General
UK government clarifies some national security screening regime procedures
Well over a year into the operation of a new national security regime, the UK government has sought to address concerns around the transparency and predictability of the assessment process in a second edition of “market guidance notes”.
Most significantly, the government has confirmed that:
- parties can now contact the Investment Security Unit for guidance on whether an acquisition is subject to mandatory notification
- notifications can be made on the basis of heads of terms – although filing too early risks revised terms triggering re-notification
- it is possible to expedite the assessment process where parties are suffering from material financial distress
- parties can make representations on remedies at any point in the process
- no final order will be published if a party withdraws from an acquisition
Our alert takes you through the key updates and what they mean for filings in practice, as well as some of the remaining areas of uncertainty.
U.S. FTC challenges pharma deal on the basis of conglomerate concerns
The U.S. Federal Trade Commission (FTC)’s suit to block Amgen’s acquisition of Horizon Therapeutics raises an unusual portfolio theory of competitive harm that has not been seen in U.S. merger cases for decades. The challenge returns FTC enforcement to controversial positions that it and the Department of Justice (DOJ) Antitrust Division took before the Chicago school revolutionised antitrust policy in the 1980s.
It alleges that the deal would allow Amgen to leverage its portfolio of blockbuster drugs to entrench the monopoly positions of two Horizon medications in violation of Section 7 of the Clayton Act, which prohibits transactions that may substantially lessen competition, or tend to create a monopoly.
In particular, the FTC claims that, post-merger, Amgen would be able to use rebates on market-leading drugs, eg Enbrel, to pressure insurance companies and pharmacy benefit managers (PBMs) into favouring Horizon products used to treat thyroid eye disease and chronic refractory gout, respectively Tepezza and Krystexxa.
The FTC alleges that the value of the rebates that Amgen can offer as part of its cross-market bundles “may make it difficult, if not impossible,” for smaller rivals who are developing competing drugs to match the level of rebates that Amgen would be able to offer.
Notably, the FTC suggests that the deal valuation, which is highly dependent on growing Tepezza and Krystexxa, would incentivize Amgen post-acquisition to “raise Tepezza and Krystexxa rivals’ barriers to entry or dissuade them from competing as aggressively if and when they gain FDA approval”. In addition, the agency cites Amgen’s past history of engaging in cross-market bundling to gain its drugs preferred placement on insurers’ and PBMs’ medication lists.
The case is significant for a number of reasons.
First, it is likely the first government challenge in the U.S. asserting a portfolio theory of harm, where the alleged anti-competitive lever would be the combined firms’ ability to obtain better rebates on the basis of the collective product portfolio. Notably, the FTC is alleging that the merger impacts competition even though the parties’ products are not in overlapping or vertically-related markets. The last time such a theory was asserted by the U.S. government was the FTC case against Procter & Gamble’s acquisition of Clorox Chemical Co., which went up to the Supreme Court and resulted in a 1967 decision in favour of the agency to block the deal.
Together with the DOJ, the FTC plans to address conglomerate issues or “ecosystem” type effects in joint merger guidelines. Draft guidelines are expected to be released soon, and will be of relevance to deals across the U.S. economy.
Second, it is a reminder of the FTC’s current focus on anti-competitive rebate schemes in the pharmaceutical sector. Given the FTC’s ongoing market inquiry into PBM’s business practices and its June 2022 policy to ramp up enforcement against PBM rebates and fees that block patients’ access to competing lower-cost drugs, the industry was already on notice. This latest case indicates that the FTC is learning from these inquiries and will use merger control enforcement to attempt to remedy transactions it views as anti-competitive.
Finally, this is the FTC’s first challenge to a pharmaceutical merger in quite some time. In announcing the challenge, FTC Bureau of Competition Director Holly Vedova warned that the “FTC won’t hesitate to challenge mergers that enable pharmaceutical conglomerates to entrench their monopolies at the expense of consumers and fair competition”.
We will keep you updated on the progress of the FTC’s challenge and report once the agencies’ draft guidelines are finalised.
