Clayton Act Does Not Bar Post-Consummation Antitrust Challenge To Airline Merger
A completed corporate merger may be challenged on antitrust grounds under Section 7 of the Clayton Act, the U.S. Court of Appeals for the Eighth Circuit has ruled in a case involving a complaint challenging the merger of Northwest and Republic airlines more than ten years after its consummation. Midwestern Machinery, Inc. v. Northwest Airlines, Inc., 167 F.3d 439 (8th Cir. Feb. 2, 1999).
In 1986, Northwest and Republic agreed to merge. In accordance with then-applicable regulatory requirements, the U.S. Department of Transportation (DOT) approved the merger. Although DOT had authority to grant the parties antitrust immunity as necessary to implement the approved transaction, the airlines did not seek immunity and DOT did not grant it. The merger was completed, and all of Republic's stock was turned in and extinguished, with Northwest as the surviving entity.
More than ten years later, a group of frequent travelers on Northwest brought suit challenging the merger under Section 7 of the Clayton Act, which broadly prohibits corporate acquisitions that may substantially lessen competition or tend to create a monopoly. The plaintiffs claimed that the Northwest-Republic merger was anticompetitive and, in particular, that the merged carrier had unlawfully exercised enhanced market power by raising significantly airline fares in the Minneapolis St. Paul market, in which Northwest and Republic had been active competitors prior to their combination.
In a decision reported in this column last year (Association Highlights, March-April 1998), the trial court dismissed the complaint. While recognizing that a post-acquisition claim can exist for holding and using acquired stock and assets in violation of Section 7, the trial court concluded that the completed Northwest-Republic merger precluded such a claim because there could be no anticompetitive use of the acquired stock when Republic ceased to exist upon consummation of the merger and all of its stock was turned in and extinguished. 990 F. Supp. 1128 (D. Minn. 1998).
Supported by an amicus curiae brief submitted by 11 States, the Eighth Circuit reversed. Rejecting Northwest's argument that no Republic stock or assets were left to substantially lessen competition, the court held that a Section 7 cause of action "can exist even though a merger occurs and two corporations effectively become one." The court rested its holding on two grounds.
First, the court found that the express language of Section 7 applied to completed corporate mergers because it prohibited acquisition of the "whole or any part" of the stock or assets of a corporation. In the court's view, a full corporate merger -- in which the separate legal identity and stock of the acquired firm are extinguished -- constituted the acquisition of the "whole" of its stock or assets under Section 7.
Second, the court concluded that, although the primary thrust of Section 7 was to arrest potentially anticompetitive combinations in their incipiency, several prior cases had established that completed acquisitions and post-acquisition conduct can give rise to a Section 7 violation. The particular decisions cited by the court did not involve a full corporate merger, as distinct from an acquisition and separate holding of stock or assets of a company, yet the court found in these decisions support for the principle that an acquisition may be challenged under Section 7 at any time after acquisition, "until the deal is undone."
The court expressed concern that accepting Northwest's argument would undermine Clayton Act enforcement by encouraging parties to structure competitively objectionable combinations as full corporate mergers and to attempt to consummate them before the transaction's antitrust effects could be fully assessed. The court also found no merit to the suggestion that permitting Section 7 challenges to completed corporate mergers would open up transactions to continued challenge long after their consummation. The court indicated that statute of limitations, laches and other proof and causation problems would limit Section 7 challenges to completed mergers.
Misrepresentations of fact that do not affect the "core" of a legal proceeding do not fall within the "sham" exception to the Noerr-Pennington doctrine, and thus do not vitiate the antitrust immunity applicable to government petitioning activity, the U.S. Court of Appeals for the Third Circuit has held in a sharply divided decision. Cheminor Drugs, Ltd. v. Ethyl Corp., 1999 U.S. App. LEXIS 3140 (3rd Cir. Mar. 1, 1999).
The judicially recognized Noerr-Pennington doctrine holds that efforts to petition government for redress -- including litigation before courts and administrative agencies -- are immune from antitrust liability, even when the petitioning activity is intended to secure a competitive advantage or harm a competitor. It has long been established, however, that the immunity does not extend to petitions or lawsuits that are a mere "sham" to cover intentional efforts to harm a competitor. In Professional Real Estate Investors v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993) ("PRE"), the U.S. Supreme Court established a two-part test for determining whether litigation is a "sham" for these purposes. First, the litigation must be "objectively baseless" in the sense that the claim lacks probable cause. Second, if the litigation is "objectively baseless," a court must then assess the litigant's subjective motivation and determine whether the baseless lawsuit conceals an attempt to interfere directly with the business relationships of a competitor through the use of -- as distinct from the outcome of -- government processes.
Cheminor Drugs raised an issue not resolved in PRE: whether the "sham" exception to Noerr-Pennington immunity would apply where a litigant perpetrated fraud on or made other misrepresentations to a tribunal. Ethyl Corporation, a major U.S. manufacturer of bulk ibuprofen, filed an anti-dumping administrative complaint against Cheminor, an Indian producer of bulk ibuprofen, claiming that Cheminor was receiving subsidies from the Indian government, that it was illegally dumping ibuprofen at less than fair value in the U.S., and that the domestic ibuprofen industry (of which Ethyl was the major producer) suffered material injury as a result. The U.S. government made a preliminary determination to grant relief to Ethyl, following which Cheminor withdrew from the market.
