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U.S. Court Rules on Premerger Exchange of Information, Highlighting Risks and Best Practices for Merging Parties

Toby G. Singer, J. Bruce McDonald, Jones Day Antitrust Alert, January 2011

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Last week the U.S. Court of Appeals for the Seventh Circuit rejected an antitrust lawsuit by institutional pharmacy Omnicare that challenged premerger planning and information exchanges between two health insurers, UnitedHealth Group and PacifiCare Health Systems. Although this decision affirmed summary judgment for the defendants, it reflects the antitrust risks for parties to a proposed merger exchanging forward-looking information during merger discussions and suggests some best practices.

"Gun jumping"

Competitors planning a merger that they have not yet closed must balance the need to plan for the hoped-for combination of their businesses, which typically involves exchanging internal information they otherwise would not share externally, against the antitrust rules against coordination between competitors, as the merging parties remain competitors until closing. Even in the context of planning for postmerger operations, coordination of current activities and exchanges of information can violate Sherman Act § 1, which prohibits agreements that restrain competition, and the rules against "gun jumping" under the Hart-Scott-Rodino premerger notification statute, which do not allow control of a company to transfer to its merger partner before closing.

The Omnicare case

To be allowed to provide insurance coverage for prescription drugs under Medicare Part D, managed care providers must demonstrate that their networks include enough retail and institutional pharmacies to provide "convenient access" to enrollees. In 2005, United and PacifiCare each were negotiating reimbursement contracts with Omnicare, the nation’s largest institutional pharmacy, which provides pharmaceutical services to long-term care facilities like nursing homes.

At the same time, United and PacifiCare were planning to merge, exchanging information as part of due diligence and preparing for postmerger operations.

Before the merger was closed, United and Omnicare negotiated an agreement on terms favorable to Omnicare. After some brinksmanship, PacifiCare and Omnicare also signed an agreement, this one less favorable to Omnicare. Shortly after the merger closed, United abandoned its Omnicare contract and joined PacifiCare’s. Omnicare brought an antitrust action, claiming that the insurers had, before closing their merger, coordinated their approaches with Omnicare to ensure that one of them was able to make a deal for a lower reimbursement rate.

Evidence of conspiracy

Omnicare alleged that information exchanged between United and PacifiCare about Medicare plans gave them the opportunity to confer about their negotiations with Omnicare and devise a plan that would result in better reimbursement terms. Omnicare proffered evidence to support its allegations:

- Early negotiations between PacifiCare and Omnicare broke down just a week after PacifiCare and United committed to merge.

- The merger agreement exempted Medicare Part D contracts from restrictions on PacifiCare making large contractual commitments premerger.

- The merging parties discussed plans for their Part D programs and exchanged extensive nonpublic information, including anticipated reimbursement rates, projected national average bids, and actuarial analyses.

- Integration planning began before the parties actually merged. A "strategic operations memo" suggested that PacifiCare’s wholly owned pharmacy benefit subsidiary be used as a "stalking horse to obtain the best service and contracts" from Omnicare.

- After Omnicare had agreed to a contract more favorable to PacifiCare and after the merger was consummated, United informed Omnicare it was unhappy with its contract and then moved to operate under the PacifiCare-Omnicare contract.

Omnicare claimed that, taken together, the evidence suggested the insurers had conspired against Omnicare. The district court disagreed, granting the insurers’ motion for summary judgment, and the court of appeals affirmed.

Evidence of independent action

The appellate court held that the evidence of conspiracy was "ambiguous," that is, equally consistent with either conspiracy or independent action by the defendants. Therefore the burden was on Omnicare to provide evidence tending to exclude the possibility of independent action, to show that the factfinder should infer conspiracy even though it also could infer independent action.

The court found Omnicare’s evidence insufficient to defeat summary judgment. For every piece of evidence Omnicare offered in support of joint activity, there was evidence to undercut the inference. For example, even before the alleged coordination between United and PacifiCare, United had documented it did not like its agreement with Omnicare. Before Omnicare was willing to accept PacifiCare’s proposed contract, PacifiCare had abandoned talks with Omnicare and been approved for Medicare Part D with another pharmacy network. The "strategic operations memo" was not circulated until after the alleged conspiracy would have been well underway. With these additions to the chronology, and absent a smoking gun, the insurers were able to put Omnicare’s allegations in a different light.

Steps to limit antitrust risk

Although it took extensive discovery and summary judgment proceedings to get there, United and PacifiCare were able to show their premerger activities were not illegal. Although both courts agreed that "a mere possibility of a merger cannot permit business rivals to freely exchange competitively sensitively information," the courts may have been influenced by the steps the parties took apparently to avoid improper information exchanges and coordination. For example:

- In general their information exchanges were policed by antitrust counsel, who sometimes advised they provided less information than requested.
- The parties limited their disclosures of especially sensitive information, such as rates in contracts with providers. PacifiCare and United exchanged only their average bids for Part D plans, which were provided only to persons not involved in Part D contract negotiations.

Balanced against the evidence supporting a finding of independent action by United and PacifiCare in their dealings with Omnicare, the court concluded that the inference of conspiracy was less reasonable than the inference of independent action. Therefore the claim of antitrust conspiracy failed.

Best practices

Although it may not ward off a litigious plaintiff, merging parties can follow best practices to limit the risk that their premerger planning will be found to be unlawful coordination between competitors or gun jumping before the transaction is closed:

- Merging parties may exchange information needed for due diligence and plan for postmerger integration and operations, but only in ways that do not undercut the requirement they remain independent competitors before closing or afterwards if the deal is abandoned.

- The parties should provide competitively sensitive information only in aggregated form and only to persons within the companies not in a position to use it for commercial purposes. Some information should almost never be exchanged directly with a competitor, such as customer contract terms, marketing plans, or detailed cost data.

- An alternative to directly exchanging information is to use a third party or consultant to receive and aggregate or summarize the information for the parties.

- There is greater competitive risk in exchanging information that is more detailed and more current or forward looking. The more competitive information that is exchanged between negotiations and closing, the more likely it is that competition will be perceived to be reduced.

- Of course, the parties may not control or limit each other’s premerger marketing, pricing, or other competition. And neither party should make current commercial decisions based on information learned in due diligence.

- Inside or outside antitrust counsel should be consulted to find ways to engage in due diligence and premerger planning while avoiding antitrust risks. Maintaining a record of exchanged information or planning discussions will help substantiate that the parties have limited competitive risks in the premerger process.

The Omnicare case highlights the risks inherent in premerger activities. Careful planning and discipline will reduce the risk that merging competitors will be found to have engaged in improper information exchanges or coordination before completing their transaction.

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