$1.8 Million Settlement in U.S. Gun-Jumping Case Highlights Importance of Reviewing Pre-Merger Coordination 

publication 

August 2006 - (Lang Michener Competition & Antitrust Brief , Special Edition electronic version)

Lang Michener Competition & Antitrust Brief

Background

The U.S. Department of Justice ("DOJ") recently announced a $1.8 million (U.S.) civil settlement with QUALCOMM Incorporated ("Qualcomm") and Flarion Technologies, Inc. ("Flarion") for alleged "gun-jumping" in relation to Qualcomm's acquisition of Flarion.

Like Canada's Competition Act (the "Act"), the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") requires merging companies in transactions that exceed certain monetary thresholds to file submissions with antitrust authorities and observe a mandatory waiting period before the acquiring company acquires beneficial ownership of the target (i.e. continue to operate independently until the end of the waiting period).

The Complaint

The civil complaint filed by the DOJ alleged that Qualcomm obtained operational control of Flarion's business before the expiration of the mandatory waiting period and, by obtaining operational control, acquired beneficial ownership of Flarion's assets in violation of the HSR Act.

The DOJ said, in relation to this case, that "merging parties must continue to operate independently until the end of the pre-merger waiting period" and that it would "vigorously enforce this requirement against any company that assumes operational control of a business that it is acquiring."1

As we reported in our Competition & Antitrust Brief Spring 2006, "Gun-Jumping and Due Diligence: Reducing Merger Risks," the reason antitrust agencies are concerned about coordination before a transaction is finalized is two-fold.  The first is a desire to prevent merging parties from combining their activities before the merger has been reviewed by the antitrust authorities (the Competition Bureau in Canada and the DOJ and Federal Trade Commission in the United States).  Secondly, this type of conduct, commonly referred to as "gun-jumping," can also be the subject of an investigation under the criminal conspiracy provisions of the Act in Canada (or the U.S. Sherman Act) where it is alleged that the parties, who are not yet affiliated, have conspired to lessen competition.

The Merger Agreement

At the core of the DOJ's concerns in this case was the merger agreement between Qualcomm and Flarion and the parties' conduct beyond the agreement which, according to the DOJ, resulted in a level of coordination sufficient to violate the HSR Act.

The merger agreement prevented Flarion from engaging in certain basic business activities during the waiting period without Qualcomm's consent (i.e. entering agreements to license its intellectual property to third parties, hiring employees except in the ordinary course of business, and presenting business proposals to customers or prospective customers).  According to the DOJ, Qualcomm's control over Flarion also went well beyond the merger agreement and involved day-to-day business decisions such as routine employee hiring decisions, marketing products and services to customers, and product discounts.

Implications for Canadian Mergers

There are a number of similarities between U.S. and Canadian pre-merger notification regimes.  When a transaction exceeds the relevant monetary thresholds, parties in both countries are required to submit pre-merger notifications and wait specified periods before closing a transaction.  In the United States, an acquiror cannot acquire "beneficial ownership" of an acquiree before the expiration of the HSR Act's 30-day waiting period.  In Canada, notifiable transactions cannot be "completed" before the expiration of the applicable waiting period, which varies depending on whether the parties have made a "short form" (14 day waiting period) or "long form" (42 day waiting period) pre-merger notification.

Given these similarities, this most recent gun-jumping case may have a number of implications for merger review in Canada.  These may include more critical review by merging parties and their counsel of merger agreement covenants (to minimize the level of pre-merger coordination) and taking steps to ensure that the acquiror does not obtain day-to-day control of the acquiree during the applicable waiting period (to ensure that the parties continue to operate as separate economic entities).

This case should not, however, discourage firms from engaging in legitimate and necessary pre-merger coordination.  In this regard, the General Counsel of the Federal Trade Commission confirmed in a recent speech that "merging firms have a legitimate interest in engaging in certain forms of coordination that would not be expected except in the merger context," such as due diligence and transition planning.2  It is also worth noting that the U.S. gun-jumping cases to date have involved excessive pre-merger coordination (i.e., where the merging firms prematurely combined significant aspects of their day-to-day operations).3

With respect to enforcement, the Qualcomm case indicates, however, that U.S. antitrust authorities will not hesitate to take enforcement action against merging parties that engage in significant pre-merger coordination.  Whether Canada's Competition Bureau follows suit remains to be seen.  Prudence dictates that conduct flaunting the Act's merger review scheme is just as likely to attract censure.

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[1]  Department of Justice, Antitrust Division, Assistant Attorney General, News Release, "Qualcomm and Flarion Charged With Illegal Pre-merger Coordination" (April 13, 2006).

[2]  William Blumenthal, General Counsel, Federal Trade Commission, "The Rhetoric of Gun-Jumping" (Remarks before the Association of Corporate Counsel, New York, November 10, 2005) at 2.

[3]  See United States v. Gemstar-TV Guide International Inc., No. 03-0198, 2003 WL 21799949 (D.D.C. July 11, 2003); United States v. Computer Associates International Inc., No. 01-02062, 2002 WL 31961456 (D.D.C. Nov. 20, 2002); Complaint, United States v. Input/Output, Inc., No. 99-0912 (D.D.C. filed Apr. 12, 1999); In re Commonwealth Land Title Insurance Co., 126 F.T.C. 680 (1998); In re Insilco Corp., 125 F.T.C. 293 (1998); United States v. Titan Wheel International Inc., No. 96-01040, 1996 WL 351143 (D.D.C. May 10, 1996).