Administrative Litigation Following the Denial of a Preliminary Injunction: Policy Statement

FEDERAL TRADE COMMISSION

Administrative Litigation Following the Denial of a Preliminary

Injunction: Policy Statement

AGENCY: Federal Trade Commission.

ACTION: Policy statement, and accompanying Commission statement, with

request for public comment.

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SUMMARY: The Federal Trade Commission has adopted policies explaining

how, after a court had denied preliminary injunctive relief to the

Commission, the Commission decides whether administrative litigation

should be commenced or, if it has already been commenced, should be

continued. While the policies are already in effect, the Commission

will receive comment for thirty days, and will thereafter take

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such further action as may be appropriate.

DATES: The policy statement was effective on June 21, 1995. Comments

will be received until September 5, 1995.

ADDRESSES: Comments should be sent to the Secretary, Federal Trade

Commission, Sixth Street and Pennsylvania Avenue, NW., Washington, DC

20580. Comments will be entered on the public record of the Commission

and will be available for public inspection in Room 130 during the

hours of 9 a.m. until 5 p.m.

FOR FURTHER INFORMATION CONTACT:

William Baer, Director, Bureau of Competition, (202) 326-2932, or

Ernest Nagata, Deputy Assistant Director for Policy and Evaluation,

Bureau of Competition, (202) 326-2714.

SUPPLEMENTARY INFORMATION: 1. On June 21, 1995, the Commission issued

the following statement to accompany its policy statement:

Commission Statement to Accompany Statement of Federal Trade Commission

Policy Regarding Administrative Merger Litigation Following the Denial

of a Preliminary Injunction

Introduction

The Federal Trade Commission is charged with ensuring that U.S.

consumers are protected from higher prices, lower quality, and lessened

innovation that could result from anticompetitive mergers.\1\

Historically, the Commission has resolved merger cases through

administrative trials or consent orders. In recent times, most of the

Commission's antitrust complaints have been settled through

administrative consent orders.\2\ For those relatively few merger cases

in which the Commission has litigated, the Commission's usual practice

in recent years has been first to seek a preliminary injunction in

federal district court to prevent the consummation of the proposed

transaction.\3\ The Commission has won most of its challenges at the

federal district court level.\4\

\1\ As used herein, the term ``merger'' includes mergers,

acquisitions, joint ventures, and equivalent transactions.

\2\ For FY 1990 through FY 1994, the Commission resolved

complaints through administrative consent orders, without

authorizing either federal court or administrative litigation, in

67% of the merger enforcement actions that the Commission

authorized.

\3\ For FY 1990 through FY 1994, the Commission authorized

preliminary injunction actions in 29% of the merger enforcement

actions that it authorized; in 4% of its merger enforcement actions,

the Commission authorized administrative trials without first

proceeding to federal court for a preliminary injunction.

\4\ During the five-year period covered by fiscal years 1990-

1994, five out of seven of the Commission's motions for a

preliminary injunction were granted. In one case, FTC v. University

Health, Inc., 938 F.2d 1206 (11th Cir. 1991), the district court's

denial of a preliminary injunction was reversed on appeal. For

fiscal years 1985-1989, the Commission was successful in six out of

nine motions for a preliminary injunction.

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There have been five instances in the last ten years in which a

federal district court has refused to grant a preliminary injunction

sought by the Commission, and the Commission then proceeded with a

challenge to the merger in administrative litigation.\5\ In such

circumstances, the determination to continue a merger challenge in

administrative litigation is not, and cannot be, either automatic or

indiscriminate. In any given case, the evidence, arguments, and/or

opinion from the preliminary injunction hearing may, or may not,

suggest that further proceedings would be in the public interest. The

Commission's guiding principle is that the determination whether to

proceed in administrative litigation following the denial of a

preliminary injunction and the exhaustion or expiration of all avenues

of appeal must be made on a case-by-case basis.

