Parties to a proposed merger or acquisition involving competitors should stay alert during due diligence for the possibility that there may be evidence of existing antitrust violations and that such evidence could be discovered by an antitrust enforcement agency during the merger review process.

On July 13, 2012, Bosley, Inc. (Bosley), a subsidiary of Aderans America Holdings, Inc. (Aderans America) and Aderans Co., Ltd. (Aderans, and collectively, the Respondents) entered into a stock purchase agreement to acquire HC (USA), Inc. (Hair Club), a subsidiary of Regis Corporation, for $163.5 million.¹ The Federal Trade Commission (FTC) did not challenge the acquisition itself but did discover what it alleged to be antitrust violations during the course of its investigation. On April 8, 2013, the FTC announced a proposed consent agreement with the Respondents regarding the exchange of competitively sensitive, nonpublic  information with Hair Club alleged to violate Section 5 of the FTC Act, 15 U.S.C. § 45.² The proposed consent agreement provides inter alia that the Respondents will cease and desist from exchanging competitively sensitive, nonpublic information with any competitor, will implement an antitrust compliance program, and will file annual reports with the FTC for a period of 20 years.³ On April 9, 2013, Aderans completed its acquisition of Hair Club.⁴

Background

Bosley and Hair Club manage medical/surgical hair restoration practices. The companies have “nationwide geographic footprints and national brand recognition,” with Bosley being “the largest manufacturer of medical/surgical hair transplantation practices in the United States.”⁵ In its complaint, the FTC alleged that the chief executive officers of Bosley and Hair Club exchanged competitively sensitive, nonpublic information about aspects of their businesses for at least four years.⁶ According to the FTC, the companies’ CEOs “directly exchanged detailed information about future product offerings, surgical hair transplantation price floors, discounting, forward-looking expansion and contraction plans, and operations and performance.”⁷ Bosley allegedly indicated that it had similar communications with additional competitors and “viewed these information exchanges as business as usual.”⁸

Analysis

The exchanges of information between Bosley and Hair Club, according to the FTC, served no legitimate purpose and instead had the purpose, tendency, and capacity to facilitate coordination and endanger competition.⁹ The FTC explained that such information exchanges enhanced each competitor’s understanding of the other’s prices, discounting and marketing tactics, products and operating strategies, and geographic expansion and contraction plans.¹⁰

The FTC identified three competitive risks posed when a competitor exchanges this kind of competitively sensitive information with rivals.¹¹ The discussion of competitively sensitive information could lead to (1) a conspiracy to restrict competition, (2) the facilitation of coordination among rivals, or (3) the restriction of rivals’ respective competitive efforts based on the reduced uncertainty regarding their competitors’ plans.¹² These risks are particularly significant when the information exchanged is “highly detailed, disaggregated, and forward-looking.”¹³

In weighing the potential for competitive harm against the prospect of legitimate efficiency benefits, the FTC determined that no legitimate business purpose was furthered by the information exchanges between Bosley and Hair Club, “considering the type of information involved, the level of detail, the direct nature of the communication, and the absence of any related pro-competitive impact.”¹⁴

The proposed consent agreement enjoins future anticompetitive information exchanges and requires the implementation of antitrust compliance programs by the Respondents.¹⁵ In particular, the FTC’s proposal enjoins the Respondents from “[c]ommunicating any Competitively Sensitive, Non-Public Information to any Competitor” and from “[r]equesting, encouraging, or facilitating [such communications] from any Competitor.”¹⁶ The FTC defines such information as “any competitively sensitive, non-public business information of Respondents or any of their Competitors relating to medical/surgical hair transplantation services in the United States, including without limitation non-public information relating to pricing or pricing strategies, costs, revenues, profits, margins, output, business or strategic plans, marketing, advertising, promotion, or research and development.”¹⁷

The proposed consent agreement is drafted so that it would not interfere with the Respondents’ ability to participate in “legitimate industry practices,” including those involving joint ventures, due diligence, market research, competitive offers to customers, and receipt of competitive intelligence.¹⁸ Further, the Respondents are required to implement an antitrust compliance program that provides (1) the designation of a compliance officer or director, (2) annual training for personnel who would have contact with competitors or responsibility for the sales, marketing, or pricing of medical/surgical hair transplantation in the United States, (3) distribution of the Respondents’ compliance program to all persons who receive training, (4) ongoing legal support for responding to questions about the compliance program or the antitrust laws, and (5) document retention to record the Respondents’ compliance with the proposed consent order.¹⁹

Caution for Merging Competitors

The FTC notes in its complaint that Bosley viewed information exchanges with its competitors as “business as usual.”²⁰ Hence, the FTC’s consent agreement provides another illustration of the importance of providing antitrust compliance training to corporate executives as well as personnel involved in sales, marketing, pricing, trade associations, and other capacities for all management employees. This matter also highlights the importance of conducting careful due diligence in connection with a proposed transaction. While the uncovering of such evidence may not pose a complete barrier to the consummation of a transaction – just as Bosley and Hair Club completed the transaction here – the parties nonetheless must be mindful of the risk that such conduct could come to light as part of the merger review process and result in sanctions imposed under the antitrust laws.