Ruling on Pre-Merger “Gun-Jumping” Claims
A recent decision of the U.S. Court of Appeals for the Seventh Circuit in an antitrust case provides an important reminder of the federal antitrust law’s “gun-jumping” prohibitions for parties contemplating an acquisition, merger, joint venture or similar transaction.
“Gun jumping” refers to unlawful concerted action prior to consummation of such a transaction, in contrast to permissible pre-closing due diligence and related planning.
The due diligence process generally raises substantial antitrust concerns because two or more competitors are necessarily exchanging highly sensitive information and often want to ensure any significant business decisions taken prior to closing will be consistent with the business strategy and judgment of the contemplated new entity, although there is, of course, no guarantee that the transaction will be consummated. As a result, prior to the consummation of such a transaction, the parties must remain independent and cannot take concerted action, or they may face stiff penalties.
Background of Omnicare Case
The facts of Omnicare, Inc. v. United Health Group, Inc. are straightforward.
Beginning in 2005, two health insurers, UnitedHealth Group Inc. (“United”) and PacifiCare Health Systems Inc. (“Pacific”) began contemplating a merger, ultimately entering into a merger agreement and conducting due diligence. Prior to closing of the merger, both United and Pacific were also engaged in contract negotiations with a large national pharmacy, Omnicare Inc. (“Omnicare”), related to the provision of pharmaceuticals for the insurers’ Medicare Part D programs. Both United and Pacific entered into agreements with Omnicare, although Pacific’s agreement was more favorable to the health insurer. After the merger was consummated, United abandoned its less favorable terms and utilized Pacific’s arrangement.
In response, Omnicare filed a complaint asserting that the merging insurers violated antitrust “gun-jumping” prohibitions. Specifically, Omnicare presented evidence that before the merger, among other things, United and Pacific had exchanged confidential reimbursement and other information related to their Medicare Part D programs and had specifically permitted Pacific to continue negotiating long-term Medicare Part D contracts under the merger agreement while most other long-term contract negotiations were restricted. Omnicare also claimed that Pacific’s aggressive bargaining and United’s postmerger abandonment of its contract were all part of a coordinated strategy between the defendants that started before they merged.
At the district court level, Pacific and United prevailed on their summary judgment motions. On appeal, the Seventh Circuit affirmed because the defendants were able to demonstrate that the inference of conspiracy was less reasonable than the inference of independent action of the parties (e.g., United wanted out of its contract regardless of the merger, Pacific also negotiated with other pharmacies, etc.).
Federal Antitrust Law’s “Gun-Jumping” Prohibitions
Although Omnicare was unsuccessful, this case serves as a stark reminder of the U.S. federal antitrust law’s “gun-jumping” prohibitions. “Gun-jumping” violations can be asserted under two statutes, Section 1 of the Sherman Act and the Hart-Scott- Rodino Act (“HSR”).
Section 1 of the Sherman Act generally addresses anticompetitive agreements between independent firms, prohibiting certain impermissible restraints on trade. Per se violations include certain covenants not to compete, price-fixing and customer allocation. Parties to a merger or similar transaction can violate the Sherman Act by engaging in such prohibited conduct prior to closing (i.e., while the parties are still independent firms). Notably, the Department of Justice may claim violations and seek criminal penalties, and either private plaintiffs seeking treble damages or government enforcement agencies, including the Department of Justice or the Federal Trade Commission, may assert civil claims.
HSR prohibits, among other things, an acquiring party from exercising “substantial operational control” over the acquired party during the HSR waiting period. Violations could include premature transfers of indicia of ownership, such as management or control of the acquired party, joint decision-making between the parties, and exchange of competitive information except as necessary for due diligence purposes. Penalties include civil fines per day of violation as imposed by the Attorney General.
Possible Protective Measures
Understanding that every transaction is unique, parties contemplating an acquisition, merger, joint venture or similar transaction should consider undertaking certain protective measures to insulate the parties from “gun-jumping” claims. These might include:
- Consult with antitrust counsel in developing parameters of due diligence review and pre-transaction coordination efforts;
- Continue operating businesses in the ordinary course prior to closing to the extent practicable;
- Avoid coordinated decision-making, integration, joint contract negotiation or similar activities prior to consummation of the transaction;
- Refrain from using any information obtained through due diligence in making any decisions that involve the competition between the parties prior to consummation;
- Limit due diligence reviews to information necessary to assess value and material risks directly related to the transaction;
- Use third parties and/or consultants as intermediaries when exchanging competitively sensitive information, such as pricing schedules, cost data, strategic plans, customer contracts and information, product development plans, etc. and make certain that any competitively sensitive information is in aggregated form before it is exchanged so that it cannot be used for anti-competitive purposes;
- Create access limits to competitively sensitive information to ensure that such information is only seen by those who need to review it for due diligence purposes in connection with the consummation of the transaction and not by personnel in charge of pricing, marketing or other competitive decision-making;
- Document all of the information exchanged, the reasons for exchange and the limits to access imposed; and
- Impose pre-closing restrictions, such as material adverse change clauses, generally and carefully, so as not to restrict competition between the parties.
For More Information
For more information, please contact your Stevens & Lee health care or antitrust attorney.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.