On November 9, The Capitol Forum hosted a conference call with Professor Steven Salop to get his views on where we are on “litigating the fix” and how he thinks courts should view the issue. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning, everyone. And thanks for joining today’s conference call. Our guest today is Professor Steve Salop, who recently wrote a paper called “Fixing “Litigating the Fix””. Steve is a Professor of Economics and Law at Georgetown University Law Center in Washington, D.C., where he teaches antitrust law and economics. And a quick note before we get underway. For the first part of the call, I’ll interview Steve. And then we’ll move into a Q&A format where we’ll entertain questions from the audience. If you have questions for us, please email them to editorial@thecapitolforum.com. And Steve, thanks so much for doing this today.
STEVE SALOP: Oh, you’re welcome. It’s my pleasure.
TEDDY DOWNEY: I think before we get into your paper, which you coauthored with Jennifer Sturiale, maybe we could just do a little quick background on what is litigating the fix? What are we talking about here?
STEVE SALOP: Okay. What it means is that the court would evaluate the sufficiency of the proposed remedy (or “fix”) to preserve competition, rather than just focusing on whether the original merger, as proposed in the HartScott would have been anti-competitive. So it’s not only going to look solely at the original merger as proposed, but it’s also going to focus on the merger as-remedied to see whether the remedy is sufficient.
TEDDY DOWNEY: Yeah, and can you drill down a little bit into some of the complexity here?
STEVE SALOP: Okay. The way it works is the firms file an HSR submission and the agency does a second request. And if the agency sees serious problems during the second request investigation, they tell the parties that the merger needs some kind of remedy or they are going to block it. The parties may (and often do) propose a remedy. There’s negotiation very often. And most of the time the agency and merging parties reach an agreement on the remedy. When that happens, the agency issues a complaint. And simultaneously, they issue a consent decree that contains the remedy. That happens a lot of the time.
But when they fail to reach an agreement, or if the agency chooses just not to negotiate, the government issues a complaint and they prepare to go to court. And at that point, the parties might ask the judge to consider a possible remedy rather than simply than simply adjudicate the merger as proposed. That is, the parties want to adjudicate the merger as fixed. And that’s where you get the term litigating the fix.
TEDDY DOWNEY: And how often does litigating the fix occur? And I guess as a part of that question, why is it more important now? I think to your recent point, when they fail to reach an agreement, there’s a lot more of that going on. So that might be part of it. But how often does this occur and why is it so important right now?
STEVE SALOP: Let me first talk about history. Since 2000, “litigating the fix” has been proposed 16 or 17 times, depending on how you count. And that’s about 40 percent of the litigated cases. So it’s really a high percentage of the litigated cases. And of the fifteen cases that have reached outcomes in District Court, it’s been accepted three times out of fifteen. It’s become more important over time. And it’s particularly important now because it appears that DOJ is hanging much tougher in the negotiations or perhaps not even negotiating at all.
TEDDY DOWNEY: Yeah, I think you’re seeing the same thing at the FTC too. They’re not willing to really agree to remedies and there’s more litigation. So you have a bit of a double whammy here.
STEVE SALOP: Well, I think it’s more DOJ than FTC. The FTC has accepted many consent decrees, including a massive divestiture in the Tractor Supply case. Tractor Supply was buying something like 160 stores, and the FTC agreed to a consent decree in which Tractor Supply would divest about half of them. So the FTC seems more open to settlements than DOJ.
TEDDY DOWNEY: Yeah, I guess we’ll see about that. So can you talk a little bit more about how the merging firms have succeeded in getting the courts to accept their fix? What are the circumstances and arguments and things like that?
STEVE SALOP: As I said, merging parties have gotten the scourt to accept fixes three times in the last 20 years. Arch Coal was a divestiture. Arch Coal had bought, I think, three mines. And then they agreed to divest one of them. Booz Allen and United Healthcare are the other two. In United Healthcare, there was a proposed divestiture of Change’s division that competed with United Healthcare. They proposed that divestiture, which the court accepted.
There also was a vertical aspect to the case. DOJ was worried that United Healthcare would be obtaining and using proprietary information from the clients that it competed with. There was no explicit remedy there. The court just found that United Healthcare would not engage in the expropriation of the information.
