Novel FTC Theory in Evonik, PeroxyChem Sinks Merger Win Streak

The Federal Trade Commission’s multi-year winning streak ended with Evonik Industries AG’s successful $625 million acquisition of PeroxyChem LLC after unsuccessfully employing an atypical legal strategy to block the deal.

Lawyers for the FTC invoked the uncommonly used theory of supply-side swing. The theory is that suppliers of a product have the ability to easily switch from one product grade to another, giving one firm the ability to monopolize an entire product market.

The FTC’s “mistake in my view was putting all of their eggs in one basket which is the supply side swing theory,” Joel Mitnick, an antitrust partner at Cadwalader, Wickersham & Taft LLP, said.

U.S. District Court Judge Timothy Kelly, who denied the FTC’s request to stop the merger, called the commission’s swing theory “a substantial departure from the typical way in which a product market is defined,” in his Feb. 3 opinion. Kelly’s initial decision denying the FTC’s merger block was issued Jan. 24.

The FTC’s “failure begins and ends” with its supply-side swing theory, Kelly said.

Uncommon Loss

For the FTC, the case marks the commission’s first merger loss in five years.

And making matters worse, such merger cases are usually easy for the government to win as Evonik’s acquisition of PeroxyChem is a horizontal deal between between firms that operate in the same industry- the hydrogen peroxide industry.

There aren’t that many antitrust cases that touch on supply side swing, so the FTC “went with a somewhat novel approach,” Jennifer Oliver, an antitrust litigator at MoginRubin LLP, said.

“It seems like if the FTC maybe played it a bit differently they could have gotten better results,” Oliver said.

The FTC has not commented on whether it will appeal the ruling.

Evonik and PeroxyChem closed their merger Feb 3.

Too Broad

The FTC challenged the deal in August 2019 by arguing Evonik’s acquisition of PeroxyChem would reduce competition in the hydrogen peroxide industry, leaving only three other other hydrogen peroxide producer in the Southern and Central U.S.

In defining the market impacted by the deal, the FTC chose to lump three different grades of hydrogen peroxide together: standard, specialty, and pre-electronics grade hydrogen peroxide.

Once merged, Evonik and PeroxyChem would be able to dominate the market for these three grades, the FTC argued. As the main supplier of hydrogen peroxide, the new company could easily switch production from one grade of the chemical compound to another, the FTC alleged.

But the FTC’s market definition was an “oversimplification” since in the industry switching from one grade of hydrogen peroxide to another isn’t a profitable or easy strategy, Judge Kelly said in his opinion.

The FTC’s “failure was not buttressing” its supply side swing theory with similar market definition claims involving buyers of hydrogen peroxide on the demand side, Mitnick, a former FTC trial attorney, added.

Few Implications

While a tough loss for the FTC, the case isn’t likely to significantly influence other future antitrust cases, Mitnick said.

“It’s about bad trial tactics, it’s not a case about substantive antitrust law,” he added.

However, the case does shed light on how a judge analyzes important factors in an antitrust case, including market definition and the potential overlap of products between two merging companies, said Jan Rybnicek an antitrust attorney at Freshfields Bruckhaus Deringer LLP who represented the companies.

Anytime there’s “a decision that shows what a judge finds persuasive or what he or she does not, I think that is useful,” Rybnicek added.

For Kelly, a Trump appointee, the Evonik-PeroxyChem suit was his first antitrust case since he took the bench in the U.S. District Court for the District of Columbia in 2017.

Kelly is also currently reviewing the Justice Department’s antitrust settlement with T-Mobile U.S. Inc. and Sprint Corp. over their $26 billion merger. He has yet to approve the DOJ’s Sprint, T-Mobile settlement.

The case is Federal Trade Commission v. RAG-Stiftung et al., Dist. Ct. D.C., No. 1:19-cv-02337