Binding Arbitration of Merger Challenges: First Do No Harm

The U.S. Department of Justice (DOJ) recently announced that the Antitrust Division will use Alternative Dispute Resolution to resolve issues of market definition in its challenge of Novelis Inc.’s proposed acquisition of Aleris Corporation. The companies are two of four North American producers of aluminum auto body sheet. In this commentary, “Binding Arbitration of Merger Challenges: First Do No Harm,” AAI Advisor Stephen Calkins looks in depth at this development and its implications for antitrust enforcement. Calkins is Professor, Wayne State University Law School; former Federal Trade Commission General Counsel; and former Member of the Competition and Consumer Protection Commission of Ireland.

“[T]he [Antitrust] Division’s general approach is to follow the Hippocratic Oath and ‘first, do no harm.’”[1] That was the view of current AAG Makan Delrahim in November 2018. Unfortunately, the Division recently abandoned that approach in favor of what AAG Delrahim described as a “novel” and “truly groundbreaking” procedure for merger enforcement.[2] For the first time ever, the Division will use arbitration pursuant to the Administrative Dispute Resolution Act of 1996, 5 U.S.C. § 571 et seq., to resolve a matter[3]—remarkably, a merger challenge.

One aspect of federal antitrust enforcement that is working well is the litigating of challenges to problematic horizontal mergers. In case after case, the Antitrust Division or the FTC has gone to federal court and won.[4] Indeed, the government almost always wins.[5] And it is not uncommon for merging parties, facing the prospect of serious litigation and unwilling to accept the formidable litigation risks, to abandon the transaction.[6]

Why would the Antitrust Division tamper with this impressive record of success? AAG Delrahim points to potential savings of time and money. But surely the agencies have sufficient resources to challenge problematic mergers. Nor is time a serious issue, since once discovery is complete merger cases are heard on an expedited basis and quickly resolved. Mr. Delrahim notes that “an arbitrator could be an antitrust specialist or former judge”—but he suggests no reason to think that the agencies’ remarkably strong record would have been even better had the cases been heard by an arbitrator.

Indeed, there are many reasons to believe that this “novel” change is not only unnecessary but ill-advised in general and specifically in United States v. Novelis, Inc., No. 1:19-cv-02033-CAB (N.D. Ohio) (complaint filed Sept. 4, 2019), the horizontal merger case in which it is being tried. The arbitrator(s) are likely to be relatively more skeptical of the government’s case, and there is no appeal; the legal standards to which the parties agreed are relatively unfavorable to the government; risks of delay are shifted from the merging parties to the government; the proceeding will apparently be conducted in secrecy so the public will be less likely to understand and accept the outcome; no judicial precedent will be created to help clarify the law; and as merging parties come to realize what a better deal Novelis’s and Aleris’s lawyers have negotiated, parties to other mergers will demand equally favorable treatment from DOJ and also from the FTC.

The Decision-Maker

Merger cases are normally decided by federal district judges, with the agency having considerable discretion as to which court—and thus, to some extent, which judge—to choose. Cf. United States v. Sabre Corp. (complaint filed D. Del. Aug. 20, 2019) (suit filed neither in D.C., where many merger challenges are heard, nor in a district where either merging party is headquartered). In Novelis the Division chose the Northern District of Ohio, a district with nine Democratic-appointed judges (three with senior status) and five Republican-appointed judges (one with senior status).[7] (It happened that the case was assigned, presumably randomly, to Judge Christopher A. Boyko, who was appointed by President George W. Bush.)

Contrast the typical generalist judge in a district of the government’s choosing with the Novelis “Arbitral Tribunal,” as the arbitrator(s) are called. (The parties’ agreement is set out in Plaintiff United States’ Explanation of Plan to Refer this Matter to Arbitration (“Explanation of Plan”) and an accompanying “Term Sheet” that includes “Exhibit A,” filed N.D. Ohio Sept. 4, 2019.) If the parties agree on a single arbitrator, fine—but there is no suggestion that they have done so. Assuming they do not so agree, there will be a three-arbitrator Tribunal. Each side will name five candidates and then select one name from the opposing party’s list. If the parties can’t agree “on the third member of the Arbitral Tribunal,” each must select two names from the opposing party’s list, and then the two arbitrators first selected will choose from among those four names. See Term Sheet Exhibit A.

