DOJ Obtains Disgorgement of Profits for Illegally Consummated Merger

On March 16, 2015, the Department of Justice (“DOJ”) and New York State Attorney General announced that they reached a settlement with Coach USA Inc., City Sights LLC and their joint venture, Twin America LLC, to remedy competition concerns in the New York City hop-on, hop-off bus tour market.  This case is noteworthy because it is the first time the DOJ’s Antitrust Division sought and obtained disgorgement in a consummated merger matter.

Background

In March of 2009, Twin America, LLC was formed by Coach USA, Inc. and City Sights, LLC.  Coach USA and City Sights were operators of double-decker tour buses that had aggressively competed against each other to attract customers, which were and are for the most part, visitors/sightseers in New York city.  Indeed, the Antitrust Division’s complaint alleged that prior to the formation of Twin America, LLC, Coach USA, the long-standing market leader through its “Gray Line New York” brand, and City Sights, a firm that launched the “City Sights NY” brand in 2005, accounted for approximately 99 percent of the hop-on, hop-off bus tour market in New York City.  Between 2005 and early 2009, the two companies engaged in vigorous head-to-head competition on price and product offerings that directly benefited consumers.

According to the complaint, Coach and its corporate parent, Stagecoach Group PLC, knew that combining with Coach’s only meaningful competitor would allow the merged firm to raise prices and communicated this idea to City Sights during joint venture negotiations.  Therefore, the purpose of the joint venture was to end that head to head competition and to become the sole provider of hop-on, hop-off bus tours in the New York city market, which allowed the joint venture to immediately raise prices by 10%.  The transaction that formed Twin America LLC and monopolized the New York city hop-on, hop-off bus tour market was not required to be reported under the Hart-Scott-Rodino (“HSR”) Act.  Because it was a non-reportable transaction and no one alerted the Antitrust Division of any competition concerns, the Division did not learn about the joint venture until after its consummation.  Similarly, the State of New York did not learn of the illegal combination that resulted in Twin America, LLC until after it was formed.  The State of New York, however, learned of the illegal transaction and began an investigation and issued subpoenas in the summer of 2009.

After receiving the subpoenas, the Coach USA and City Sights delayed the State of New York’s antitrust investigation by belatedly filing the transaction with the federal Surface Transportation Board (“STB”) and asserting that the STB had exclusive jurisdiction.  The STB rejected the joint venture in early 2011 as not in the “public interest” and affirmed its ruling in early 2012, directing Coach USA and City Sights to either dissolve Twin America, LLC or terminate minimal interstate operations that provided the basis for STB jurisdiction.  Coach USA and City Sights removed the matter from STB jurisdiction and continued to operate the joint venture.

From 2009 to 2012, there was no new entry or expansion in the market, and Coach USA and City Sights were able to sustain the 2009 price increases.  Any new competitors must obtain bus stop authorizations from the New York City Department of Transportation (“NYCDOT”) at or sufficiently close to top attractions and neighborhoods to meaningfully compete with Twin America, LLC.  Apparently, NYCDOT is the city agency in charge of managing bus stop authorizations, which are required for hop-on, hop-off operators to load and unload passengers.  Both Coach and City Sights hold large portfolios of bus stop authorizations covering virtually all of Manhattan’s key attractions that they received from the NYCDOT years ago before many locations were at capacity so new entrants cannot obtain any competitively-meaningful bus stop authorizations in Manhattan.

On December 11, 2012, the Antitrust Division and the NY State AG filed a complaint in the U.S. District Court of the Southern District of New York alleging that the March 2009 joint venture that formed Twin America violated the antitrust laws and allowed the parties to raise prices to consumers.  The trial was set for February 23, 2015, however, Coach USA and City Sights adjourned the trial date to facilitate settlement discussions with the Antitrust Division and the NY State AG.

Settlement

The settlement resolves the Antitrust Division’s and NY State AG’s competitive concerns as it requires Twin America, LLC to relinquish all of City Sights’s Manhattan bus stop authorizations to the NYCDOT and disgorge $7.5 million in ill-gotten profits that Coach USA and City Sights obtained by operating Twin America, LLC, the illegally consummated joint venture, in violation of the antitrust laws.

