DOJ Merger Challenge Makes Unprecedented Use of Arbitration to Determine Market Definition
The Situation:The U.S. Department of Justice ("DOJ") has sued to block a proposed acquisition of Aleris Corporation by Novelis Inc. In an unprecedented move, the parties and DOJ agreed to refer the "dispositive" issue of product market definition to binding arbitration.
The Significance: DOJ's willingness to consider arbitration in antitrust matters could prove to be a positive development for companies (and for the government) to the extent it creates an avenue for faster resolution of critical issues without having to incur the time and expense to litigate all issues in court. The identity and background of the arbitrator may be even more important to this process than a federal judge who is chosen by random draw.
Looking Ahead: This case may signal a continuation of DOJ's efforts to reform the merger process by embracing arbitration as an alternative to litigating court challenges. If it is an outlier or the beginning of a trend for resolving merger (and nonmerger) matters will depend on several factors, including the success of the arbitration in this case and the extent to which DOJ provides additional guidance on the subject.
For the first time in history, DOJ's Antitrust Division plans to use binding arbitration to resolve an important element of a merger challenge. As part of its lawsuit to block the proposed acquisition of Aleris Corporation by Novelis Inc., the parties and DOJ agreed to resolve the issue of market definition through binding arbitration, "should certain conditions be triggered." The specific triggering events, however, have not been disclosed publicly. DOJ implemented the relevant order and regulations for Alternative Dispute Resolution ("ADR") in the mid-1990s. This marks the first time DOJ has used its arbitration authority.
Novelis, a flat-rolled aluminum producer, entered into a definitive agreement to acquire Aleris, a relatively new producer of flat-rolled aluminum, in July 2018. More than a year later, DOJ filed a complaint in the Northern District of Ohio seeking to block the acquisition. Incidentally, this is in the same district as the Federal Trade Commission's ("FTC") unsuccessful court challenge to the STERIS/Synergy merger in 2015 (decided on the discrete issue of whether the target would have entered the U.S. market absent the transaction) (see here for more details).
The Novelis complaint alleges that the acquisition would combine two of only four North American producers of aluminum auto body sheet ("ABS"), providing the combined entity with 60% of total production capacity and allowing it to raise prices, reduce innovation, and provide less favorable terms of service to automakers. Automakers are increasingly using aluminum ABS to develop vehicles that are lighter and more fuel-efficient.
The complaint quotes internal party documents to support DOJ's theories, including that Novelis was worried Aleris could be sold to a "new market entrant in the U.S. with lower pricing discipline" and that an "alternative buyer [was] likely to bid aggressively and negatively impact pricing" in the market.
In announcing the challenge, DOJ promoted the use of arbitration as allowing it to "resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources," although it offered few details as to how. In 1995, Attorney General Janet Reno ordered the entire DOJ (not just the Antitrust Division) to undertake greater use of ADR "in appropriate cases." In 1996, the Antitrust Division published policy guidance, including on case selection criteria, different ADR techniques such as arbitration and mediation, and factors favoring or disfavoring ADR. Notably, that guidance provides that:
Because of the time constraints imposed by the Hart–Scott–Rodino Antitrust Improvements Act of 1976 and the exigencies of the merger review process in general, ADR techniques will likely be difficult to apply during the course of merger investigations. On the other hand, nonmerger investigations often have more timing flexibility.
The merger parties must have agreed to the arbitration because DOJ cannot proceed unilaterally down that path.
Neither the complaint nor accompanying DOJ press release provide details on the arbitration process, such as discovery or confidentiality of information, nor did it disclose the identity or qualifications of the arbitrator (antitrust expert or generalist).
Arbitration proceedings are usually confidential. In litigation, by contrast, while aspects of proceedings may be closed to the public to protect a party's business secrets, there is a strong presumption that the public should have full access to documents and testimony. If there is no or limited disclosure of information arising from the arbitration, this could impair the public's understanding of the basis for DOJ enforcement decisions. In mergers, this includes the basis for why a transaction was abandoned or allowed to proceed with or without a remedy. On the other hand, the confidential nature of arbitration may be an important reason why a private party would agree to ADR in the first instance.
DOJ's decision to embrace arbitration in this case, on what it refers to as "the dispositive issue of market definition," is noteworthy. For many years, the antitrust agencies have consistently downplayed the significance of market definition, perhaps nowhere more directly than in the agencies' 2010 revisions to the "Horizontal Merger Guidelines." In that document, DOJ and FTC state that "measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illuminates the merger's likely competitive effects." Instead, the guidelines emphasize other ways "to address the central question of whether a merger may substantially lessen competition," such as merger simulations and tests for unilateral price effects, which "need not rely on market definition." Officials at both DOJ and FTC have adopted this more holistic position of downplaying market definition and focusing more on effects-based evidence, under both Republican and Democratic administrations. Government, academic, and consulting economists, in particular, have argued that market definition should not be dispositive where it is possible to prove market power directly.
