DOJ Offers Guidance on Unprecedented Arbitration in Merger Challenge
The Situation: The United States Department of Justice Antitrust Division ("DOJ") has provided details on the unprecedented use of arbitration to resolve its challenge to the proposed acquisition of Aleris Corporation by Novelis Inc.
The Significance: Companies now have greater insight into the factors DOJ will consider when contemplating arbitration in antitrust matters. This could prove to be a positive development for companies—and for the government—to the extent it facilitates faster resolution of critical issues without incurring the time and expense to litigate all issues in court.
Looking Ahead: Alternative dispute resolution could become a model for future antitrust enforcement actions if the government and companies can agree that the potential benefits (efficiency, timing, certainty) outweigh the limitations, including DOJ's guidance that arbitration may not be appropriate if it means a lost opportunity to create legal precedent.
As discussed in our September 2019 Commentary, DOJ's press release in this matter explained that arbitration will help "resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources," although it offered few details as to how.
Since then, in a notice filed in the U.S. District Court for the Northern District of Ohio where DOJ filed its challenge, DOJ stated that "because this merger challenge would turn on a single dispositive issue [product market definition], the parties have agreed to refer this issue to binding arbitration … to lessen the burden on the Court and reduce litigation costs …." The notice includes a redacted term sheet governing the parties' agreement to arbitrate. According to that document:
- The parties and DOJ "must work in good faith to commence the arbitral hearing" within 120 days of the filing of the answer, assuming DOJ has not accepted a remedy. Arbitration must be completed within 21 days, and the decision made within 14 days of the hearing.
- If DOJ and the parties cannot agree on a single arbitrator, they will select a panel of three arbitrators.
- The arbitral decision is not to exceed five pages.
- If the arbitrator determines the relevant market is broader than DOJ alleges, the complaint will be promptly dismissed. If the arbitrator agrees with DOJ, the parties must divest certain assets and pay DOJ's fees and costs, including expert fees.
- The notice reveals that the parties are negotiating a divestiture to resolve DOJ's complaint. If the remedy is finalized prior to commencement of the arbitration, DOJ acknowledges that the proposed remedy is acceptable, subject to its final approval and pursuant to required federal court review under the Tunney Act. Novelis agrees to "continue negotiating in good faith" toward a possible remedy. If arbitration has commenced and DOJ prevails, the parties must agree to divest to a buyer DOJ deems acceptable.
- If the arbitrator rules for DOJ prior to December 20, 2019, or if the legal challenge or arbitration are still pending as of that date, the parties can close the transaction subject to holding the divested assets separate from the rest of the business.
During a speech made on the same day as the court filing, Assistant Attorney General for the Antitrust Division ("AAG") Makan Delrahim, explained that DOJ would consider three factors when determining whether to use arbitration: (i) efficiency gains, (ii) clarity of the question the arbitrator would resolve; and (iii) potential lost opportunity to create legal precedent. AAG Delrahim added that DOJ also would consider the identity of the arbitrator, how costs would be allocated, and the arbitration process (which would be agreed by the DOJ and the parties "likely before filing suit").
Four Key Takeaways
- One of DOJ's factors for considering arbitration is whether there is agreement between DOJ and companies on a clear question for the arbitrator. Identifying and reaching agreement on this point may prove challenging in many cases.
- DOJ may not want to use arbitration in cases that involve high-profile industries or companies, or that implicate important policy considerations. In these situations, the government is more likely to pursue litigation that creates valuable legal precedent over arbitration, where the outcome and reasons for it will be less transparent and determinative of future cases.
- Arbitration provides DOJ and companies with more control over when and how the case will be resolved. The arbitration schedule in this case is similar to a typical merger litigation, i.e., four months for pretrial discovery and three weeks for a hearing. It differs with respect to timing for the arbitration decision, which must occur within 14 days of the hearing's conclusion. That decision also cannot exceed five pages, so it necessarily will be light on details and reasoning. Judges, by contrast, have significant latitude over how they manage trials, including when to issue a decision.
- Arbitration may expedite closing by permitting remedy discussions and fact discovery to occur in parallel. The antitrust agencies often take the position that staff can focus on a settlement or prepare for trial, but not both. Parallel remedy and fact discovery therefore have the potential to deliver a faster resolution.
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