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New DOJ Merger Remedies: E d d A i  E f  T lExpanded Antitrust Enforcement ToolsNavigating Revised Guidance to Mitigate Anti‐competitive Impact With Conduct and Structural Remedies

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JULY 19, 2011

Today’s faculty features:

J. Robert Kramer, II, General Counsel, Office of the General Counsel,

U.S. Department of Justice, Washington, D.C.

Michael H. Knight, Partner, Jones Day, Washington, D.C.

Joseph G. Krauss, Partner, Hogan Lovells, Washington, D.C.

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ANTITRUST DIVISION POLICYANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES

J. Robert Kramer IIGeneral Counsel, Antitrust Division

202-514-3543Robert Kramer@usdoj gov

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Robert.Kramer@usdoj.gov

IntroductionIntroduction

• The Policy Guide provides guidance to the staff of the Antitrust Division and to the b i it i l i dbusiness community in analyzing proposed remedies for mergers

• Touchstone principle: a successful merger remedy must effectively preserve

i i i h l kcompetition in the relevant market

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The Need for an Updated GuideThe Need for an Updated Guide

• The merger landscape has evolved since 2004

• The Division increasingly reviews complex international and vertical transactions

• Old guide did not reflect remedies filed in recent Division cases

• The Division’s Office of the General Counsel has principal responsibility for enforcing

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has principal responsibility for enforcing Division decrees

Types of RemediesTypes of Remedies

St t l• Structural– Require merging firms to sell overlapping business or

physical or IP assets to create a new competitorphysical or IP assets to create a new competitor

• Conduct– Prescribes aspects of merged firm’s conductp g– Can preserve a merger’s potential efficiencies while

remedying likely competitive harm

• Hybrid– Combination of structural and conduct provisions

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FYs 2010 and 2011FYs 2010 and 2011

14 Horizontal Decrees:• 13 required divestiture.

3 Vertical Cases:• All have conduct

• Some have additional relief; i.e., notification provisions restrictions on

restrictions.• Structural relief was not a

viable optionprovisions, restrictions on resale, short-term supply agreements

viable option.

• One had substantial vertical issues and also included conduct relief.included conduct relief.

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Live NationLive Nation

• Allegation: Unilateral theory based on Live Nation incipient competition and intent to compete on price. Live Nation also had unique advantages in challenging Ticketmaster because of its promotion b sinesspromotion business

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Live NationLive Nation

Remedy:• Divestiture: License Ticketmaster Host on a White Label basis for up

to 5 years; acquirer has option to enter into perpetual license or choose third-party ticketer or enter itself, but then cannot use Ticketmaster

• Divestiture of Paciolan to Comcast within 60 days of closingy g

• Prohibits retaliation against venue for contracting with another ticketer

• Prohibits tying live entertainment to ticketing services

• Firewalls promotional employees from sensitive ticketing information

• Clients switching to another ticketing service can obtain ticketing data

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ComcastComcast

Allegation: Merger would allow Comcast to lessen competition from traditional MVPDs and emerging OVDs by withholding or raising the cost of content, especially content of the NBC broadcast network

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ComcastComcast

Remedy:• Existing FCC regulation and FCC Order protects traditional MVPDs;

supplemented by DOJ anti-retaliation prohibitions

• Comcast must license programming to OVDs on either terms economically equivalent to those given to MVPDs or terms y q gcomparable to those given to other qualified OVDs. Arbitration may be available to certain OVDs

• Comcast must relinquish management rights in Hulu and provideComcast must relinquish management rights in Hulu and provide content to Hulu comparable to what is provided by other JV partners

• Nondiscrimination in transmission of OVD’s network to a Comcast broadband customerbroadband customer

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GrafTechGrafTech

Allegation: GrafTech, a producer of graphite electrodes, proposed to acquire Seadrift, a major upstream needle coke producer. GrafTech already purchased needle coke from Conoco through a contract ith an MFN and a dit rights The contractcontract with an MFN and audit rights. The contract rights combined with control over Seadrift would give the two needle coke producers substantial real-give the two needle coke producers substantial realtime customer specific pricing and volume information and create a danger of coordinated effects

