FTC Behavioral Remedies. Commissioner Edith Ramirez Federal Trade Commission ABA Antitrust Fall Forum November 17, 2011

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1 FTC Behavioral Remedies Commissioner Edith Ramirez Federal Trade Commission ABA Antitrust Fall Forum November 17, 2011

2 Behavioral Remedies Behavioral remedies more commonplace in conduct cases Injunctions, cease & desist orders, and order provisions prohibiting continuation of illegal conduct or requiring affirmative conduct to rectify harm Behavioral remedies disfavored in merger cases except where substantial mergerspecific efficiencies would be lost if relief were structural 2

3 Behavioral Remedies: Horizontal Mergers Behavioral remedies are generally discouraged strong preference for structural relief Difficulties of behavioral remedies arise most acutely in the horizontal merger context Difficulty identifying all the ways that firms compete to ensure a return to a competitive market Hard to structure and monitor relief between former direct competitors in same business line Risk unintended consequences (e.g., prohibition may limit the party s ability to respond to changing market dynamics) Often limited duration 3

4 Behavioral Remedies: Horizontal Mergers Evanston is a notable exception (FTC 2007) Consummated merger relief ordered seven years after closing and costs to separate the hospitals would be great Quality improvements made post-close would not survive merger and delays to re-implement Cardiac surgery program State-of-the-art medical records computer system Rather than divestiture, FTC required separate negotiating teams and contracting for each hospital 4

5 Behavioral Remedies: Horizontal Mergers Short-term behavioral remedies are often a useful supplement to structural relief Aid in transfer of assets Examples: Contract modification (Cardinal Health Inc. FTC 2011; Dun & Bradstreet Corp. FTC 2010; Lubrizol Corp. FTC 2010) Supply agreements (Perrigo Corp. FTC 2011; Teva Ltd. 2011) Technical support obligations (Perrigo Corp. FTC 2011; Teva Ltd. 2011) Non-solicitation of transferred employees for a fixed time (Houghton Int l FTC 2010) Access to crucial services needed to compete (Pilot Corp. FTC 2010) 5

6 Behavioral Remedies: Vertical Mergers Behavioral remedies almost exclusively used in vertical mergers Appropriate to preserve efficiencies yet prevent competitive harm Structural remedies may be used for a vertical merger, but behavioral remedies are often effective Concerns are not loss of a competitor, but change in competitive incentives and increased ability to exploit market power Effectiveness and enforceability remain concerns 6

7 Behavioral Remedies: Vertical Mergers Approach to behavioral remedies in horizontal and vertical mergers largely unchanged over last two decades More likely in industries with close government oversight E.g., Defense; Telecom; Utilities More likely in consummated mergers 7

8 Firewalls Behavioral Remedies: Vertical Mergers Prevent information flowing from the acquired business up (or down) to the acquirer Generally requires a monitor Examples: FTC PBM Consents Eli Lilly & Co. (1995); Merck & Co. (1999) FTC Defense Merger Consents Alliant Techsystems, Inc. (1995); Boeing Co. (1996); Raytheon Co. (1996); Lockheed Martin Inc. (1996) FTC Bottler Consents PepsiCo & Coca-Cola Company (2010) Irving Oil Co. (FTC 2011) 8

9 Behavioral Remedies: Vertical Mergers Non-discrimination/Fair Dealing Upstream firm must offer similar terms to third-party customers that it offers to its subsidiary Raises concerns about what constitutes fair terms Susceptible to evasion and can be difficult to monitor Examples: Silicon Graphics (FTC 1995) Time Warner Inc. (FTC 1996) Merck & Co. (FTC 1998) America Online, Inc. (FTC 2000) Boeing Co. (FTC 2007) 9

10 Behavioral Remedies: Vertical Mergers Compulsory Licensing Provisions Enables competitors to adjust to the change in ownership of a key input needed to preserve competition FTC would disfavor an open license without defined terms and licensees Often terms derived through arbitration Examples: Cadence Design Sys., Inc. (FTC 1997) Ceridian Corp. (FTC 2000) 10

11 Behavioral Relief in Mergers and Other Enforcement Actions Mark S. Popofsky Ropes & Gray LLP Washington, D.C. November

12 Road Map/Background Why discuss Behavioral Remedies? Notable recent use of Behavioral Remedies by the FTC and DOJ, including in horizontal context. Significant difference in tone between the 2004 Antitrust Division Policy Guide to Merger Remedies 1 (decrying conduct remedies as more difficult to craft, more cumbersome and costly to administer, and easier than a structural remedy to circumvent ) and 2011 Guide 2 (expressing greater flexibility in finding a remedy that works ). Rationale for Behavioral Remedies Types of Behavioral Remedies Recurring Issues 1 ANTITRUST DIV., U.S. DEP T OF JUSTICE, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES (2004), available at 2 ANTITRUST DIV., U.S. DEP T OF JUSTICE, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES (2011), available at 2