The strategic key, then, is to be able to identify five individuals all of whom are highly likely to be strongly favorably inclined to your position. Exhibit A states that each party is to name “five acceptable arbitrators” but no rules are set out. The Division may well feel an unwritten obligation to name distinguished individuals widely viewed as open-minded, fair, and impartial. In contrast, the merging parties’ lawyers will have a fiduciary obligation to represent their clients zealously by naming five extremely conservative Chicago-school true believers with a consistent track record of supporting all mergers about which any reasonable observer could disagree. Anyone who follows antitrust could easily come up with five reliable names. It would violate the merging parties’ lawyers’ obligation to their clients were they to name even a single antitrust moderate.

Since the Arbitral Tribunal selection process is likely to have a starting point of five extreme conservatives and five moderates, a betting person would predict that the Tribunal will be, by a 2-1 majority, extremely and reliably conservative. We can’t be sure of this outcome—for all we know, DOJ and the parties have reached a secret understanding concerning the Tribunal. (Perhaps the parties’ lawyers, not wanting to embarrass the Division, have promised to show restraint.) But publicly available evidence suggests that the case will be decided by less favorable decision maker(s) than had DOJ litigated the case in federal court. DOJ could nonetheless prevail, of course—the Novelis complaint seems pretty compelling—but DOJ’s chances of prevailing are less than they would have been in the normal course.

Unfavorable Legal Standards

A careful parsing of the DOJ/Novelis agreement shows that DOJ has agreed to relatively unfavorable legal standards. In particular:

Clayton Act Section 7 bans mergers that “may” substantially lessen competition. Some courts require a showing of a “reasonable likelihood” of an anticompetitive effect. But in Novelis, DOJ agreed that “the ultimate question” is much tougher: “whether the proposed transaction will substantially lessen competition in a relevant line of commerce.” Term Sheet at ¶ 4.a (emphasis added) (noting this question as background rather than an issue the Arbitral Tribunal will resolve directly).
Although merger litigation often involves market definition, the Merger Guidelines (at Section 2) make clear that harm to competition can be shown without defining a market. In Novelis, DOJ can prevail only by proving the existence of a product market limited to aluminum automotive body sheet (“ABS”). In an ordinary PI litigation, DOJ could prevail by proving an all-aluminum ABS market, but also by showing that even in a broader market the merger is sufficiently likely to harm competition because Aleris’s entry lowered prices, the parties engage in substantial head-to-head competition, and Aleris has been playing an important pro-competitive disruptive role. Merger Guidelines Sections 2.12 & 2.14-2.15. In Novelis DOJ has agreed that it can win only by proving an all-aluminum ABS market (while noting that “evidence of competitive effects can inform market definition,” Term Sheet ¶ 4.a). (Of course, the merging parties also are limited as to the arguments they can make. Without more information I can only guess that DOJ is the more disadvantaged, but that is a guess, not a certainty.[8])
According to the Novelis complaint, “[a]n automaker can make a car part out of aluminum, steel, or other material . . . .” Complaint ¶ 26. In a court, if DOJ were compelled to prove a market, at least in theory DOJ could prevail by proving, among other things, the existence of a market limited to aluminum and some “other material” other than steel. Not in the Novelis abitration. If the Arbitral Tribunal determines “that the relevant market is broader than aluminum ABS”—any broader—DOJ must abandon the case. No, I don’t know enough about this business to know how likely that it, but why wouldn’t DOJ insist that if it can win only by proving all-aluminum, the defendants can win only by proving an “all-metal” market (that includes steel)?
In court, the customary remedy usually is an injunction preventing the proposed merger. In Novelis, a DOJ loss would be a total defeat, whereas a DOJ “win” would not prevent the merger but rather would result in some divestiture to which the parties have agreed. Term Sheet ¶ 4.c. It’s as though the parties have agreed to a consent order but it will be entered only if DOJ is successful in the arbitration.

The bottom line is that court challenges to mergers proceed according to legal standards that government enforcers have been using successfully to block problematic horizontal mergers. Now, in Novelis, DOJ has agreed to proceed under less favorable standards. Of course, in some future arbitration DOJ could insist on legal standards as good as those otherwise available to it. But this first experiment does not give one confidence.

Risks of Delay are Flipped

In the usual merger challenge, it is the merging parties that bear the risks of delay. Assuming that government enforcers proceed in good faith to challenge a troubling merger, courts do not allow mergers to close until their legality has been determined. Merging parties routinely claim that delay will impose grave harm, but in the end a substantial number of merger cases are heard and achieve resolution. Sometimes merging parties lose and then decide not to appeal; sometimes they decide to fold as soon as a complaint is filed; but although the government is subjected to pressure to try a case quickly, everyone knows that if a judicial proceeding is delayed the closing date for the merger will be similarly delayed. Justice will be done.