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GrafTechGrafTech

Remedy:• Amend the supply agreement to remove audit rights, pp y g g

sharing of non-public sensitive information, and MFN pricing. Prohibit use of such terms in future contracts

• Firewall GrafTech employees who negotiate contract terms with Conoco from those who make pricing and production decisions at Seadrift. Prevent Seadrift employees p ynegotiating with GrafTech electrode competitors from sharing competitively sensitive data with GrafTech

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Google/ITAGoogle/ITA

Allegation: ITA licenses QPX software, a search engine with unique capabilities used by online travel intermediaries (OTIs). Google intends to offer a travel search product that competes with OTIs. Gi en the importance of QPX the acq isition ofGiven the importance of QPX, the acquisition of ITA would give Google the incentive to foreclose or raise the costs of rivalsraise the costs of rivals

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Google/ITAGoogle/ITA

Remedy:• Google must honor existing QPX licenses, renew them on similar

terms and offer to license to OTIs not under contract on fair, reasonable and non-discriminatory terms. The obligations also run to new InstaSearch technology. Google must continue ordinary course

d d t l t d th d tupgrades and not lessen resources to upgrade the product

• Firewall Google from sensitive OTI information obtained through provision of QPX or InstaSearch services

• Google generally cannot enter into agreements to limit seat availability and booking class information to OTI competitors. Granting licenses cannot be conditioned on OTI purchases of other Google servicesp g

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Recent Conduct Remedies SummaryRecent Conduct Remedies Summary

• Tailor remedies to facts of case and theory of harm

• Four cases show a range of conduct remedies: Firewalls

Mandatory licensing

Tying prohibitions

MFN prohibition

A i li i i i Anti-retaliation provision

Relinquishing management rights

Limiting exclusive contracts Limiting exclusive contracts

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Guiding Principlesg p

All Di i i di h ldAll Division merger remedies should:

1. Effectively preserve competition

2. Focus on preserving competition, not protecting individual competitors

3. Tailor remedies by applying legal and economic principles to the facts of each case

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Remedies by Type of MergerRemedies by Type of Merger

• Horizontal Mergers: The Division pursues a structural remedy in the vast majority of casesV ti l M Th Di i i id• Vertical Mergers: The Division considers tailored conduct remedies and, in some cases, structural remedies

• Mergers with both horizontal and vertical dimensions: May require a combination of structural and conduct provisions

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Structural RemediesStructural Remedies

• Any divestiture must include all the assets necessary for the buyer to compete effectively with the merged entity

• The Division prefers divestiture of an existing business entity that already has demonstrated its ability to compete in the relevant market

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Implementation: TimingImplementation: Timing

I ti “fi it fi t”• In some cases, parties pursue a “fix-it-first” remedy to resolve the Division’s concerns

ith t th Di i i b i i itwithout the Division bringing suit• In other cases, the parties may propose an

upfront buyer for a specific package of divestiture assets

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Implementation: TimingImplementation: Timing

• In most merger cases, the parties (or a selling trustee) will shop a specific asset package in an effort to find a buyer

• Divestiture periods are short—60 to 90 days are the norm

• In some instances, the Division will require a “crown jewel” provision to increase the chances j pthat an appropriate buyer will emerge

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Implementation: Protecting Divestiture Remedies

The Division’s tool box includes measures to f d it di tit disafeguard its divestiture remedies:

- Hold separate/asset preservation provisions

- Operating and monitoring trustees

- Selling trusteesg

- Division purchaser approval

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Implementation: Protecting Di i R diDivestiture Remedies

A proposed purchaser must meet three requirements:

- Divestiture to proposed purchaser must not cause competitive harm

- Purchaser must have ability and incentive to use divested assets to compete in the relevant marketassets to compete in the relevant market

- Purchaser must have sufficient acumen, experience, and financial capability to compete effectively in the market over the long term

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Conduct RemediesConduct Remedies

• Can be an effective method for addressing competition concerns raised by vertical mergers

• Sometimes used to address concerns raised by horizontal mergers (usually in conjunction with a

l d )structural remedy)• Clear and careful drafting is especially important

f d t difor conduct remedies• Can expect active Division monitoring

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Conduct RemediesConduct Remedies