U.S. Supreme Court ruling paves the way for challenges to FTC administrative proceedings
In an important ruling with the potential to materially impact how antitrust cases are brought in the U.S., the U.S. Supreme Court has held that litigants can bring constitutional challenges in federal district court against the Federal Trade Commission (FTC) and the Securities Exchange Commission (SEC) without first fully exhausting administrative proceedings.
In twin cases, one against the FTC and one against the SEC, the plaintiff challenged the ability of the FTC and SEC to pursue litigation before an FTC or SEC Administrative Law Judge, respectively, in lieu of litigation before a federal court judge. In addition, the plaintiff challenged the FTC’s constitutionality in combining prosecutorial and adjudicative functions within the same agency. It also claimed that the authority to issue orders remedying the agency’s own allegations with severely limited judicial oversight is unconstitutional.
While not ruling on the merits of the challenge, the court set out where and when litigants can bring these types of claims. However, significantly, two justices set out their concerns over the FTC/SEC processes, appearing in principle to be receptive to the litigants’ claims.
It is likely that the court will soon consider the constitutionality of administrative adjudication. In the meantime, it will be interesting to see if the FTC in particular continues to bring risky cases before its own internal administrative court, or whether it rethinks this approach in light of the court’s ruling. Our alertgives you more details on the case and its implications.
Digital & TMT
EU, U.S. and UK antitrust authorities diverge on assessment of Microsoft/Activision Blizzard
This month we saw another major post-Brexit merger control divergence between the European Commission (EC) and the UK’s Competition and Markets Authority (CMA). Adding further complexity, the U.S. Federal Trade Commission (FTC) is seeking an injunction of the deal before the agency’s Administrative Law Judge on grounds that go beyond the concerns raised by the UK and EC.
The EC has conditionally approved Microsoft’s proposed acquisition of Activision Blizzard after the CMA prohibited the deal in April.
The two authorities were fairly aligned in terms of the impact that the proposed acquisition is expected to have on competition.
Following in-depth investigations, they both raised foreclosure concerns in relation to Microsoft’s strong position in the nascent rapidly-evolving cloud gaming market, concluding that it would be detrimental to competition if Microsoft made Activision’s games (such as Call of Duty) exclusive to its own cloud game streaming service. The EC added that any such exclusivity could also strengthen Microsoft’s position in the market for PC operating systems. The CMA stressed that strengthening Microsoft’s position in cloud gaming would risk undermining innovation and the development of the market.
However, the authorities took diverging positions when assessing the behavioral remedies offered by Microsoft.
The EC has accepted 10-year “comprehensive” licensing commitments:
- a free license to EEA-based consumers that would allow them to stream, via any cloud game streaming services, all current and future Activision Blizzard PC and console games for which they have a license
- a corresponding free license to cloud game streaming service providers to allow EEA-based gamers to stream any of Activision Blizzard’s PC and console games
The EC stated that, based on “hard evidence” and “extensive information and feedback” from rivals and customers, including game developers and distributors and cloud gaming platforms, Microsoft’s licensing offer would “fully address” the EC’s antitrust concerns.
Notably, the EC goes on to say that the commitments “represent a significant improvement for cloud game streaming compared to the current situation”. It believes that making Activision’s games available in this way will actually “boost the development” of cloud game streaming technology generally as well as enable more EEA consumers to stream the games.
In stark contrast, the CMA found that Microsoft’s proposal had “a number of significant shortcomings connected with the growing and fast-moving nature” of cloud gaming services. The CMA considered that the remedy did not sufficiently cover different cloud gaming service business models, including multi-game subscription services, and was not sufficiently open to providers wishing to offer versions of games on non-Windows PC operating systems. It was also concerned that the proposal would standardise the terms and conditions on which games are available.
Fundamentally, the CMA was strongly opposed to behavioral commitments replacing “a free, open and competitive market with one subject to ongoing regulation”. It therefore concluded that blocking the deal “would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention”.
