Mergers & Antitrust Law News

Coal Giants’ Antitrust Hearing Starts With High Stakes for FTC

July 13, 2020, 10:31 AM

The Federal Trade Commission’s antitrust enforcement strategy will be put to the test during a hearing in a federal district court in St. Louis as the agency looks to put the brakes on a coal mining joint venture between Peabody Energy Corp. and Arch Resources Inc.

The FTC is asking U.S. District Court Judge Sarah Pitlyk of the U.S. District Court for the Eastern District of Missouri to block the coal deal, which it says would eliminate competition in Wyoming’s Powder River Basin region, likely leading to higher costs for consumers.

Because Peabody and Arch Resources—formerly Arch Coal—compete head-to-head in coal production, a joint venture would eliminate competition and raise prices, the FTC says. The two companies produced more than 60% of all coal mined in the region in 2018 and also control more than 60% of coal reserves in the area, the commission said in its complaint.

Arch Resources and Peabody, which announced their deal in June 2019, say the government is incorrectly defining the product market and not understanding the competitive nature of the energy industry. The companies need the deal to survive alongside other energy alternatives, such as natural gas, they say.

A 10-day preliminary injunction hearing kicks off Monday.

High Stakes

The case carries high stakes for the FTC, as it comes just months after the commission lost a similar argument to block a merger between hydrogen peroxide producers Evonik Industries AG and PeroxyChem LLC. It was the agency’s first loss in more than five years.

In 2004, the commission also failed to block Arch Resources’ acquisition of assets owned by Triton Coal Company LLC after a federal district court in Washington denied the government’s request for an injunction and a federal appeals court agreed.

Steve Levitsky, an antitrust attorney formerly with Dewey and Leboeuf LLP, said the FTC will have a tougher time now challenging Arch Resources.

“The market share for coal has been progressively and dramatically dropping, and there is every reason to presume it will continue to drop and to ignore that takes a dishonest view of market definition,” he said.

Obtaining a preliminary injunction would be the first, but most crucial, step for the FTC to stop the Arch-Peabody deal altogether. The commission would then continue its own administrative process to formally block the deal.

If the court doesn’t issue a preliminary injunction, it’s likely the commission would drop all proceedings.

Attorney General Backing

The companies’ argument that the FTC should focus less on coal and more on the broader energy market echoes similar assertions in the Evonik-PeroxyChem case. By lumping three different grades of hydrogen peroxide together, the FTC’s market definition was an “oversimplification,” the court said in handing the agency a loss in that case.

Wyoming’s attorney general is backing the joint coal venture, calling the FTC’s product market definition “shockingly antiquated.”

State attorneys general typically join the FTC in merger challenges, “so it is noteworthy that Wyoming is siding with the companies here,” said Tara Reinhart, head of Skadden, Arps, Slate, Meagher & Flom LLP’s antitrust group. The Wyoming attorney general’s unusual position “should resonate with the judge,” she said.

Six state attorneys general backed the FTC in its 2004 case against Arch Resources. There’s no state support for the agency this time around.

Out of Touch

The district court in the 2004 Arch Resources case found that the FTC used an overly narrow market definition. The government also failed to factor in how Arch Resources’ plan to sell off a mine involved in the deal would ensure that enough market players stayed in the industry, it held.

“With respect to product market, the FTC is going to have to be very careful that they don’t find themselves in the same situation here as they were back in 2004,” said Eric Mahr, an antitrust partner at Freshfields Bruckhaus Deringer LLP.

“When an agency starts trying to shape the product market to fit its case instead of shaping the case to fit the product market they are really in dangerous territory,” said Mahr, who formerly served as the DOJ antitrust division’s director of litigation.

Most customers who buy coal from the Powder River Basin region only do so when the price is lower than other alternatives, particularly natural gas, Reinhart said.

“The challenge for the FTC will be to convince the judge that downstream competition from natural gas and other sources of energy should not be considered part of the market,” she said.

The case is Federal Trade Comm’n v. Peabody Energy Corp., E.D. Mo., No. 4:20-cv-00317.

To contact the reporter on this story: Victoria Graham in Washington at vgraham@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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