Bloomberg Law
June 4, 2019, 8:00 AM

INSIGHT: Judge Moves Aetna/CVS Deal Into Unchartered Tunney Act Waters

Lisl J. Dunlop
Lisl J. Dunlop
Axinn, Veltrop & Harkrider LLP
Jeny M. Maier
Jeny M. Maier
Axinn, Veltrop & Harkrider LLP

The upcoming district court hearings in Aetna/CVS raise for the first time complex questions about the role of the federal courts in approving Department of Justice antitrust settlements, the exercise of the DOJ’s prosecutorial discretion, and the extent to which parties can rely on resolutions reached with the DOJ in merger and other antitrust investigations.

CVS and Aetna announced their proposed merger in December 2017. The transaction was valued at $69 million and touted as opening the way to providing a “uniquely integrated, community-based healthcare experience” by connecting Aetna’s extensive provider network with greater consumer access through CVS.

After a lengthy investigation, in October 2018 the DOJ announced that it would require CVS and Aetna to divest Aetna’s Medicare Part D prescription drug plan business for individuals to WellCare to resolve competitive concerns from the horizontal overlap between CVS’s SilverScript Part D business and Aetna’s business.

Q&A for the Public

Due to the high-profile nature of the case, the DOJ also released a set of “Questions and Answers for the General Public” in which the it discussed the settlement as well as its investigation of the competitive impacts of the vertical integration of CVS and Aetna.

The DOJ noted that it “determined that the merger is unlikely to cause CVS to increase costs to Aetna’s health insurance rivals due to competition from other PBMs and retail pharmacies,” and that “the evidence also showed that CVS is unlikely to be able to profitably raise its PBM or retail pharmacy costs post-merger because it would lose customers and Aetna would not be able to offset those losses by capturing additional health insurance customers.”

As required under the Tunney Act, the DOJ filed its complaint in CVS/Aetna, along with the proposed final judgment and a “competitive impact statement” with the U.S. District Court for the District of Columbia. Again, as directed by the Tunney Act, all three documents were published in the Federal Register, summaries of the proposed final judgment were published in The Washington Post, and the judgment was opened to public comment for 60 days.

The Tunney Act then directs that the DOJ file the comments with the court and file a response to the public comments (if needed) before a federal judge reviews the filings to determine whether the DOJ’s proposed remedy is in the public interest.

Court has Discretion

The next step is within the court’s discretion. The Tunney Act is designed “to ensure that the entry of antitrust consent judgments is in the public interest.” In doing so, a court may hold evidentiary hearings, admit amicus curiae, review public comments, or “take such other action in the public interest as the court may deem appropriate.”

In practice, however, courts have taken a fairly narrow approach to judicial review, frequently relying on DOJ filings and only rarely holding hearings and issuing reasoned decisions.

Furthermore, parties routinely close their transactions and proceed with agreed divestitures while the Tunney Act process is ongoing. Indeed, all consent decrees over the last several years followed this process, including such high-profile matters as American Airlines’ acquisition of US Airways (in which Tunney Act proceedings completed some 14 months post-closing) and Anheuser Busch’s acquisition of SABMiller (in which Tunney Act review was completed over two years post-closing).

Here, after the DOJ filed the proposed consent judgment, the parties closed their transaction on Nov. 28, and completed the sale of the Part D business to WellCare on Nov. 30.

Concern Over ‘Rubber Stamp Approach’

At this point, the process started to diverge from the typical narrative. At a Nov. 29 status hearing, Judge Richard J. Leon—the presiding judge in the DOJ’s challenge to the AT&T-Time Warner merger, and to whom this case had been assigned through the court’s automated case assignment system—said that he was concerned that the parties were taking a “rubber stamp approach” to the court’s approval.

He next ordered the parties to explain why CVS should not be required to hold Aetna separate given that the court has not evaluated:

  1. whether the proposed final judgment remedies the harm alleged in the DOJ’s complaint, or
  2. whether the complaint is in the public interest or is drafted so narrowly as to “make a mockery of judicial power.”

Although the DOJ responded that such measures were not necessary, CVS agreed voluntarily to halt integration efforts and hold Aetna separate until the Tunney Act proceedings could be completed.

Following the filing of public comments on the consent decree and the DOJ’s response, Leon indicated he would hold evidentiary hearings in June. While apparently well within the bounds of what is permitted by the Tunney Act, this is an unprecedented move.

The court issued a memorandum order on May 13 outlining hearing procedures and listing six witnesses to be called—three from amici curiae and three for the DOJ and CVS. In particular, the court stressed that “this hearing is not a trial”—no reports will be exchanged in advance, questions will come only from the party calling the witness and the court, there will be no cross-examination, and there will be no opening or closing arguments

Leon also addressed the elephant in the room: The extent to which the court would consider the vertical competitive concerns that the DOJ asserted are outside the scope of its complaint: “an understanding of how participants in [Part D markets] are affected by markets for pharmacy benefit management (“PBM”) services would appear to be essential.”

What’s Next?

It remains to be seen what impact—if any—Leon’s interpretation of the Tunney Act has on the CVS/Aetna transaction. Deep-seated principles of deference to the exercise of prosecutorial discretion suggest the settlement is unlikely to be dislodged or replaced. And should the process actually result in the settlement’s rejection, an appeal would surely follow.

The proceedings may, however, have a wider-reaching impact on the way in which parties and the DOJ approach such settlements in the future. In settled cases where some aspects of a case are not challenged, parties will need to consider potentially holding aspects of the merging companies separate pending Tunney Act review.

Alternatively, the DOJ may consider whether avoiding the Tunney Act process is worth the enforcement power of a formal settlement and instead push parties for more informal “fix it first” remedies. Given the DOJ’s recent emphasis on having up-front buyers in merger settlements, holding an investigation open until a divestiture has completed may be an option for the agency.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Lisl J. Dunlop is a partner at Axinn, Veltrop & Harkrider LLP. She guides clients through the antitrust-related aspects of mergers and acquisitions, joint ventures and other combinations, and sales and distribution matters and represents clients in antitrust agency investigations.

Jeny M. Maier is a partner at Axinn, Veltrop & Harkrider LLP. She regularly advises parties to large M&A transactions on international antitrust notification requirements and substantive competitive issues and assists clients with responding to civil and criminal antitrust investigations, and defending related class-action litigation.

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