Tuesday, May 31, 2011

Improperly Defined Relevant Markets Doom Private Merger Challenges

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

Recently, the U.S. Court of Appeals in San Francisco rejected two appeals in private merger challenges based on improper relevant market definitions.

Air Travel

A private suit for a preliminary injunction blocking the merger of United Airlines and Continental Airlines was properly dismissed, the federal appellate court ruled in a May 23 not-for-publication decision.

The plaintiffs—airline travelers and travel agents—failed to define a valid relevant market for purposes of evaluating the competitive effects of the transaction. Denial of the plaintiffs’ motion for preliminary injunction (2010-2 Trade Cases ¶77,187) was affirmed.

Defining and proving the relevant market for antitrust analysis was a “necessary predicate” to the plaintiffs’ success on the merits of their Clayton Act claim, the court explained. The court rejected the plaintiffs’ assertions that the district court erred in rejecting their proposed national market in air travel. The transaction would be more appropriately evaluated using a "city-pair" market. The city-pair market, which was endorsed by the district court, could satisfy the reasonable interchangeability standard.

According to the court, in defining the outer bounds of a relevant antitrust market, “the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it” was considered. To meet this standard, products did not have to be perfectly fungible. However, they had to be sufficiently interchangeable that a potential price increase in one product would be defeated by the threat of a sufficient number of customers switching to the alternate product.

A national market in air travel did not satisfy this standard. A flight from San Francisco to Newark was not interchangeable with a flight from Seattle to Miami, the court noted. No matter how much an airline raised the price of the San Francisco-Newark flight, a passenger would not respond by switching to the Seattle-Miami flight.

The court noted that the Department of Justice endorsed the city-pair market. The Justice Department closed its investigation into the merger after United Airlines and Continental Airlines agreed to transfer takeoff and landing slots and other assets at Newark Liberty Airport to Southwest Airlines (CCH Trade Regulation Reporter ¶50,258).

The Justice Department’s investigation determined that the merger would result in overlap on a limited number of routes where United and Continental offered competing nonstop service. The largest of those routes were between United’s hub airports and Continental’s hub at the Newark airport.

The May 23 decision in Malaney v. UAL Corp., No. 10-17208, appears at 2011-1 Trade Cases ¶77,463.

Pharmaceutical Industry

Just a few days earlier, the same three-judge panel of the Ninth Circuit rejected another private merger challenge. On May 19, dismissal (2010-1 Trade Cases ¶76,988) of a challenge to the 2009 merger of pharmaceutical companies Pfizer Inc. and Wyeth was affirmed. Independent retail pharmacies failed to sufficiently allege a relevant product market to support their challenge, the appellate court ruled.

The failure to allege a product market consisting of reasonably interchangeable goods rendered their complaint “facially unsustainable,” the appellate court explained.

The complaining pharmacies proposed a relevant product market consisting of “the pharmaceutical industry,” including the “manufacture, sale, and innovation of all pharmaceutical products, prescription pharmaceutical products, non-prescription pharmaceutical products, brand name pharmaceutical products and particular pharmaceutical products and therapies specifically noted and identified by Pfizer and Wyeth in their annual reports.”

While the market did not have to be pled with specificity, the complaining pharmacies failed to state any facts indicating that all pharmaceutical products were interchangeable for the same purpose, the court noted.

Pfizer, Inc.’s $68 billion acquisition of Wyeth was approved by the FTC in October 2009. Under the terms of an FTC consent order (CCH Trade Regulation Reporter ¶16,376), the combination was permitted to proceed, subject to divestitures aimed at preserving competition in multiple U.S. markets for animal pharmaceuticals and vaccines.

The May 19 decision in Golden Gate Pharmacy Services, Inc. v. Pfizer, Inc., appears at 2011-1 Trade Cases ¶77,455.

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