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24 January 2008
In early September 2007 the Federal Trade Commission (FTC) issued a complaint alleging that two dialysis clinic operators - American Renal Associates, Inc (ARA) and Fresenius Medical Care Holdings, Inc - unlawfully restrained competition in violation of Section 5 of the FTC Act when ARA paid Fresenius to close clinics located near competing ARA clinics in Rhode Island and Massachusetts as a part of a 2005 asset purchase agreement.(1)
According to the complaint, the parties entered into an asset purchase agreement dated August 3 2005 whereby ARA proposed to (i) acquire five Fresenius clinics in the Providence, Rhode Island and the Fall River, Massachusetts areas, and (ii) pay Fresenius to close another three competing clinics, for approximately $4.4 million. The parties terminated this agreement on March 13 2006 after the FTC raised antitrust concerns.
The complaint alleged that the agreement between ARA and Fresenius, which were competitors in the provision of out-patient dialysis services, to close three Fresenius clinics was an unlawful horizontal agreement to eliminate competition and to reduce dialysis capacity in the three affected areas. The parties' written contract listed each Fresenius clinic to be closed and the specific amount of money to be paid by ARA for the closure, allocating each amount to the ARA clinic closest to the clinic to be closed. The parties further agreed that Fresenius would not reopen any out-patient dialysis clinics within 10 to 12 miles of the closed facilities for at least five years and would attempt to enforce the non-compete provisions of its agreements with the medical directors of the closed facilities for ARA’s benefit, preventing those physicians from serving as medical directors for any potential new entrant.
The FTC also alleged that ARA’s proposed acquisition of Fresenius’s two Warwick, Rhode Island facilities would have substantially reduced competition for out-patient dialysis services by eliminating competition between the Warwick clinics and ARA’s nearby Cranston, Rhode Island clinic. The FTC’s analysis laid out the factors that the FTC considered to conclude that the relevant geographic market was so localized, including the distance end-stage renal disease patients are willing and able to travel to receive dialysis treatments. The FTC noted that because end-stage renal disease patients often suffer from multiple health problems and may require assistance travelling to and from the dialysis clinic, and because of the high frequency of treatments, these patients are unwilling and unable to travel long distances for dialysis treatment. Furthermore, the FTC concluded that the time and distance a patient will travel in a particular location is significantly affected by:
The parties agreed to a consent order that prohibits ARA and Fresenius from agreeing with any person to close a dialysis clinic or allocate any dialysis customer, territory or market for 10 years.(2) The consent order would also require ARA to give the FTC prior notice before acquiring any interest in a dialysis clinic in the Warwick/Cranston area because there is a risk that ARA remains interested in expanding in the area, but any such further acquisition would likely fall below the Hart-Scott-Rodino Act pre-merger notification thresholds.
The FTC’s action in this matter is unusual in that it proceeded to investigate and obtain an order against the parties even after they had abandoned the originally proposed deal. Its aggressive position is a reminder that companies cannot diminish the impact of problematic contractual provisions in a merger agreement simply by walking away from the deal. Care must always be taken in drafting contractual provisions even in transactions that are unlikely to receive significant scrutiny.
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