DOJ's New Guidance on the Use of Arbitration and Its Application in Merger Disputes
Background on DOJ's Use of Arbitration
In March 2020, the Antitrust Division of the Department of Justice completed its first-ever arbitration in United States v. Novelis.1 Rather than proceed to trial in federal court, as is customary in merger litigation, the parties decided to bring the sole issue in dispute before an arbitrator: whether the relevant product market consisted only of aluminum auto body sheet (aluminum ABS), as DOJ alleged, or also included traditional or high strength steel, as the merging parties argued. The arbitrator issued a ruling in favor of DOJ, finding that aluminum ABS constituted a relevant product market.
According to the parties' arbitration agreement, DOJ's victory triggered a requirement that Novelis divest Aleris's North American aluminum ABS operations, most notably, Aleris's mill in Lewisport, Kentucky.2 Following on the heels of that victory, DOJ appears poised to use arbitration in future matters where appropriate. On November 12, 2020, DOJ issued new guidance on when it may consider the use of arbitration.3 While the Arbitration Guidance applies to any civil litigation brought by the Antitrust Division, this advisory will focus on the use of arbitration to resolve merger disputes.
When and Why DOJ May Consider Arbitration Moving Forward
The DOJ's Arbitration Guidance describes arbitration as "an important litigation tool that the Antitrust Division has at its disposal." It recognizes that arbitration has certain advantages and disadvantages for DOJ compared to proceeding to trial in federal court, and lays out the factors DOJ should consider when assessing whether to pursue arbitration.
The most significant advantage the Arbitration Guidance describes is arbitration's efficiency, both in terms of resolving the dispute more quickly and reducing the amount of government resources used to resolve the dispute. Other advantages include allowing the parties more direct control over the requested remedy and adjudicating the dispute before an arbitrator with deep antitrust expertise. The Arbitration Guidance recognizes two disadvantages as well: the lack of precedential value of an arbitration award and the loss of the public interest in adjudicating the dispute in an open federal court.
Accordingly, the Arbitration Guidance identifies certain factors that may lead DOJ to pursue arbitration instead of litigation, while acknowledging that not every factor must be present for DOJ to seek arbitration and that additional factors may be considered beyond those listed:
- The issues in the case are clear, easily agreed upon, and dispositive, such that they can be presented to and decided by an arbitrator.
- The parties wish to control the range of possible remedies.
- Arbitration would lead to a more efficient use of the government's resources without affecting the government's ability to protect consumers, or proceeding in federal court would result in unacceptable delay.
- The issues in the case are complex and would benefit from adjudication by an expert in antitrust law.
The first three factors all appear to be have been present in the Novelis merger litigation. There, the parties had narrowed the dispute to market definition, which was negotiated through the arbitration agreement and was dispositive to the dispute. The range of possible remedies was also limited because the competitive overlap could be resolved by the divestiture of a single Aleris mill. On the other hand, it is not clear that the issues in the Novelis case were so complex that presenting them before an arbitrator (an experienced antitrust practitioner) presented significant advantages over a federal judge. In addition, the six-month timeframe it took to arbitrate the case was not necessarily any faster than the time it takes to litigate a preliminary injunction in federal court.
Considerations for Merging Parties
The DOJ's Arbitration Guidance does not address considerations for merging parties (or other defendants) that are assessing whether to pursue arbitration, which may be consistent with the government's interests in some areas but diverge in others. Key advantages of arbitration to merging parties include:
- Coming to a faster resolution at a lower cost. This likely is a strong consideration if the merits lend themselves to arbitration, although in practice arbitration may not save substantially more time than litigation.
- The confidential nature of arbitration, which eliminates the potential for internal company documents to be introduced in open court at trial.
- Presenting evidence, particularly from economic experts, to an antitrust specialist, which may be advantageous to the merging parties as well as to DOJ.
- Obtaining concessions from DOJ, such as limiting DOJ's potential arbitration remedies to divestitures of specific assets or allowing the broader transaction to close while the parties arbitrate the fate of overlapping portions of the transaction.
Arbitration may, however, have disadvantages to merging parties that are not considerations for DOJ:
- In agreeing to narrow the scope of the dispute at issue for arbitration, merging parties relieve DOJ of its burden to prove every element of a violation of Section 7 of the Clayton Act and may forgo the opportunity to present evidence of merger efficiencies.
- The merging parties also may relinquish any right to appeal an adverse decision. The arbitration agreement in the Novelis case did not allow for appeal of the arbitration award.4
Will the Arbitration Guidance Lead to More Arbitration?
Despite the DOJ's Arbitration Guidance, whether arbitration becomes more commonly used in merger disputes is highly uncertain for three main reasons. First, the Biden Administration will bring in new leadership at the Antitrust Division, who may not have the same passion for arbitration as the outgoing Division leadership. The discretionary nature of whether to use arbitration means that the new leadership could ignore the Arbitration Guidance and render the Novelis arbitration a one-off occurrence.
Second, all parties must consent to arbitration. Even if the factors in the Arbitration Guidance strongly weigh in favor of arbitration, the merging parties' considerations may be different and favor a full trial in federal court. In the Novelis case, the merging parties' incentive to arbitrate may have been a result of concessions DOJ was willing to make in the arbitration agreement. In that agreement, DOJ agreed to limit its remedy to a divestiture of one of multiple mills involved in the acquisition rather than seeking to enjoin the entire transaction. DOJ also allowed the parties to close the foreign portion of the transaction in the event the arbitration had not concluded by a certain date.5 Neither concession might have been available to Novelis had DOJ pursued its case in federal court.
Third, the use of arbitration is a significant procedural departure from traditional practice in merger disputes. Both DOJ and counsel for merging parties are accustomed to trying merger cases in federal court, and the parties must agree on procedural issues for arbitration, not least of which is selecting an arbitrator. Although these procedural hurdles could prove insurmountable in future cases, arbitration in the Novelis case allowed the parties to choose an arbitrator with extensive antitrust experience and dictate the timing by which he had to issue a decision— two important variables outside the control of litigants who try merger cases in front of federal district court judges.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Arbitration Decision, U.S. v. Novelis Inc. and Aleris Corp., No: 1:19-cv-02033-CAB (N.D. Ohio, Mar. 9, 2020) (U.S. v. Novelis) (redacted public version).
Competitive Impact Statement, No. 1:19-cv-02033-CAB (N.D. Ohio, May 12, 2020) (ECF No. 48).
U.S. Department of Justice, Antitrust Division, Updated Guidance Regarding the Use of Arbitration and Case Selection Criteria, (Nov. 12, 2020).
Arbitration Term Sheet, U.S. v. Novelis, (Sept. 9, 2019).
See Arbitration Term Sheet, U.S. v. Novelis, at paras. 4-5 (Sept. 9, 2019). Novelis was allowed to close the transaction with a hold separate order prior to the arbitration hearing, although it did not close until after it cleared all European regulatory hurdles a month after the arbitration decision was issued.