The CMA is not alone in its opposition of the transaction. Notably, the FTC sued to block Microsoft/Activision Blizzard in December 2022 detailing wider antitrust concerns. It claims the deal would harm competition in high-performance gaming consoles and subscription services by denying or degrading rivals’ access to gaming content. The FTC was reportedly not interested in having any remedy discussions. An in-house administrative court trial is scheduled to begin in August. Reviews are ongoing elsewhere, including in South Korea, Australia and New Zealand.
For parties to transactions with a possible impact in both the UK and EU, there are two important takeaways.
First, do not expect the CMA and EC to reach the same outcome, even if they find similar substantive concerns. Presenting consistent arguments across EU and UK (and any other merger control) filings can clearly help to manage this risk, although cannot completely remove it.
Second, when designing any remedy offer bear in mind the potential for differing assessments and approaches. Microsoft/Activision Blizzard is practical proof of the CMA’s strong preference for a structural fix over behavioral commitments. Cargotec/Konecranes (the other major post-Brexit merger divergence between the CMA and the EC) demonstrates that the CMA is sceptical even of certain types of structural remedy, such as “mix-and-match” divestments which carve out assets from each merging party.
The EC, on the other hand, may be more amenable to both of these types of remedy. In digital sector deals in particular, an offer of behavioral commitments may get traction, eg to address concerns over access or where the EC considers the parties’ proposal is “simple” and “not hard to monitor” – this was how EC Executive Vice President Margrethe Vestager reportedly described Microsoft’s 10-year licensing commitments in comments to the press.
In terms of the next steps for the Microsoft/Activision Blizzard deal, the parties plan to appeal the CMA’s decision. They will no doubt be boosted by the outcome of the EC’s review. The CMA, however, remains resolute in its objection to the transaction. We will keep you posted as further developments unfurl.
UK CMA starts informal review of AI foundation models as other authorities have AI in their sights
The UK’s Competition and Markets Authority (CMA) has launched an “initial review” of competition and consumer protection considerations in the development and use of artificial intelligence (AI) foundation models.
Foundation models are a type of AI technology “that are trained on vast amounts of data that can be adapted to a wide range of tasks and operations”. Applications include chatbots, writing assistants, coding and artistic image generation. Examples include OpenAI’s GPT-3 and 4.
In line with the UK government’s March 2023 White Paper, the CMA intends to produce principles to guide the ongoing development of foundation models and ensure continued “vibrant innovation” benefitting consumers, businesses and the UK economy.
The CMA’s review may also inform recommendations to the government and other regulators, and the authority could ultimately initiate a more formal market study or investigation.
The CMA is not the only antitrust authority to have AI on its radar. Many share a concern that the development of generative AI could further entrench the position of large technology companies.
In a recent op-ed piece in the New York Times, Federal Trade Commission (FTC) Chair Lina Khan warned that the FTC and other regulators must be vigilant to antitrust risks. She notes that “enforcers have the dual responsibility of watching out for the dangers posed by new AI technologies while promoting the fair competition needed to ensure the market for these technologies develops lawfully”.
Elsewhere, in March, the Competition Commission of South Africa announced that it would evaluate the significance of generative AI search support as part of its market inquiry into the distribution of media content on digital platforms.
In April, EC Executive Vice President Margrethe Vestager reportedly noted that the European Commission (EC)’s work on competition in AI is in an exploratory phase and that the EC plans to create an office to investigate potential AI-related concerns. She also stated that there is scope for the Digital Markets Act to be amended to address any future AI concerns that the EC identifies.
In terms of regulation more generally, this month the EU took a step closer to putting in place “the world’s first rules on Artificial Intelligence”. A report on the European Parliament’s vision for the AI Act, adopted by European Parliament committees, included obligations for providers of foundation models “to guarantee robust protection of fundamental rights, health and safety and the environment, democracy and rule of law”. But there are concerns that the Act’s registration requirements, extensive use of standards not yet defined, and international reach all risk introducing significant uncertainty, and potentially making certain models of AI innovation unsustainable. The Act risks opening yet another area of regulatory divergence between U.S., EU and other regulators.