\5\ R.R. Donnelley & Sons, Dkt. 9243, is currently before the

Commission on respondents' appeal from the Initial Decision of the

administrative law judge. In Owens-Illinois, Inc., Dkt. No. 9212,

the Administrative Law Judge (``ALJ'') found liability but the

Commission reversed. 1987-1993 Transfer Binder (CCH) para. 22,731

(Sept. 11, 1989) (Initial Decision), rev.d, 1987-1993 Transfer

Binder (CCH) para. 23,162 (Feb. 26, 1992). In Promodes, S.A., Dkt.

No. 9928, the administrative complaint was settled. 113 F.T.C. 372

(1990). In Occidental Petroleum Co., Dkt. No. 9205, both the ALJ and

the Commission found liability. 1987-1993 Transfer Binder (CCH)

para. 22,603 (Sept. 30, 1988) (Initial Decision), aff'd, 5 Trade

Reg. Rep. (CCH) para. 23,370 (Dec. 22, 1992), appeal dismissed

pursuant to stipulation and modified order, 5 Trade Reg. Rep. (CCH)

para. 23,531 (Jan. 14, 1994). In a fifth case, Lee Memorial

Hospital, Dkt. No. 9265, the administrative proceeding, which was

filed prior to the district court's denial of a preliminary

injunction, has been stayed pending appeal.

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The Commission is issuing the attached Statement to clarify the

process it follows in deciding whether to pursue administrative

litigation following denial of a preliminary injunction. The Statement

also notes that, if necessary, the Commission will adopt certain

procedures to ensure parties to a transaction the opportunity to have

their views heard by the Commission before it makes its determination.

In order to place these issues in context, this Statement begins by

addressing the value of administrative litigation and why a preliminary

injunction proceeding, regardless of its outcome, may not in and of

itself provide a sufficient basis for the resolution of complex merger

litigation.

The Value of Administrative Litigation

The Federal Trade Commission was created in part because Congress

believed that a special administrative agency would serve the public

interest by helping to resolve complex antitrust questions. Congress

intended that the Commission would play a ``leading role in enforcing

the Clayton Act, which was passed at the same time as the statute

creating the Commission.'' \6\ It was expected that an administrative

agency was especially suited to resolving difficult antitrust

questions, and that the FTC should be the principal fact finder in the

process: it is ``within the Commission's primary responsibility'' to

draw inferences of competitive consequences from the underlying

facts.\7\

\6\ Hospital Corp. of America v. FTC, 807 F. 2d 1381, 1386 (7th

Cir. 1986), cert. denied, 481 U.S. 1038 (1987) (``HCA'').

\7\ HCA, 807 F. 2d at 1386.

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The Commission has fulfilled that special role in a number of

important merger cases.\8\ Administrative cases provide valuable

guidance on how the Commission applies the relevant legal standards and

analytical principles as they evolve over time. Application of these

standards and principles to concrete factual situations, developed in a

full record, can provide insight into why certain mergers are likely to

harm competition and result in consumer injury, and why others may not.

Especially because the Supreme Court has addressed substantive issues

of merger law only rarely in recent decades,\9\ and because antitrust

law during that time has evolved in response to economic learning, the

Commission's opinions have been an important vehicle to provide

guidance to the business community on how to analyze complex merger

issues.

\8\ For example, the Commission's decision in Occidental

Petroleum provided important guidance on supply side substitution

and coordinated interactions in merger analysis. The Commission's

decision in HCA explained how coordination could occur in an

industry with differentiated and non-homogeneous products. Judge

Posner, writing for the Seventh Circuit affirming that decision,

called it a ``model of lucidity.'' 807 F. 2d at 1385. The

Commission's decision in American Medical International, Inc., 104

F.T.C. 1 (1984) examined in detail the dimensions of price and non-

price competition in the hospital industry and discussed

efficiencies considerations in analyzing a merger.