Not so in Novelis. DOJ has agreed that if the arbitration is not resolved before December 20, the parties may proceed to close the transaction subject to a hold separate order. Term Sheet ¶ 5 (difficult to parse because of redacting). Novelis clearly benefits from this provision. See Novelis Press Release (Sept. 4, 2019) (“Due to the agreement reached with the DOJ . . ., Novelis is confident that the DOJ suit is not an impediment to closing the transaction by the January 21, 2020, outside date under the merger agreement, even if a remedy is required . . . .”). The benefit to DOJ is less clear.

Proceeding Conducted in Secret Without Full Explanation, Review or Opportunity to Set Precedent

Normal merger challenges are conducted in public to the extent confidentiality concerns allow; judges issues an opinion as lengthy as needed; judges are constrained by knowing that every decision establishes precedent (and every decision helps clarify the law); and the opportunity for judicial review can prevent errors. Not so in Novelis. All hearings “are to be kept confidential.” Term Sheet Exhibit A. The Arbitral Tribunal shall issue only a “brief statement of its reasoning, not to exceed five pages.” Id. There is no opportunity for appeal, and of course an arbitration does not establish legal precedent.

Again, it is easy to see why Novelis is excited about these departures from the norm. The benefit to DOJ and the public interest is less clear. Among the worrisome aspects are implications for Tunney Act review. Normally if a merger is resolved by settlement on the eve of or during trial, the public has enjoyed substantial opportunity to observe the litigation unfolding and to form a view as to the appropriateness of a remedy. In Novelis, however, the parties have already agreed to the remedy (if there is one) and all of the litigation concerning the importance of that remedy will be conducted in secrecy. Commentators will thus be more in the dark than in an analogous court proceeding.

Conclusion

AAG Delrahim boldly touts this “first use of a novel form of dispute resolution for federal antitrust enforcement.” George Washington U Speech, supra note 2, at 1. Never before has an Antitrust AAG found it desirable to follow the 1996 Alternative Dispute Resolution Policy Statement issued by Clinton AAG Anne K. Bingaman, 61 Fed. Reg. 36895, 36896 (July 15, 1996). The premise of that Policy Statement was that “the application of ADR techniques in appropriate circumstances to the negotiation process” may improve on “unassisted negotiations.” Id. Although binding arbitration is not excluded, the focus is on settlement. “[M]any civil cases brought by the Antitrust Division will not be good candidates for ADR—for example, most merger investigations will face time constraints that make the use of ADR impossible . . . .” Id. at 36898. “Because of the time constraints imposed . . ., ADR techniques will likely be difficult to apply during the course of merger investigations.” Id. at 36896. It was chiefs of sections “conducting civil, non-merger investigations” that were directed to identify cases promising for ADR. Id. In truth, of course, the Antitrust Division and the FTC regularly settle cases without involving formal ADR procedures, and for 23 years no one has found it valuable to change what works.

Antitrust enforcement is generally conducted on a bipartisan basis with only modest swings based on the identity of top officials.[9] One of the issues that has divided enforcers is the relative virtues of arbitration and litigation. Thus, when the Solicitor General filed an amicus brief supporting the losing respondents in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), who unsuccessfully attempted to distinguish and limit AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the FTC joined the brief by a 3-2 vote, with the two Republican commissioners voting no.[10] Now, in its Novelis submission, the Antitrust Division has joined the chorus of praise for arbitration: “Federal policy has long favored arbitration as an efficient and economical alternative dispute resolution (‘ADR’) mechanism that provides parties with a speedier and less costly alternative to litigation.” Explanation of Plan at 2-3 (citing and quoting from Concepcion).

The worst thing about this new initiative is that it will be harming merger enforcement long after AAG Delrahim has returned to private life. This experiment is not being conducted quietly. Delrahim proclaimed: “This new process could prove to be a model for future enforcement actions, where appropriate, . . . .” George Washington U Speech, supra note 2, at 1. The merger bar is a small bar comprised of unusually talented lawyers, and they have surely already appreciated what a sweet deal was won by Latham & Watkins and Fried Frank. The Division should expect regularly to see demands for equally generous treatment—demands perhaps backed up by talk of “due process” and “equal protection.” Indeed, although DOJ nowhere mentions any consultation with the FTC, that agency, too, should brace itself regularly to receive petitions demanding that merging firms should enjoy the same advantages in FTC litigation that they would enjoy were the case brought by DOJ. Damage will have been done even if, as one observer suggested seems likely,[11] DOJ and Novelis are about to settle the case.

It would have been better first to have done no harm.

