Monday, March 05, 2012

Asahi v. Cotherix (Cal. Ct. App. - March 5, 2012)

I'd have written this opinion somewhat differently.  Despite the fact that I might well have reached the same result on these facts.

The question is whether two separate companies are immune from antitrust liability when they engage in pre-merger anticompetitive conduct.  The correct answer, in my view, is "No."  Once they merge (if they in fact do so), they're a single entity, and Copperweld -- a case I discuss at length in my Stanford Law Review article -- immunizes the conduct of this single enterprise.  But before they merge, they're still two separate entities, both legally and doctrinally, and hence aren't exempt from the antitrust laws.  Either the federal antitrust laws (the Sherman Act) or California's antitrust laws (the Cartwright Act).

The Court of Appeal, by contrast, takes a sharply different view.  Justice Bruiniers' opinion, perhaps understandably, focuses on the fact that these two entities will (likely) become a single entity, and that as a practical matter merging companies often engage in pre-merger agreements, and holds that under these circumstances, the Cartwright Act doesn't apply.  But I'd be a lot more reluctant to so hold.  Not only because they are still separate entities, but also because (1) there's a probability that the merger will never happen, and (2) it's tough to draw a dividing line between impermissible activities and those "in anticipation" of a merger.

Imagine, for example, Competitors X and Y.  They are thinking about merging, so decide to allocate their sales:  X will only sell west of the Mississippi River and Y will only sell east of it.  The Court of Appeal holds that that's fine in the merger context, even though it'd be clearly illegal outside of it.  But what if the "thinking" about merging is in the medium- (or even long-) term:  it's sincere, in that the two companies may well merge in the future, but there's no definitive deal at this point.  Still okay?  For one month?  One year?  Ten years?  How's that different than an actual merger -- a merger that is still not definite, even after a written agreement is reached, without shareholder (and often regulatory) approval, which may come years down the line?  And what about failed mergers?  Still okay to engage in anticompetitive conduct?  What about mergers you know are going to fail?  Still okay to violate the Sherman Act?

I take these concerns to be far from nontrivial ones.  Does this mean that I'd hold that activities taken in contemplation of a merger are subject to the exact same test as those taken outside of this context?  Probably not.  I'd probably consider the context to be relevant to a rule of reason analysis.  And if push came to shove, I might even be willing to hold that if the merger actually takes place, there might be some form of immunity to reasonable pre-merger activities in contemplation thereof. 

But the Court of Appeal's holding here is substantially broader than that targeted principle, and holds a plethora of pre-merger conduct to be essentially categorically immune from antitrust scrutiny.  I don't like that.  I'd have liked to see more discussion of the other side.  Of the downsides -- or at least the potential downsides -- of immunity.  And, accordingly, a more narrow opinion.

I might be inclined to say that if entities want to merge, they can engage in a reasonable amount of coordination, but that they do so at their peril.  If the merger fails, they're not immune.  Consider that yet another downside of a failed merger:  sort of like a break-up fee for the consumer.  Ditto if the pre-merger conduct is beyond that necessary to engage in the merger.

Mergers have their benefits.  But when their social costs outweigh the benefits, or when the social costs are incurred without obtaining those benefits, I see little reason to protect them.  Much less to immunize them categorically from antitrust scrutiny.

So I'd have written this one differently.