\9\ The Supreme Court's last opinion on substantive merger law

was United States v. General Dynamics Corp., 415 U.S. 486 (1974).

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Why A Preliminary Injunction Proceeding May Not Be A Sufficient

Substitute for Administrative Litigation

If the same value could be achieved through a preliminary

injunction proceeding as through administrative litigation, then there

would be no reason for the Commission ever to proceed past the

preliminary injunction phase. The differences between the two types of

proceedings, however, mean that one does not equate with the other.

A preliminary injunction hearing has a limited purpose: to

determine whether to enjoin the consummation of a proposed transaction

pending a full adjudication on the merits. Thus, the district

overseeing a preliminary injunction hearing is not charged with making

a final ruling on whether the acquisition in unlawful.

Indeed, there may be an inadequate basis for doing so. Because a

preliminary injunction proceeding has a limited purpose, the

evidentiary record produced is often limited in scope. A court may not

hear any witnesses, but instead may rule solely on the basis of the

papers filed by the parties. A preliminary injunction proceeding is

generally much shorter in duration than a full trial, and, because of

its expedited nature, the thoroughness of the evidentiary presentation

and analysis may be less than would be expected in a full trial. Since

merger analysis can be a highly complex, fact-intensive undertaking, it

may be particularly ill-suited for final resolution on the merits in

the abbreviated forum of a preliminary injunction proceeding.

Some commentators have suggested that because the Department of

Justice lacks the ability to challenge mergers in the administrative

process, the Commission's litigation should be confined to the federal

courts in order to bring the two agency's enforcement powers in line

with one another. The problem with such an approach is that the

significant benefits of administrative litigation outlined above would

be lost in such a change in enforcement policy. The business community

would be denied the guidance provided by merger decisions based on a

complete analysis of a full evidentiary record, and Congress' vision of

the FTC's central role in merger enforcement would be subverted.

Nonetheless, the Commission recognizes that automatic pursuit of

administrative litigation following denial of a preliminary injunction

is not required to serve the public interest. The attached Statement of

Policy is intended to clarify the process the Commission follows in

determining whether to pursue administrative litigation following

denial of a preliminary injunction.

2. On June 21, 1995, the Commission issued the following policy

statement:

Statement of Federal Trade Commission Policy Regarding Administrative

Merger Litigation Following the Denial of a Preliminary Injunction

The Commission will assess on a case-by-case basis whether to

pursue administrative litigation following the denial of a preliminary

injunction.\1\ If necessary, the Commission will amend its Rules of

Practice \2\ in order to facilitate the reconsideration of the public

interest in continuing with an administrative case when an

administrative complaint has already issued.

\1\ Although the focus of this policy statement is merger

litigation, similar principles would apply following the denial of a

preliminary injunction in the context of non-merger competition

litigation.

\2\ 16 CFR 3.1 et seq.

As discussed in the Commission Statement to Accompany Statement of

Policy Regarding Administrative Merger Litigation Following the Denial

of a Preliminary Injunction, the Commission believes that it would not

be in the public interest to forego an administrative trial solely

because a preliminary injunction has been denied. Nor would it be in

the public interest to require an administrative trial in every case in

which a preliminary injunction has been denied. Thus, a case-by-case

determination is appropriate. This approach gives the Commission the

opportunity to assess such matters as (i) the factual findings and

legal conclusions of the district court or any appellate court, (ii)

any new evidence developed during the course of the preliminary

injunction proceeding, (iii) whether the transaction raises important

issues of fact, law, or merger policy that need resolution in

administrative litigation, (iv) an overall assessment of the costs and

benefits of further proceedings, and (v) any other matter that bears on

whether it would be in the public interest to proceed with the merger

challenge.

If necessary, the Commission will amend Part 3 of the Commission's

Rules of Practice to expedite its review of the issues and

determination immediately following the denial of a preliminary

injuction and the exhaustion or expiration of all avenues of appeal.

