DOJ Sues to Block Novelis’ Acquisition of Aleris and Agreed to Use Binding Arbitration to Resolve Product Market Definition

On September 4, 2019, the DOJ filed an antitrust lawsuit in the Northern District of Ohio to block Novelis Inc.’s proposed acquisition of Aleris Corporation.

Complaint

The DOJ alleges that the acquisition would substantially lessen competition in the North American market for rolled aluminum sheet for automotive applications, commonly referred to as aluminum auto body sheet.  The complaint explains that steel companies are developing lighter, high strength steel varieties for the auto industry. But as Novelis has observed, high strength steel “is largely replacing existing mild steel” and “cannibalizing the existing material” (i.e., traditional steel). The threat of substitution from aluminum to high strength steel is, as Aleris confirms, “limited.”  The price of aluminum auto body sheet is three or four times more expensive than traditional steel.  The complaint further alleges that the transaction would combine two of only four North American producers of aluminum auto body sheet.  The other two suppliers’ capacity is mostly committed to automakers.  Thus, other automakers rely on Novelis and Aleris to produce aluminum body sheet for automobiles to make cars lighter, more fuel-efficient, safer and more durable.

For years, Novelis was operating in a three firm market where it was the price leader.  It had the ability to increase prices without a loss of sales.  DOJ alleges that in 2016, Aleris entered the North American market as an aggressive competitor, which had an immediate impact on pricing and services.  Indeed, Novelis’ documents show that it decreased prices and increased the quality of its services in response to Aleris’ entry.

Novelis’s acquisition of Aleris would eliminate a rival it described as “poised for transformational growth.”  The complaint quotes other internal presentations to the Board of Directors and emails describing an anticompetitive rationale for the transaction:

• Novelis worried that Aleris could be sold to a “[n]ew market entrant in the US with lower pricing discipline” than Novelis, and that an “[a]lternative buyer [was] likely to bid aggressively and negatively impact pricing” in the market.
• “[A]n acquisition by us as the market leader will help preserve the industry structure versus a new player . . . coming into our growth markets and disturbing the industry structure to create space for himself, while hurting us the most.”
• Novelis should acquire Aleris because there is a “disincentive for market leader [i.e., Novelis] to add capacity and contribute to a price drop” and an acquisition of Aleris “prevents competitors from acquiring assets and driving less disciplined pricing.”

If this deal were allowed to proceed without a remedy, Novelis would lock up 60 percent of projected total domestic capacity and the vast majority of uncommitted capacity of aluminum body sheet, enabling the company to raise prices, reduce innovation and provide less favorable terms of service to the detriment of automakers and ultimately American consumers.

Novelis Contends That DOJ Suit Ignores The Full Scope Of Automotive Body Sheet Competition

It says that the DOJ lawsuit is based on the contention that the only relevant competition among automotive body sheet providers is that among aluminum manufacturers such as Novelis and Aleris. It ignores competition from steel automotive body sheet, even though steel automotive body sheet is currently used for nearly 90 percent of the market.

Novelis says that aluminum automotive body sheet attempts to take share from steel automotive body sheet.  And argues that for the DOJ to prevail in its lawsuit, it needs to prove that there is a distinct “relevant market” for aluminum automotive body sheet, which means that steel automotive body sheet does not significantly constrain the price and quality of aluminum automotive body sheet. Novelis further states that the DOJ does not deny that steel automotive body sheet usually competes with aluminum automotive body sheet, but instead contends that the constraint from steel is absent from some procurements (where an automotive manufacturer has supposedly already decided between steel and aluminum). Novelis believes that by focusing on just a small slice of steel-aluminum competition and ignoring the broader competitive process, the DOJ’s theory contravenes well-established principles of market definition.

Novelis further contends that the DOJ also disregards the extraordinary bargaining power of the automotive manufacturers and their ability to generate bid processes that will ensure competitive pricing for automotive body sheet.

Arbitration

The Antitrust Division has agreed with defendants to refer the matter to binding arbitration should certain conditions be triggered.  The arbitration would resolve the issue of product market definition.  The arbitration would take place pursuant to the Administrative Dispute Resolution Act of 1996 (5 U.S.C. § 571 et seq.) and the Antitrust Division’s implementing regulations (61 Fed. Reg. 36,896 (July 15, 1996)).  This would mark the first time the Antitrust Division is using this arbitration authority to resolve a matter.  The head of the Antitrust Division, Makan Delrahim, said that “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.  Alternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers.”

Lessons Learned:

Here, the transaction is presumptively anticompetitive because a large dominant player with 60% of a concentrated market is acquiring a new disruptive entrant.  What is noteworthy is the use of the arbitration procedure agreed to by Novelis and the DOJ.  The DOJ and Novelis clearly are debating the product market definition.  If the DOJ is right on the product market definition, the merger is anticompetitive in the North American market for aluminum auto body sheet and it would require a fix.  The merging parties can then negotiate a divestiture remedy that would resolve the competitive concerns.  As Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division put it, “[t]his arbitration would allow the Antitrust Division to resolve the dispositive issue of market definition in this case efficiently and effectively, saving taxpayer resources.” He added that “[a]lternative dispute resolution is an important tool that the Antitrust Division can and will use, in appropriate circumstances, to maximize its enforcement resources to protect American consumers.”  So, this may be the start of a trend to obtain settlements without the need for a full trial on the merits.

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The DOJ will focus on supposed “hot docs” to support its case because the buyer appears to be touting the intended anticompetitive consequences of the acquisition.  At the end of the day, however, a “smoking gun” document regarding anticompetitive intent will be rejected by a judge unless the DOJ provides the foundations of an antitrust case through market analysis and empirical evidence.  Nevertheless, this case demonstrates why corporate executives must be mindful about what they write as careless and inappropriate language in company documents can have an extremely negative effect on a merger review.

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