• The most common forms of conduct remedies include:– Firewall provisions– Non-discrimination provisionsNon discrimination provisions– Mandatory licensing provisions– Anti-retaliation provisionsAnti-retaliation provisions– Prohibitions on certain contracting practices

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Regulatory ConsiderationsRegulatory Considerations

• When mergers involve firms in regulated industries, the Division considers the impact of papplicable regulations

• The existence of regulation typically does notThe existence of regulation typically does not eliminate the need for an antitrust remedy

• Collaboration ith the reg lator agenc is a best• Collaboration with the regulatory agency is a best practice. E.g., cooperation with FCC in Comcast/NBCComcast/NBC

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Jurisdictional ConsiderationsJurisdictional Considerations

• The Division often works with international and state antitrust authorities in merger matters and considers it to be a best practiceconsiders it to be a best practice

• Our goal is to ensure that, to the extent possible, i i i di d fli ilDivision remedies do not conflict unnecessarily

with other jurisdictions’ remedies

• Front Office works with our staff and non-US agencies to achieve coordinated merger remedies

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New DOJ Merger Remedies Guide: Expanding the Guide: Expanding the

Medicine Chest

Michael H. KnightMichael H. Knightmhknight@jonesday.com

202 879 555330

202.879.5553July 19, 2011

Basic Highlights

• New Guide issued June 17, 2011• Updates 2004 policy and includes important changes:

• Use of conduct remedies• Crown jewel provisions

A bit ti• Arbitration• Monitor trustees• General Counsel positionGeneral Counsel position

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Some Comparisons to 2004:• Conduct RemediesConduct Remedies

• 2004 – “A conduct remedy . . . typically is more difficult to craft, more cumbersome and costly to administer, and easier than a structural remedy to circumvent.” 2011 “C d t di b ff ti• 2011 – “Conduct remedies can be an effective method for dealing with competition concerns raised by vertical mergers and also are sometimesraised by vertical mergers and also are sometimes used to address concerns raised by horizontal mergers.”

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Some Comparisons to 2004:• Crown Jewel ProvisionsCrown Jewel Provisions

• 2004 -- “The Division disfavors the use of crown jewel provisions because generally they j p g y yrepresent acceptance of either less than effective relief at the outset or more than is necessary to remedy the competitive problem.”

• 2011 -- “A crown jewel provision may be necessary [in certain cases] to ensure that the remedy will effectively preserve competition.”

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Some Comparisons to 2004:• Monitor TrusteesMonitor Trustees

• 2004 – “[A]ppointment of a monitoring trustee should be reserved for relatively rare situations where a monitoring trustee with technical expertise unavailable to the Division could perform a valuable rolevaluable role.

• 2011 – “A monitoring trustee with industry experience can reduce the burden on the Divisionexperience can reduce the burden on the Division and the parties while ensuring that the parties adhere to the decree.”

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New Guide reflects New Guide reflects current realities at DOJ

illi i i i l• Greater willingness to intervene in vertical mergers?• Greater willingness to impose non-structural remedies?• Squares with several recent matters:• Squares with several recent matters:

• Google/ITA• Comcast/NBCUComcast/NBCU• GrafTech/Seadrift• Ticketmaster/Live Nation • George’s/Tyson

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New Guide reflects New Guide reflects current realities at DOJ

• Greater willingness to take regulatory approach?pp• Crown jewel provisions• Arbitration• Arbitration• Monitor trustees• General Counsel oversight

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Pros/Cons for Clients• Pros –

• Expanded “medicine chest” may allow more deals to gain clearancedeals to gain clearance

• Greater flexibility in remedies• Cons• Cons –

• Could prove to be Pandora’s BoxT i “ k h ld b• Temptation to “make the world a better place”

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How to Determine/Assess Possible Remedies

Identify the nature of potential harm: Horizontal? Identify the nature of potential harm: Horizontal? Vertical? Both?

Assess the strength of the merits case. Remedies are by nature case specific.