The issuance of an administrative complaint during the pendency of a

preliminary injunction proceeding will affect only the nature of the

procedures under which such considerations will be reviewed, not

whether they will be reviewed.

If an administrative complaint has not been issued by the time of

the district court's ruling on a preliminary injunction and the

exhaustion or expiration of all avenues of appeal, the Commission's

consideration of whether to issue an administrative complaint will be

conducted under its normal procedures for non-adjudicatory matters. If

an administrative complaint has already been issued, the Commission

will make its determination within the procedural framework for

adjudicatory proceedings under Part 3 of the Commission's Rules of

Practice.

The policy articulated in this Statement is applicable to any

current and future merger enforcement actions initiated by the

Commission under Section 13(b) of the Federal Trade Commission Act. The

Commission intends, however, to issue within thirty days a Federal

Register notice soliciting public comment on the Commission's policy

and, if necessary, setting forth any conforming amendments to Part 3 of

its Rules of Practice.

3. The Commission has determined to adopt a new rule, 16 CFR

Sec. 3.26, to facilitate review of the public interest in continuing an

adjudicative proceeding when, after the adjudicative proceeding has

begun, a court denies preliminary injunctive relief in a section 13(b)

case brought in aid of the adjudication. Under rule 3.26, which is

published elsewhere in this issue, respondents can choose to have such

review conducted either within the framework for adjudicative

proceedings, or following withdrawal of the administrative case from

adjudication.

Also, as noted in footnote 1 of the June 21 policy statement, the

principles applicable to administrative merger litigation would apply

in the context of non-merger competitive litigation. They are also

applicable in the context of consumer protection litigation.

By direction of the Commission, Commissioner Azcuenaga

concurring in part and dissenting in part.

Donald S. Clark,

Secretary.

Dissenting Statement of Commissioner Mary L. Azcuenaga Concerning FTC'S

Adoption of Rule 3.26 Respecting Administrative Litigation Following

Denial of a Preliminary Injunction

On June 26, 1995, the Commission issued a Statement of Policy

Regarding Administrative Merger Litigation Following the Denial of a

Preliminary Injunction and an accompanying

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explanation.\1\ These documents reaffirm the Commission's longstanding

policy, consistent with Section 5 of the FTC Act, 15 U.S.C. Sec. 45(b),

of reconsidering whether to pursue administrative litigation following

the denial of preliminary relief by the courts. Section 5 requires that

the Commission premise issuance of an adjudicative complaint on finding

reason to believe that the law has been violated and that enforcement

would be in the public interest. This obligation continues implicitly

throughout the proceeding, requiring the Commission to take all

reasonable steps to assure itself that an enforcement action, once

begun, remains in the public interest. I joined in that Statement.

\1\ These materials appear again in this volume of the Federal

Register.

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The Commission now adopts new Rule 3.26 to govern how the agency

will proceed if a court denies a requested preliminary injunction

pending completion of an administrative adjudication.\2\ A central

feature of the new rule is that following the court's action, the

respondents may choose to have the administrative matter removed from

adjudication to permit the parties to discuss with the Commission

privately, off the record and ``without the constraints of adjudicative

rules,'' \3\ the public interest in continuing the adjudication in

light of the court's action.\4\ Strictly speaking, no revision of the

Rules is necessary because existing provisions of the Rules of Practice

are sufficient to permit the Commission to address any effect the

court's action may have on the public interest in continuing the

adjudication.\5\ Nevertheless, I have no objection to adopting a new

rule to provide specific procedures for reconsidering an administrative

adjudication following denial of a preliminary injunction. My

difference of opinion is this: I believe that a rule adopted to address

this situation should provide that the matter be left in adjudication

for any reconsideration by the Commission and that any communication

between the parties and the Commission take place on the record.\6\

\2\ See 15 U.S.C. Sec. 53(b).

