By Jody Coultas, J.D.
The FTC Commissioners unanimously agreed that the consummated merger was anticompetitive.
An Administrative Law Judge’s decision that the acquisition of Freedom Innovations by Otto Bock HealthCare North America, Inc. was anticompetitive and that the appropriate remedy was the divestiture of all assets acquired by Otto Bock was upheld by the FTC in an order announced today. Otto Bock must divest the Freedom Innovations assets to an FTC-approved buyer (In the Matter of Otto Bock HealthCare North America, Inc., FTC File No.: 171 0231).
Otto Bock and Freedom Innovations were top sellers of microprocessor knees (MPKs). MPKs employ microprocessors to adjust the stiffness and positioning of the joint in response to variations in walking and ground conditions. They are usually prescribed to patients with above-the-knee amputations who have a relatively high degree of mobility. They reduce the risk of falling, cause less pain, and assist the health and function of the sound limb.
In December 2017, the FTC filed an administrative complaint, alleging that the acquisition of Freedom Innovations by Otto Bock eliminated head-to-head competition and thereby reduced competition in the MPK market in the United States. The FTC contended that following the close of the deal on September 22, 2017, which was not reportable under the Hart-Scott-Rodino Act, Otto Bock began integrating the Freedom Innovations’ business, including personnel, intellectual property, and other critical assets.
The ALJ issued an initial decision on April 29, 2019, holding that the acquisition may substantially lessen competition in the MPK market in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act, and ordering Otto Bock to divest Freedom’s entire business, with potential exceptions for certain prosthetic foot lines, to a buyer approved by the Commission.
Relevant market. The ALJ properly found that MPKs sold to prosthetic clinics in the United States constitute a relevant product market, according to the Commission. Otto Bock argued that an MPK product market is "impermissibly vague" and therefore insupportable, but did not provide an alternative market definition. It is clearly defined in terms of a specific feature, the use of a microprocessor. Otto Bock had no difficulty understanding and referring to this group of products in its ordinary business practice.
Anticompetitive effects. There was sufficient evidence that the transaction had already had anticompetitive effects and would likely continue to harm consumers in the highly concentrated MPK market, according to the FTC. There was evidence that a significant fraction of clinical customers view Otto Bock’s C-Leg and Freedom’s Plie as their first and second choice from MPKs. Otto Bock and Freedom also vigorously competed before the merger, and customers were able to negotiate lower prices based on that competition. Competition between the companies was likely set to intensify with Freedom’s impending introduction of a new product (the Quattro). One of the main reasons for Otto Bock’s acquisition of Freedom was to keep Freedom’s MPKs out of the hands of its competitors, especially the Quattro. Furthermore, the FTC found Otto Bock’s rebuttal evidence insufficient to overcome the strong showing of likely anticompetitive effects.
Failing firm defense. Otto Bock asserted the failing firm defense, which required it to show: (1) the allegedly failing firm would be unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it had made unsuccessful good faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the market and pose a less severe danger to competition than does the proposed merger. A successful failing firm defense effectively permits a transaction that otherwise would violate antitrust law.
The FTC concluded that Otto Bock failed to show a grave probability of Freedom’s failure. Otto Bock could not meet the first element of the failing firm defense simply by showing that it had an imminent payment that exceeded its existing cash on hand. The existence of Freedom’s pending debt repayment was not sufficient to show that the firm was insolvent. At the time of the acquisition and during the approximately one year leading up to it, Freedom was engaged in a turnaround that had begun to show results. Although Otto Bock argued that Freedom’s lenders would still have liquidated the company regardless of any financial or operational turnaround plan, there was no evidence that Freedom or its lenders ever formally calculated a liquidation value for Freedom’s assets. As to element two, Otto Bock could not show that prospects for Chapter 11 reorganization were "dim or nonexistent." Finally, Otto Bock failed to demonstrate a reasonable, good faith effort to engage in an alternative, less anticompetitive transaction.
Divesture. The FTC found that the ALJ’s ruling that divestiture of Freedom’s entire business, with potential exceptions for certain lines of prosthetic foot products that may not be necessary for competition in the MPK market, was the appropriate remedy and necessary to restore competition in the MPK market. Including Freedom’s foot products in the divestiture order avoids placing the risk of a failed remedy on consumers. Also, the FTC concluded that the order provided adequate assurance that the divestiture buyer will have the assets that it needs to restore competition and allows Otto Bock potentially to retain certain non-MPK assets that are not necessary to this remedial purpose. Otto Bock’s argument that a divestiture of only Freedom’s MPK assets would suffice to restore competition was rejected. Nor was the order "punitive" as argued by Otto Bock.
Legitimacy concerns. For the first time, on appeal, Otto Bock argued that the Commission’s Part 3 proceedings were unconstitutional, challenging the legitimacy of the appointment and removal processes for the ALJ; the division of antitrust enforcement workload between the FTC and the U.S. Department of Justice; and various procedural rules that govern the offering and admissibility of evidence at Part 3 trials. Because Otto Bock did not raise the objections in its pleadings or while the matter was pending before the ALJ, the arguments were waived. The Commission also noted that it would have rejected the arguments anyway.
Attorneys: Daniel K. Zach and Stephen A. Mohr for FTC. Sean P. McConnell, Wayne A. Mack, Edward G. Biester, III, Sean S. Zabaneh, and Sarah O’Laughlin Kulik (Duane Morris LLP) for Otto Bock HealthCare North America, Inc.
Companies: Otto Bock HealthCare North America, Inc.; FIH Holdings
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