The relinquished bus stop authorizations include highly-coveted locations such as the areas surrounding Times Square, the Empire State Building and Battery Park, where rival firms have been chronically unable to obtain competitive bus stop authorizations.  By increasing the NYCDOT’s inventory of bus stops and freeing up capacity at approximately 50 locations throughout Manhattan, the settlement will significantly ease the barrier to new rivals being able to meaningfully compete with Twin America.  Twin America will continue to hold Gray Line New York’s bus stop authorizations for its own hop-on, hop-off service.

The disgorgement of $7.5 million in profits that Coach USA and City Sights obtained from the operation of their illegal joint venture was in addition to $19 million that they already agreed to pay to a class of consumers to settle related private litigation brought after the filing of the Antitrust Division’s complaint.  The Antitrust Division and the New York State AG, however, believed that disgorgement was appropriate because the facts of this case relate to a consummated merger involving an anticompetitive price increase and deliberate attempts to evade antitrust enforcement.  The Antitrust Division and the State AG believe that the payment of $7.5 million in disgorgement will deprive the defendants of ill-gotten profits they retained even after the class settlement and deter future antitrust law violations.  In addition to disgorgement, Coach USA further agreed to reimburse the United States $250,000 in attorney’s fees and costs to resolve claims that Coach failed to meet its document preservation obligations.

The settlement of the lawsuit also requires Coach and Twin America to establish antitrust training programs and that they provide the government with advance notice of any future acquisition in the New York City hop-on hop-off bus tour market that is not otherwise reportable under the HSR Act.

Antitrust Division’s Previous Use of Disgorgement

In 2010, the DOJ obtained disgorgement related to a financial derivative contract entered into between KeySpan Corporation and Morgan Stanley, a financial services company, that gave KeySpan a financial interest in the electricity capacity sales of its largest competitor, Astoria, and incentivized KeySpan withhold capacity to increase prices in the electricity capacity market in New York.  The anticompetitive effects of the agreement lasted from January of 2006 until March 2008, when regulatory conditions eliminated KeySpan’s ability to affect the market price of electricity capacity.

At the time, the settlement was noteworthy because it was the first time in history that the Antitrust Division sought disgorgement of profits as a remedy for a civil antitrust violation of the Sherman Act.  The Antitrust Division traditionally sought only injunctive relief in the civil cases that it brought. Normally, the Division seeks to rescind the anticompetitive arrangement or enjoin the anticompetitive conduct. The injured parties usually must recover damages through private, civil actions. In its Competitive Impact Statement, the Division indicated that it sought disgorgement because it believed the filed rate doctrine would have limited consumers ability to recover antitrust damages.  That being said, the Sherman Act expressly authorizes the DOJ only to “prevent and restrain” violations of the Sherman Act, in addition to bringing criminal prosecutions. 15 U.S.C. §§ 1, 4. The Division’s approach in the KeySpan case reflected a shift in the DOJ’s policy with the aggressive interpretation of the DOJ’s civil enforcement authority. In Twin America, however, a class of consumers actually sued and settled for $19 million.  The DOJ and the New York State AG, however, believed that the parties’ ill-gotten gains were above the $19 million settlement so they pursued an additional disgorgement of profits.

Lessons Learned

The Antitrust Division’s challenge and settlement is noteworthy for several reasons. First, the challenge reiterates that the Antitrust Division is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Second, it demonstrates that completed deals that slip beneath the Antitrust Division’s radar screen initially are fair game even if the Antitrust Division learns about them later. Third, the fact that a deal is not HSR reportable does not mean that no antitrust issues exist with the combination. Fourth, the Antitrust Division can and will challenge a consummated deal if it determines that the deal is anticompetitive. Fifth, the Antitrust Division has a particular interest in post-acquisition competitive effects of consummated mergers.  Finally, and most importantly, the Antitrust Division, for the first  time, sought and obtained disgorgement of ill-gotten profits, required the parties to introduce antitrust training programs, and obtained attorneys fees and costs related to a consummated merger.

Therefore, parties to a consummated deal that raise significant antitrust issues and avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct.  Moreover, corporate and private counsel should be aware of the likely consequences and the risks of consummating transactions that raise significant competitive issues.  The risks may include: defending against costly and lengthy government investigations as well as government and private litigation; reorganizing to the government’s demands of possible divestitures even after integration has taken place; paying off private plaintiffs for their injuries; and disgorging profits gained from the alleged anticompetitive merger.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com