\3\ Notice of Final Rule with Request for Public Comment, 60

Fed. Reg.______, Slip Notice at 2-3.

\4\ I do not oppose the alternative procedure included in the

new rule, which expressly authorizes a motion by any respondent to

dismiss the complaint in the public interest. Although the

alternative procedure is redundant in light of existing Rules 3.22

and 3.23, 16 CFR Secs. 3.22 and 3.23 (1995), I do not find it

objectionable because the arguments would be presented on the record

unless the Commission directs otherwise.

\5\ See, e.g., Rule 3.22 governing adjudicative motions and Rule

3.23 governing interlocutory appeals. The Commission also, of

course, may act sua sponte to seek briefing from the parties or to

dismiss the complaint.

\6\ Confidential communications between the Commission and its

staff before a matter enters adjudication and when the Commission is

still carrying out its prosecutorial responsibility make sense. In

our system of law, investigational and prosecutorial decisions are

protected from public scrutiny. See 5 U.S.C. Sec. 552(b)(5). Such

confidential communications after the prosecutorial function has

concluded with the issuance of a complaint, however, raise issues

concerning the exercise by the Commission of its quasi-judicial

function.

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The Commission opines that complaint counsel will be more candid

off the record because they ``will be able to discuss the case without

concern that their statements might compromise their litigation

position if the case is returned to adjudication.'' \7\ It also

suggests that the ex parte procedure will confer similar benefits on

``respondents (and even third parties).'' \8\ It is unclear to me why

all this candor cannot and should not take place on the public record.

\7\ 60 Fed. Reg. ______, Slip Notice at 4.

\8\ Id.

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Traditionally, the Commission acts as a prosecutor up to and

including its decision to issue an administrative complaint. As soon as

the vote to issue an administrative complaint is complete, the

Commission assumes a judicial role with respect to that case, which

then is said to be ``in adjudication.'' \9\ It should go without saying

that the Commission must not allow its prosecutorial role to intrude in

any respect in carrying out its deliberative role in an administrative

adjudication. Removing a matter from adjudication to chat off the

record suggests that there is something that the Commission would

prefer that the world not know. It also suggests an unease on the part

of the Commission in carrying out its judicial function and an unseemly

reluctance to relinquish its prosecutorial role. Although the automatic

withdrawal provision may not disadvantage the respondent in any given

proceeding, it may well undermine public confidence in the integrity of

the Commission's adjudicative process.

\9\ At this point, all further communications between the

parties (complaint counsel and the respondent(s) are on the record

with certain specified exemptions. Rule 4.7, 16 CFR Sec. 4.7.

Let us consider three scenarios following a court's denial of a

preliminary injunction: First, complaint counsel have a strong case,

notwithstanding the court's denial of a preliminary injunction. If this

is so, complaint counsel can explain why on the record. After the case

has been withdrawn from adjudication and reconsidered, presumably the

Commission will return the case to adjudicative status. Even if the

respondents initiated withdrawing the matter from adjudication, the

procedure, in-and-out-and-in adjudication, may create a perception that

complaint counsel, speaking off the record, had an unfair advantage.

The respondents may believe that had they only known what the staff was

saying to the Commission behind closed doors while the case was

withdrawn from adjudication, they could have defended more effectively

and won a dismissal. After all, the court gave the first round to the

respondents on the record.

A second scenario is that the case is weak, and complaint counsel's

arguments in support of the complaint are correspondingly weak. The

Commission suggests in its Federal Register notice that if discussion

is held on the record, complaint counsel will be inhibited from

pointing to weaknesses in the case for fear that if the Commission

disagrees and requires the adjudication to go forward, complaint

counsel will be disadvantaged by having conceded the weaknesses of the

case on the record. An underlying assumption here is that any

weaknesses in the case will remain undiscovered (by the courts, by the

respondent and by the administrative law judge), as long as complaint

counsel can confide in the Commission off the record. Perhaps more

serious, the assumption suggests an abiding lack of confidence in the

administrative system of adjudication and the Commission's place in it.