We will keep abreast of antitrust reviews and enforcement worldwide, and update you when the CMA reports on its findings – expected in September 2023.
Industrial & Manufacturing
European Commission’s Norsk Hydro/Alumetal clearance rules out “green” aluminum concerns
This month the European Commission (EC) unconditionally approved Norsk Hydro’s proposed acquisition of Alumetal.
Significantly, it marks the EC’s first unconditional phase 2 clearance since 2020 (and was closely followed by a second – Viasat’s planned purchase of Inmarsat). What makes the EC’s Norsk Hydro/Alumetal investigation really stand out, however, is its focus on the impact of the deal on “green aluminum”.
In particular, the EC detailed “green killer acquisition” concerns when it referred the transaction – notably worth only EUR232m and originally filed under the EC’s simplified procedure – for an in-depth review. It noted Alumetal’s “strong growth potential for the supply of advanced foundry alloys made from recycled aluminum, which are used to produce vehicles that are more fuel-efficient and therefore can reduce emissions”.
When clearing the deal, EC Executive Vice President Margrethe Vestager said that the acquisition will not negatively impact the competitive landscape for certain aluminum products, “[e]specially green ones”.
Specifically, the EC’s phase 2 review ruled out antitrust concerns in relation to solid advanced aluminum foundry alloys. The authority cited the parties’ “moderate” combined market shares, the existence of a number of sizeable alternative suppliers, “including green players”, and the fact that the parties are not close competitors in the market.
The EC also concluded that the vertical relationships between Alumetal as a producer of aluminum master alloys and Norsk Hydro as a potential customer (as a producer of casthouse products) would not foreclose rivals because of the presence of sufficient alternative suppliers and customers.
There are two key takeaways.
First, merging parties should prepare for the EC to consider – as part of its competitive assessment – the impact of a transaction on the EU’s green transition. In accordance with the goals of the European Green Deal, the EC will, for example, examine any potential effect on innovation in green technology, recycling and sustainable industry, decarbonising industrial processes and pollution.
Second, a phase 2 review will not necessarily result in remedies or prohibition. Unconditional clearances following an in-depth investigation are not common, but sometimes the EC will need the extra time to, eg, gather information to dismiss any provisional concerns. In addition to the two EC unconditional phase 2 clearances, this month has also seen the UK’s Competition and Markets Authority unconditionally clear Viasat/Inmarsat, in large part based on additional evidence of competitive entry into the satellite communications sector during phase 2.
For more on antitrust intervention levels in M&A across the globe, see our Global trends in merger control enforcement report.
Mid-trial settlement sees U.S. DOJ accept its first merger remedy in 18 months
The U.S. Department of Justice (DOJ) Antitrust Division has agreed to settle its challenge to Assa Abloy’s planned acquisition of Spectrum Brands’ hardware and home improvement division. In doing so, the DOJ steps away from this Administration’s stated no-settlement policy for mergers.
Under the proposed settlement, Assa Abloy will divest various assets to Fortune Brands Innovations. The DOJ notes that the divestments are “designed to allow Fortune to compete in the markets for premium mechanical door hardware and smart locks used in residential and multifamily buildings”. The settlement remains subject to court approval.
The case is significant in marking the first merger remedy accepted by the DOJ since current Antitrust Division head Jonathan Kanter took office in November 2021.
The DOJ under Kanter’s leadership has become sceptical of the efficacy of merger remedies in addressing antitrust concerns, with Kanter commenting that remedies short of blocking an anti-competitive deal “too often miss the mark”. Assa Abloy/Spectrum Brands shows that the DOJ is nevertheless open to divestment remedies in some situations.
This could even be the case where the agency is not completely convinced that the remedy package will fully address its concerns. In an impact statement filed with the settlement, the DOJ was clear that it did not contend that the remedy would “fully eliminate the risk to competition” alleged in its complaint. However, it agreed to the settlement based on the “totality of circumstances and risks” associated with the court proceedings.