Later, Cheminor brought an antitrust complaint against Ethyl, alleging that its anti-dumping complaint was baseless and was made in bad faith solely for anticompetitive reasons. Among other things, Cheminor claimed that Ethyl had misrepresented the facts concerning its injury from the alleged dumping. Ethyl moved for summary judgment, contending that its petitioning activities were immune from antitrust challenge under Noerr-Pennington. The trial court granted the motion.
On appeal, a divided panel of the Third Circuit affirmed. Believing that the case fell within the analytical framework of PRE, the majority considered whether the alleged misrepresentations rendered Ethyl's anti-dumping claim "objectively baseless." The majority found that, "if the alleged misrepresented facts do not infect the core of Ethyl's claim and the government's resulting actions, then the petition had an objective basis and will receive Noerr-Pennington immunity under the first step of PRE." Reviewing the facts, the majority determined that none of the alleged misrepresentations affected the "core" of Ethyl's anti-dumping claim, which had an objective basis even without regard to the alleged misrepresentations. The majority declined, in its words, to "carve out a new exception" to Noerr-Pennington immunity for fraud or misrepresentation. In short, the majority concluded that fraud or misrepresentation does not make petitioning activity a "sham" unless it is so material that, absent the misstatements, the petitioning would have been "objectively baseless."
The dissenting judge took issue with the majority's entire characterization of the governing legal principles. In her view, the "sham" exception to Noerr-Pennington immunity would apply not only where the litigation was objectively baseless (the issue considered in PRE), but also where the litigation was based on knowing and material misrepresentations. While the majority found only one ground for invoking the "sham" exception to Noerr-Pennington immunity (objectively baseless litigation), the dissent asserted that there was a second and independent ground (fraud), which could vitiate the immunity without regard to whether the alleged misrepresentation went to the "core" of the litigation claims or whether the claims were "objectively baseless." According to the dissent, "[b]y thus conflating the concepts of 'material' and 'objectively baseless,' the majority ignores the risk that a party will intentionally use fraud and misrepresentation to transform a claim that is otherwise weak and unlikely to prevail, although not 'objectively baseless,' into one that succeeds."
The Federal Trade Commission (FTC) has filed an administrative complaint challenging, on competitive grounds, the acquisition of two interstate natural gas pipelines by a company that operates a local natural gas transmission system with which the pipelines connect. In re CMS Energy Corp., FTC File No. 991-0046 (Mar. 19, 1999). A proposed settlement filed with the complaint would permit the transaction to proceed, subject to provisions regulating the combined company's interconnection with unaffiliated pipelines.
At issue was the proposed $2.2 billion acquisition of two interstate natural gas pipelines (Panhandle Eastern and Trunkline) by the parent company of Consumers Energy, which owns and operates the only intrastate natural gas transmission system in a large portion of Michigan, and uses this system to purchase, transport, store and distribute natural gas to Michigan consumers. Consumers Energy also generates, transmits and distributes electricity to consumers in the same region. The FTC complaint alleges that natural gas consumed within Consumers Energy's service area is provided through Panhandle Eastern, Trunkline and three other interstate pipelines, each of which has one or more points of interconnection with Consumers Energy's intrastate distribution system.
The FTC complaint alleged that the proposed acquisition would substantially lessen competition for pipeline transportation of natural gas into Consumers Energy's service area. According to the FTC, Consumers Energy, as a customer of interstate natural gas transportation services, has an incentive to maintain competitive access to its distribution system in order to maintain flexibility and minimize prices for the delivery of gas into its system. But after the acquisition of Panhandle Eastern and Trunkline, the FTC alleged, Consumers Energy would have an incentive to deny unaffiliated pipelines interconnection or otherwise restrict their access to the Consumers Energy system in order to maintain higher post acquisition transportation prices on Panhandle Eastern and Trunkline. Such action, the FTC asserted, could increase the price of natural gas and electricity for consumers. The FTC acknowledged that both interstate natural gas transportation rates and local gas transmission and sale prices are subject to regulation. But the FTC alleged, without further explanation or elaboration, that it is "unlikely" that regulation by the Federal Energy Regulatory Commission or the Michigan Public Service Commission "could prevent the likely anticompetitive effects of the acquisition."
Under a proposed settlement filed with the complaint, Consumers Energy would be permitted to proceed with the proposed acquisition, subject to requirements designed to prevent it from restricting or eliminating the interconnection capacity available to competing pipelines. The agreement provides that, if Consumers Energy reduces interconnection capacity (based on historical usage adjusted for circumstances of force majeure or routine maintenance), affected shippers may either (1) nominate their shipments to another pipeline interconnection point into the Consumers Energy system at no additional cost or (2) "borrow" gas from Consumers Energy's own supply to replace the gas that is subject to capacity constraints. The proposed settlement also requires Consumers Energy to maintain an electronic bulletin board posting information on capacity constraints at interconnection points on its distribution system. The proposed settlement will be considered by the FTC after a 60 day public comment period.
* Association for Transportation Law, Logistics and Policy Association Highlights (Vol. 22, No. 4, May-June 1999)
Copyright ) 1999, Association for Transportation Law, Logistics and Policy.
Reprinted With Permission.