The recent US Federal Trade Commission (FTC) win in its challenge to block a proposed joint venture between Peabody and Arch Coal, the two largest producers of coal in the Southern Powder River Basin (SPRB), once again highlights the importance of market definition in merger litigation. Defining the relevant market – i.e., the market in which to analyze the parties, their competition, and the attendant effects of the proposed transaction – often makes or breaks FTC and Department of Justice (DOJ) merger challenges. A product market that is too broad or too narrow could mischaracterize the extent of competition between the merging parties, over or understate the presence of competitors, and render calculation of market shares misleading or meaningless. For example, earlier this year the FTC lost its bid to block Evonik’s acquisition of PeroxyChem – ending its seven-trial winning streak – largely because a federal district court judge agreed with the merging parties that the relevant product market alleged by the FTC was unduly broad.
But, when the FTC or DOJ demonstrates its alleged market definition is not too broad, not too narrow, but just right, it often enjoys a presumption of a likely harm to competition – a presumption that can pave the way to a government litigation win. Indeed, in FTC v. Peabody/Arch Coal, the district court: (i) accepted the FTC’s SPRB coal-only product market definition despite arguments that it was too narrow; (ii) presumed the transaction would harm competition based on metrics calculated under the FTC’s market definition; and (iii) ultimately found Peabody and Arch Coal unable to rebut that presumption. The court therefore granted the FTC’s request for a preliminary injunction, and Peabody and Arch Coal soon after abandoned their deal.
Testing the Fit: Metrics Assessed by the Court
In FTC v. Peabody, the FTC alleged a relevant product market consisting of only SPRB coal. Peabody/Arch Coal forcefully challenged this product market as too narrow, citing competition from other, newer energy sources including natural gas.
The court devoted more than 32 pages to evaluating the relevant product market in which to analyze the proposed joint venture. Weighing economic evidence in the proverbial battle-of-the-experts, the court found that the SPRB coal market satisfies the hypothetical monopolist test – i.e., whether a hypothetical monopolist in the alleged market could increase prices.
The court then turned to a methodical assessment of the practical indicia of relevant market definition set out in the Supreme Court’s Brown Shoe decision: (i) industry or public recognition of a distinct market; (ii) distinct prices; (iii) distinct customers; (iv) distinct characteristics; and (v) unique production facilities. Taking the Brown Shoe indicia one-by-one, the court tested the SPRB coal market – as well as the broader energy market claimed by Peabody/Arch Coal. Although certain factors also supported a broader energy market, the court consistently found the SPRB coal market satisfied every practical indicia of an antitrust relevant market.
Proving the Fit: Economics and Evidence
To support SPRB coal as a relevant product market, the FTC put forward not only economic analysis from an expert witness, but documentary and testimonial evidence that consistently supported an SPRB-coal-only relevant market. This confluence of evidence from various sources – including the parties themselves – was crucial to the court’s acceptance of the FTC’s alleged relevant product market.
The court gave particular weight to FTC-marshaled customer testimony and Peabody/Arch Coal ordinary course documents, including:
- Peabody/Arch Coal ordinary course documents analyzing SPRB coal as a distinct commodity, separate from other fuel sources;
- Customer testimony regarding SPRB-specific procurement processes that put SPRB coal suppliers in head-to-head competition;
- Peabody/Arch Coal ordinary course documents that analyze competition only from SPRB coal suppliers in relation such bid processes;
- Customer testimony that plants configured for SPRB coal cannot easily switch to other fuel sources; and
- Customer testimony valuing SPRB coal for its “distinctive properties.”
Choosing the Fit: Getting it Just Right
Despite finding it “indisputable” that “coal competes with natural gas and renewables in a broader energy market,” the court accepted the FTC’s SPRB coal-only market, finding that the evidence supported a distinct competitive market for SPRB coal. Moreover, the court found that, as the narrower properly defined relevant market, the SPRB coal market was the appropriate fit for analysis of the transaction.
Hedging the Fit: Pleading Markets in the Alternative
In its complaint, the FTC alleged three different geographic markets in the alternative: (1) the SPRB; (2) the United States; and (3) one or more of the plants where SPRB coal is consumed. With the FTC effectively covering the waterfront of potentially relevant geographic markets, Peabody and Arch Coal never challenged the FTC’s alleged geographic market.
By providing flexibility for the relevant geographic market, the FTC virtually guaranteed that one of its proposed geographic markets would be accepted. Indeed, with a single page of analysis, the court accepted the SPRB as the relevant geographic market in which to analyze the transaction.
Moral of the Story: Lessons from Peabody/Arch Coal
The Peabody/Arch Coal decision is an important reminder of three core principles when assessing the antitrust risk and potential defenses associated with a transaction:
- Consider all potential relevant markets. It is not sufficient to identify a relevant market for which competition would not be harmed. Rather, if the transaction could harm competition in a different or narrower market, the transaction may present an avenue for the agencies to pursue an enforcement action.
- Prioritize economic analysis. It is difficult to consider the range of potential relevant markets without some level of empirical analysis. Identification and/or elimination of relevant markets based on economic analysis bears directly on understanding of potential risk areas.
- Know your ordinary course documents. Documents created outside the context of a potential transaction carry significant weight with antitrust agencies, and ultimately with courts. In evaluating antitrust risk associated with a potential transaction, it is crucial to understand how the competitive landscape is assessed in the ordinary course.
Overall, early analysis of the same types of data and ordinary course documents that the agencies and courts rely on benefits any antitrust risk assessment. The FTC or DOJ, and perhaps ultimately a court, will rigorously test both quantitative and qualitative evidence to find the relevant market that fits just right. Parties can, and should, be prepared for this assessment.