Antitrust Law as a Negotiating Tool and the Pursuit of Family Dollar Stores

Dollar signWhen you are a law student, you don’t usually understand that most cases are just one of several business tools that are companies utilize to advance their interests in the marketplace.

You might think that cases are academic-like exercises that reach either trial or some appellate court (perhaps after a motion-to-dismiss or summary-judgment motion). One or the other party or both are seeking justice and will not rest until the case terminates. That’s not a surprise, really, because much of what you do in law school is read such cases. I guess that is why many law students want to become appellate attorneys.

But the reality is that—as much as lawyers like myself like to view the law through an academic lens—a lawsuit or threat of a lawsuit is often just a way for someone to seek leverage. The claim is real and is serious, but litigating the case to termination is usually a last resort. The best result is often a settlement—the earlier the better.

Lawyers don’t like to talk about that much because unless you are on a contingency fee an early settlement means less money for the attorney. But it is the truth; lawyers are not special, really. What we do in litigation is often just another business tool to advance our client’s position in the marketplace. There are exceptions, of course—cases where justice must be done—but most commercial litigation doesn’t fall into that category.

Most of commercial litigation is a negotiating tool.

And an antitrust claim is a particularly large (and effective) bat when it comes to leverage.

Why do Antitrust Claims Create Leverage?

First, a successful antitrust plaintiff receives treble damages, as well as attorneys’ fees. Antitrust damages are often large by themselves because of the nature of the claims, but the prospect of multiplying them by three will get the attention of the general counsel or boards of most defendants. An antitrust case is usually a materially-reportable event. Sometimes a particularly ambitious plaintiff will take advantage of that fact and will file a claim before a prospective merger or other big deal.

Second, antitrust law is not very clear. Antitrust law is consistently evolving and courts, litigants, and antitrust agencies often disagree about how certain doctrines should apply to the facts. This creates uncertainty and uncertainty creates risk.

This is particularly true of cases alleging forms of exclusionary conduct under Section 2 of the Sherman Act or vertical agreements under Section 1 of the Sherman Act. For example, allegations of loyalty discounts, exclusive dealing, resale-price maintenance, bundled discounts, tying, etc. may create large risk for defendants because the law is so uncertain. As we will see below, antitrust issues in mergers & acquisitions create a double risk—both the uncertainty of the law and the uncertainty in how an antitrust agency will treat the merger.

If you combine uncertainty with treble damages plus attorneys’ fees, you get negotiating leverage.

Third, antitrust lawsuits are expensive. Going from complaint to trial takes a lot of money and attention. A defendant that receives either a letter threatening an antitrust claim or a filed claim itself will strongly consider settling rather than fighting it through.

In What Situations Do Companies Exercise this Leverage?

Anytime an antitrust or competition issue lurks is an opportunity for leverage. But that is too easy. Here are a few instances where you can expect to see it.

First, you will often see antitrust claims arising out of a typical business setting where one competitor is harming another. Companies compete in the market, but that competition often enters the courtroom. There is a fine line between vigorous legal competition and acts that the antitrust laws condemn. When a company with market power engages in questionable conduct—which may be on either side of the fuzzy antitrust line—it is common for the company with less market power to file or threaten a claim. This “leverage” often stops the offending conduct.

Second, antitrust is almost everywhere in intellectual-property litigation. If you see someone file a patent-infringement claim, you can reliably count on an antitrust counterclaim. Because of the special relationship between patent law and antitrust law, antitrust claims—of various levels of merit—are often thrown into the larger patent-litigation war.

If you are involved in patent litigation, you probably ought to have an antitrust attorney as part of your team, at least for consulting purposes. Besides helping to defend claims, they can sometimes see claims that you miss.

Third, in the mergers & acquisitions world, the antitrust risks of the merger often become a storyline to the negotiations among potential suitors. A great example of this is Dollar General’s pursuit for Family Dollar. Dollar General is the unquestioned high bidder, but Family Dollar is rebuffing them by citing concerns that the FTC will block the merger. (You can read my comments in a previous article by Reuters here).

Dollar General is now willing to divest up to 1500 stores to win antitrust approval, even though it thinks that at most, divestiture of 700 would be sufficient. It is now also willing to pay a $500 million fee if it can’t get past the FTC. In addition, it raised its offer from the initial offer that Family Dollar rejected, ostensibly based upon antitrust concerns.

With the disclaimer that I don’t have access to the documents, haven’t performed any economic studies, and haven’t studied the issue in detail, I think the antitrust claims here are overblown. In the current marketplace, it is highly doubtful that the FTC would block such a merger, particularly when such a significant divestiture is offered. That, by the way, is the usual solution in a situation like this where the geographic markets are primarily local and the industry is retail.

Going further, I have great doubt about whether the FTC should even consider that level of divestiture. The retail market is quite crowded in most geographic markets and the prospect of free shipping from companies like Amazon adds further competition to every geographic market. While there may be some evidence that the shoppers at dollar stores don’t view Amazon as a competitor for the goods they buy at dollar stores, it is likely that Wal-Mart is a competitor. And with Wal-Mart’s significant economies-of-scale and other advantages, I would think that an antitrust agency would encourage rather than discourage a stronger competitor for Wal-Mart.

But, anyway, the point is that even though I cannot speak intelligently as to the motivations of Family Dollar in refusing the higher bid because of antitrust concerns, it looks to me like Family Dollar is using a combination of the magnitude and uncertainty of the antitrust risk as a negotiating tool to obtain a better deal. Or maybe there are non-business reasons why they don’t want to sell to Dollar General. But, in any event, I think the antitrust risks are overstated, particularly when Dollar General is willing to divest so many stores.

So applying this situation to our earlier discussion, this could be an instance where a party to a prospective merger is using both the significant consequences of an antitrust challenge as well as the uncertainty of an antitrust resolution to gain negotiating leverage.