On May 5, 2023, the Department of Justice’s Antitrust Division (DOJ) reached a settlement with ASSA ABLOY AB (ASSA ABLOY), requiring it to divest certain premium mechanical door hardware and residential smart lock businesses to Fortune Brands Innovation, Inc. (Fortune) as a condition to completing its $4.3 billion acquisition of Spectrum Brand Holding Inc.’s Hardware and Home Improvement division.
Until Friday’s settlement was reached, ASSA ABLOY’s offer to divest portions of it business had not appeased the DOJ, whose concern is that the deal may substantially lessen competition in the premium mechanical door hardware and residential smart lock markets, as discussed in our previous blog. Pursuant to the settlement, ASSA ABLOY agreed to a broader divestiture than it had previously offered.
The settlement, which is subject to court approval, opens the door for the transaction to proceed. We consider what this means for US merger enforcement going forward.
First divestiture remedy accepted under current DOJ administration: Under Jonathan Kanter, the head of the Antitrust Division, the DOJ has been skeptical of merger remedies, adopting the view that “merger remedies short of blocking a transaction often miss the mark” and that “in most situations we should seek a simple injunction to block the transaction. It is the surest way to preserve competition.” Keeping to this mantra, the DOJ asserted that only complete prohibition of the transaction would eliminate its the competition risks, despite the parties’ remedy offer. Nonetheless, the settlement reached in this case indicates the DOJ is – at least in certain circumstances – willing to step back from a merger challenge and that divestiture remedies may be back on the table, even if they are slightly less than perfect in the agency’s eyes.
Litigation as leverage for the DOJ: The uncertainty of merger litigation carries an inherent risk – indeed, the DOJ explained in its competitive impact statement that it was the “totality of circumstances and risks associated with this litigation” that led the DOJ to agree to a settlement. Litigation and its risks can affect bargaining positions, which parties should keep in mind when considering settlement options as a DOJ or Federal Trade Commission (FTC) merger review process progresses.
The merging parties’ decision to agree to an expanded divestiture package is likely to have been influenced by litigation risk and costs. The parties agreed to include additional assets and commitments in the settlement beyond what they had originally offered, such as a widened scope of intellectual property to be divested and rights to use ASSA ABLOY’s popular Yale brand in a manner that would allow Fortune to serve larger multifamily buildings. Although the expanded divestiture package does not address every one of the DOJ’s asserted concerns – such as the severance of ASSA ABLOY’s divested smart lock business from its global R&D team – it appears the DOJ may have been able to extract a greater concession from the parties than it otherwise would have if it agreed to accept a divestiture in lieu of suing to block the transaction.
DOJ’s tough stance on mergers faces a reality check: In this case, an area of risk for the DOJ was that the case may not just end in a loss clearing the way for the transaction to close in any event, but also potentially create a judicial precedent placing a greater burden of proof on the government in a “litigate-the-fix” case – an outcome that may have been perceived as potentially unhelpful to DOJ’s broader merger enforcement agenda. In the DOJ’s view, the merging parties have the burden of proving that a proposed remedy will resolve any anticompetitive effects of merger. However at trial, Judge Ana Reyes had showed openness to considering the merging parties’ argument that the DOJ must prove the post-divestiture merger would nevertheless still harm competition, a higher hurdle for the DOJ to overcome. With this case ending in settlement, further judicial development of the standard will need to wait until another day.
The mid-trial settlement is a dramatic breakthrough for the merging parties in this case, but whether it marks a tide shift in the DOJ’s approach to merger enforcement remains to be seen. The case concludes with the DOJ extracting an expanded remedy package, but the challenges faced in this case may give the agency pause for thought before refusing merging parties’ remedy offers and instead choosing to embark on merger litigation seeking an outright block in the future. As with all potential merger control reviews, parties should consider the necessity of remedies and the associated scope of any remedy package offered – as well as the strategy and sequencing of such a remedy offer. As in ASSA ABLOY’s case, litigating the fix remains a potentially viable strategy that could allow parties to shift risk somewhat onto the DOJ to either (i) consider accepting the remedy in advance of a suit to block or (ii) adjust midstream and accept a remedy package as sufficient to avoid downside risk of an outright loss and associated precedential hurdles in future cases.