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Wading into antitrust waters in which legal authority is notoriously scarce, the United States District Court for the Northern District of Illinois has buoyed up some of the guidelines commonly used by antitrust practitioners to steer merging parties through deal negotiations and pre-closing information exchanges. In Omnicare, Inc. v. UnitedHealth Group, Inc., et al., the court granted merging parties UnitedHealth and PacifiCare summary judgment against plaintiff Omnicare, ruling that, under the particular circumstances of the case, certain due diligence information exchanges, a negative covenant in the merger agreement, and other conduct by the merging parties could not establish a pre-closing anticompetitive agreement in violation of federal and state antitrust laws.

The decision is consistent with the advice of experienced counsel in this area, directing merging parties to limit the exchange of information to what is necessary to carry out due diligence, to refrain from exchanging detailed competitively sensitive information prior to closing, and to establish appropriate safeguards (such as firewalls or the use of outside consultants) to prevent access to a merging party’s competitively sensitive information by the other party’s personnel with competitive decision-making responsibilities.

UnitedHealth and PacifiCare are health insurers that provide, among other things, prescription drug coverage to senior citizens under the Medicare Part D program. To qualify under that program, health insurers must show that they are capable of providing pharmacy services to individuals in long-term care facilities, which is often done by contracting with institutional pharmacies such as Omnicare. In this case, each of UnitedHealth and PacifiCare began separate negotiations with Omnicare while also exploring a merger with each other. UnitedHealth signed an agreement with Omnicare before obtaining certification under the Medicare Part D program, while PacifiCare broke off negotiations with Omnicare one week after signing the merger agreement. After obtaining Medicare certification without using Omnicare, PacifiCare resumed negotiations with Omnicare and obtained a much more favorable contract than UnitedHealth’s. Following the UnitedHealth/PacifiCare merger, UnitedHealth abandoned its own deal with Omnicare and took advantage of the more favorable terms in PacifiCare’s contract with Omnicare.

Omnicare sued UnitedHealth and PacifiCare, claiming, among other things, that the defendants violated the Sherman Act and state antitrust laws by “conspiring to coordinate their negotiations with Omnicare in order to fix and depress the prices paid by defendants to Omnicare for providing those services.” As evidence of the unlawful agreement, Omnicare offered (a) economic analysis of the parties’ premerger conduct; (b) the existence of a negative covenant in the merger agreement requiring PacifiCare to obtain UnitedHealth’s prior approval for any transaction exceeding $3 million and not in the ordinary course of business; and (c) the exchange between the merging parties of allegedly competitively sensitive information in the course of due diligence.

The court granted the defendants’ motion for summary judgment on the antitrust claims, ruling that Omnicare’s evidence was equally consistent with independent conduct as with the alleged conspiracy. Under well-established law, a plaintiff cannot survive summary judgment on an antitrust conspiracy claim unless it can put forward evidence that tends to exclude the possibility of independent conduct on the part of the defendants. Evidence that is equally consistent with an unlawful agreement as with lawful independent business judgment will not suffice and, without more, means that the antitrust conspiracy claim must fail.

The court addressed each category of evidence in turn. With respect to the economic evidence, the court declined to second-guess PacifiCare’s business decision to abandon negotiations with Omnicare after execution of the merger agreement, noting that several other prescription drug plans had followed a similar course during the same period and finding that Omnicare had failed to show that PacifiCare’s ability to get a favorable deal from Omnicare was due to anything other than PacifiCare’s strong bargaining position having already obtained Medicare Part D certification. The court also dismissed the probative value of the negative covenant in the merger agreement, finding that the disclosure letter attached to the merger agreement explicitly excluded PacifiCare’s Part D negotiations from requiring UnitedHealth’s approval and adding, in accord with prevailing legal commentary in the area, that negative covenants such as the one at issue are common practice in mergers.

The court then addressed several categories of pre-closing communications and information exchanges. Noting the virtual absence of legal standards for determining when premerger discussions are anticompetitive, the court stated that

[t]he balance the court seeks to strike here is a sensitive one. On the one hand, courts should not allow plaintiffs to pursue Sherman Act claims merely because conversations concerning business took place between competitors during merger talks; such a standard could chill business activity by companies that would merge but for a concern over potential litigation. On the other hand, the mere possibility of a merger cannot permit business rivals to freely exchange competitively sensitive information. This standard could lead to “sham” merger negotiations, or at least allow for periods of cartel behavior when, as here, there is a substantial period of time between the signing of the merger agreement and the closing of the deal.

Balancing these competing interests, the court ruled that UnitedHealth’s pre-signing access to certain strategic information of PacifiCare, including Part D average prices, did not support an inference of conspiracy because it was not inconsistent with the belief that the two entities were still acting independently in their respective negotiations with Part D pharmacy suppliers. The court similarly held that UnitedHealth’s pre-signing access to PacifiCare’s expected average brand discount off drugs’ average wholesale price did not support an inference of conspiracy because, “rather than requesting all information about all relevant markets, UnitedHealth asked only for averages and ranges.” The court emphasized the importance of determining whether the information requested was necessary for the due diligence process, and noted that UnitedHealth asked for the pricing information late in the process, and then in as general a form as possible to enable UnitedHealth to evaluate PacifiCare’s Part D readiness and its level of business risk. The court also declined to find probative of conspiracy the fact that UnitedHealth reviewed PacifiCare’s Form of Prescription Drug Services Agreement, even if the same form later was the basis for PacifiCare’s agreement with Omnicare.

Turning to pre-signing information exchanges flowing from buyer to target, the court found that, under the circumstances of this case, PacifiCare’s access to UnitedHealth’s average prices also failed to support an inference of antitrust conspiracy. The court recognized that, while it is more difficult to justify a merger target’s review of the buyer’s pricing information, such review has a rational basis in that a merger target reasonably wants some assurance that the buyer is well-run and has a strong strategic vision for the future. The court emphasized that the information exchange passed muster in this case because UnitedHealth hired an independent actuary to deliver the pricing information to PacifiCare in a sealed envelope, with the intent that the contents be viewed only by PacifiCare employees who were insulated from participating in PacifiCare’s Part D certification process.

In sum, the court’s decision is consistent with advice customarily given by antitrust practitioners in this area. Parties engaging in due diligence in contemplation of a corporate transaction should limit information exchanges to what is strictly necessary to move the negotiations forward. Competitively sensitive information should be exchanged only when absolutely necessary, and then only in as general a form as possible. If, in the late stages of the process, the exchange of more detailed competitively sensitive information is absolutely necessary for the deal to proceed, then appropriate safeguards, such as the use of outside consultants or firewalls, should be put in place to prevent access to one party’s competitively sensitive details by another party’s personnel with competitive decision-making responsibilities. Because the proper application of these principles is highly fact-specific, merging parties should always consult counsel before exchanging any competitively sensitive information in the course of due diligence.