Booz Allen was a weird case. It was essentially litigated as an agreement under Section 1 rather than the merger under Section 7. DOJ discovered that Booz Allen and the target firm — EverWatch — were the only two likely bidders for an NSA (National Security Agency) contract. The DOJ alleged that the existence of the pending merger agreement would lead the parties not to bid against each other very hard, would not compete hard for the contract. Therefore, it wanted the court to enjoin the merger agreement. the DOJ proposed a fix that the merger would be delayed until after the contract was awarded, and that EverWatch and Booz would each have the ability to withdraw from or renegotiate the merger agreement at that point. This fix then would maintain their incentives to compete. The court said, they have explained why they would continue to compete hard against each other, despite the pending (or actual) merger. So there is no need to enjoin the deal or have any other remedy.
TEDDY DOWNEY: And so it seems like sometimes there are a lot of different circumstances. Does the court ever say they won’t even consider a fix at all?
STEVE SALOP: There were several cases before 2000 where courts said that. Since then, courts pretty much rejected consideration of the remedy in the Advocate and Ardaugh mergers. But usually, if the parties propose the fix in time so that the agency to have enough time to investigate at it, the court will consider it. The one thatis the most interesting is the most recent Penguin/Simon Schuster Publishing merger. The court denied the DOJ’s motion in limine not to consider the remedy. It said the issue doesn’t go to admissibility. It goes to weight. And then in the opinion that just came out, the court very emphatically said that they placed zero weight on the remedy proposal.
TEDDY DOWNEY: Interesting. So, weighing all these different things, how would you describe the current state of the law on litigating the fix?
STEVE SALOP: I would say that if the parties propose it in time, so that the agencies have time to analyze it, and if the proposal is definite rather than being vague, the court will be willing to considier the fix. What is more unsettled are the relative burdens, particularly the burden on divestitures. It seems that if the parties propose a conduct remedy, the court will treat it as a rebuttal issue and place the burden of production on the parties. But if it’s a divestiture, then sometimes the court may say that it will focus only on the new merger with the divestiture. It’will not look at the original merger at all. But that issue’s still unsettled.
TEDDY DOWNEY: Yeah, that seems pretty important where that burden is. Obviously, if you put the burden on the parties, it’s harder for them in court. Now, do the firms ever say they’ll only do the fix if the court says that the unremedied merger is illegal?
STEVE SALOP: In my research, I only found one example of a “conditional” fix. It was the Aetna merger. the fix proposal is usually made unconditionally.
TEDDY DOWNEY: I want to actually kind of stay on this for a second, because you mentioned that the DOJ sued in the Booz Allen case on the actual merger agreement as being illegal. Does that open the door for more of those? If the merging parties file a merger and they say, actually, we have a new one here, can the DOJ or FTC say, okay. We’ll deal with that one in a second. But we’re going to sue you on the agreed upon illegal merger, the original merger. Does it open the door to more of that type of litigation? Obviously, Booz Allen did not go well for DOJ, but it seems like a tactic they are open to.
STEVE SALOP: Well, the idea would have to be that the merger agreement the agreement as is, even before the merger closes is going to reduce competition. Kind of like gun jumping in its way. But the argument there would not be a Section 7 violation, because you’re not attacking the merger. You’re just attacking the merger agreement. So the agency would have to attack it under Section 1, where the burden of proof would be higher. So I don’t see that happening a lot.
Now, the Albertsons/Kroger situation is interesting. After the merger agreement was announced Albertsons announced an enormous dividend that some people are saying is going to make Albertsons a weak competitor and then use that weakness as a justification for the merger. That seems pretty unusual. And, I just read that the D.C. Court denied the TRO but the issue is still open in a court in the state of Washingotn. I’m not sure that I see the merger agreement itself becoming the focus of the FTC investigations, as opposed to the merger itself.
TEDDY DOWNEY: Yeah, the merger agreement versus what will happen if they merge.
STEVE SALOP: Yeah, what will happen in the future?
TEDDY DOWNEY: Now, let’s talk about your paper. I think a question, especially given the Kwoka Paper previously, why shouldn’t it just be banned? Why shouldn’t it just be prohibited? This whole idea of a litigating the fix. Why should it be allowed?
STEVE SALOP: I think that’s a good question. And I really started there. I more or less suggested that in an earlier article in 2013. But I’ve learned a lot since then. And right now, I don’t think it’s possible to kill this process and I don’t think it’s necessary, practical or beneficial to kill it. So let me just give you some facts.
