On Friday, March 4, 2005, the Federal Trade Commission filed a motion for declaratory relief and for a temporary restraining order (TRO), seeking to prevent Blockbuster from being able to consummate its tender offer for the shares of its rival, Hollywood Video. The FTC contends that Blockbuster failed to comply with the terms of the FTC’s Request for Information (called a “Second Request”) in connection with the antitrust agency’s investigation into the proposed Blockbuster/Hollywood Video transaction. Viewed in isolation the request for a TRO seems very technical and therefore unimportant, but in effect, the request is quite extraordinary. See
First some background. In connection with every merger investigation, the FTC and Department of Justice (DOJ) have concurrent jurisdiction to review and challenge a transaction. Each agency has particular market expertise, and takes the responsibility for reviewing transactions in its designated industries. The FTC always takes the lead in reviewing transactions in the consumer goods and electronics industries; thus, the FTC was tasked with reviewing the Blockbuster hostile tender.
After its initial review of the transaction, the FTC concluded that questions remained regarding whether the Blockbuster/Hollywood transaction would harm consumers, and the agency issued a Second Request. The Second Request subpoena ostensibly demands nearly all of the documents created by a company over a period of years preceding the transaction (usually 3 – 5 years), and also requires parties to provide detailed pricing, discounting, and costing information. In this particular Second Request, we learn from the FTC’s March 4, 2005 complaint that the agency demanded information from Blockbuster relating to its pricing, specifically with regard to store-by-store rental fee information, so that the agency could conduct an economic analysis to determine who competes for Blockbuster business.
Blockbuster “complied” with the terms of the Second Request in early February 2005. In late February, the FTC realized that the detailed pricing information provided by the company was in large part incorrect. According to the FTC complaint, Blockbuster acknowledged and corrected the deficiencies, subsequently submitting correct information sometime later that month.
The FTC is on a tight time clock to complete its review of a transaction after the parties comply with the terms of a Second Request. Here, Blockbuster certified its compliance in early February, and under the HSR Act, the FTC has only 30 days from the time of that certification to approve or challenge the deal. Thus, without a decision to challenge the proposed tender by early March, Blockbuster technically would be able to close its tender for the shares of Hollywood, without further interference from the FTC. The FTC’s motion for a TRO claims that Blockbuster, however, failed to comply with the terms of the Second Request because it provided faulty pricing data. As a result, the FTC demanded from the court an order stating that Blockbuster’s 30-day clock had not yet started to tick and prohibiting the company from consummating its tender offer until such time did lapse, giving the agency precious additional time to complete its review of the transaction.
This request is quite extraordinary for antitrust practitioners. There have only been two other cases in the last 25 years where there has been a court dispute over whether a party has complied with the terms of the Second Request or not (FTC v. McCormick in 1988 and FTC v. Dana Corp. in 1981). Generally, parties prefer to resolve these compliance disputes informally—usually by reaching some sort of “timing agreement” with the agencies that allow them more than the statutorily provided 30 days to complete their antitrust review, in exchange for an agreement with the agency reviewing the deal not to challenge in court the parties’ compliance with the Second Request. For whatever reason—here, we can only speculate—Blockbuster and the FTC could not reach an agreement as to timing and this dispute proceeded to court.
Why do I think this ended up in court? Glad you asked. With no special inside information, it seems to me that Blockbuster is marching forward with its transaction, and does not care whether it resolves the FTC’s antitrust concerns at the agency level or in court. It appears that Blockbuster has concluded that the FTC will challenge the transaction regardless of how accommodating the company is with regard to timing or other FTC requests, and has decided not to give another inch to the FTC. I can fathom that the FTC has provided some indication of serious concern regarding the transaction to Blockbuster, and has at least informed them of the possibility that the agency will sue to block the transaction, and Blockbuster is resigned to fighting this challenge in court. We shall see. If this deal ends up in court, as I discussed in my last posting, there are extremely interesting questions of market definition and antitrust harm that no doubt a court and the FTC will have to carefully consider.