Challenging Mergers: Timing is (Mostly) Everything

Denver, Colo. (October 28, 2021) - Clayton Act Section 7 is a statute private companies often overlook when seeking to combat mergers that are likely to degrade competition and, in the process, impair a company’s ability to participate as a market supplier or consumer. A Fourth Circuit case reminds us, however, that private parties directly can use the statute in the right circumstances to level the playing field where they operate. In that Fourth Circuit case, a company successfully obtained damages and divestiture of a merger even though years had passed since government regulators approved the deal.

Post-merger attacks under Section 7 have an Achilles heel though: the equitable defense of "laches.” Unnecessarily delaying action to vindicate competitive rights can derail a private claim as well as uproot or limit claims of government regulators upon whom a private entity might otherwise rely to restore purportedly lost competition.

Background on Section 7

Section 7 (15 U.S.C. § 18) prohibits mergers and acquisitions that substantially lessen competition or tend to create a monopoly. In other words, combinations can be unwound on the front end (prior to consummation) or back end (after consummation) if there is a reasonable probability the merged entity will erode the competitive landscape to the detriment of consumers. In calling on Section 7, a party need not prove harm is certain to arise from a merger (though the harm must be probable). Parties, however, cannot predicate claims solely on injury to themselves; there must also be harm to the competitive process itself.

Merging companies can try to overcome showings of probable harm by offering evidence of the procompetitive benefits of the merger. In this way, the analysis turns to whether the evidence of market harm (e.g., likely higher prices) outweighs the market positives (e.g., improved product quality) being supplied to consumers by the merging entity. To assist them in weighing the evidence, courts have free reign to assess a wide variety of factors; the analysis is not strictly scripted but examines a “totality-of-the-circumstances.”

The United States, state governments, and private parties can pursue relief under Section 7 and related antitrust statutes (15 U.S.C §§ 15, 18, 26). Historically, private parties have left merger challenges to federal competition regulators: primarily the Department of Justice (DOJ) and Federal Trade Commission (FTC).[1] In turn, these regulators often deploy Section 7 to try to unravel combinations in their incipiency.

Background on Laches

Laches is a defense in equity that prevents those who “sleep on their rights” from seeking relief for another’s supposed wrongful conduct. In essence, the doctrine works like a statute of limitations (i.e., a law that provides a specified number of years to bring an action) premised on notions of fairness. For the defense to succeed, a defendant must prove (1) the plaintiff unreasonably delayed in filing suit, and (2) the delay prejudiced the defendant.

Laches is a valid defense to a Section 7 action brought by private parties or state governments. However, the defense is not available against the United States government. To give context to what is “too long” to bring an antitrust action, courts look to the statute of limitations in civil antitrust actions, which is four years. This creates a presumption that cases brought after four years of a merger and seeking divestiture can be barred by laches.

Being a presumption, the four-year period is not set in stone. And the Fourth Circuit has said that what is too long to wait to bring an action is measured from the date when the plaintiff should have known that it had a viable claim and was able to pursue that claim. For example, a party does not have a basis to sue in its individual capacity under the antitrust laws, including Section 7, until it is faced with injury from a merger. In the absence of that injury, the plaintiff would not be able to allege the necessary “antitrust injury” element of the claim. Thus, the claim would not ripen until the requisite injury emerged.

The Tension Between Section 7 and Laches on Display

Earlier this year, the Fourth Circuit decided Steves & Sons, Inc. v. Jeld-Wen, Inc. 988 F.3d 690 (4th Cir. 2021). The appellate court concluded that a plaintiff with a “good excuse” for delay in filing a Section 7 suit challenging a merger will not be barred by laches from pursuing a claim. Specifically, the plaintiff, Steves & Sons, waited more than 40 months after the closing of a merger (and after stating initially that it did not oppose the merger) before filing suit against the merged entity. In determining whether Steves & Sons had a good excuse for its delayed filing, the court looked to the specifics of when the plaintiff became aware of the threatened injury arising from the merger.