I mentioned there have been 16-17 cases where the judge considered the fix. So I think it’s really blowing against the wind to try to ban them. I think a better approach would be to fix the process. As I once said to Rick Rule, who claimed that he wanted to “fix” Section 2, his proposal amounted to fixing Section 2 the way we fixed our cat. But I do not intend to go that far here. We should just mitigate any problems to prevent false negatives.
Courts have an inherent discretion to fashion a remedy in an antitrust case. So if the agency proposes to enjoin the merger as proposed, as a violation of Section 7, the court can always say, “Okay. Yeah, that merger’s anti-competitive, but I don’t think you need to enjoin them. I don’t think you need to have a permanent injunction for the merger. Instead, I’m going to fashion a remedy that permits the merger.” So I don’t think there’s good legal precedent to ban litigating the fix. I think you’d have to do it with legislation and I do not know if that is even feasible..
In addition, under the Kwoka/ Weber Waller proposal, the parties can always pull and refile. Suppose the agency issues the complaint and the parties want to litigate the fix, but there is a rule that you’re not allowed to litigate the fix. The parties can say, okay, we will withdraw our agreement and put in an identical agreement, but with a remedy. And the only difference here is that they will have to pay another $280,000 filing fee on a big merger. Our proposal instead mimics the HSR process without requiring a new HSR filing. Same waiting periods, same evidentiary burdens. So to that end, I don’t think prohibiting post-complaint remedy proposals would make much difference.
TEDDY DOWNEY: I think there’s tremendous sort of cost and uncertainty around redoing a deal though. I mean, you’re sort of leaving that out here, recutting the deal.
STEVE SALOP: It’s possible.
TEDDY DOWNEY: Yeah. I mean, I think the merging parties might not agree that that’s not significant. I mean, certainly the filing cost.
STEVE SALOP: The filing costs are minimal. For a $1 billion deal, the filing fee tops out at $280,000. That’s a half a week of work by the outside lawyers. But they could avoid the need for this renegotiation by putting these provisions into the original negotiated agreement. Just like they now negotiate a reverse breakup fee, they could negotiate that if a complaint is filed and no remedy is agreed to by the government, we will issue a new HSR filing that has a remedy.
TEDDY DOWNEY: Yeah, it’s interesting. Let’s keep going in the paper. We’ll come back to more questions in a minute. So you’re saying you can’t ban it. How would you limit it? What’s the sort of process that you came up with here?
STEVE SALOP: Okay, five steps. First, we want to make sure the agencies have enough time to investigate a definite proposal. So the proposal has to be definite. The firms need to identify the divestee and the terms of the deal. Or if it’s a conduct remedy, they need to have a definite remedy.
As for timing, we mimic the HSR steps. The firms would make a remedy filing. There would be a 30-day waiting period in which the government can issue the equivalent of a second request, a CID. After the parties certify compliance with the CID, then the court mandates a second waiting period before the trial phase starts. So that’s how you deal with the timing and definiteness.
Second, we would put an evidentiary burden on the parties, even for divestitures or partial acquisitions. I can go into that in more detail.
Third – and very important we recommend that the courts refuse to even consider two specific types of remedy proposals. One would be promises that the divisions of the merged firms will continue to compete. So we would say the court should not even consider the kind of remedy that was proposed in Penguin or in Booz Allen. The other would be proposals where firms have promised not to raise price such as H&R Block, /TMobile/Sprint and the Advocate health care merger. We would recommend outright rejection of those promises. Because these promises are in total conflict with economic incentives and also antitrust law.
Fourth, we recommend that certain other remedies should be treated with a high degree of skepticism, in particular vertical nondiscrimination provisions like in Illumina/Grail/United Healthcare or AT&T/Time Warner.
Finally and this also is really important we recommend that all of these promises be made legally binding and the court should oversee the impact of the remedy on the market. And the court should be ready and able to levy sanctions or modify the order if the remedy doesn’t work.
TEDDY DOWNEY: And you have these recommendations that the courts outright reject certain types of promises. What have the courts said about those types of promises to date?
