Though horizontal merger challenges by the Department of Justice (DOJ) or Federal Trade Commission (FTC) typically involve mergers of head-to-head competitors, the FTC recently challenged the proposed US$1.9 billion merger of Steris Corporation and Synergy Health plc on the grounds that it would impair potential future competition between the merging parties. The FTC predicated its administrative complaint on the theory that Synergy had planned to bring new medical device sterilization technology to the United States in order to compete with Steris but scuttled those plans as a result of the proposed merger. The FTC sought a preliminary injunction in the Northern District of Ohio halting the merger pending the FTC’s administrative hearing.
Last week, the district court denied the FTC’s motion for a preliminary injunction. The court concluded that the Commission had failed to establish a likelihood of success on the merits of its administrative case, but the court also accepted as a legal matter the FTC’s proffered “actual potential competition” theory of harm. The decision and the Commission’s action are noteworthy as they are reminders that courts and the antitrust agencies may not limit their competitive assessment of a merger to its effect on existing competition and may instead evaluate the merger’s effect on potential future competition.
The FTC’s Complaint
Steris and Synergy both provide contract sterilization services to medical device companies. Three primary methods of contract sterilization currently are used in the United States: gamma radiation, e-beam radiation, and ethylene oxide gas. X-ray is another sterilization method but currently is used only outside of the United States. Steris is one of two U.S. providers of contract gamma sterilization. Synergy, a British company, is the largest provider of e-beam services in the United States but does not provide gamma or x-ray sterilization in the United States, though Synergy does provide those services outside the United States. Sterigenics is the other U.S. provider of contract gamma sterilization.
The FTC’s complaint alleges that, before Steris and Synergy announced their merger, Synergy had been planning to bring to the United States an emerging x-ray sterilization technology it believed would compete directly with Steris’ and Sterigenics’ gamma sterilization services. The FTC’s complaint alleges that Synergy abandoned its plans to bring x-ray sterilization to the United States once Synergy and Steris entered into their proposed merger, and that Steris pursued the merger in order to eliminate the competitive threat to its gamma sterilization services from Synergy’s contemplated x-ray sterilization services. The FTC’s complaint does not allege that the merger would impair existing competition, but rather this potential future competition.
Actual Potential Competition Theory
The theory of competitive harm that underlies the FTC’s challenge to the Steris-Synergy merger is known as the actual potential competition theory. That theory is one of future, not current, competition and posits that the market would become more competitive through the impending entry of one of the merging parties but for the merger. Theories of future competitive harm are rare but not unheard of in merger challenges. The 2010 Merger Guidelines recognize the actual potential competition theory and explain that, “if one of the merging parties has a strong incumbency position and the other merging firm threatens to disrupt market conditions with a new technology or business model, their merger can involve the loss of actual or potential competition.”1 The FTC has challenged mergers based on the potential loss of future competition and has secured consent decrees in connection with those merger challenges.2
The case law concerning the actual potential competition theory is both scarce and mixed. The Supreme Court has twice been presented with the question of whether the actual potential competition theory is cognizable under Clayton Act Section 7 but reserved judgment in both instances.3 At least one Court of Appeals has embraced the theory,4 but others have been less accepting of it.5 Commentators similarly have differing opinions on whether the theory falls within the scope of Section 7.6 Even the FTC itself has offered mixed signals on the viability of the theory. Though it has relied on the actual potential competition theory in recent merger challenges, the FTC has acknowledged that this “doctrine represents a rather peculiar theory of competitive injury” because it “postulates that a merger or acquisition may prevent the relevant market from becoming as competitive as it might otherwise become.”7
Denial of the FTC’s Motion for Preliminary Injunction
The FTC’s theory of future competitive harm caused by the Steris-Synergy merger also formed the basis for the FTC’s motion for preliminary injunction before Judge Polster in the Northern District of Ohio. The FTC argued that the court should grant its motion because the FTC had a substantial likelihood of prevailing on the merits of its administrative case. The FTC argued that the acquisition of a potential competitor violates Section 7 if (1) the relevant market is highly concentrated; (2) the competitor “probably” would have entered the market; (3) its entry would have had pro-competitive effects; and (4) there are few other firms that can enter effectively. The agency argued that all of these factors had been met. Steris and Synergy argued that the FTC’s theory of competitive harm finds no support in law or policy, and that the FTC could not establish the predicates of that theory in any event.
