/>iIn the past several weeks, the Federal Trade Commission (FTC) approved final orders in two matters, settling charges that the buyers’ consummated acquisitions of their respective competitors, though valued below the Hart Scott Rodino (HSR) Act’s notification thresholds, were anticompetitive. In the first consent order approved, the FTC alleged that the acquisitions violated Section 7 of the Clayton Act[1] by eliminating the only significant competition in the market, which resulted in the buyer, Graco, Inc., holding a monopoly position as the only full-line manufacturer of fast-set equipment (FSE).[2] In the second consent order approved, the FTC alleged that the effect of Charlotte Pipe’s acquisition of its rivals has been a substantial lessening of competition in the cast iron soil pipe products (CISP) markets in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act[3] by, inter alia, eliminating competition, eliminating a maverick firm and increasing concentration and market power.[4] Neither Graco nor Charlotte Pipe have admitted any violation of law.
With the increasing number of agency challenges to consummated transactions not reportable under the HSR Act over the past few years, parties should not be surprised by these latest challenges. However, because the transactions at issue were consummated 3-10 years ago, the FTC was not able to use a “typical” remedy of requiring divestiture of the assets and “recreating” independent going concerns, and instead devised behavioral remedies aimed at facilitating the restoration of competition to the extent possible. The use and monitoring of behavioral remedies presents a number of challenges and, as Commissioner Joshua Wright noted in his separate Statement regarding the Graco matter, they “must be ‘tailored as precisely as possible to the competitive harms associated with the merger to avoid unnecessary entanglements with the competitive process.’” [5]
CHARLOTTE PIPE TRANSACTIONS
According to the FTC’s complaint, prior to acquiring the CISP business of Star Pipe in the transaction at issue, Charlotte Pipe had acquired the CISP product assets of at least three other competitors in transactions during 2002, 2004 and 2009 that were not subject to the HSR Act’s reporting requirements.[6] The FTC alleged that the CISP product market in the U.S. is highly concentrated, and that at the time of the Star Pipe acquisition, Charlotte Pipe and one other competitor sold in excess of 90% of the CISP products in the United States. According to the FTC, Star Pipe was a maverick that entered the market in 2007 and gained some of the remaining U.S. CISP market share prior to its acquisition by Star Pipe in 2010.[7]
In connection with the acquisition, the parties executed a confidentiality and non-compete agreement that restricted Star Pipe’s and certain of its employees’ activities in North America for six years and prohibited disclosure of the transaction. According to the FTC, Charlotte Pipe destroyed the CISP production equipment that it acquired from Star Pipe.[8]
To remedy what the FTC claimed to be a substantial lessening of competition, including the alleged elimination of substantial competition between the transaction parties, increased concentration and market power, the elimination of a maverick firm, and the six year non-competition agreement,[9] Charlotte Pipe agreed, without admitting any violation of law, to (i) provide prior notice to the FTC of future acquisitions, whether or not subject to the HSR Act’s reporting requirements; (ii) refrain from enforcing the confidentiality and non-compete agreement against Star Pipe; and (iii) send a notice to customers and maintain a link on its website regarding Charlotte Pipe’s previous confidential acquisitions of various CISP importers.[10] The FTC’s vote to accept the consent order was 4-0.[11]
GRACO TRANSACTIONS
According to the FTC’s Complaint, Graco acquired its only significant competitors in the FSE market, Gusmer and GlasCraft, resulting in Graco enjoying a market share above 90%. These transactions were valued below the HSR Act’s notification thresholds. [12] The FTC alleged that FSE manufacturers rely heavily on distributors and do not sell “competitively significant quantities” of products directly to end-users, who require information, parts and services from the distributors.[13] The complaint stated that prior to the transactions, FSE distributors carried multiple manufacturers’ brands and that Gusmer, GlasCraft and Graco competed aggressively on price and non-price factors, responding to each other’s innovations.[14]
Following its acquisitions of Gusmer and GlasCraft, Graco closed their FSE manufacturing facilities.[15] Graco also initiated certain strategies that the FTC believed reduced prospective entrants’ ability to join distribution networks and thus enter the FSE market, including “raising distributors’ discounts and inventory thresholds, thereby reducing distributors’ ability to carry the products of new entrants, and threatening distributors with termination or other retaliation, should they agree to carry the products of competing manufacturers.”[16] The FTC alleged that since Graco is the only remaining full-line manufacturer of FSE, it has “substantial control of the established [FSE] distribution channel in North America,” allowing its increased pricing incentives and exclusive behaviors to substantially reduce prospective competitors’ access to FSE customers and ability to enter the market.