STEVE SALOP: In Booz Allen, the court said that the staff at the two firms care about their personal reputations. They want to have reputations for competing. And moreover, if they don’t compete, the customer will realize that they shaded their bid and punish them in future contracts. So therefore, notwithstanding the fundamental economic incentives that the DOJ economist testified to, I find that there is more to incentives than just economics. In Penguin, by contrast, the court in effect said this is a useless remedy and did not to place any weight on it. Stephen King testified for DOJ and said that this remedy is like expecting a husband and wife buying a new house to bid against each other.
TEDDY DOWNEY: Yeah, that didn’t go over well with that judge, those promises. I want to take a little bit of a step back here. You say that these promises when you say they’re sort of behavioral promises I would say are sort of at odds with antitrust law. I mean, DOJ and FTC have been pretty adamant that they are not going to do behavioral remedies anymore and they show evidence that they don’t work. You seem to agree with that. I’m curious if you could sort of follow-up on why you’re against these types of behavioral remedies.
STEVE SALOP: There are horizontal remedies and there’s the vertical ones. The horizontal ones go completely against antitrust back 100 years. In Trenton Potteries, the Supreme Court said that claiming that you will set a reasonable price is not a defense of price fixing. And so it must follow directly that it can’t be a defense in a merger case either. And if a court is going to allow that kind of promise, the court’s is going to have to oversee the bidding process and future prices. And Trenton Potteries makes it clear that courts aren’t qualified to do that.
The second legal doctrine is Copperweld. Copperweld makes it clear that we treat a corporation as a unitary entity and that the divisions of a corporation are expected to cooperate and not compete. So you cannot bring a case saying that Toyota and Lexus are price fixing when they set their price jointly. Now, if you reject Copperweld and allow this kind of promise of intra-corporate competition as in Penguin, then maybe antitrust should force divisions of a corporation to compete with each other. The door swings both ways. And that is why I think that remedy is totally at odds with antitrust law as well as economic incentives.
With respect to vertical, I’ve always been suspicious of vertical conduct remedies. I like to say there are three ways to foreclose — deny, degrade, discriminate. It is very difficult to detect all the ways in which that foreclosure could occur in a way that’s sufficient to deter it from occurring. I consulted for Raytheon, which was opposed to the Lockheed Martin/Aerojet Rocketdyne merger. My analysis indicated that it would have been very difficult or impossible, even for an expert customer like the DOD, to detect and deter all the various ways that Lockheed might have used to foreclose rivals like Raytheon and others.
Maybe the merged firm could not totally deny rivals access to any cooperation or to Aerojet technology entirely. But it they could deny them early access to the best technology. It also could do things like assign the Bteam to support the rivals. And members of the B-team would realize, hey, it’s not really in our corporation’s interest to give this our best effort. It also would not have been possible for DOD to figure out if the fee had been increased above the competitive level.
So there’s so many ways in which you can foreclose. I mean, Illumina/Grail, Illumina’s proposed contract is really long and complex. And the FTC has claimed is does not cover everything. It is not clear how a court or a customer is going to be able to figure out whether the foreclosure is actually taking place, and prove it to a court?
TEDDY DOWNEY: We’ve got a question from the audience here, which I think kind of goes back to one of your points about what the state of the law is. The question is “wondering if Arch Coal, Time Warner and Change make it pretty clear – or actually TWX Arch Coal, Time Warner and Change make it pretty clear at this point that the fix is part of the transaction. So I think you’ve sort of already kind of disagreed with this, but if you can kind of address that as sort of a question.
STEVE SALOP: Well, I think that the concept of “part of the transaction” does not answer the relevant question. Let me talk about UHG/Change, and the divestiture remedy. The DOJ wanted to say that you should do the HHIs on the basis of the pre-merger shares of the two firms — as if there were no divestiture. Though, of course, UHG wanted to do the opposite. They wanted to say, well, the divestiture totally cures the problem. Well, if you take that position, the question’s going to be whether the divestee is going to provide the same degree of competitive intensity, as did the original firm. That’s the issue that needs to be litigated. And so the question is, who bears the burden of production on that issue?
The court (Judge Nichols) in UHC/Change said that he would have personally preferred the latter, but would use the DOJ’s approach and put the burden on the parties to show sufficient competitive intensity. He found that the divested firm did. So that’s where he came out.
In Arch Coal, the court took the divestiture into account and then calculated the HHIs based on the postdivestiture world, and the court did it in several different ways. And in the end, the said the DOJ satisfied its prima facie case, but weakly. And the court ultimately found for the parties.
