Bloomberg Law
May 11, 2023, 3:11 PM

ANALYSIS: How ‘Litigating the Fix’ Is Upending Merger Review

Eleanor Tyler
Eleanor Tyler
Legal Analyst

The Department of Justice announced on May 5 that it reached a settlement with Assa Abloy AB, a Swedish lock manufacturer, ending the DOJ’s lawsuit seeking to block Assa Abloy’s $4.3 billion merger with US lock maker Spectrum Brand Holding Inc. The agreement will see Assa Abloy divest assets to Fortune Brands Innovations, Inc., and the move is intended to continue competition in the markets for premium mechanical door hardware and smart locks.

In the past, a company reaching a settlement with the DOJ to divest assets in order to complete a merger would be unsurprising. The Assa Abloy settlement is the first one that the DOJ has reached in a merger case in the past year. In settling, the DOJ indicated that only blocking the deal would fully protect competition, but the risks of losing the case were greater than the risk of settling for less than full competition post-merger.

That’s not how the DOJ normally talks about settlements—or how it reaches them. In the past, the agency would negotiate a consent order before filing suit against a deal. Two things are at work here:

  • the US antitrust enforcers, DOJ and FTC, have fundamentally changed their approach to remedies in merger enforcement, having concluded last year that divestitures often don’t suffice to remedy a problem merger; and
  • courts increasingly listen when merging companies argue that a proposed divestiture will remedy any anticompetitive problems with a deal, a strategy called “litigating the fix.”

Neither trend will surprise antitrust practitioners who have been watching this unfold for more than a year. But there are wider implications—the decision-maker to whom a company is pitching divestiture remedies has fundamentally changed. The process, hazards, and outcomes of merger review aren’t what they used to be, either.

Negotiating to Yes

Negotiations about divestitures in a merger enforcement investigation used to happen in private. The DOJ and the FTC would exchange information with the parties, haggle about what assets might be divested, and typically reach an agreement about how to proceed without involving a court. The resulting settlement would be published, get court approval, and the merger could close.

When I say the parties and agencies “typically” reached agreement, I mean that in fiscal year 2021, the last year for which full, official data are available, parties reported 3,520 mergers to the agencies pursuant to the Hart Scott Rodino Act, and the FTC challenged 18 deals while the DOJ challenged 14. Of the 18 deals, the FTC reached a consent order (settlement) in five, seven were abandoned or restructured, and the FTC brought cases to block six. And of the 14, the DOJ reached a consent decree in nine, saw three deals restructured, and challenged two deals in court.

The US enforcement agencies counted consent agreements reached this way as a win. The divestitures (or occasionally other remedies) that the agencies negotiated were intended to maintain competition following the merger, and remedies studies showed that they generally did so.

No More Settlement

But in 2022, the agencies began to question whether settlements are really a “win.” In a January 2022 speech, DOJ antitrust chief Jonathan Kanter said that “merger remedies short of blocking a transaction too often miss the mark.” He added that complex settlements in merger cases too often “suffer from significant deficiencies,” and therefore the DOJ should seek to block deals rather than accepting negotiated remedies in most situations. “It is the surest way to preserve competition,” he said.

According to Dechert LLC‘s Antitrust Merger Investigation Timing Tracker (DAMITT), the agencies concluded only eight consent agreements in merger investigations during calendar year 2022 (all from the FTC), and the Assa Abloy settlement is the first one they’ve reached this year. The agencies are on track to file around the same number of challenges they have in recent years, but they clearly aren’t settling merger challenges like they did in the past.

Instead, parties seeking to merge are bringing their proposed remedies to court when the agencies challenge a merger. “Litigating the fix” isn’t a new tactic, but is becoming increasingly successful. The approach really took off after 2020, when both a chemical producers merger and the T-Mobile/Sprint deal defeated agency challenges in court using proposed remedies. More cases have followed. Courts increasingly seem to be evaluating merger challenges in light of the proposed divestitures, rather than considering the challenge on the basis of the deal as inked. Other parties are currently trying the tactic.

‘Litigation Risk’

Which brings us to the Assa Abloy case. The DOJ agreed to settle, permitting the Assa Abloy-Spectrum deal to close, based on divestitures that Assa Abloy proposed and litigated during a bench trial before the newly-appointed Judge Ana Reyes.

In a remarkable statement in its competitive impacts assessment, the DOJ readily admitted that it believes the divestitures won’t “fix” the anticompetitive harm caused by the merger. The agency said it’s agreeing to the deal because, “based on the totality of circumstances and risks associated with this litigation,” this deal represents the public interest.

In short, the DOJ likely saw the risk not only that the deal would be ok’d by the court, but that the resulting opinion might be harmful precedent beyond the boundaries of this one case.

Big Deals, Big Stakes

Fundamentally, therefore, companies in deals that will probably draw antitrust scrutiny face a different world. The rise of the fix fundamentally changes the negotiations during a merger investigation, shifting the balance of power and likely the substance of talks. That alone will likely impact which deals are inked and closed.

There has always been a perverse incentive at work in merger review: Exactly those deals that pose the most competitive danger are likely to generate the most profit. These deals are the most worthwhile for the parties to fight with the DOJ/FTC to complete. When you add the costs and uncertainty of litigation, only the most profitable deals will be worth the fight. The bigger the players, the bigger the deal, the more likely the deal will be going through after a battle in court. That’s probably not the best policy outcome.

The process has changed fundamentally as well. Negotiations that used to be private will be hashed out in court—expert agency evaluation will be replaced by a remedies decision by a randomly assigned judge. Each deal will essentially face a unique process. And the agencies, on behalf of the public, will more often have to cut their losses when it comes to a purportedly anticompetitive deal. The goal of equal footing for merging parties is eroded, and confidence in the process may be also.

Bloomberg Law subscribers can find related content on our Antitrust Practice Center page.

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