Arnold & Porter Discusses Criminal Antitrust Risks in Mergers & Acquisitions

On July 9, President Biden issued an Executive Order that announced a policy of increased antitrust enforcement across many industries. The DOJ Antitrust Division and the Federal Trade Commission quickly followed with an announcement that they would jointly launch a review of merger guidelines with an eye towards a more aggressive enforcement approach.

These announcements serve as an important reminder that the risks resulting from more vigorous merger review are not limited to getting the deal through. Companies and their investors should also consider the risks posed by criminal antitrust investigations that can follow merger review. One need look no further than the packaged-seafood industry, where the attempted merger of two well-known tuna brands resulted in a criminal investigation, civil class action suits, and—for one company—bankruptcy. In light of the government’s policy of aggressive antitrust enforcement, company executives and investors should evaluate all proposed mergers & acquisitions for potential criminal antitrust violations.

Case Study: Packaged Seafood

Chicken of the Sea and BumbleBee Merger

In late 2014, Thai Union Group PCL, owner of Tri-Union Seafoods LLC, d/b/a Chicken of the Sea International (COSI), announced plans to purchase BumbleBee Foods LLC from a private-equity company for $1.5 billion. To finance the acquisition, Thai Union planned to raise $400 million dollars via a public stock offering.

DOJ reviewed the transaction, which would have combined two of the three major brands of packaged seafood in the United States. In July 2015, Thai Union disclosed that it was abandoning the stock offering because DOJ had issued a grand jury subpoena to COSI. By late 2015, DOJ announced that the companies were abandoning the merger altogether, and stated that “the market is not functioning competitively today, and further consolidation would only make things worse.” This commentary foreshadowed additional developments in the matter.

DOJ Criminal Investigation

In late 2016, a year after DOJ disclosed that the merger had been abandoned, DOJ announced that two BumbleBee executives had agreed to plead guilty to criminal antitrust violations—specifically, for participating in a conspiracy to fix prices of canned tuna. And six months later, DOJ announced that BumbleBee and a StarKist Co. executive had agreed to plead guilty as well. BumbleBee paid a $25 million fine, which was reduced in an effort to preserve the ongoing viability of the company.

In 2018, DOJ indicted BumbleBee’s then-CEO, Christopher Lischewski, and announced that StarKist had agreed to plead guilty. After substantial litigation between DOJ and StarKist regarding the appropriate fine amount, the court imposed a $100 million fine against StarKist.

Lischewski Trial

After a multi-week trial in November 2019 involving numerous witnesses, including the three executives who had pleaded guilty as well as Lischewski himself, Lischewski was found guilty. The court sentenced Lischewski to 40 months imprisonment. Lischewski appealed his conviction to the Ninth Circuit, but his appeal was denied earlier this month.

Civil Litigation

More than 70 civil suits have been filed against the three packaged-seafood companies seeking damages in connection with their criminal antitrust violations. The plaintiffs include supermarkets, commercial food preparers and consumers. Public records indicate that the companies have agreed to settlements totaling approximately $60 million to resolve certain plaintiffs’ claims, with the bulk of the litigation still ongoing.

BumbleBee Bankruptcy

For BumbleBee, the road that began with a promising merger unfortunately ended in bankruptcy. While Lischewski’s trial was ongoing, BumbleBee filed for Chapter 11 bankruptcy and announced plans to sell its assets to its largest creditor for $925 million in cash and debt, representing a $575 million loss of enterprise value compared to the 2014 transaction.

Three Takeaways

Success Breeds Imitation

DOJ’s success in the packaged-seafood investigation will further embolden its attorneys to scour through merger documents for signs of potential criminal antitrust violations. DOJ credited its civil attorneys’ keen eyes during the merger review, leading to the discovery of materials that resulted in the criminal investigation. DOJ formalized this practice in September 2020, when DOJ updated its civil investigative demand templates and deposition procedures to inform parties that their documents and testimony may be used in other proceedings, including criminal cases.

Importantly, this risk is not limited to mergers reviewed by DOJ. FTC coordinates with DOJ on many issues—for example, the two agencies recently announced their collaboration on a working group for reviewing pharmaceutical mergers. This collaboration historically has included referrals to DOJ of any potential criminal antitrust violations. The July 9 Executive Order is expected to increase coordination between the two agencies, including the pursuit of criminal antitrust violations uncovered by FTC.

Industries in Focus

As the packaged-seafood case study makes clear, failing to account for criminal antitrust risks can result in significant financial losses for companies and their investors, and individual liability for corporate executives. These risks are more acute in industries singled out in the July 9 Executive Order, which include agriculture, healthcare, and technology. In addition to these industries, the Executive Order also prescribed greater antitrust scrutiny in labor markets, affecting all employers. Companies conducting transactions in these industries and markets should be prepared for greater scrutiny of potential criminal antitrust violations.

An Emerging Trend: Labor Market Enforcement

A key developing risk involves criminal antitrust enforcement in labor markets. Following a joint DOJ-FTC announcement in 2016 regarding antitrust enforcement concerning labor-market practices, DOJ has prosecuted multiple companies and individuals for alleged labor-market collusion. For example, in January 2021, DOJ brought its first “no poach” case when it indicted Surgical Care Affiliates LLC (SCA) and an affiliated company, for entering into employee non-solicitation agreements with two other companies that competed with SCA for employees. SCA heralds a new enforcement trend, as DOJ has since brought additional criminal cases involving labor markets and is expected to continue to prioritize this area.

In addition, there are public reports of criminal investigations and civil enforcement actions for alleged no-poach conduct, which followed merger reviews by DOJ. For example, evidence obtained during the merger of two rail-equipment suppliers resulted in a DOJ civil enforcement action to enjoin a no-poach agreement.

These DOJ enforcement actions—whether criminal or civil—are followed shortly by class-action suits seeking damages on behalf of current and former employees. Accordingly, companies should ensure that transaction due diligence, as well as antitrust compliance programs, account for criminal antitrust risks involving hiring and employment.

This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “Buyer and Seller Beware: Criminal Antitrust Risks in Mergers & Acquisitions,” dated July 26, 2021, and available here.