One more case that’s worth mentioning here. I don’t know what TWX is either, but —
TEDDY DOWNEY: I think it’s Time Warner. Yeah, I think it’s Time Warner.
STEVE SALOP: Hold off on that. I think a really important case is the Libby case. Libby was proposing to buy the glassware business of Anchor. And when the government complained because there was an overlap in the part of the business where Anchor supplied restaurants (the food service business). So they proposed a remedy and they really amended the merger agreement so that Newell, which owned the Anchor, would retain the food service business and Libby would get the rest — the retail business, for example. Libby also got the factory and the molds. And so for the food service the business that Newell would retain, Newell would have to use a contract manufacturer to actually make the dishes.
The court concluded that Newell would be disadvantaged relative to how strong Anchor was previously. That is the post-merger firm would be competitively weaker than the pre-merger firm. Based on this finding that that Newell’s retained business would be such a weaker competitor, the court used the HHIs based on the pre-merger shares as a proxy. So it took kind-of an in-between sort of analysis.
As for Time Warner, what can you say about Judge Leon? DOJ never should have litigated when it found out Judge Leon was assigned. I supported the case in principle, but DOJ really screwed up the litigation at every step along the way. They proposed to reject the conduct remedy to a judge for whom they had previously proposed a very similar conduct remedy as a consent decree. I personally thought the Time Warner proposal, the AT&T proposal, was much weaker than the similar remedy in Comcast/NBC. But the DOJ never put a witness so on to say that. So the arbitration remedy just stood unrebutted. So, you have to litigate well. So I don’t think Time Warner is the same kind of example as Arch Coal or United Healthcare.
TEDDY DOWNEY: We’ve got a couple more questions here. First, this fixing remedies, optional fixes, seems to be a little bit of a creature of the previous way that the agencies reviewed deals. The FTC and DOJ for decades has sort of agreed that, hey, we can figure out a solution here. We can fix this deal. And so, it makes sense. You’re the lawyers for the merging parties and you say, hey, let’s try to get our deal done and let’s see if we can’t just sneak it through. And if it doesn’t sneak through, if it gets attention, then we’ll have this option to work out a solution that’s win/win for everyone. But now you’re in an environment where you’ve got a bad deal. I mean, you’re probably going to get sued. I mean, odds are if you’ve got a big bad deal with some hair on it, you’re going to get sued. And there’s two things there. And you’re not going to have your remedy really seriously considered.
So there’s no negotiating process really anymore. It’s more like you have a remedy in there you have, but they’re not going to accept it. So you’re sort of talking to a wall for the most part. What is the incentive for the companies to even have these anymore if you’re going to get sued anyway? Why don’t you just put in the fix from the getgo if you don’t really have the option?
STEVE SALOP: The agency might miss it. The incentive to selfdisclose is weak because the agencies are terribly resource constrained and they don’t always see the problem. So that’s the barrier to self-disclosure. And so better to wait and see what happens and go to court if necessary.
TEDDY DOWNEY: Usually, they have these like clauses that allow for disasters and things like that, that sort of signal, hey, there’s obviously a pretty big problem here.
STEVE SALOP: Well, sometimes they do and sometimes they don’t. I’m not sure what the question is, Teddy, frankly.
TEDDY DOWNEY: It’s more like you have this to make it specific to your paper, it’s almost like a solution to the way things were. And it’s like a very influx thing regarding the way the DOJ and the FTC operate around this. And so you’re going to have you have all these new pieces of information. As you bring up, you have two recent examples where either a state or the DOJ is litigating the actual merger agreement itself, right? Which, again, it sort of creates a little bit of incentive not to have these.
STEVE SALOP: Let me go back to where we are. DOJ is now signaling that it’s either not going to negotiate or it’s going to negotiate really tough. We don’t know exactly which it’s going to be. But let’s suppose they’re not going to negotiate at all. They’re just going to “just say no,” as I as I put it in my earlier article. The FTC has not revealed that that’s their policy yet. But let’s suppose the FTC does it as well. So now the parties realize that they’re not going to be able to negotiate a consent decree. The firms might say, gee, it’s really expensive to go to court. And so, we’re going to self-disclose and propose a remedy as part of the original agreement. But they also might say, we’ll just go to court if there’s a problem — which is what we have seen so far. You seem to be implying by your question that we might prevent them from going to court with a voluntarily proposed remedy. But as I explained earlier in the call, I do not think you can can’t prevent them from doing so.
