The
This summary should help you prepare for the
The Parties and the Transaction
Altria, together with its subsidiaries, is the largest and one of the oldest cigarette companies in the
As with most antitrust matters, especially merger investigations, market definition was contentious. Generally, e-cigarettes are electronic devices that aerosolize nicotine-containing liquid using heat generated by a battery as the user puffs. Open system e-cigarettes contain a reservoir that a consumer can refill with their choice of a nicotine-containing liquid. Closed system e-cigarettes have a container that already contains that liquid. Closed systems include cig-a-likes, which mimic the shape and look of a traditional cigarette, as well as pod products that have various shapes, including a shape like a USB thumb drive.
The e-cigarette category began growing rapidly about ten years ago. A few companies offered different options. Altria offered cig-a-like products and then pod products, but JLI offered only pod products. At the time of the challenged transaction, pods were the dominant choice of consumers, with JLI's product the market leader.
While sales of pods, especially JLI's pods, grew strongly at the end of 2017, Altria was only selling cig-a-likes and their sales fell. For regulatory reasons, Altria sought to purchase an existing pod product because it couldn't develop its own product in a reasonable timeframe. In late 2017, it licensed the rights to a Chinese pod product and rushed it to market in early 2018.
Altria then approached JLI in early 2018 about an acquisition. By the end of July, the up-and-down negotiations centered around a multi-billion-dollar investment by Altria in exchange for a minority interest in JLI, possibly a non-voting interest convertible to voting after antitrust clearance. (An acquisition of non-voting securities does not require Hart-Scott-Rodino approval; conversion of such securities does.) At this point, the parties were far from reaching a deal, but began to discuss two other items that would lead to the
The ironic first issue was how the parties could obtain antitrust clearance for the entire transaction. The parties' term sheet described cooperation with the
Second, in exchange for regulatory aid, Altria would agree to not compete with JLI's e-cigarette products. Again, JLI didn't want Altria's to access sensitive JLI information when performing these services would allow Altria to improve its current e-cigarette products (before divestiture) or develop better new ones.
While negotiating over financial considerations and Altria's voting rights, the parties continued to refine these two items. In later term sheets, the requirement that Altria "cease to operate" its e-cigarette assets disappeared while the requirement that Altria either contribute those assets to JLI or divest them remained.
Negotiations broke down in early September, but improved in October as Altria came around to terms much closer to JLI's proposals. In early December, Altria announced that it was pulling its remaining e-cigarette products from the market, allegedly to conserve costs for product development or to invest in JLI. The parties finally reached an agreement later in December. Altria then ceased its other e-cigarette development efforts.
The Challenge and Initial Decision
On
Under the
In the Initial Decision, the ALJ went through the usual market definition analysis and agreed with the
The ALJ dismissed the Sherman Act Section 1 count, finding insufficient evidence of an agreement between the parties to have Altria exit the e-cigarette market in return for entering the transaction.
The ALJ also similarly dismissed both the Sherman Act Section 1 claim and Clayton Act Section 7 claim because the non-compete provision did not unreasonably restrain competition and the minority investment was not reasonably likely to substantially harm competition in the e-cigarette market. The ALJ accepted complaint counsel's expert's calculation of Altria's share of the market just before it exited the market; but, he found that that share had been dropping and so overstated Altria's likely competitive significance in the market going forward. The ALJ also rejected that expert's estimate of the disposition of Altria's customers after it left the market, instead crediting the actual diversion that occurred. As a result, the ALJ estimated that the transaction led to only a small change in concentration. Because Altria was not likely to be an effective actual or potential competitor even if the transaction did not occur, the ALJ found that the transaction did not substantially harm competition.
Antitrust Issues on Appeal
This case tees up several interesting antitrust issues for the FTC Commissioners. As in any Section 1 case, the question of agreement is key: Does this combination of communication followed by action add up to an agreement? The context for the communications is unusual here-negotiations specifically designed to reach an agreement that ultimately were successful. Even more importantly, some of the communications that complaint counsel finds most troubling are the preparations for
The Commissioners also must opine on a couple issues that have been in the antitrust news lately. In merger cases, how strong is the structural presumption? Here, the market shares as measured by complaint counsel's expert were high enough to trigger a presumption that would block the deal. The initial decision had some issues with the timing of those measurements, but its bigger objection was that those backward-looking shares said very little about future competition. Will Commissioners who have championed the strength of such presumptions agree?
Non-compete agreements have come under increasing scrutiny recently. But the history of such agreements being found reasonable in the merger context, if narrowly tailored, predates the Clayton Act. Can enforcers dead-set against them in other contexts accept them in a merger context? In this merger context?
Of course, the biggest antitrust issue is a most basic one for the
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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