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19 October 2006
The US Department of Justice Antitrust Division often enters into consent decrees to address its competitive concerns about proposed mergers and acquisitions. Since 1974 the Antitrust Procedures and Penalties Act - commonly known as the Tunney Act - has required the federal courts to review each consent decree in civil antitrust cases filed by the Antitrust Division to ensure that the remedy proposed in the consent is in the public interest. The act provides the court with broad discretion to seek all the information it needs to fulfil this obligation. While courts in a limited number of cases have used this flexibility to conduct evidentiary hearings and investigate the merits of the proposed remedy, the judicial review process has often been described by commentators as a 'rubber stamp' of the Antitrust Division's decision to settle the case. In merger cases the Antitrust Division even allows the parties to close their transaction before the judge has approved the consent decree.
In response to the perception that judicial review of antitrust consents was often merely a rubber stamp, the US Congress amended the Tunney Act in 2004. While the modifications were relatively minor - the Antitrust Division apparently believed that nothing had changed - the legislative history indicates that Congress intended to strengthen the court's role in the process and provide more effective oversight of antitrust consent decrees. Now these amendments are being put to the test as a federal district court reviews the Antitrust Division's consent decrees in two of the largest telecommunications mergers in US history - Verizon/MCI and AT&T/SBC - and a number of critics have filed briefs arguing that the 2004 amendments require the court to play an extremely active supervisory role. While the court has not yet decided whether it will hold full-blown evidentiary hearings, the judge has demonstrated that he intends to conduct a thorough analysis of these decrees. This development injects more uncertainty into the antitrust consent decree process in the United States and may have wide-ranging effects on future Antitrust Division merger remedies.
Prior to the Tunney Act, there were no formal statutory procedures governing the Antitrust Division's antitrust consent decrees. The act was inspired largely by the Antitrust Division's settlement of antitrust suits challenging International Telephone & Telegraph Corp's (ITT) mergers with several other corporations during the Nixon administration in the 1970s. The settlements prompted allegations of improper influence by ITT because they contained far less relief than was sought in the original complaint and came on the heels of a $400,000 donation by ITT to Nixon's political party during his re-election campaign.
To avoid future allegations of impropriety in antitrust consent decrees, the act required transparency and objective judicial oversight of the consent process by imposing specific rules for the notification of consents, the opportunity for third parties to provide comments and judicial review of the consent. The Antitrust Division must prepare and file a complaint and competitive impact statement simultaneously with the proposed consent decree explaining both the alleged antitrust violation and the proposed remedy. These documents must be published in the Federal Register, a US government publication that contains most routine publications and public notices of government agencies, at least 60 days before the decree becomes final. During this period, the public may comment and the Antitrust Division must respond. The comments and responses are published in the Federal Register.
Before entering the consent decree as a court order, the court must determine whether it is in the public interest. The act lays out two sets of factors for the court to consider. First, the court assesses the decree's competitive impact, including the duration of relief sought, the anticipated effects of alternative remedies actually considered by the Antitrust Division and "any other considerations bearing upon the adequacy" of the decree. Second, the court should examine the impact of the consent decree "upon the public generally and individuals alleging specific injury" from the violations stated in the complaint. The act permits the court broad leeway in determining the necessary scope of its review to confirm that the consent decree is in the public interest. The court may:
Courts have generally deferred to the Antitrust Division, but judges in a few instances have used their Tunney Act powers expansively. The first widely publicized use of the Tunney Act was the 1982 review of the AT&T consent decree. In a lengthy opinion, the judge stated that, although the act required some deference to the prosecutorial discretion of the Antitrust Division:
"[i]t does not follow...that courts must unquestioningly accept a proffered decree as long as it somehow, and however inadequately, deals with the antitrust and other public policy problems implicated in the lawsuit. To do so would be to revert to the 'rubber stamp' role which was at the crux of the congressional concerns when the Tunney Act became law."
He refused to approve the consent decree as written, insisting that the court's ongoing oversight authority was not robust enough. The parties consented to the court's proposed modifications and the modified decree was entered.
The debate over the scope of the Tunney Act intensified in the 1995 review of the Antitrust Division's first consent decree with Microsoft, when a court refused to enter a consent decree for the first time. The district court denied the Antitrust Division's motion to grant the decree because:
On appeal, the DC Circuit held that the district court had overstepped its bounds by reformulating the issues and "effectively redraft[ing] the complaint". The court noted that the Antitrust Division's allegations were the product of its prosecutorial discretion and a judicial challenge of the complaint's scope would implicate separation of powers issues. The court implied that district courts should accept all decrees that do not "appear to make a mockery of judicial power". It reversed and ordered the district court to enter the consent decree.