TEDDY DOWNEY: Yeah, I was more thinking that the new policies that the FTC and DOJ are creating different incentives and that responding to them, you know, it seems like it might be a little tough to propose how the courts should handle something where it could be changing is really what I was getting at.
But we’ve got a couple other questions here. DOJ and Kanter’s solution to structural remedy appears to be let the parties fix it first and have DOJ ignore the remedy entirely and I guess either litigate or clear the transaction unconditionally. How is ignoring the remedy and clearing a transaction ever preferable to having the government as a signatory on a consent decree where they can monitor compliance?
STEVE SALOP: I think somebody has to monitor compliance. I think that’s very important. And my experience is that the agencies don’t do such a good job of monitoring compliance. And what we’ve seen in these recent cases is the courts are reluctant to monitor as well. So an important aspect of my proposal is that the court would oversee the remedy. And indeed, I’d like to see them have the ability to modify the decree if it’s not working. Rather than just treating the decree as a contract and looking at the four corners, I’d like to have the decree, or the order by the judge, modifiable under certain circumstances. I wrote a short article in Antitrust magazine proposing that.
TEDDY DOWNEY: Yeah, it’s an interesting question. Because if you’re against consent agreements, I think it does make sense to not enter into them if you don’t think they’re going to work. And I think that there’s a big gap now between these antitrust enforcement and what they think would actually work versus others. Also resource constraints, I’ve been covering these consent agreements for 15 years. I guess I’ve seen one that seemed to work at all that was kind of complex, I would say – which was the beer merger and even that –
STEVE SALOP: Which beer merger?
TEDDY DOWNEY: At the time when Anheuser-Busch/InBev divested Modelo , you had some kind of aggressive competition coming out of that. But there were concerns around that as well. That was pretty complicated, but it was a big divestiture. I’ve got one example where it kind of worked and pretty much every other one, just interviewing these people monitoring – there’s no real monitoring of these. I mean, I’m not saying anything mean. I’m not trying to be mean, but it’s very difficult to monitor. The monitoring is not really robust. So I kind of get it. But yeah, it’s a bit of a tricky question.
STEVE SALOP: I just want to mention several things. In the FTC’s self-study that they released in 2017 and this was their self-study they claimed that only 66 percent of remedies were successful. The rest were either qualified successes, which meant it took more than two or three years, or failures. That’s a pretty low success rate.
TEDDY DOWNEY: Yeah, their bar was extremely low. Their bar was basically like, are those assets still even around? That was basically the bar.
STEVE SALOP: And then we have the disasters. We have the catastrophes, Hertz/Advantage and Albertsons/Safeway. But the other problem is that monitoring does not mean correction if it doesn’t work. I believe the poster child is the 1994 Microsoft decree, which didn’t do the job. And the court said, well, it’s a contract. You can’t show that they violated the contract. And so then DOJ needed to bring the new case, the big Section 2 case. So you have to make the consent decree modifiable if it’s not working. And that’s not easy. That means you need to monitor intensely. You need to have detailed information being reported. You probably need information from rivals as well. And you have to be able to modify the decree – and not in a way like in Safeway/Albertsons, where Albertsons was able to buy back some stores they divested.
TEDDY DOWNEY: Yeah, we could definitely spend a lot of time on these divestitures. But we’ve got another question here and we’re running short on time. So we’ve seen the parties waiting until after they get sued to propose a remedy. United Health/Change, Assa Abloy/Spectrum. In both of these, the parties mentioned they discussed remedies with the parties before getting sued. Any reason why they’re doing this? Is this litigation strategy and less time to give DOJ time to do due diligence? We’ve seen that. I think that is a bit of a theme. But you point out that that may not work simply because judges seem to be more willing to be receptive to remedies when they’ve given DOJ ample time.
STEVE SALOP: I can mention a couple of ideas. First a big law defense lawyer would tell you that we thought we were going to be able to negotiate a consent decree. We didn’t want to go to court. We just wanted to get our deal done. And we proposed the consent decree to them. We promised we would paper it up later, nail it down. But DOJ said no. And once they said no and sued us, then we decided to go to the judge and tell the judge that the DOJ was being unreasonable. We had a good consent decree in mind. And we want you to look at it. It was out-of-control agency trying to not do its job. So I think that’s what they would say, why they waited.
