that the current trend in private merger enforcement will decline, and it may, in fact, continue to grow. Proposed legislation that would lower the bar for private plaintiffs could also pave the way for increased merger challenges by private parties. A 2020 House Judiciary Committee report recommended certain legislative reform with respect to private antitrust enforcement, including eliminating judicially created standards for antitrust injury and antitrust standing, reducing procedural obstacles to litigation, and lowering the heightened pleading requirement from Bell Atlantic Corp. v. Twombly. If the “private attorneys general” contemplated since 1914 take on an even greater role in merger enforcement, it will increasingly become a factor merging parties and their counsel should consider when analyzing competitive issues associated with a proposed transaction.