While the defendant argued the merger itself (in 2012) alerted Steves & Sons of the injury it would face because of the merger (that is, a reduction in supply options from three to two companies), the court concluded the Section 7 claim did not become actionable (and the time to sue did not begin to run) until the defendant (in 2014) indicated it would stop supplying the plaintiff with product and the plaintiff’s only other supplier announced (also in 2014) it would no longer offer to supply the plaintiff. Without supply from either, Steves & Sons would not be able to realistically compete. Because Steves & Sons filed its action in 2015, the court rejected this aspect of the merged entity’s laches arguments. As a result, the Fourth Circuit sustained the lower court’s entry of a divestiture order.

On the other hand, in New York v. Facebook, 2021 U.S. Dist. LEXIS 127227 (D.D.C. June 28, 2021), a district court did apply laches to the Section 7 claims of a host of state attorneys general. There, 46 states, among others, filed an action in late 2020 alleging Facebook’s acquisitions of Instagram in 2012 and WhatsApp in 2014 substantially lessened competition and tended to create a monopoly in a relevant market. In applying laches, the district court had little problem deciding that the states simply had waited too long to bring an action. Among other points, the district court noted that (i) the states’ complaint recognized that in 2014 analysts opined that Facebook’s WhatsApp purchase was to solidify Facebook’s monopoly position, and (ii) that eight years had passed since Facebook purchased Instagram. On top of this, the district court found prejudice to Facebook, including economic prejudice arising from the many-year delay in suing Facebook.

While the states made numerous arguments – essentially their best efforts to provide “good excuses” – for the delay in filing (e.g., application of parens patriae), the district court rejected each argument. The court consistently returned to the bottom line: the states could provide no reasonable justification for their years delay in filing their claims. The delay doomed the Section 7 claim.

The court’s unreasonable delay analytical framework, which led to condemnation of the state regulators’ complaint, has been applied to private parties too. In Midwestern Mach. Co. v. Northwest Airlines, Inc., 392 F.3d 265, 277 (8th Cir. 2004), for example, the Eighth Circuit found unreasonable delay when a private entity waited several years before filing.

Takeaway

Regulator approval of a merger does not give a merged entity free rein to act with competitive impunity. Competitors or consumers of the merged entity concerned about the entity's market behavior may be able to challenge the merger, even after the fact, when the merger degrades the competitive process and causes injury to the potential plaintiff. Beyond damages, a Section 7 claimant can seek divestiture.[2]

Alternatively, a private actor may prefer to petition state or federal government enforcers to act and thereby enhance its ability to compete through remedies that restore or preserve the competitive landscape, to include fair access to products, services, and consumers. In either circumstance, a private party must be sensitive to notions of fairness as expressed by the laches doctrine. Wait too long to address a merged entity's competitive practices and a remedy may become out of reach or limited in its breadth and effectiveness.[3]

Given the complexity of these and other Section 7 issues, private parties can benefit by consulting antitrust counsel on their legal rights as a competitor or consumer of a merged entity.

For more information on this topic, contact the authors of this alert. Visit our Antitrust & Competition Practice page to learn more about Lewis Brisbois’ capabilities in this area.

[1] One reason private parties defer to federal regulators is that not every party can prove “antitrust injury,” which is a prerequisite to bring a claim under the antitrust laws. See Steves & Sons, Inc. v. Jeld-Wen, Inc., 988 F.3d 690, 710 (4th Cir. 2021); Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986). “Antitrust injury” means the type of injury (e.g., exclusion from a market) the antitrust laws are designed to prevent and which flows from the contested conduct. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977).

[2] Parties dealing with the anticompetitive effects of a merger may also have other recourse available to them under the antitrust laws such as monopolization claims under Sections 2 of the Sherman Act (15 U.S.C. § 2) or actions for injunctive relief, including divestiture, under Section 16 of the Clayton Act (15 U.S.C. § 26).

[3] Unclean hands also can unhinge a Section 7 claim, but that is a subject for another day.

Authors:

Christopher H. Wood, Partner

Thomas L. Dyer, Associate