Now, suppose they are really trying to jam the agencies. In the old cases where they really did jam the agencies, the court said no. We have some experience with cases like that in Advocate and Ardaugh, and an earlier one, Franklin Electric. In Franklin Electric, I think they proposed the remedy during the hearing. And the court said, no, it’s too late.
So my proposal eliminates the jamming by making sure that the government has enough time. I think the defense lawyers would tell you today, as one of my friends did at lunch yesterday, that no judge is going to deny the agency from obtaining discovery. So that lawyer just didn’t see the need for my fancy proposal with its formal waiting periods and so on. He said, that’s not even necessary. The court’s going to give the agency discovery time. I disagree. I think you need to nail it down and so we have given some parameters that we recommend the court use –the same sort of timing parameters as in HSR, but without a new formal HSR filing.
TEDDY DOWNEY: Another question here. What do you think about the latest Albertsons/Kroger deal? And they had up to a 650 store divestiture. They had, I think, 100 to 350 in their proposed spinoff. And just given the track record of failed divestitures in supermarkets, what are your thoughts on that in terms of litigating the fix?
STEVE SALOP: Well, maybe the joking question is whether they planning to divest to Haggens? Look, it’s likely a really big divestiture. I would have thought it would be a nonstarter in today’s environment at ther FTC. But that’s why I brought up Tractor Supply. I was pretty shocked that the FTC took the Tractor Supply divestiture of half the stores.
TEDDY DOWNEY: Did that start when Chair Khan was there? Or did that start before she got there? Did that start and finish during her tenure?
STEVE SALOP: I don’t know. What difference does that make?
TEDDY DOWNEY: You know how these deals, they get on their path. It’s sort of like go through the system at the staff level and then they come up. I think it took a while to get the leadership in place to implement the new policies.
STEVE SALOP: I’ve certainly heard that firms are being more reluctant, that deterrence has increased. But what I pick up also is very limited. I don’t know the extent to which the new groups are actually having practical deterrence effects.
TEDDY DOWNEY: Let’s talk about Illumina/Grail really quickly. And then we do have one last audience question. Illumine/Grail, Bill Baer and AI wrote an amicus brief in that on litigating effects. I wanted to get your reaction to that and how you think the FTC will come out on Illumine/Grail.
STEVE SALOP: The AAI cited my article numerous times. So for that reason alone, I thought the brief was wonderful. I don’t know enough today about the facts to comment on whether Illumina’s remedy is sufficient. My article suggests that the Commission should look at it very skeptically. The promised behavior conflicts with fundamental incentives. It would be difficult to eliminate by contract all the ways that Illumina might foreclose. And it would be very difficult to detect violations. You know, deny, degrade, discriminate as the methods of foreclosure. So I would expect the full Commission is going to look at it very skeptically.
But there’s another issue in that merger which we should not ignore, which is that it appears that the main concern is not just current competitors, but also future competitors. And so there’s an issue it’s almost like a potential competition issue that’s also going to have to be resolved. But in terms of the remedy, sure. I think the FTC is going to look at it skeptically. Indeed, in Lockheed Martin/Aerojet, the vote to block was 4-0. Both Republicans, Commissioner Phillips and Commissioner Wilson, voted for that complaint, where you had what should have been thought of as an expert customer.
TEDDY DOWNEY: We’ve got one more question and then I have one before I let you go. In United Health/Change or Assa Abloy/Spectrum, DOJ didn’t get a suitable remedy proposed by the parties before settling. It only got it after. We already talked about that. Create a reason for them to sue if they expect to get a better remedy out of it. But if an appropriate horizontal remedy is proposed during the investigation phase, what is the upside of the DOJ to refuse an appropriate horizontal remedy that is very likely to be held up in court and be left with only vertical theories of harm that have a low chance of success?
STEVE SALOP: The possible benefit of the DOJ strategy is the commitment value. Sometimes there is a value to committing not to negotiate.