13 Recent Examples Case Name Date Type of Merger Remedy Ticketmaster 2010 V-H Structural & conduct (longterm) Election Systems Gazette/Daily Mail 2010 V-H Structural & conduct (longterm) 2010 H Conduct (specific contracts incorporated) What s New 10 year prohibition on certain activities 10 year prohibition on certain types of competitive activity Joint venture; highly regulated solution 3

14 Recent Examples Case Name Date Type of Merger Remedy What s New PepsiCo 2010 V Conduct Firewall provision Comcast 2011 JV Conduct 7 year term; positive obligations George s Foods 2011 H Conduct Specific plant modifications Evanston 2007 H Conduct Post-merger challenge, too difficult to unscramble 4

15 Rationale Conduct remedies are designed to Prevent harmful/anticompetitive conduct BUT Preserve beneficial aspects of merger (or conduct). Structural relief might prove overbroad. May also be used in conjunction with structural relief to facilitate efficacy of such remedies (e.g., ensure divestitures are effective). More frequently used with vertical mergers but have recently been used for horizontal mergers. 5

16 Types of Conduct Remedies Firewall Provisions: Prevent firm from sharing information with acquired unit or with third parties. U.S. v. Ticketmaster Entm t, Inc., No (D.D.C. 2010) (merger with concert promoter) Prohibited disclosure of ticketing data to employees whose principal responsibilities involved operation of venues, concert promotions, or artist management services U.S. v. Daily Gazette Co., No (S.D.W.V. 2010) (newspaper merger) Newspapers had been engaged in joint venture before merger Required continued publication of and editorial independence for both papers In re PepsiCo, Inc., FTC File No (2010) (merger with bottlers) Instituted firewall between PepsiCo and bottlers to prevent exchange of competitively sensitive information concerning rival Dr. Pepper Snapple Group, which used same bottlers In re Evanston, FTC File No (2007) (hospital merger) Required separate negotiating teams for hospitals Highly unusual case in which a conduct remedy, rather than a divestiture, is more appropriate because merger had been consummated several years before 6

17 Types of Conduct Remedies Non-Discrimination Provisions: Presupposes that a transaction or conduct can change incentives with respect to dealings with third parties. Such remedies preclude imposing discriminatory terms (higher prices, lower quality, slower delivery, reduced service, or unequal access to products). U.S. v. Ticketmaster Entm t, Inc., No (D.D.C. 2010) (merger with concert promoter) Prohibited tying sales of ticketing services to concerts or artists that the combined company promotes U.S. v. Daily Gazette Co., No (S.D.W.V. 2010) (newspaper merger) Prohibited discrimination against Daily Mail in circulation or advertising activities U.S. v. Comcast Corp., (D.D.C. 2011) (Comcast/NBC joint venture) Requires joint venture to match best practices of its peers, and prohibits restrictive contracting practices 7

18 Types of Conduct Remedies Mandatory Licensing Provisions: Another remedy that redresses changed incentives. Preserve competitors ability to adjust to the change in ownership of a key input. U.S. v. Comcast Corp., No (D.D.C. 2011) (Comcast/NBC Joint Venture) Required providing online-video distributors with access to Comcast/NBC video programming on terms comparable to those given to multichannel video programming distributors. Transparency Provisions: Ensure increased ability to monitor conduct by requiring submission of information to regulators that otherwise would not be required. Increases risk that transparency could facilitate coordination in certain industry settings. U.S. v. MCI Commc ns Corp., No (D.D.C. 1994) Required disclosure of data, including pricing, to regulatory authorities 8

19 Types of Conduct Remedies Anti-Retaliation Provisions: Yet another response to changed incentives. U.S. v. Ticketmaster Entm t, Inc., No (D.D.C. 2010) (merger with concert promoter) Prohibited retaliation against concert venue customers switching to another ticket service Concerns about enforcement mitigated by DOJ s significant experience in enforcing a similar anti-retaliation provision in U.S. v. Microsoft, No (D.D.C. 2002) U.S. v. Comcast Corp., No (D.D.C. 2011) (Comcast/NBC Joint Venture) Prohibited retaliation against content providers for providing programming to online distributors Prohibitions designed to facilitate competitive entry: Prevent merged entity from entering contracts that may foreclose or slow market entry or that block competitor s access to inputs. U.S. v. Election Systems & Software, Inc. No (D.D.C.) (merger of voting equipment systems providers) Prohibits ES&S for 10 years from bidding for new installation of voting equipment or on procurements to replace more than 50% of a customer s installed equipment 9