Against this backdrop, DOJ's decision essentially to concede the "dispositive" significance of market definition can be seen as either a dramatic pivot or an acknowledgement of reality in most cases, depending on one's perspective. After all, the merger statute (Clayton Act § 7) requires evidence of injury to competition in a "line of commerce," and Supreme Court precedent indicates that "determination of a relevant market is a necessary predicate" to a Section 7 claim. In this sense, market definition, the issue potentially subject to arbitration here, is a critical and often determinative element in merger challenges. Because the competitive effects analysis flows from market definition, the party that wins the latter typically—but not always—prevails on the former.
Following filing of the complaint, Novelis issued a press release indicating that the company believes it can close the transaction by January 21, 2020 (the outside date under the merger agreement), notwithstanding the lawsuit. In recent years, most DOJ merger challenges have taken more than five months from filing of a complaint to a district court decision.
For this reason, the parties may have believed that pursuing arbitration on market definition—a topic that in traditional litigation can consume significant time for discovery and briefing—would provide them with deal certainty sooner than litigation. DOJ, in turn, may have viewed the decision as consistent with its larger policy goal of streamlining the merger review process. In September 2018, Assistant Attorney General for the Antitrust Division Makan Delrahim announced a series of reforms intended to expedite merger reviews (see here for more details).
The DOJ press release quotes AAG Delrahim on the significance of ADR: "Alternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers." This statement may signal a continued and more extensive effort by DOJ to embrace new procedures to streamline not only merger investigations but also merger challenges.
Since publication of this Commentary, DOJ released guidance regarding the use of arbitration to resolve its challenge to this transaction, detailed in our October 2019 Commentary.
Six Key Takeaways
- The arbitration provision in this matter is not public, so important details—triggers to invoke arbitration, selection of arbitrator, discovery scope and limitations, confidentiality, timing, and how the binding decision by the arbitrator will affect the federal judge's analysis and ruling on likely competitive effects—at this point have not been disclosed publicly. Because DOJ has characterized the market definition issue as "dispositive," it appears that the parties have agreed that the arbitration ruling will effectively resolve the entire challenge.
- Whether DOJ and companies pursue ADR in the future will be informed by whether arbitration is considered successful in this case. If DOJ concludes that the process suffered from severe shortcomings—whether on issues of discovery, confidentiality, application of facts to economic issues and legal precedent, timing, or other factors—DOJ may be less likely to entertain ADR in the future.
- Arbitration can offer an attractive alternative to litigation, for example, in circumstances where the facts are well developed; the disputed issues are clear; the parties would benefit from reliance on the expertise of a third-party expert; and litigation would present significant uncertainty, resource, and timing concerns. Companies and their counsel would benefit from DOJ providing additional information about the reasons for its decision to consider ADR in this case and the "appropriate circumstances" under which DOJ will consider using arbitration in future cases.
- Although one of the benefits of ADR is that it may provide a resolution more quickly than litigation, the original DOJ policy guidance suggested ADR might be more appropriate in nonmerger investigations because those matters, unlike transactions, "often have more timing flexibility." While arbitration is being considered in this case, DOJ (and companies) may in the future be more likely to consider ADR in the context of nonmerger conduct investigations, for example, monopolization claims based on exclusive dealing, loyalty rebates, bundling, or predatory pricing.
- DOJ's willingness to consider arbitration in antitrust matters could prove to be a positive development for companies (and for the government) to the extent it creates an avenue for faster resolution of critical issues without having to incur the time and expense to litigate all issues in court.
- The identity and background of the arbitrator may be even more important to this process than a federal judge who is chosen by random draw. An arbitrator, unlike a federal judge, does not typically have research resources such as judicial clerks and may have to rely more extensively on briefing of the parties. And because arbitration rules use relaxed evidentiary standards, the arbitrator may end up considering facts and information that may not land before a judge. If the arbitrator has a good understanding of antitrust law, he or she will be able to manage and understand the types of legal, economic and evidentiary issues that commonly arise in antitrust matters without starting from scratch. This would give the parties an opportunity to dive quickly into the issues without having to guess about whether basic education on antitrust issues will be important to the decision-maker. Whether the parties to the arbitration find that type of background to be more or less advantageous to their positions may set up a contentious fight at the outset on the identity of the arbitrator.
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