TEDDY DOWNEY: Yeah, I mean, I just think this fundamentally is the old lens of thinking how the agencies think. The agencies used to think what is the best thing we can get out of this bad situation? And that’s why they came up with all of these solutions. Maybe they didn’t want to go to court. Maybe they didn’t think they could win in court. And when you have a DOJ that very much cares about establishing principles and FTC, I think, is the same way of we don’t think these remedies work. We will not entertain them. We will sue you. That’s what you’re going to get. So I just don’t think they think of it. I don’t really think they think about this type of stuff.
STEVE SALOP: Well, Teddy, you’re really reflecting my 2013 article in the Fordham Law Review, that there’s a commitment value. Just say no. You will get more deterrence that way. But, that means the agency must be prepared to go to war. If its going to get deterrence, it’s going to take a while. And it will have to go to war with the Army it has, not with the Army it wants. And right now, the agencies have very limited armies because of their severe budget constraints. So it’s pretty amazing that DOJ has been able to litigate so many cases simultaneously. It’s litigated more cases than ever before in a period of time.
Now, unless they get more money, this “just say no” policy could fail. There’s an old joke it’s a law and economics joke that a policeman with one bullet can deter a crowd of a thousand people if none of the thousand people want to go first to rush the policeman and get shot. But if all one thousand rush the policeman at the same time, that could work because the odds that any specific person gets shot is just one in a thousand. So if all these firms propose mergers with the idea that DOJ can’t sue them all, then it can pay to take their their chances.
TEDDY DOWNEY: Well, I think, I mean, we’re about to see that. We cover all this potential litigation very closely. I mean, you can get to ten cases on mergers pretty easily, looking at the cases that DOJ and FTC are reviewing right now. So things might be tested on that front very soon.
I do want to ask you a little bit of a question on this resource thing. Because one of the interesting things that we’re seeing more is a lot of collaboration among international regulators. Timing has become a very big problem in a lot of these deals because internationally things can get dragged out. You’re now seeing states take an absolutely incredible active role. I mean, I don’t think people really understand how big a deal this Washington litigation is, not only putting private equity in the crosshairs, but also just creating, I think, another tool in the toolbox in some respects, both on litigating the deal itself and then having a state get out in front of something that would be harder for the FTC to do themselves, because the statutes in Washington are more favorable to the AG there than federal statutes. What do you make of all of that in terms of the portfolio of tools in the antitrust toolbox here?
STEVE SALOP: First of all, I’m really impressed by the Washington State AG. I’ve done some work on labor issues, and what they’ve done with the franchises is really kind of quite stupendous. As for international cooperation, in that you go to war with the Army you have, it now seems that we’ have NATO too. The CMA and the European Commission are the ones who are really taking the lead in a lot of these deals. And so that will increase the deterrence power of the U.S. agencies. They will kill deals, not the FTC or DOJ.
As for this Kroger/Albertsons, they are arguing that they were going to the dividend anyway and it is unconnected to the merger. I am not sure how the Washington State AG is going to win that case, if there is no relation to the merger.
TEDDY DOWNEY: Yeah, that’s something we’ve been looking into, but it’s part of the agreement. I mean, it’s interwoven into the agreement. And it would be something that would obviously come up when you’re negotiating a merger with that big of a dividend. I mean, it’s not like you wouldn’t talk about that. So that is a little confusing as well. But the judge seems to be focused more on what the effects to Albertsons would be from it. At least how that judge is looking at it seems favorable. But you’re saying on appeal or something like that.
STEVE SALOP: You have apparently studied it in more detail than I have. A firm is allowed to declare dividends. I don’t know whether it’s related to the merger or not.
TEDDY DOWNEY: Yeah, it’ll be interesting. Well, thank you so much. The paper, I think a lot of our listeners have read it. I noticed a nice jump on your downloads over the past couple of days. I encourage everyone to read it. I think it’s really interesting. This is a super-hot topic, very interesting area of law. We are excited to keep covering it. I am interested to see how you and our friend John Kwoka resolve the differences in your two papers over time. And thank you so much for doing this. It was a real pleasure.
STEVE SALOP: Okay. Thank you. And I just want to say that there’s a later version of the article posted on SSRN now, a November 4th version. The paper keeps advancing. So you might want to take a look at that version. The main difference is Section 5 and especially the issue on which remedies should be accepted. So thank you very much. This was fun.
TEDDY DOWNEY: Thank you. Thank you. And thanks, everyone, for joining the call today.