In denying the FTC’s motion, Judge Polster accepted the FTC’s actual potential competition theory, but he did not analyze the theory and did not himself endorse it. Rather, he held that even though Steris and Synergy “challenge the actual potential doctrine . . . the FTC has clearly endorsed this theory by filing the case, and the administrative law judge will be employing it. Accordingly, in deciding the likelihood of success on the merits, the Court will assume the validity of the doctrine.”8
The court’s analysis of the evidence focused on the second prong of the FTC’s theory — whether, absent the acquisition, Synergy probably would have brought its x-ray sterilization technology to the United States within a reasonable period of time. For three primary reasons, Judge Polster concluded that the FTC had failed to make the necessary showing. First, though Synergy’s board had endorsed the concept of U.S. x-ray before the merger announcement, the business plan was never approved, and there were significant obstacles that had to be overcome to secure that approval. Second, the evidence showed that the announced merger had no significant impact on Synergy’s plans for U.S. x-ray because Synergy continued to try to obtain customer buy-in and develop a suitable machine. Third, Judge Polster determined that the head of Synergy’s sterilization business — not its CEO — made the decision to discontinue the U.S. x-ray project after he concluded that there was little to no likelihood of getting board approval. Accordingly, Judge Polster concluded that the FTC had failed to show that it was likely to succeed on the merits and denied the FTC’s motion.
The FTC’s challenge to the Steris-Synergy merger also highlights an important difference between FTC and DOJ merger challenges. Under existing law, if the FTC fails to obtain a preliminary injunction to enjoin a challenged merger, the agency nonetheless may proceed with an administrative case seeking to block or unwind the merger before an FTC administrative law judge. In contrast, if the DOJ fails to obtain a preliminary injunction, the matter remains in the same federal district court for adjudication on the merits. Legislation currently pending in Congress — known as the SMARTER Act — seeks to eliminate this and other differences between the FTC and DOJ merger review processes.
Future Developments and Key Takeaways
The FTC’s administrative case challenging the Steris-Synergy merger is scheduled to begin October 28, 2015. If the action goes forward, it may result in the creation of additional case law providing further guidance to merging parties where their merger may affect future competition. Regardless, as reflected by the FTC’s challenge and Judge Polster’s recent decision, the antitrust agencies and the courts may evaluate the effects a merger is likely to have on future or potential competition. Accordingly, a merging party and its antitrust counsel should fully explore whether the merger would impair not just current but also future competition in order to evaluate fully the antitrust aspects of the contemplated deal.
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1U.S. Dep’t of Justice & FTC Horizontal Merger Guidelines (2010) § 2.1.5.
2See, e.g., In re Cephalon, Inc., 138 FTC 583, 586 (FTC 2004) (“The effects of the Acquisition, if consummated, may be to lessen competition and tend to create a monopoly. . . by eliminating potential competition between Cephalon and Cima in the market for the manufacture and sale of prescription drugs for the treatment of breakthrough cancer pain”; associated consent required the grant of a third-party license to a generic version of breakthrough cancer pain drug); In the Matter of Polypore Int’l, Inc., 2010 FTC LEXIS 97, at *71 n.41 (FTC Dec. 13, 2010) (“[W]e find that liability . . . could be premised in the alternative on the elimination of actual or perceived potential competition”).
3See United States v. Marine Bancorp., 418 U.S. 602 (1974); United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973).
4See Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cir. 1981).
5See, e.g., Tenneco, Inc. v. FTC, 689 F.2d 346, 352 (2d Cir. 1982) (explaining that “[t]he actual potential competition theory . . . has yet to receive sanction from the Supreme Court or this Court,” but nonetheless applying the theory to conclude that the FTC had erred in finding a Section 7 violation).
6Compare Areeda & Hovenkamp, ANTITRUST LAW, ¶ 1124 with Lewis A. Kaplan, Potential Competition and Section 7 of the Clayton Act, 25 ANTITRUST BULL. 297, 317 (1980) (“[T]he actual potential entrant doctrine should be rejected as inconsistent with the language and purpose of [S]ection 7”).
7In re B.A.T. Indus., Ltd., No. 9135, 1984 FTC LEXIS 4, at *147-48 (FTC Dec. 17, 1984) (emphasis removed).
8See FTC v. Steris Corp., et al., (N.D. Ohio Sept. 24, 2015) (opinion and order).