SOMETHING TO CHEW ON---CVS Is About to Face a Judge With More Than Just a Big Merger on His Mind -- Barrons.com
6:14 am ET May 13, 2019 (Dow Jones) Print
By Robert Teitelman
For roughly a year, a federal judge in Washington has been jousting with the Justice Department.
Last June, U.S. District Judge Richard Leon dealt the agency's antitrust division a stinging setback
by approving the AT&T (ticker: T) merger with Time Warner .
The Justice Department then struck back with an appeal that it was unlikely to win, which it didn't.
Justice had to deal with Leon again over the $69 billion CVS Health (CVS) merger with Aetna ,
which moved forward only after the agency negotiated a "remedy" in the form of a consent decree:
CVS agreed to sell Aetna's Medicare Part D business to WellCare Health Plans (WCG).
At the time, the judge complained that the Justice Department had pulled a fast one on him,
saying that the remedy was cosmetic
("less than one-tenth of 1% of the merger"),
and that he still had to approve the consent decree, so maybe CVS shouldn't rush to integrate Aetna.
"You need to slow this down," Leon said,
visibly annoyed,
arguing that he had the authority to ensure that the settlement hadn't made a "mockery" of the judiciary.
Leon ordered what's known as a Tunney hearing to vet the decree
-- the deal closed in November 2018
-- and he suggested that he would focus not just on the settlement itself,
but take a fresh view of the deal's broader antitrust implications.
The judge said the hearing would take a week
-- a so-called mini-trial, rare to non-existent in Tunney cases
-- but it still hasn't been scheduled. Meanwhile, aspects of a merger that closed in November remain in limbo.
So what's going on here? And do investors need to worry?
It is a long shot that Leon will unravel the CVS deal or
kill WellCare's acquisition of the Part D business.
The judge could be using the CVS case to question the Justice Department's approach to antitrust,
which has been confusing, at best.
Or he might have something more fundamental in mind,
like using CVS to question the use of consent decrees to
sanitize otherwise problematic deals.
Read our recent cover story: How CVS Wants to Fix Health Care
-- and Why It's Time to Buy the Stock
Much of the prehearing maneuvering has focused on the Tunney Act,
1974 legislation little known to anyone but antitrust geeks,
who have debated it for years.
The act provides judicial oversight for consent decrees, which one law review article called "an important
-- perhaps the single most important
-- component of antitrust law enforcement."
Tunney required federal courts to review Justice Department settlements to insure that they are
"in the public interest,"
though it did not define public interest and left procedures up to judges.
This leads us down a legal rabbit hole.
The Tunney Act was first proposed after the negative reaction
to a rash of acquisitions by Harold Geneen's ITT conglomerate
during the Nixon administration
-- controversial deals that involved charges of illegal campaign donations to the Republican Party.
Congress had complained that the courts had become
"rubber stamps"
for Justice Department settlements; at one point in October,
Leon accused the department of treating him as a "rubber stamp" in the CVS case.
That wasn't just a throwaway line.
The original Tunney Act gave judges broad leeway to hold hearings
and elicit testimony from experts,
all the while taking "such action in the public interest as the court may deem appropriate."
The standard of review
-- the public interest
-- would eventually become contentious,
with courts initially softening it "to within the reaches of the public interest."
Judicial deference, however, to the Justice Department remained
the norm -- on both expertise and separation-of-powers grounds.
One exception: Judge Harold Greene's refusal to accept the consent decree in the seminal 1982 breakup of AT&T,
[imho worst breakup ever, all of these companies are 10x,s to 100x's larger in size]
arguing that oversight was inadequate. The decree was then modified.
But the act itself wasn't really tested until the Microsoft (MSFT) antitrust prosecutions in the 1990s.
The first Microsoft case began in 1992 and resulted in a consent decree in 1995 that a flamboyant U.S. district judge,
Stanley Sporkin,
after considerable consultation, prohibited,
arguing that it was too narrow, too difficult to enforce,
and raised antitrust concerns the Justice Department hadn't pursued.
The agency appealed. The appeals court ruled that the district court
had overstepped its bounds
-- Sporkin, a former Securities and Exchange Commission enforcement chief and head of the CIA,
got bounced from the case
-- and could only reject a Justice Department decree
"that appears to make a mockery of judicial power."
That is the source of Leon's "mockery" comment.
(In fact, Sporkin may have been right.
Four years later, the government again sued Microsoft for anticompetitive practices,
resulting in an even more tumultuous case that almost resulted in the breakup of the company.
But the district court quietly accepted the Justice Department's decree in 2002.)
All this triggered a reaction by Congress, which passed amendments
to the Tunney Act in 2004 that suggested that the mockery standard was, in fact,
too limiting,
that upholding the public interest had been Congress' intent,
and that the courts could consider whether a decree would have an
effect on competition.
But as a study of the Tunney Act by lawyers at Hogan Lovells noted,
in a discussion of the 2004 amendments,
"the DOJ did not even mention that the legislation altered the Tunney Act."
Then came more controversial telecom deals.
[this is from breakup of AT&T
In paired 2006 cases,
Verizon Communications' (VZ)
acquisition of MCI and
SBC's of AT&T,
Leon's colleague in Washington,
Judge Emmet Sullivan, again tackled consent decrees
-- and rethought Tunney Act standards.
Sullivan held hearings,
allowed amici curiae, or friends of the court,
to make filings, and ordered the Justice Department to submit more evidence
-- all unusual.
Some 17 months after the decrees had been filed,
Sullivan ruled that the Microsoft mockery standard was roughly the
same as the public-interest standard and that courts should focus
on the Justice Department decree itself,
and not wander off to explore broader competition issues.
Sullivan was just a lone district court judge, but his interpretation has held ever since.
Now Judge Leon seems to be intent on testing it.
The judge created a stir by releasing a list of witnesses for the hearing that consisted of representatives of groups that had
filed amici curiae opinions against the deal,
including the American Medical Association and
the American Antitrust Institute.
Attorneys for CVS and the Justice Department then filed motions
that argued against allowing them to testify,
selectively quoting the legislative history,
citing the Microsoft case,
and arguing that "particularly in vertical merger cases,"
opponents are often self-interested, which is true, if universal.
As the CVS motion says,
the amici curiae "have made clear they intend to use these
Tunney Act proceedings as a platform to present theories of
purported harm to competition that the government has not alleged
-- theories the government in fact rejected after a lengthy and
thorough review." CVS then offered seven of its own witnesses.
In its filing, the Justice Department includes a proposed order
for Leon to sign, kicking five of the seven amici off the witness list. That order looks a lot like a rubber stamp.
Leon is a veteran jurist who has to know he is putting interpretations of the Tunney Act
-- and perhaps the entire practice of consent decrees
-- in the dock.
Could it be mere pique? Sure.
But that pique may be stirred by his sense that the DOJ has taken
the courts for granted in antitrust,
violating both congressional intent and judicial prerogatives.
In any event,
Tunney remains an unsatisfying historical jumble of views.
Leon hasn't revealed what exactly he wants Tunney to be.
And if he does, it might not survive an appeal
-- remember Sporkin
-- given how essential consent decrees are to keeping the wheels
of mergers and acquisitions turning.
But Leon does seem to think it's time to disrupt things.
(END) Dow Jones Newswires
May 13, 2019 06:14 ET (10:14 GMT)
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