The Federal Trade Commission (FTC) announced in July of this year that, going forward, whenever merging parties settled an FTC merger challenge, the settlement would impose restrictions on the ability of the merging parties to consummate any future acquisitions, regardless of size, for a period of ten years. This announcement reversed FTC policy (which had been in effect for 25 years), that – absent unusual circumstances – treated each merger, and each merging party, as a new and distinct matter, subject to long-standing merger principles. In announcing the decision, FTC Director Holly Vedova stated that “The FTC should not have to waste valuable time and resources investigating clearly anticompetitive deals that should have died in the boardroom,” and that this new policy will “force acquisitive firms to think twice before going on a buying binge because the FTC can simply say no.”
Only months after this announcement, dialysis provider DaVita will likely become the first entity subjected to this new policy. On October 25, the FTC announced that it had reached an agreement with DaVita to settle its investigation of DaVita’s proposed acquisition of the University of Utah’s dialysis clinics. If approved by the Court, DaVita will not only be required to divest three Provo-area dialysis clinics, but, pursuant to the new policy, DaVita will be required to seek FTC approval for the acquisition of any dialysis center anywhere in Utah for the next ten years (regardless of whether the transaction would otherwise be subject to the Hart-Scott-Rodino Act reporting requirements). In announcing the proposed settlement, the FTC stated that “DaVita has a history of attempting to buy up competing dialysis clinics in an industry that is already highly concentrated,” and that the restriction on future acquisitions will “help the Commission quickly identify and ultimately prevent future facially anticompetitive deals by DaVita.”
Notably, when the new FTC policy was announced in July, it was the subject of significant criticism, with two of the five FTC Commissioners voting against its adoption. Commissioner Phillips, one of the two Commissioners who voted against the policy, decried it as an “M&A merger tax” on any party that enters into a merger consent with the agency, and predicted that it would make merging parties less likely to agree to settle merger challenges going forward (which he suggested would add to the costs required for the FTC to derail such transactions). Commissioner Phillips also predicted that restricting future acquisitions by settling parties would put them at a competitive disadvantage with their competitors, potentially requiring them to bid higher for a target to compensate the seller for the added level of uncertainty and longer lead time required to obtain prior approval from the FTC. Commissioner Phillips also noted that, without the implementation of this new policy by the FTC, nothing restricted the FTC to impose such a restriction on a case-by-case basis in circumstances where the Commission felt it was required (rather than making it a “standard provision” of all Consent Decrees.
Notwithstanding the disagreement among the FTC Commissioners regarding the benefits of this new policy, the proposed Consent Decree in the DaVita matter indicates that, going forward – at least for now – the provision imposing restrictions on future transactions will become a “standard” provision in FTC settlements. And, given that most healthcare industry mergers are reviewed by the FTC, and not the DOJ, this new policy is likely to have significant implications for future healthcare transactions. (Notably, no similar policy shift has been announced by the Department of Justice Antitrust Division, and Jonathan Kanter’s nomination to head the Antitrust Division is currently still pending before the Senate Judiciary Committee.) In short, potential buyers will need to consider whether the risk of an FTC challenge – and settlement, with future restrictions, if challenged – are outweighed by the value of the transaction, and sellers will likely assess, as Commissioner Phillips predicted, whether the proposed price offered by a buyer subject to a “future transaction restriction” is sufficient in light of the added regulatory burdens doing a transaction with such buyers will impose. Whether this development will ultimately have a chilling effect on healthcare transactions going forward (particularly given President Biden’s direction that the FTC “focus” on healthcare antitrust issues) remains to be seen. Stay tuned.