Lessons from FTC v. Wilhelmsen for merger practitioners

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Last month, Judge Tanya S. Chutkan of the United States District Court for the District of Columbia granted the FTC’s Motion for Preliminary Injunction, halting Wilhelmsen’s proposed acquisition of Drew Marine following a 10-day hearing. The opinion, a redacted version of which is now public, contains insights on esoteric but important areas of merger analysis of interest to antitrust practitioners, namely cluster markets, product markets for targeted customers, and the use of economic tools such as the Gross Upward Pricing Pressure Index (GUPPI) and merger simulation to predict competitive effects.

The Backstory

In a complaint filed in February 2018, the FTC alleged that Wilhelmsen and Drew Marine are the two largest competitors for the supply of marine water treatment products and services to global fleets and each other’s closest competitor. The companies compete to offer products and services that treat water in operational equipment aboard ships, including engine cooling water and boiler water. The FTC alleged that owners and operators of global fleets benefit from competition between Wilhelmsen and Drew Marine, and that the proposed acquisition threatened to eliminate those benefits, thereby substantially reducing competition in violation of the Clayton Act.

The FTC called eight fact witnesses and two expert witnesses at the hearing, in addition to highlighting evidence from Defendants’ business documents. After considering all the evidence presented, the court found that the FTC had established a strong prima facie case of anticompetitive effects based on high market concentration and had bolstered that case with additional evidence that the proposed acquisition would substantially lessen competition. The court did not accept the Defendants’ rebuttal arguments regarding ease of entry and expansion, buyer power, and efficiencies. Following the court’s decision, Wilhelmsen abandoned the transaction.

Cluster Market: Marine Water Treatment Products and Services

The FTC’s alleged relevant product market grouped boiler water treatment (BWT) products and services and cooling water treatment (CWT) products and services together in a cluster market of marine water treatment products and services. BWT and CWT products and services are used to treat water in different systems on a vessel—boilers and engines—and are not reasonably interchangeable substitutes for each other. However, the FTC argued that it was appropriate to cluster BWT and CWT products and services into one relevant market for analytical convenience because they are subject to similar competitive conditions. Defendants argued that this cluster market was either over-inclusive—because it combined two product categories that are not reasonably interchangeable—or under-inclusive—because it left out other categories of marine products and services that the Defendants sell to the same customers.

The court concluded that the FTC appropriately clustered BWT and CWT products and services into a single relevant market for analytical convenience given the similar competitive conditions and market dynamics relating to both of these types of marine water treatment products and services. This analysis reaffirms the market definition principles addressed by the court in FTC v. Staples, Inc. There, the court also relied on similar competitive conditions to find a cluster market of consumable office supplies, including a broad range of non-substitute office products, such as pens and binder clips, while excluding certain office products, such as ink and toner, which faced different competitive conditions. Importantly, in both cases, market definition was bolstered by extensive evidence showing likely anticompetitive effects.

Targeted Customers: Global Fleets

The Horizontal Merger Guidelines §4.1.4 counsel that a market based on targeted customers may be appropriate in certain circumstances, including where “prices are individually negotiated and suppliers have information about customers” that would allow for price discrimination. Price discrimination can affect market definition, the measurement of market shares, and the evaluation of competitive effects.

Using this analysis, Judge Chutkan found that global fleets constitute a distinct customer group. Compared to local or regional fleets, these customers have distinct needs, including centralized negotiation of contracts, worldwide delivery, product consistency, and product availability. The FTC’s testifying economic expert, Dr. Aviv Nevo, defined global fleets as customers with ten or more globally trading vessels. According to the court, there need not be a magic number or dividing line driving the threshold cutoff for the boundary of the targeted customer group; rather a reasonable cutoff may be useful and necessary for “practical analytical purposes.” The court found that the “choice of ten globally trading vessels was not intended as an exact statement of the threshold cutoff of globally trading vessels a fleet must have in order to manifest distinct product-related needs and preferences.” Rather, this cutoff served as part of a reasonable and appropriate method of estimating the targeted customer group. Dr. Nevo conducted additional sensitivities using other reasonable estimates of the boundary of the targeted customer group to check the robustness of this threshold, showing directionally consistent results supporting the FTC’s targeted customer market definition.

This analysis tracks similar inquiries performed by the court in FTC v. Sysco and FTC v. Staples, Inc. In Sysco, the court found that national customers have a number of distinct requirements for broadline foodservice distribution services, including a wider variety of services and national footprint. The court confirmed that the needs of customers operated to define the relevant product market, as regional suppliers were insufficient options for national customers. In Staples, the court found a targeted customer market made up of large business-to-business customers that spent at least $500,000 on office supplies annually. In each of these cases, the determination that the merger was likely to substantially lessen competition was rightly focused on post-merger competition faced by these targeted customers.

Economic Tools: GUPPIs and Merger Simulation

In addition to evidence of head-to-head competition and high market shares, Judge Chutkan also considered the results of different modeling techniques used by Dr. Nevo to assess the likelihood of competitive harm. Dr. Nevo calculated several variations of GUPPIs and used a merger simulation. Both techniques yielded results that were consistent with other evidence that the merger likely would result in anticompetitive harm. While the data in merger cases are often imperfect, a quantitative analysis can bolster documentary evidence and witness testimony to help courts assess the likely effects of a merger.

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