One element of the remedy package enables the DOJ to reopen the proceedings to seek additional divestitures if the monitoring trustee – to be put in place to ensure compliance with the remedies – determines that Fortune has not replicated the “competitive intensity in the residential smart locks business that was lost”. It remains to be seen whether we will see similar provisions in other divestment remedy packages going forward.
Overall, the case is a positive precedent for merging parties seeking to persuade the DOJ that their deal should be allowed to close with remedies to fix any alleged agency concerns. For more on the approach of antitrust authorities around the globe to merger remedies, see our Global trends in merger control enforcement report.
Labour
U.S. DOJ’s criminal no-poach prosecutions dealt significant blow with further acquittal
On 28 April, a U.S. federal judge issued a rare bench acquittal on a motion by six aerospace industry executives who were being prosecuted by the U.S. Department of Justice (DOJ) for allegedly fixing wages and entering into no-poach agreements.
The Connecticut judge concluded that an alleged blanket agreement not to hire “allowed for exceptions that were regularly used even during periods of hiring ‘freezes’”. For example, a supplier could hire engineers and other skilled labourers if they separated from their prior employer. The decision underscores the complexities in prosecuting these novel charges.
It is the DOJ’s fourth consecutive loss in criminal labour collusion trials. The DOJ lost a further case involving home healthcare agency owners in March 2023.
Significantly, in this most recent case the judge concluded that “as a matter of law” the case “does not involve a market allocation under the per se rule” of the Sherman Act. In effect, the judge found that the agreement was not inherently anti-competitive, the DOJ had produced insufficient evidence and no reasonable juror would have found the individuals guilty.
Unusually, the motion to acquit was granted during the trial, before the defence presented its case to the jury.
Overall, the case is a significant setback for the DOJ’s labour market enforcement efforts. The inference is that in future cases the DOJ cannot necessarily rely on no-poach agreements being “per se” criminal violations of antitrust law.
Instead, it may have to meet the “rule of reason” standard applied in other decisions and therefore produce evidence of the effects of the agreements, market definition and specific market harms. Indeed, the bar as to what constitutes per se anti-competitive conduct is a high one; it remains unclear if any agreements – including more restrictive “naked” no-poach agreements – can be assessed under the per se standard.
All eyes are now on the outcome of a criminal case against Surgical Care Affiliates as well as civil litigation against the companies that employed the individuals acquitted last month. Outwardly, the DOJ still appears committed to enforcement, with Antitrust Division head Jonathan Kanter in March describing criminal prosecutions against alleged deals restricting wages and worker mobility as an important priority. We will keep you posted.
Meanwhile, the DOJ has suffered another criminal trial loss – this time related to bid-rigging. A jury acquitted a concrete repair and construction firm and its chief executive of charges that they participated in a conspiracy to rig bids for public contracts in Minnesota.
Life Sciences
Dutch court quashes healthcare merger prohibitions
In recent months, the Court of Rotterdam has annulled two separate prohibition decisions by the Dutch Authority for Consumers and Markets (ACM) in healthcare markets.
In December 2021, the ACM blocked Bergman Clinic’s proposed acquisition of Mauritskliniek. Both parties are independent treatment centers that provide plannable specialist medical care. Bergman Clinic is owned by private equity firm Triton.
The ACM concluded that the transaction would strengthen Bergman Clinic’s “very strong” bargaining position vis-à-vis health insurers. The authority was concerned that it could allow Bergman Clinics to demand price increases, on top of healthcare prices that had “risen considerably more” than that of other independent treatment centers and hospitals offering the same type of care.
However, this month the court ruled that the ACM had misinterpreted responses given by health insurers in interviews. The court suggested that the ACM may have even influenced the insurers’ answers by sharing with them the results of a pricing study. It also criticised the ACM for failing to follow up on indications that insurers’ customers view other indep
