Assa Abloy-Spectrum Brands divestiture case another opportunity to develop caselaw on 'litigating the fix'

The Department of Justice’s lawsuit to block Assa Abloy’s proposed acquisition of a Spectrum Brands unit is the latest opportunity to advance federal caselaw regarding “litigating the fix” – when companies ask a court to adjudicate their merger based on a proposed remedy, or “fix,” which was either rejected by or not proposed to the US antitrust agencies. A Washington, DC, federal judge is expected to rule on which party bears the burden of proving a proposed divestiture's effects on competition.

Caselaw in this area has gotten murkier since US District Judge Carl Nichols’ ruling in the UnitedHealth-Change Healthcare merger this September, which departed from other DC district court rulings on the issue. Nichols allowed that merger to proceed and held that the parties’ remedy, which was rejected by the DOJ during the antitrust review process, was sufficient to mitigate any anticompetitive harm.

As fewer merger cases settle, trying to litigate the fix has grown more common. And if US District Judge Amy Berman Jackson agrees with Nichols’ ruling in UnitedHealth, it could provide a path forward for M&A attorneys to push remedies through and get deals approved — even as the antitrust agencies have taken a hardline stance against them.

But, according to two amicus briefs filed in the case, that decision could have repercussions for the agencies’ ability to enforce the Clayton Act, and increase incentives for merging parties to try to push “weaker” remedies through the courts.

Assa Abloy, a Swedish manufacturing company, agreed to acquire the Hardware and Home Improvement division Spectrum Brands in 2021. The DOJ filed a complaint to block the deal in September of last year, arguing that the transaction would eliminate competition and lead to higher prices and lower quality for certain door lock mechanisms.

In December, Assa Abloy announced its plan to divest two of its divisions — Emtek and Smart Residential, manufacturers of “smart lock” and other door locking mechanisms — that competed with some of Spectrum Brands’ divisions.

Fortune Brands, a manufacturer of home and security products including several smart-lock and door hardware brands, agreed to acquire the divisions for around $800 million.

The question of which side must prove the divestiture’s effects — whether it would fully ameliorate any anticompetitive effects or not — also depends on if the parties can agree on the product market. A joint status report on this issue is expected to be filed on Feb. 6.

While the merging parties have claimed the divestiture would “fully resolve all the alleged competitive concerns,” the DOJ has said the parties are trying to push an unapproved remedy through the courts, instead of engaging in the usual regulatory review process with the agency.

“Defendants now—months after the Complaint was filed—attempt to cure their anticompetitive deal by unilaterally proposing a separate, conditional transaction in which ASSA ABLOY would carve out and divest pieces of its integrated global business to a self-selected buyer,” the DOJ wrote in its pre-trial brief.

Jonathan Kanter, assistant attorney general of the DOJ's antitrust division, has said remedies should be “the exception, not the rule” and has advocated for the agency to sue to block more deals outright.

But if the district court does rule that the government must prove that a divestiture does not ameliorate the antitrust concerns in a deal, that could give companies a discrete avenue to use litigation as a way around Kanter’s stance.

Precedent

Washington, DC, federal judges have agreed to shift the burden to prove a remedy’s effects to the defendants in at least two recent cases: the Aetna-Humana merger, which was blocked in 2017, and the Sysco-US Foods transaction, which was abandoned by the parties in 2015.

In Aetna, the court considered the defendants’ proposed remedy as a rebuttal argument, once it had already determined that the primary transaction threatened anticompetitive effects.

In his 2017 opinion enjoining Aetna’s acquisition of rival insurer Humana, US District Judge John Bates laid out a three-step burden-shifting framework. After the government had met its presumption, the burden to disprove the anticompetitive effects fell to the defendants, according to Bates. The final burden to rebut defendants' claims, and the ultimate burden of persuasion, would still rest with the government — as it does with the plaintiff in all cases.

Bates wrote in his ruling that “the Court finds that the divestiture would not 'restore [the] competition' lost by the proposed merger,” and blocked the deal.

In his opinion, Bates also relied on precedent from a Federal Trade Commission preliminary injunction hearing on the merger of Sysco and US Foods.

If the plaintiff shows that the merger is likely to significantly increase concentration in a given market, “the burden then shifts to the defendant to rebut the presumption,” wrote US District Judge Amit Mehta in his decision to temporarily block the Sysco-US Foods merger.

But last year, Nichols offered a differing opinion in his ruling to allow the UnitedHealth-Change Healthcare merger.

A defendant doesn't need to produce evidence clearly disproving future anticompetitive effects as that would require them to rebut a probability with a certainty and would relieve the government of its ultimate burden of persuasion, Nichols wrote in his opinion.

Similar to the Assa Abloy case, UnitedHealth and Change Healthcare brought a structural remedy to court. And in that case, the merger was able to proceed despite the antitrust division’s open skepticism of divestiture deals.

Burden of proof

The American Antitrust Institute and former Obama administration assistant attorney general Bill Baer wrote in their amicus brief that “once the government meets its initial burden of demonstrating that a merger risks substantially reducing competition,” the burden of proof should shift to the merging parties to prove that their proposed remedy “eliminates that risk”.

Placing the burden of proof on defendants in this case is necessary, a second amicus brief from a group of antitrust law professionals argued, in order to bar merging parties from significantly changing the terms of a merger after it has been reviewed by the antitrust agencies under the Hart-Scott-Rodino Act.

“Under these circumstances, the proposed remedy is the merging parties’ defense, which they crafted and are uniquely positioned to explain,” the AAI brief said. “It should be their responsibility to demonstrate that the remedy is concrete, comprehensible, enforceable, and eliminates the risk to competition.”

Defendants have objected to the briefs, saying they are too closely aligned with the government’s position.

The parties pointed out in their pre-trial brief that “both the government and amici concede that the ultimate burden of proof rests with the government,” and argued that shifting the burden to the companies would be dangerous.

To allow the burden of proof to switch to the defense under a “vague” and “manipulable” standard would “impermissibly relieve the government of its burden of proving a violation of Section 7” of the Clayton Act, the defendants’ pre-trial brief said.

Next steps

How Jackson rules on the burden-shifting question may come down to how the product market is defined, which the parties have yet to agree on.

Jackson has asked the DOJ to provide the defendants with a list of products from their companies and competitors that it says fall into the market, defined in the complaint as “premium mechanical door hardware” and “smart locks.”

The parties are expected to file a joint status report on Feb. 6 that should address the product market dispute and whether the government “can establish the effect of the proposed merger on competition” in those markets.

Once the product market is agreed upon, the parties will “advise promptly about whether the concentration levels in the relevant markets are sufficient to satisfy the government’s burden,” according to a Jan. 26 status report.

—Additional reporting by Ilana Kowarski.