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^[1] “Life in the Fast Lane”[fn]: Antitrust in a Changing Telecommunications Landscape at 11, Remarks as Prepared for Delivery at the Federal Telecommunications Institute’s Conference on “Competition Challenges in the Digital World” (Nov. 7, 2018), https://www.justice.gov/opa/speech/file/1108606/download.

^[2] “Special, So Special”*: Specialist Decision-Makers in, and the Efficient Disposition of, Antitrust Cases, Remarks of Makan Delrahim at the 7^th Bill Kovacic Antitrust Salon at 1 (Sept. 9, 2019), https://www.justice.gov/opa/speech/file/1201301/download.

^[3] Press release, Justice Department Sues to Block Novelis’s Acquisition of Aleris (Sept. 4, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-noveliss-acquisition-aleris-1.

^[4] See FTC v. Sanford Health, 926 F.3d 959 (8^th Cir. 2019) (3-0) (affirming grant of PI); United States v. Anthem, Inc., 855 F.3d 345 (D.C. Cir. 2017) (2-1) (affirming PI); FTC v. Advocate Health Care Network, 841 F.3d 460 (7^th Cir. 2016) (3-0) (reversing denial of PI: PI issued on remand): FTC v. Penn State Hershey Medical Center, 838 F.3d 327 (3d Cir. 2016) (3-0) (reversing denial of PI); FTC v. Saint Alphonsus Medical Center-Nampa Inc., 778 F.3d 775 (9^th Cir. 2015) (3-0) (affirming divestiture order); FTC v. Wilh. Wilhelmsen Holding ASA, 341 F.Supp.3d 27 (D.D.C. 2018) (granting PI); FTC v. Tronox Ltd., 332 F. Supp.3d 187 (D.D.C. 2018) (granting PI); United States v. Aetna Inc., 240 F.Supp.3d 1 (D.D.C. 2017) (granting PI); FTC v. Staples, Inc., 190 F.Supp.3d 100 (D.D.C. 2016) (granting PI); United States v. Tribune Publishing Co., 2016 WL 2989488 (C.D. Cal. 2016) (TRO granted); FTC v. Sysco Corp., 113 F. Supp.3d 1 (D.D.C. 2015) (granting PI); United Sttates v. Bazaarvoice, Inc., 2014 WL 203966 (N.D. Cal. 2014) (finding violation); cf. ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6^th Cir. 2014) (3-0) (upholding divestiture order). But cf. United States v. AT&T, Inc., 916 F.3d 1029 (D.C. Cir. 2019) (affirming denial of PI in vertical case); FTC v. Steris Corp., 133 F.Supp.3d 962 (N.D. Ohio 2015) (denying PI in potential competition case).

^[5] The government’s current success rate has not always been the norm. See Stephen Calkins, Developments in Merger Litigation: The Government Doesn’t Always Win, 56 Antitrust L.J. 855 (1988).

^[6] See, e.g., Statement of Bruce Hoffman, Director of FTC’s Bureau of Competition, on Fidelity National Financial Inc.’s Decision to Drop Proposed Acquisition of Stewart Information Services Corp. (Sept. 10, 2019) (merger abandoned even though complaint issued with a 3-1-1 vote), https://www.ftc.gov/news-events/press-releases/2019/09/statement-bruce-hoffman-director-ftcs-bureau-competition-fidelity.

^[7] See https://en.wikipedia.org/wiki/United_States_District_Court_for_the_Northern_District_of_Ohio#Current_judges.

^[8] Perhaps one could speculate that had the Division been proceeding in bad faith, it might be aware that the parties had, for instance, an overwhelming efficiencies defense, such that this whole procedure is a scheme to block the merger by denying the parties their day in court to establish that defense. But I can imagine neither the Division proceeding down such a path nor the talented lawyers representing the merging parties permitting it.

^[9] See Stephen Calkins, Remarks Intended for Delivery on the Acceptance of the American Antitrust Institute’s 2019 Award for Antitrust Achievement (supporting bi-partisan enforcement), https://www.antitrustinstitute.org/wp-content/uploads/2019/08/Calkins_201-Antitrust-Achievement-Award.pdf.

^[10] FTC/DOJ Amicus Brief Supports Right of Private Parties to Pursue Relief Under the Antitrust Laws (Jan. 30, 2013), https://www.ftc.gov/news-events/press-releases/2013/01/ftcdoj-amicus-brief-supports-right-private-parties-pursue-relief.

^[11] Matthew Perlman, DOJ Dusts Off Arbitration Option for Mergers After 20 Years, Law360 (Sept. 16, 2019) (quoting Amanda Wait: “”Really, everybody might have just needed a little bit more time,’ she said.”).