Antitrust Alert: U.S. FTC Revises Merger Challenge Rules: Automatic Stay of Administrative Litigation When Agency Loses Preliminary Injunction in Court
One important procedural difference between merger challenges by the U.S. Department of Justice and the Federal Trade Commission is that FTC may challenge a non-consummated merger through both a district court preliminary injunction and administrative litigation (Part 3 adjudication). Recent revisions to the FTC Rules of Practice may reduce the likelihood of administrative litigation in cases where the agency fails to obtain a district court injunction blocking consummation of the transaction.
FTC has modified its Rules of Practice to address what happens to administrative proceedings challenging mergers after the agency tries but fails to obtain a preliminary injunction in U.S. district court. Under the revised Rule 3.26, when FTC seeks a preliminary injunction in the courts and loses, the administrative litigation now will be automatically stayed if requested by the merging parties in the administrative proceeding. This stay will allow FTC to decide, on a case-by-case basis, whether it would be in the public interest to continue pursuing the administrative litigation. In other words, a win by the merging parties in district court now effectively halts an administrative challenge to a merger. This has not been the case since 2009 when the rules last were changed.
FTC merger challenge process
When the FTC decides to challenge a non-consummated merger, it will, after initial premerger notification filings and a Second Request, file an administrative complaint to begin the Part 3 litigation. Because an administrative complaint does not block the parties from closing the transaction, the agency simultaneously will move for a preliminary injunction in a U.S. district. While not technically meant definitively to determine the merits of the merger, a preliminary injunction hearing results in a mini-trial, with significant briefing, witnesses testimony, and the reports and testimony of experts.
If FTC prevails on the preliminary injunction, the parties cannot close the transaction. The parties are then left with the choice of defending a lengthy Part 3 adjudication within the FTC (and subsequent appeals to the federal courts) or abandoning the transaction. Thus, the grant of a preliminary injunction generally has proven fatal to the challenged transaction. However, if the court denies the preliminary injunction, the FTC adjudicative process is not automatically dismissed; it just means that the transaction can close and the administrative litigation will proceed. Closing a transaction while a challenge is still ongoing in FTC Part 3 risks not only a protracted legal battle in the agency and the courts, but also, if the Commission prevails on the merits, the potential unwinding of a consummated agreement—a very expensive result.
How this Rule 3.26 change affects the process
Following announced rules change, when FTC loses a preliminary injunction proceeding, it automatically removes the matter from Part 3 adjudication and engages in a case-by-case review of the adverse judicial ruling before deciding whether to continue the case. The Part 3 adjudication is suspended pending a final determination. This same rule had been in place from 1995 to 2009, and was implemented following complaints about the FTC's decision to pursue Part 3 adjudication against R.R. Donnelley & Sons Co.'s acquisition of a competitor despite losing a preliminary injunction. There, the FTC did not dismiss the Part 3 adjudication until five years after being denied a permanent injunction—and only after the parties were required to defend the then-consummated deal before an administrative law judge and the full Commission. In the ten years following the initial adoption of the 1995 rule, the FTC never chose to pursue administrative litigation following a loss in federal court on a motion for preliminary injunction.
However, in 2009, Rule 3.26 (along with others) was changed in a stated effort to expedite the Part 3 adjudication process. That 2009 rule change meant that a matter was not automatically withdrawn from adjudication following a loss on a preliminary injunction (though the parties could file for withdrawal or dismissal of the Part 3 adjudication earlier than they could previously). Rather, the default became that Part 3 adjudication would continue unless and until the Commission decided otherwise. As an empirical matter, the FTC has not seen fit since 2009 to exercise its ability to continue with Part 3 adjudication following a loss on a preliminary injunction, so nothing may appear to change. Still, as a matter of potential risk to the parties, the 2009 change resulted in significant discomfort even for those parties successful in blocking a motion for a preliminary injunction. Moreover, advocates of the new rule emphasize that the uncertainty under the 2009 rule may have led to an increased number of transactions being abandoned before any preliminary injunction hearing simply because the parties were unwilling to tolerate the risk of winning in court only to face protracted agency adjudication.
The FTC's rule change appears against a backdrop of increasing pressure in Congress and among certain antitrust policy groups to enact legislation affecting the FTC's ability to challenge mergers as it has traditionally done. In an effort to address what some see as differing (and arbitrary) standards and procedures depending on which federal agency reviews the proposed merger, the Standard Merger and Acquisitions Review Through Equal Rules (or SMARTER) Act has been proposed. This proposed federal legislation incorporated the change now made by the FTC but goes further by changing the injunctive standard the FTC must meet to block a merger. While sponsors of that bill have approved of the Commission's recent rule change, others have reiterated that it does not go far enough. The Commission's rule change clearly will not end this debate.
The Commission also is making a number of non-substantive changes to the Part 3 rules, and changes to its Rules of Practice relating to the officers who can modify compliance with compulsory process and updated procedures for responding to public record requests. The Commission vote to adopt the revisions to its Rules of Practice was 5-0, and the rule changes will take effect upon Publication in the Federal Register. The full text of the March 13, 2015, rule changes can be found on the FTC's website.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.