In 2002 the court was asked once again to approve an antitrust consent decree involving Microsoft when the Antitrust Division agreed to settle its civil suit regarding Microsoft's monopolization of the operating system market. The Antitrust Division had already won on the issue of liability; the only remaining issue was the proper remedy. This time - despite a prior district court ruling in the case that had ordered the break-up of the company, as well as intense opposition from Microsoft's competitors, customers and many voices in academia - the court entered the consent decree with only minor modifications.
Following the approval of the second Microsoft consent decree, Congress enacted two relatively minor changes to the Tunney Act as part of the Antitrust Criminal Penalty Enhancement and Reform Act 2004. First, the act now states that courts "shall" (instead of "may") take the enumerated factors into account in an analysis of the consent decree. Second, a provision was added stating that the act did not require the court to conduct an evidentiary hearing or to permit anyone to intervene.
The statements in the congressional record by the amendments' supporters indicated
they believed the legislation would "make clear" that the DC Circuit's
1995 interpretation of the Tunney Act in Microsoft (in particular, the
"mockery of the judicial function" language) was too narrow. Senator
Kohl stated that the amendments would "insure that the courts can take
meaningful and measured scrutiny of antitrust settlements".
Verizon/MCI and SBC/AT&T: The 2004 Amendments in Practice
The meaning of the 2004 amendments became the subject of intense debate this summer when the Antitrust Division sought approval of its consent decrees regarding the Verizon/MCI and SBC/AT&T transactions. The settlements provided narrow relief involving only partial divestitures of fibre into specific buildings.
As in the Microsoft Cases, the proposed decrees received strong criticism from many industry participants and commentators who believed that the remedies were insufficient. Critics argued that the Antitrust Division should have sought additional divestitures, and that the amended Tunney Act requires more in-depth review. The merging parties and the Antitrust Division argued that the court's inquiry was limited to the competitive issues identified in the complaint, and the Antitrust Division asserted that the 2004 Tunney Act amendments "do not alter this law".
On July 12 2006 the judge held an unprecedented hearing to determine:
He asked the parties to consider a number of questions, including the following:
On July 25 2006 the judge refused to sign the consent decrees without more information. He ordered the Antitrust Division to produce "any material necessary for the court to satisfy its judicial and statutory function" by August 7 2006. He also indicated that it was "premature" to order a full evidentiary hearing, but refused to rule out the possibility of such a hearing in the future.
This ruling led to an intense round of briefing on both sides. The Antitrust Division filed a 21-page memorandum explaining the harm it had identified and the remedy created to address the harm, accompanied by almost 200 exhibits and a 19-page declaration from its expert economist. Several amici filed responses to the Antitrust Division's materials, arguing that the Antitrust Division's filing was inadequate because, among other things, it did not contain several traditional elements of a merger analysis, such as market concentration data and pricing data/analysis. The amici also continued to argue that the proposed remedy did not adequately address all the harm alleged in the Antitrust Division's complaint. The Antitrust Division filed a 38-page reply brief in which it defended its market definition. The Antitrust Division reminded the court that "nothing in the Tunney Act requires the United States to prove the underlying case, as if this proceeding were a trial on the merits". It simultaneously filed a reply declaration from its expert economist in which he defended and explained the Antitrust Division's economic analysis of the transactions.
Several US senators and members of Congress, including those who orchestrated the 2004 Tunney Act amendments, have also expressed interest in the SBC/AT&T and Verizon/MCI mergers. On September 28 2006 two of the senators who were instrumental in the passage of the amendments sent a letter to the Antitrust Division asking why the parties were allowed to consummate their transactions before the completion of the Tunney Act process. They argued that this practice "subvert[s] both the opportunity for public comment and meaningful judicial review under the Tunney Act". The senators requested that the Antitrust Division explain how allowing consummation prior to Tunney Act approval is consistent with the Tunney Act.
The ultimate effects of the 2004 amendments - and the ongoing review of the
Verizon/MCI and SBC/AT&T mergers - are still unclear. At a minimum, these
developments create uncertainty in the merger process. If future consent decrees
could be subjected routinely to this level of judicial scrutiny and delay, merging
parties may be more inclined to hold off closing their transaction until the
Tunney Act process has run its course - or the Antitrust Division could require
a delay in closing. This may make parties more inclined to litigate instead
of negotiating consent decrees. In some transactions, it could increase the
risk that the transaction will fall through. Finally, it is also likely that
future the Antitrust Division complaints accompanying consent decrees will be
drafted more narrowly to prevent objecting parties from arguing that the proposed
remedy does not adequately address the alleged violations.
For further information on this topic please contact Janet L McDavid or Logan M Breed at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (email@example.com or firstname.lastname@example.org).
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