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Federal Judge Denies FTC’s Bid to Preliminarily Enjoin Steris-Synergy Health Merger

September 28, 2015 download PDF

On September 24, 2015, a federal judge in Cleveland denied the Federal Trade Commission's request to enjoin Steris Corp.'s acquisition of Synergy Health plc while the Commission's separate administrative proceeding to block the acquisition was pending. FTC v. Steris Corp., No. 15-cv-1080 (N.D. Ohio Sept. 24, 2015). Steris and Synergy are both healthcare-product sterilization companies. They employ different sterilization technologies that are used for different purposes. See Op. at 1-2. The FTC alleged, however, that the merger would harm competition by eliminating Synergy as an "actual potential entrant" that could have competed with Steris. See id. at 3. In denying the FTC's motion, the court held that the Commission had not sufficiently demonstrated that it is likely to succeed on the merits in its administrative proceeding. [1] Id. at 41. The decision is significant because it is one of few to address a situation in which the FTC must prove that, absent the merger, a party to a transaction would enter the relevant market and compete with the other party, and that the absence of this potential entry harms competition. [2]

Background

In May 2015, the FTC sought a temporary restraining order and preliminary injunction against the acquisition of Synergy by Steris under section 13(b) of the Federal Trade Commission Act. See Compl., FTC v. Steris Corp., No. 15-cv-1080 (N.D. Ohio June 4, 2015) (redacted public version). The FTC alleged that Steris and Synergy "are the second- and third- largest sterilization companies in the world" and that "Steris is the largest provider of gamma radiation sterilization services in the United States." [3] Id. at ¶¶ 1-2. The FTC further alleged that "X-ray radiation sterilization will be a close substitute for gamma sterilization." [4] Id. at ¶ 4. The FTC acknowledged in its complaint that Synergy "is a small U.S. . . . player today . . . [but] is an actual potential entrant with its x-ray sterilization business, which would substantially augment its competitive significance" and allow it to compete against the gamma radiation services provided by Steris and others. Id. at ¶ 11.

The FTC, citing evidence that Synergy was poised with plans to enter the U.S. market with an x-ray sterilization service, claimed that the elimination of the potential competition from Synergy as a result of the acquisition would substantially lessen competition in violation of Section 7 of the Clayton Act or Section 5 of the FTC Act. See id. at ¶ 127. As the court summarized, "[t]he FTC asserted that the acquisition of an actual potential competitor violates Section 7 if (1) the relevant market is highly concentrated, (2) the competitor 'probably' would have entered the market, (3) its entry would have had pro-competitive effects, and (4) there are few other firms that can enter effectively." Op. at 6.

In August 2015, the court held a hearing to determine "whether, absent the acquisition, the evidence shows that Synergy probably would have entered the U.S. contract sterilization market by building one or more x-ray facilities within a reasonable period of time." Id. at 7.

The Court's Opinion

After extensive findings of fact, the court found that the FTC failed to carry its burden of showing that it had "a likelihood of proving at trial that, absent the merger, Synergy probably would have entered the U.S. contract sterilization market by building one or more x-ray [sterilization] facilities in the U.S. within a reasonable period of time." Id. at 28.

The FTC had asserted that Synergy was indeed planning to enter the market, but that it abandoned plans when the Steris acquisition was announced. Id. at 3. Instead, according to the court's findings, "the most significant reason Synergy opted to discontinue the U.S. x-ray project was lack of customer commitment" to purchase such services. Id. The court also cited costs for customers to convert from gamma- to x-ray sterilization and the capital costs faced by Synergy as other factors explaining Synergy's decision to abandon its plans to enter the market. See id. at 31-36. Ultimately the court was persuaded that the FTC failed to make a sufficient showing that Synergy was poised to enter the U.S. market, and thus was unlikely to succeed on the merits in its administrative proceeding. Id. at 41. The FTC was thus unable to satisfy the standard for a preliminary injunction under Section 13(b) of the Clayton Act.

