Shifting Sands: DOJ Applies New Merger Enforcement Standards in Recent Lawsuit
On September 15, 2022, the Department of Justice (“DOJ”) sued to block ASSA ABLOY AB’s (“ASSA ABLOY”) proposed $4.3 billion acquisition of the Hardware and Home Improvement division of Spectrum Brands Holdings Inc. (“Spectrum”). The Complaint, as well as a recent speech at the Georgetown Antitrust Law Symposium by Assistant Attorney General (“AAG”) Jonathan Kanter, reflects a number of merger enforcement policy changes. In particular, the Complaint shows DOJ’s willingness to sue to block problematic transactions even when parties propose remedies to address the agency’s concerns. In addition, DOJ appears to be moving away from an analysis of the likely competitive effects of a transaction and toward a more formalistic analysis emphasizing market shares. DOJ’s new approach increases risks for parties during the merger review process at the agency but also creates opportunities for parties willing to litigate against the agency, given DOJ’s attempt to move away from established case law.
The DOJ’s ASSA ABLOY Lawsuit
The buyer in the transaction is ASSA ABLOY, a Swedish conglomerate that manufactures residential and commercial door hardware and electronic access control systems. Last year, it announced an acquisition of the hardware and home improvement brands of Spectrum, the largest producer of residential door hardware in the United States. On its face, DOJ’s Complaint alleges straightforward horizontal harms, such as higher prices and lower customer service, due to anticompetitive effects in two relevant markets: premium mechanical door hardware and smart locks.
While the bulk of the Complaint centers on standard theories of horizontal harms, it also highlights DOJ’s shifting standards in merger reviews as previewed by AAG Kanter’s speech.
First, under the leadership of AAG Kanter, DOJ has become very skeptical and possibly even hostile to settlements as a fix for potential anticompetitive harms. AAG Kanter has previously stated that DOJ has a “duty . . . to litigate, not settle, unless a remedy fully prevents or restrains the violation.” The Complaint, however, goes further and asserts that a party’s attempts to address regulatory risks is itself evidence that the proposed transaction is anticompetitive: “[I]n the summer of 2022, ASSA ABLOY and Spectrum effectively conceded that their proposed transaction would harm competition by proposing a ‘remedy’ to antitrust enforcers that would involve ASSA ABLOY selling off parts of its business units that that sell residential door hardware in the United States.” Compl. ¶ 82. There is no explanation elsewhere in the Complaint or in DOJ’s press release as to why the parties’ proposed remedy amounts to a concession that their transaction is anticompetitive. Further, it is not clear how to square this allegation with Rule 408 of the Federal Rules of Civil Procedure, which says that evidence of an offer to compromise a claim is not admissible as an admission as to the validity of a party’s claim.
Second, the Complaint alleges that the extensive early-stage communications (i.e., before signing the purchase agreement) between the parties as to potential divestiture remedies demonstrate that the parties recognized that the transaction was anticompetitive. Id. ¶¶ 7, 80−81. We have seen some in FTC leadership take a similar position. This emerging view at both agencies does not appear to reflect a proper understanding of the rationale for antitrust covenants in merger agreements and may make it more difficult for merging parties to manage regulatory risk. As a practical matter, it is likely to drive such discussions into phone and video conferences, and away from discoverable written communication.
Third, the Complaint reflects DOJ’s attempt to avoid needing to produce industry-specific evidence to support allegations of post-transaction coordinated effects. According to case law, DOJ is required to allege not only that the transaction would result in an increase in concentration in a highly concentrated market, but also that the industry is susceptible to coordination and that the transaction would increase the likelihood or effectiveness of coordination. The Complaint lacks these latter details and relies instead on a market-share-based structural case. AAG Kanter previewed this shift in his speech, asserting that the government and plaintiffs should not bear the burden “to demonstrate the risk of coordination” in the presence of a structural presumption. In Kanter’s view, that approach “better protects . . . markets from oligopoly behavior.” In his speech, Kanter also argued for less reliance on economic modeling and market definition. These changes, if implemented, would move away from recent enforcement practice and reduce DOJ’s evidentiary burden to establish a violation.
The Complaint and AAG Kanter’s speech indicate that DOJ is making concerted efforts to shift merger review standards away from those articulated in the case law and the 2010 Merger Guidelines. The FTC appears to be doing the same. The inevitable schism between the standards employed by the agencies and the standards employed by the courts may have significant implications for antitrust enforcement. As the agencies reduce the quantum of evidence that they require before bringing a merger challenge, parties likely will increase the number of cases they litigate in federal court, especially since DOJ has made it clear that settlement offers are no longer viewed favorably. Looking forward, it will be up to the courts to determine whether DOJ’s efforts to change merger review standards will be successful, or whether parties will prevail in their attempts to fight the shifting sands.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.