FTC Reinstates Regular Use of Prior Approval Provisions and Imposes Strict Limits on DaVita's Future Merger Activity | Practical Law

FTC Reinstates Regular Use of Prior Approval Provisions and Imposes Strict Limits on DaVita's Future Merger Activity | Practical Law

On October 25, 2021, the Federal Trade Commission (FTC) issued its Statement of the Commission on Use of Prior Approval Provisions in Merger Orders, in response to its previous recission of the 1995 Policy Statement on Prior Approval and Prior Notice Provisions. Under the 1995 policy, the agency limited the use of prior approval provisions. Under the 2021 policy, the agency will again make regular use of prior approval provisions in merger enforcement orders. On the same day, the FTC made use of the new policy, announcing that it would require DaVita, Inc. to obtain prior approval before acquiring any new ownership interest in any dialysis clinic in Utah for ten years.

FTC Reinstates Regular Use of Prior Approval Provisions and Imposes Strict Limits on DaVita's Future Merger Activity

by Practical Law Antitrust
Law stated as of 26 Oct 2021 • USA (National/Federal)
On October 25, 2021, the Federal Trade Commission (FTC) issued its Statement of the Commission on Use of Prior Approval Provisions in Merger Orders, in response to its previous recission of the 1995 Policy Statement on Prior Approval and Prior Notice Provisions. Under the 1995 policy, the agency limited the use of prior approval provisions. Under the 2021 policy, the agency will again make regular use of prior approval provisions in merger enforcement orders. On the same day, the FTC made use of the new policy, announcing that it would require DaVita, Inc. to obtain prior approval before acquiring any new ownership interest in any dialysis clinic in Utah for ten years.
In July 2021, the Federal Trade Commission (FTC) announced that it was rescinding the 1995 Policy Statement on Prior Approval and Prior Notice Provisions (1995 Policy), which had limited the practice of requiring prior notice and approval in FTC merger enforcement orders. On October 25, 2021, the FTC issued its Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (2021 Statement), reinstating the practice of requiring prior approval provisions in all merger divestiture orders in relevant markets for at least ten years.
The 2021 Statement identifies three key objectives of the new policy:
The FTC noted that nothing in the new policy is meant to change or override the clearance process employed by the Department of Justice and FTC to determine which agency will conduct merger review in each individual matter.
On the same day, the FTC announced that it incorporated a prior approval provision in its consent decree regarding DaVita, Inc.'s acquisition of the University of Utah Health's dialysis clinics (see In the Matter of DaVita Inc. and Total Renal Care, Inc.).

Policy Statement

The 2021 Statement and the rescission of the 1995 Policy reinstates prior FTC policy of regularly requiring firms that are subject to a FTC order to obtain future approval for any transaction in the relevant market where a violation was alleged. The policy, according to the FTC, will help limit time and resources spent investigating clearly anticompetitive deals.

Preventing Facially Anticompetitive Deals

The risk of being subject to a prior approval provision may discourage firms from pursuing likely anticompetitive deals. According to the 2021 Statement, many firms try to push through clearly anticompetitive deals, hoping they can close with minimal divestitures. In particular, without the risk of prior approval restrictions, acquiring companies appear willing to take a chance on anticompetitive deals because:
  • There are few downsides.
  • Their long-term strategy considers additional acquisitions in the future.

Preserving FTC Resources

The FTC expends significant resources on challenging anticompetitive mergers. The agency seeks to avoid duplicating these efforts where it may be required to:
  • Re-review the same transaction on numerous occasions.
  • Review a similar transaction by one of the parties in the same market.
According to the 2021 Statement, the agency can preserve resources by reviewing proposed mergers under a prior approval provision. The alternative, reviewing the merger under the HSR Act, allows the parties to engage in costly gamesmanship that may force the FTC into suing to block the merger.

Detecting Anticompetitive Deals Below HSR

According to the 2021 Statement, requiring prior approval will help the FTC identify harmful mergers that would not trigger federal antitrust reporting requirements. Otherwise, the FTC may learn about deals without sufficient time to investigate, and potentially block, the mergers.

Benefits to Parties to Abandon Deals Early

The 2021 Statement explains that the FTC will routinely include prior approval provisions in merger enforcement orders going forward. However, parties may be able to avoid these provisions by abandoning the deal:
  • Prior to certifying compliance with a Second Request (or, if the matter is not HSR-reportable, with a Civil Investigative Demand or subpoena duces tecum).
  • After the FTC issues a complaint to block the merger.
In a case where the parties abandon the merger after a complaint is filed, the FTC will engage in a case-by-case determination of whether to pursue a prior approval order. The FTC warns in the 2021 Statement that parties that abandon a merger after the complaint is filed do not guarantee they will avoid imposition of the restriction.

Use of Broader Prior Approvals

In some cases, the FTC may identify a need for stronger restrictions, including those that cover product or geographic markets beyond those affected by the present merger. The non-exhaustive list of factors the FTC will consider in making those determinations include whether:
  • The merging parties are attempting a transaction similar to one that has been previously challenged by the agency.
  • The relevant market is already concentrated or has seen significant consolidation in the past ten years.
  • The merger significantly increases concentration.
  • One of the parties, pre-merger, likely had market power.
  • Either party has a history of, or has indicated an interest in, additional acquisitions in:
    • the same relevant market;
    • related markets; or
    • adjacent or complementary products or geographic areas.
  • Market characteristics create an ability or incentive for post-merger anticompetitive market dynamics.

Divestiture Buyers

The FTC also intends to require all buyers of divested assets in merger consent orders to agree to a prior approval for any future sale of those assets, for a minimum of ten years.

DaVita Order

According to the FTC, DaVita has a history of attempting to acquire dialysis clinics in highly-concentrated markets. After review of DaVita's proposed acquisition of the University of Utah Health's dialysis clinics, the FTC, working with the Utah attorney general's office, issued a proposed order that includes strict limits on future mergers and acquisitions by DaVita, reflecting the agency's return to standard use of prior approval provisions.
Under the prior approval provisions, DaVita is required to receive prior approval from the FTC before acquiring any new ownership interest in a dialysis clinic anywhere in Utah for ten years. This restriction includes limits on acquisition outside the markets directly impacted by the merger, which the agency argues is necessary in part due to DaVita's history of seeking market consolidation for life-saving dialysis treatments.
The proposed order also requires:
  • Requires DaVita to divest three Provo-area dialysis clinics to Sanderling Renal Services, Inc.
  • Prohibits DaVita from entering into or enforcing non-compete agreements and other employee restrictions, including no-poach agreements.
The FTC voted 5-0 to accept the proposed order. Commissioner Christine S. Wilson issued a concurring statement, in which she supported the resulting order under the particular circumstances of this case, but noted that:
  • She dissented from rescission of the 1995 Policy.
  • She does not support an outright ban on non-competes.
  • The anti-no-poach provision is appropriate here because of previous allegations against DaVita regarding no-poach agreements, and to allow the FTC to pursue an order violation if DaVita enters into similar agreements in the future.
For more on the merger review process at the FTC, see FTC Merger Review Process Flowchart. For more on merger remedies generally, see Practice Note, Merger Remedies.