Assess whether structural relief is a viable option.Assess whether a case can be made that non-structural

relief will adequately address the concern.L k t th H thi b id b dLook to other cases: Has this bridge been crossed

before?

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How to Determine/Assess How to Determine/Assess Possible Remedies

Test the agency’s willingness to accept a remedy and flexibility in approach.

Tailor the proposed remedy as narrowly as possible toTailor the proposed remedy as narrowly as possible to address the competitive harm.

Understand the practical logistics of the proposal --Understand the practical logistics of the proposal i.e., what precisely must be done and how feasible is it?

Assess likely timing, need for ongoing agency involvement, potential need for trustee, etc.

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DOJ Merger Remedies GuideEffective RemediesEffective RemediesJoseph G. Krauss, Partnerjoseph.krauss@hoganlovells.com202 637 58327/19/2011

Washington, D.C.

202.637.5832

Advantages for clientsAdvantages for clients

• Greater Flexibility– The “broad range” of remedies considered by the Division

may enable more deals to gain clearance.Tailoring remedies to the partic lar facts of a merger ma– Tailoring remedies to the particular facts of a merger may avoid “unnecessary entanglements with the competitive process.”

– Will allow the Division to seek remedies that preserve a merger’s efficiencies. With t l il bl th Di i i i b tt bl t– With more tools available, the Division is better able to craft remedies that do not conflict with those of other competition agencies.

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Possible disadvantages for clientsPossible disadvantages for clients

• Lack of bright-line rules– The “panoply” of available remedies and “fact-intensive”

inquiry may make it difficult to predict what remedies the Division will deem appropriate for a specific mergerDivision will deem appropriate for a specific merger.

• Temptation to overdesign remedies• Temptation to overdesign remedies– With a wide variety of tools at hand and the goal of

creating carefully tailored remedies, there may be an g y yincentive to create overly complex remedies.

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What makes a remedy appropriate?What makes a remedy appropriate?

• Remedies must be tailored to address the specific competitive concerns of the merger.– Look at the specific facts of the proposed merger.

f– Identify the competitive harm.– Identify how the proposed remedy will solve the problem.Remedies should provide contingency plans• Remedies should provide contingency plans.– What happens if a purchaser backs out?

What happens if a purchaser cannot be found?– What happens if a purchaser cannot be found?– How will complainants resolve issues regarding a firm’s

post-merger compliance with a decree?

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General best practices for creating a remedyGeneral best practices for creating a remedy

• Identify the competitive harm threatened by the merger.• Replace the competition lost by the merger.• Look to other cases with similar facts.

But look for facts that distinguish the two situations– But look for facts that distinguish the two situations. – Merely copying a past proposal is unlikely to prove successful.

• Consider whether a conduct remedy will adequately address the Division’s concerns.

• Consider ways to reduce the burden on the parties.A simple and swift remedy may be preferable to a remedy requiring– A simple and swift remedy may be preferable to a remedy requiring ongoing monitoring.

• Notify the Division of relevant regulatory, state, or

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international matters.

Best practices for structural remediesBest practices for structural remedies

• Divest assets within 60-90 days.• Look for a “fit” purchaser• Look for a fit purchaser.

– One with the ability to compete effectively over the long term.• Look for a purchaser that needs less rather than more.

Di esting less than an e isting b siness entit ma be s fficient– Divesting less than an existing business entity may be sufficient.• Create an attractive package of assets to avoid divesting

“crown jewels.” Wh ibl “fi it fi t ”• When possible, “fix-it-first.”– “Fix-it first” remedies cannot contain conduct provisions.– Alternatively, find an upfront buyer.

This avoids the need for hold separate provisions and monitor or– This avoids the need for hold-separate provisions and monitor or operating trustees

• Ensure that the assets to be divested will be managed well and kept in saleable condition.

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and kept in saleable condition.

Best practices for conduct remediesBest practices for conduct remedies

• Conduct remedies should be drafted carefully.– Precise– Unambiguous– No loopholes– EnforceableL k f l t i bit ti• Look for regulatory agencies or arbitration provisions to minimize the burden on the Division.

• Look for remedies that the Division can easily• Look for remedies that the Division can easily monitor.

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