The FTC now has the choice of appealing the court's denial of its preliminary injunction motion, continuing to prosecute its administrative case, or dropping its challenge to the merger entirely. Pursuant to FTC practice, if the Commission does not file a motion for relief pending appeal with the court of appeals within seven days of the district court's decision (i.e., by October 1, 2015), Steris may move the Commission to withdraw the matter from adjudication "to consider whether the public interest warrants further litigation." 16 C.F.R. §3.26(c) (2015). As of this writing, the FTC has not announced what it plans to do.

Significance

Importantly, in this ruling, the court did not rule, as a general matter, on the viability of the "actual potential competition" theory of harm, leaving open the possibility of its application in future cases. Defendants had argued that this theory "has long been disfavored by numerous courts including the Supreme Court." [5] Op. at 6. But the court rejected that argument, noting that "the FTC has clearly endorsed this theory by filing this case, and the administrative law judge will be employing it during the [administrative] proceeding" (which is subject to review by the court of appeals), and that the court "assume[d] the validity of this doctrine" for purposes of its decision. Id. However, the court also made clear that to succeed on such a theory in the future, the FTC would have to show that a firm "probably would have entered" the relevant market, which it failed to do in this case. Id. at 28. Such evidence may include, for example, evidence demonstrating a firm's financial commitment to support entry (see id. at 29, 35) and customers' commitments to purchase the product or service (see id. at 31-32).

Additionally, this ruling is notable in that it breaks a streak of successful recent merger challenges brought by the FTC. See, e.g., Paul, Weiss Client Memorandum, Federal Judge Preliminarily Enjoins Sysco-US Foods Merger and Parties Abandon the Transaction (July 2, 2015) available at /media/3047488/1jul15at.pdf (describing successful FTC challenge to Sysco-US Foods merger); Paul, Weiss Client Memorandum, Court of Appeals Upholds Decision Unwinding Consummated Merger of Two Physician Groups Following FTC Suit (Feb. 17, 2015), available at /media/2795966/17feb15alert.pdf (describing successful FTC challenge to St. Luke's Health System acquisition of Saltzer Medical Group).

 

[1]   When the FTC staff challenges a transaction, it does so in an administrative proceeding before an FTC-appointed administrative law judge.  However, in order to prevent a challenged merger from being consummated during the pendency of the administrative proceeding, the FTC must seek an injunction in federal court.  The FTC administrative hearing in this matter is slated to begin in late October.
 
[2] See Dissenting Statement of Commissioner Joshua D. Wright, In the Matter of Nielsen Holdings N.V. and Arbitron Inc., F.T.C. File No. 131-0058 (Sept. 20, 2013).  As former Commissioner Wright has noted,  "competitive effects in actual potential competition cases still are more difficult, on balance, to assess than typical merger cases because the agency must predict whether a party is likely to enter the relevant market absent the merger."  Id. at 2 n.3.  
 
[3]  According to the complaint, "[g]amma radiation sterilizes by exposure to a radioactive isotope, Cobalt 60.  Gamma radiation has deep penetration capabilities and is favored by customers that need to sterilize dense products, such as implantable medical devices, and products with heterogeneity of density, such as products packaged in large quantities."  Compl. ¶ 3.
 
[4] "X-ray sterilization offers comparable, and possibly superior, depth of penetration, allowing it to compete for products that customers currently sterilize economically with gamma radiation.  For many products, x-ray is the only functional alternative to gamma because of the limitations of e-beam sterilization."  Compl. ¶ 4.
 
[5] In so arguing, the defendants cited International Shoe Co. v. FTC, 280 U.S. 291 (1930) (arguing that "the Supreme Court has long held that only a reduction in 'pre-existing substantial competition' can render a merger unlawful"); United States v. Marine Bancorporation, 418 U.S. 602 (1974) (arguing that in this case the Supreme Court "reserv[ed] the question whether it should expand its precedents to embrace an 'actual potential competition' cause of action"); and United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973) (same).  Opp'n to Pl.'s Mot. for Prelim. Inj., FTC v. Steris Corp. No. 15-cv-1080 (N.D. Ohio Aug. 11 2015), at 8 (redacted public version).

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