Tuesday, July 17, 2012

FTC Order Dissolving Merger of Battery Separator Makers Upheld

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

More than four years after Polypore International Inc. acquired rival battery separator manufacturer Microporous Products L.P., the U.S. Court of Appeals in Atlanta has determined that the transaction was anticompetitive.

The appellate court affirmed a December 2010 opinion (2010-2 Trade Cases ¶77,267) of the FTC, which held that the merger of the two producers of battery separators for flooded lead-acid batteries was illegal in three of the four North American markets identified in the agency’s complaint. A Commission order requiring Polypore’s divestiture of Microporous also was upheld.

Decreased Competition, Higher Prices

According to the FTC’s 2008 complaint, the consummated transaction led to decreased competition and higher prices in several North American markets for battery separators, a key component in flooded lead-acid batteries. The four markets identified were: (1) deep-cycle separators for batteries used primarily in golf carts; (2) motive separators for batteries used primarily in forklifts; (3) automotive separators used in car batteries used for starter, lighter, and ignition (SLI) power; and (4) uninterruptible power supply (UPS) separators used in batteries that provide backup power in the event of power outages.

The complaint stated that Polypore’s acquisition of Microporous left only two flooded-lead acid battery separator companies in North America—Polypore and Entek International, LLC—and that Entek operates only in the automotive separator market.

Merger of Competitors

Before the acquisition, Polypore and Microporous were competitors in each relevant market, and Microporous was uniquely situated to compete with Polypore for North American customers due to its location and the breadth of product offerings. Polypore and Microporous were alleged to be direct competitors in the deep-cycle battery separator market, and the acquisition was purportedly a merger to monopoly in that market.

Similarly, the companies were alleged to be direct competitors in the North American motive separator market. Thus, the merger led to a monopoly in that market. Polypore and Entek were direct competitors selling SLI separators, but Microporous was preparing to enter the automotive separator market, it was alleged.

The Commission decided that the transaction reduced competition in three of the relevant markets—SLI, motive, and deep-cycle—but not for the fourth, UPS batteries. On appeal, Polypore contended that the Commission improperly analyzed the transaction’s impact in the those three alleged markets.

Presumption of Illegality

The court rejected Polypore’s argument that the Commission should not have applied a presumption of illegality and should not have treated Microporous as an actual competitor. Polypore had contended that the Commission should have used only the potential competition doctrine, and not the presumption of U.S. v. Philadelphia National Bank (1963 Trade Cases ¶70,812) because the acquired firm had not entered the SLI market at the time of the acquisition.

However, Microporous was already making similar separators and had purchased a new production line that could produce the SLI separators. It had begun discussions with several companies, had produced a sample product, and had even submitted quotes and entered into memoranda of understanding with one large customer.

Polypore considered the acquisition as a way to remove a competitive threat in the market. In order to overcome the Philadelphia National presumption, Polypore would have had to show that the merger to duopoly did not have an anticompetitive effect. It failed to do so. Thus, the Commission correctly found that the merger substantially lessened competition in the SLI market.

Product Market

The Commission also properly found that the two firms’ separator products for deep-cycle batteries were part of the same product market. Polypore argued that the Microporous’s pure rubber separators were recognized as being superior in deep-cycle applications and that customers were willing to pay a premium for that superiority. However, customers were willing to substitute Polypore’s product when they could in order to keep prices lower.

Although there were distinct prices, there were not distinct customers. The products were used for slightly different purposes, but both were used in deep-cycle applications and both were made in the same type of production facilities.

The Commission did not err when it held that Polypore had not shown that Entek was a participant in the motive battery separator market or that it had plans to enter it to counteract any anticompetitive effects of the merger to monopoly in that market. It was not enough that Polypore contended that Entek could easily adjust its production line to manufacture motive battery separators or that Entek produced motive separators in the past and had expressed interest in resuming that role.

Divestiture Order

The court upheld the FTC order of complete divestiture of the acquired assets. It rejected Polypore’s contention that the divestiture order was too extensive because it included an Austrian plant. The company argued that the relief was beyond the authority of the agency, noting that the Commission had specifically limited the relevant markets to North America. The FTC had broad authority in fashioning relief and justified the divestiture of the Austrian plant. The Commission reasoned that the Austrian plant needed to be divested to restore the competition eliminated by the acquisition and provide the acquirer with the ability to compete.

FTC Reaction

“The U.S. Court of Appeals decision affirms that Polypore's acquisition of Microporous was anticompetitive, and it ensures that consumers will benefit from continued vigorous competition in the market for battery components,” said Commissioner Edith Ramirez in a July 12 statement following the issuance of the decision. “Requiring Polypore to divest its former rival Microporous means there will be more opportunities for consumers to buy quality products at a lower cost.”

The decision is Polypore International, Inc. v. Federal Trade Commission, 2012-1 Trade Cases ¶77,970.

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