Is Actual Potential Competition Actually Potentially Provable? (FTC v. Steris Corp.)

An Ohio district court last week rejected the FTC’s most recent effort to enjoin a merger under the “actual potential entrant” doctrine, after concluding that the FTC had failed to show that one of the merger partners would have entered the market absent the merger. See FTC v. Steris Corp., No. 15-cv-01080-DAP (N.D. Ohio Sept. 24, 2015). For purposes of the injunction decision, the court set aside the defendants’ argument that the “actual potential entrant” theory is generally disfavored by courts. Addressing the merits of the evidence presented by the FTC and the defendants, the court found that Synergy Health plc (Synergy)—one of the parties to the merger the FTC sought to enjoin—had abandoned entering the US market for legitimate business reasons unrelated to the merger.

Few merger cases have been brought on the actual potential entrant theory, also known as the “actual potential competition” doctrine, which posits that ‘but for’ the merger one of the merging parties would have entered the relevant antitrust market. More typically, potential competition arises in the context of perceived potential competition, where current competitors are wary of (or perceive) that a company is poised on the fringe of the market prepared to enter if market conditions become more favorable; the perception of possible new entry tempers current competitors from exercising market power for fear of encouraging additional competition from a would-be new entrant.

The Market, the Merger and the FTC’s Claim

Defendants Steris Corp. (Steris) and Synergy are the second- and third-largest providers worldwide of contract medical sterilization to eliminate microorganisms living on or in pharmaceutical products. In the US, Steris, and the largest contract sterilization provider, Sterigenics International LLC (Sterigenics), account for 85 percent of the contract sterilization market, and were described by the FTC as forming a duopoly. Steris and Synergy announced their agreement to merge on October 13, 2014. The FTC challenged the merger, alleging that prior to the merger announcement, Synergy was poised to enter the US sterilization with a new emerging technology—X-ray sterilization—which could disrupt the Steris/Sterigenics duopoly. The FTC argued that the merger violated Section 7 of the Clayton Act because absent the merger, Synergy “probably” would have entered the highly concentrated sterilization market, and its entry (specifically with X-ray sterilization plants) would have therefore been significantly procompetitive.

The Court’s Findings and Conclusions

For the court, the dispositive question was fact driven: whether Synergy would in fact “probably” have entered the US market by building one or more X-ray sterilization facilities within a reasonable amount of time, had the merger not occurred. The court found that Synergy’s X-ray project was discontinued for reasons unrelated to the merger—most importantly because of the lack of customer commitment to use a new X-ray sterilization plant. For a capital investment of this size (equivalent to Synergy’s entire annual discretionary spending in just the first phase of the project and described by the court as a “bet the farm” proposition), Synergy’s corporate practice was to secure take-or-pay contracts from customers in advance of the proposed capital expenditure; and none of Synergy’s customers would sign such an agreement in this instance. The court found that substantial barriers to customer adoption existed, including limited cost savings (due to the fact that sterilization only accounts for three percent of end-product cost) and high costs to transition to X-ray sterilization ($250,000–$500,000 per product). In fact, only six of the 185 customers targeted by Synergy agreed to sign a nonbinding letter of interest.

Moreover, evidence showed that the concern over lack of customer commitment existed prior to the merger announcement, and the FTC’s own witnesses failed to demonstrate any concrete customer commitment to the new technology. The court did not credit the FTC’s argument that Synergy had not solicited customer commitments prior to the proposed merger, nor, in light of the lack of actual customer commitments to Synergy, did it credit the argument that customers continue to be interested in the new technology.

The timeline of Synergy’s evaluation of the US X-ray sterilization project also undercut the FTC’s “actual potential entrant” claim. The court reasoned that if the merger with Steris was the cause of cancelation of the X-ray sterilization project, Synergy would have ended the project when it announced the merger. Instead, Synergy continued to actively pursue the project after the proposed merger was announced and the project leader was reportedly prepared to present the project to the combined Steris/Synergy Senior Executive Board in the event the merger went through. In fact, the key public statements by Synergy, which the FTC relied upon in order to allege that Synergy was in fact likely to enter the US market with X-ray sterilization plants, occurred after the merger was announced. In a November 2014 earnings call, Synergy said, “[W]e are pleased to announce that we have signed an agreement with IBA for X-ray technology to be deployed in the United States, supplemented by our in-house knowledge and expertise.” The court concluded that this post-merger announcement statement “show[ed] that no one at Synergy viewed the proposed merger with Steris as an impediment to its US X-ray strategy.”

Key Lessons from the Decision

This case demonstrates two critical factors in connection with proposed mergers:

• First, merger case analysis is always fact intensive, and it is particularly difficult to prove that a company is an “actual potential entrant.” The antitrust enforcement agencies, both the FTC and the Antitrust Division of the Department of Justice, face particularly difficult evidentiary impediments in attempting to enjoin mergers under this doctrine, because the decision to pursue, or not pursue, a business plan often results from balancing many considerations and competing interests within a company, not all of which point in the same direction. As a result, there is often evidence of reasons for a decision that may discredit circumstantial evidence from which agency staff might conclude supports their theory, and on which they must rely in court. Here, despite uncontroverted evidence that Synergy was seeking to create a X-ray sterilization plant in the US, and despite the fact that that plant was only canceled after an announced merger with a competitor in a concentrated market conducive to “actual potential entrant” claim, the FTC’s motion for a preliminary injunction was denied because there was considerable evidence of other reasons for the action that were consistent with Synergy’s historic business practices.

• Second, although the FTC’s challenge failed, this case demonstrates that the antitrust agencies will not limit their analysis to present-day competition between merging parties. Rather, parties should expect enforcers to carefully scrutinize the merging parties’ current and likely future competitive positions, including their strategic plans for the upcoming years. The litigation loss in this case is not likely to lessen these efforts to be forward-looking.