To remedy what the FTC claimed to be a substantial lessening of competition, including the elimination of substantial competition between the transaction parties, increased prices and reduced offerings and innovation; increased barriers to entry, and substantial increases in market concentration and market power,[17] Graco agreed, without admitting any violation of law, to (i) settle ongoing litigation with a named new entrant and provide an irrevocable license to certain Graco patents and other intellectual property in order to ensure that Graco cannot continue or renew the litigation; (ii) stop imposing conditions on its distributors that could lead to exclusivity; (iii) stop influencing its distributors not to carry or service any competing FSE products; and (iv) provide prior notice to the FTC of future (a) acquisitions of FSE businesses, whether or not subject to the HSR Act’s reporting requirements, or (b) legal proceedings against distributors or end-users regarding its trade secrets or FSE intellectual property.[18]
The FTC’s vote to accept the Graco Consent Order was 4-0, with Commissioner Wright issuing a separate statement regarding the conditions [at (ii) in the preceding paragraph] prohibiting Graco from entering into exclusive dealing contracts with distributors and establishing purchase and inventory thresholds that must be satisfied in order for distribution to obtain discounts. According to Commissioner Wright, there was insufficient evidence linking these provisions prohibiting exclusive dealing contracts and regulating loyalty discounts to the anticompetitive harm in this case.[19]
CONCLUSION
In both the Charlotte Pipe and Graco matters, the defendants agreed to settle rather than proceed through costly and protracted litigation with the government. Indeed, Graco issued a press release stating that it believes that “the complaint contains inaccuracies with regard to both the law and the facts” and “it would prevail in a court of law….” Despite this, merging parties are again reminded that the antitrust agencies will challenge consummated and “relatively small” transactions if they believe one or two competitors will control 90% or more of the relevant market, with the power to cause harm to consumers.
[1] 15 U.S.C. § 18.
[2] See In the Matter of Graco, Inc. (Statement of the Federal Trade Commission).
[3] 15 U.S.C. § 45.
[4] See In the Matter of Charlotte Pipe Foundry Co. (Analysis to Aid Public Comment).
[5] See In the Matter of Graco, Inc. (Statement of Commissioner Joshua D. Wright), quoting the Antitrust Division Policy Guide to Merger Remedies, U.S. Dep’t of Justice Antitrust Div., at 7 n. 12 (June 2011, available at http://www.justice.gov/atr/public/guidelines/272350.pdf.
[6] See In the Matter of Charlotte Pipe Foundry Co. (Complaint), at 2.
[7] See In the Matter of Charlotte Pipe Foundry Co. (Analysis to Aid Public Comment), at 2.
[8] Id.
[9] See In the Matter of Charlotte Pipe Foundry Co. (Complaint), at 4.
[10] See In the Matter of Charlotte Pipe Foundry Co. (Analysis to Aid Public Comment), at 4.
[11] See http://investors.graco.com/phoenix.zhtml?c=109328&p=RssLanding&cat=news&id=1808338.
[12] See In the Matter of Graco, Inc. (Complaint), at 3-4.
[13] Id. at 2.
[14] Id.
[15] Id. at 3-4.
[16] Id. at 2.
[17] Id. at 5.
[18] See In the Matter of Graco, Inc. (Analysis to Aid Public Comment), at 3-4.
[19] See In the Matter of Graco, Inc. (Statement of Commissioner Joshua D. Wright) at 1-2.