Complaint counsel will not be able to avoid the weakness of the case by

confiding that fact in secret to the Commission. At most, they might

conceal the weakness for a time, a result that ultimately would be

wasteful of both government and private resources. Regardless of when

during an adjudicative proceeding complaint counsel or the Commission

itself discovers a possible weakness in the case, the Commission should

base its decision whether to continue the proceeding on publicly

available information.

The new rule may lend itself to a public perception that the staff

of the Commission has an advantage over targets of enforcement actions

because the staff has the secret ear of the Commission. If the staff is

permitted secret access to the Commission, a decision to continue an

adjudication, particularly one that, based on publicly available

information, appears weak, likely would suggest that complaint counsel

were able to persuade the Commission to proceed only by ``hiding the

ball'' from the respondents. Such a message hardly is consistent with

fairness to the respondent or with the

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role of the Commission as an unbiased decisionmaker.\10\

\10\ Off-the-record discussions with the respondents, followed

by dismissal of the complaint, also may create misperceptions of

unfairness and favoritism, with the implication that nonpublic

communications that could not bear the light of day influenced the

Commission's decision.

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A third scenario is that the case is weak, respondents move to

withdraw the matter from adjudication, and complaint counsel file

nothing in support of the complaint.\11\ In such an instance, the

Commission may agree with the respondents and dismiss the adjudication,

or it may disagree and order that the proceeding continue. There seems

no good reason not to have this occur on the public record. Again,

private discussions between the Commission and its staff can create a

public perception of unfairness to the respondents arising from

apparent complicity between the prosecuting attorneys and the

purportedly impartial adjudicators--the very danger the separation of

functions requirements of the Administrative Procedure Act and the

Commission's ex parte rule are designed to avoid.\12\

\11\ This assumes that complaint counsel find themselves unable

to make a principled argument in support of the complaint. See Jose

Calimlin, M.D., Dkt. No. 9199 (June 24, 1986) (``complaint counsel

represent the Commission's prosecutorial decision as embodied in the

allegations of complaint and in the notice of contemplated

relief''); accord R.J. Reynolds Tobacco Co., Dkt. No. 9206

(interlocutory order, Dec. 1, 1986); see also R.J. Reynolds Tobacco

Co. (interlocutory order, Dec. 10, 1986) (purpose of adjudication is

``to subject the Commission's complaint to an adversarial test'').

\12\ See 5 U.S.C. Sec. 552(d); 16 C.F.R. Sec. 4.7.

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In addition to undermining the separation of functions at the

Commission, the new rule limits the Commission's discretion to decide

when individual cases should be in adjudication and remain on the

public record. The exercise of discretion in an adjudicative matter is

a responsibility of the Commission, not an occasion for apology. This

responsibility, which must be carried out consistent with the law and

with fundamental fairness, should not be ceded without a reason for

doing so. Here, I see none. Both the policy to maintain the separation

of deliberative and prosecutorial functions and the appearance of

having done so are enhanced when the Commission retains its discretion

to determine the appropriate disposition of a motion to withdraw from

adjudication. The shifting of a portion of that discretion in favor of

the respondents may appear open-minded, but, in the long term, it will

disserve the Commission and the public interest.

On balance, the Commission and the public would be better served if

the Commission retained its discretion to decide which, if any, cases

should be withdrawn from adjudication following denial of a preliminary

injunction. The new rule is likely to undermine the integrity of the

Commission and its adjudicative process by breaking down the wall

between the Commission's prosecutorial and adjudicatory roles in a

manner inconsistent with the separation of functions requirement of the

Administrative Procedure Act and its own ex parte rule.

I dissent.

[FR Doc. 95-19110 Filed 8-2-95; 8:45 am]

BILLING CODE 6750-01-M