20 Sui Generis Types of Conduct Remedies, Cont d U.S. v. George s Foods, No 5:11-cv (W.D. Va. 2011) (acquisition of Tyson Foods poultry processing plant) Purely horizontal merger with no structural remedy Required merged entity to make capital upgrades to the acquired plant and to increase its capacity within 60 days of final judgment 10

21 Recurring Issues Level of Monitoring/Intervention by Court/Agency Who will monitor? Periodic audits and self-produced reports required by DOJ in Ticketmaster Monitor appointed for five-year term by FTC in PepsiCo, in addition to requiring reports demonstrating compliance and prescribing certain specific procedures for implementation Comcast court requires annual reports for at least two years to ensure arbitration mechanism is providing adequate means for resolving disputes Who will resolve disputes? Trend toward binding arbitration E.g., U.S. v. Comcast Corp., (D.D.C. 2011) (Comcast/NBC) If disputes arise when negotiating contract terms, parties may apply to DOJ for permission to submit dispute to commercial arbitration Court required modifications to ensure adequacy of arbitration mechanisms 11

22 Recurring Issues Oversight Terms Positive obligations likely come with shorter timeframes for compliance E.g., 60 days (George s Foods) E.g., 6 months (Daily Gazette) Negative obligations tend to have longer timeframes E.g., 10 years (Election Systems & Software, Ticketmaster) E.g., 7 years (Comcast) 12

23 Recurring Issues Distortion of Incentives Do conduct remedies inhibit competition? Merger guidelines recognize that supply agreements with overly long terms may inhibit, not promote, competition E.g., Electronic Systems & Software (10-year prohibition on bidding) Agency/judicial regulation of private conduct 13

24 Conduct Remedies and Horizontal Mergers Howard Shelanski Georgetown University ABA Antitrust Fall Forum November 17, 2011

25 Conduct (Behavioral) Remedies Conduct remedies are most common in two kinds of cases: single firm monopolization and vertical mergers. Monopolization example: consent decree prohibiting Intel from offering market-share based discounts. Vertical merger example: Pepsi and Coca Cola commitments to prevent harm to thirdparty beverage producers served by the bottlers. 2

26 Conduct Remedies in Horizontal Mergers There is a well-established preference for structural remedies over conduct remedies in horizontal merger cases Structural remedies can reduce the concentrating effects of a merger and preserve market competition. Conduct remedies require on-going supervision and may have ambiguous and unintended effects. 3

27 Conduct Remedies in Horizontal Mergers, cont d Conduct remedies may still be used in horizontal mergers, especially in two circumstances: Mergers in which the only harm comes from a small, non-severable part of the transaction FTC s approval of the Pilot/Flying J truck-stop merger on condition that Pilot would, e.g., provide rivals with access to a fuel purchase card system Mergers in which structural relief is impossible or would defeat likely benefits from the merger Grifols/Talecris: commitment to enter into a manufacturing agreement with a new entrant Evanston Hospital merger 4

28 Conduct Remedies in Horizontal Mergers, cont d Conduct remedies can therefore be a complement or facilitator of structural relief (Grifols/Talecris) as well as a standalone fix. Conduct remedies are most likely to be a standalone fix in mergers that have vertical elements or to facilitate structural remedies (pilot/flying J) The agencies are very reluctant to accept conduct commitments as to price, although it has happened in particular circumstances. (XM/Sirius; Simon/Prime) 5

29 Conduct Remedies and IP Acquisitions Some horizontal mergers are essentially IP acquisitions. Licensing is a common remedy; essentially a form of structural relief A new kind of IP acquisition has been occurring that may also bring conduct remedies into the picture. Strategic acquisitions of IP that might be either legitimate means to protect a firm s competitive position but could also be used to harm rivals Rockstar/Nortel Google/Motorola 6

30 Conduct Remedies and IP Acquisitions, cont d Strategic IP acquisitions may be vertical or horizontal, and are likely a mix of both. Agencies may want to allow IP acquisitions that help competition while preventing anticompetitive elements. Allow IP portfolio to be acquired for defensive purposes but not for use against rivals Conduct remedies may thus be useful in these transactions Firewalls, non-enforcement commitments, and similar remedies may result. 7

31 Conclusions Conduct remedies disfavored in Horizontal mergers but still used. Mostly used to facilitate structural relief, address vertical aspects of mostly horizontal mergers, or allow mergers where structural relief is impossible Disfavored as a means to preserve premerger pricing but not unheard of May see increasing use in IP acquisitions 8