FTC Orders Complete Divestiture of Rival in Merger Challenge
This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.
Polypore International, Inc. has been ordered by the FTC to divest Microporous Products L.P., a rival manufacturer of battery separators, that it acquired in 2008. The Commission on December 13 released a provisionally-redacted public version of its
unanimous decision, finding the acquisition anticompetitive.
Polypore previously announced that the FTC had upheld divestiture relief ordered earlier this year by Chief Administrative Law Judge (ALJ) D. Michael Chappell.
The Commission ruled that the merger of the two producers of battery separators—membranes placed between the positive and negatively-charged plates in batteries to prevent electrical short circuits—for flooded lead-acid batteries was illegal in three of the four North American markets identified in the complaint. However, the acquisition was not likely to harm competition in a fourth market for separators used to make batteries for backup power supply.
At the time of the acquisition, only one other firm, Entek International LLC, supplied flooded lead-acid battery separators to North American customers.
Relevant Markets
FTC attorneys established four distinct relevant product markets:
(1) separators for batteries used primarily in golf carts;
(2) motive separators for batteries used primarily in forklifts;
(3) separators used in car batteries for starters, lighting, and ignition (SLI); and
(4) uninterruptible power source (UPS) separators used in batteries that provide backup power in the event of power outages.
The record supported the relevant product markets based on the end use of separators, according to the Commission. Based on design and functionality, a separator manufactured for a particular end use or customer was not reasonably interchangeable with other separators. Moreover, prices were set according to end use.
Hypotehetical Monopolist Test
The FTC's expert applied the hypothetical monopolist test to each market using a critical loss analysis and concluded that a hypothetical monopolist that supplied separators for each end use would lose less than 10% of its sales in response to a 5% price increase.
The Commission noted that, under the 2010 Horizontal Merger Guidelines (Trade Regulation Reporter ¶13,100), a product market is defined by asking whether a hypothetical monopolist of the proposed product market could impose a small but significant and nontransitory increase in price or “SSNIP” without losing sufficient sales to render the price increase unprofitable.
Product Markets
Polypore argued unsuccessfully that two separate product markets existed: (1) a market for polyethylene or “PE” separators and (2) a market consisting only of Flex-Sil, a separator made of rubber, primarily for deep-cycle applications.
The Commission found unpersuasive Polypore's expert's opinions that PE separators belonged in a single relevant market because they were highly differentiated and could be tailored to work across applications and that Flex-Sil constituted a separate relevant market because Flex-Sil had unique performance characteristics and was sold at a premium.
Relevant Geographic Market
The Commission also found a relevant geographic market limited to North America.
Polypore had argued that the market was global in scope. Because battery separators were tailored to a particular customer and type of battery, and sold through individualized negotiations, separator suppliers set separator prices based in part on customer location, according to the Commission.
Moreover, because separators were differentiated along a variety of dimensions according to customer demand, a customer could not easily defeat a discriminatory price increase through arbitrage. Additionally, North American battery manufacturers did not consider foreign supply a reasonable competitive alternative to local supply due primarily to cost and quality.
Analytical Framework
The Commission applied a traditional burden-shifting framework in reviewing the merger. This analytical approach did not, however, exhaust the possible ways to prove a Clayton Act, Sec. 7 violation on the merits, according to the Commission. In a consummated merger, post-acquisition evidence of actual anticompetitive harm could be sufficient to establish Sec. 7 liability without separate proof of market definition.
Under the traditional framework, the FTC attorneys could establish a presumption of liability by showing that the transaction led to undue concentration in the relevant market. The prima facie case could be bolstered based on market structure with evidence showing that anticompetitive unilateral or coordinated effects were likely.
Because the FTC established a prima facie case of probable harm, the burden of production shifted to Polypore to rebut the government's evidence. However, Polypore did not satisfy the burden of production.
The Commission rejected Polypore's argument that market entry by Entek or other manufacturers or the strength of sophisticated power buyers with substantial leverage would counteract any potential anticompetitive effects from the acquisition. Thus, the merger was found to violate Sec. 7 of the Clayton Act.
Remedy
The FTC ordered complete divestiture of all of the acquired assets, including a plant in Feistritz, Austria. Polypore argued that the remedy, and in particular the portion of the order requiring divestiture of Microporous’s plant in Feistritz, was overbroad and punitive. However, the Commission concluded that complete divestiture was necessary to restore lost competition to the relevant North American markets.
“[C]omplete divestiture provides the greatest likelihood that the asset package will restore competition and be sufficiently viable to readily attract an acceptable buyer,” it was decided.
Despite the objections of the merged entity, the final order also included ancillary relief, requiring Polypore to refrain from depleting Microporous’s workforce and to grant to the divestiture buyer a license to certain Polypore intellectual property that was incorporated into Microporous’s operations or battery separators during the course of the FTC investigation, litigation, and pending divestiture.
Concurring Opinion
Commissioner J. Thomas Rosch wrote a concurring opinion, suggesting “an alternate analytical framework that would focus on the competitive effects of this transaction instead of focusing initially on defining the precise contours of the relevant market and only then considering the transaction’s competitive effects.”
Commissioner Rosch concluded “especially where, as here, the merger at issue is consummated, it is generally preferable to determine whether a merger has had anticompetitive effects by reference to the parties’ motives for the transaction and the actual effects resulting from the merger instead of trying first to define with precision the dimensions of relevant market based on the testimony of paid expert economists and the predictive economic tools described in the Merger Guidelines.”
The decision is In the Matter of Polypore International, Inc., FTC Docket No. 9327. A news release on the subject appears
here on the FTC website. Text of the opinion will appear at
2010-2 Trade Cases ¶77,267.
