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Freshfields Transactions

| 3 minutes read

US Court Takes an Unusually Close Look at CVS/Aetna Merger Remedy

On Friday, U.S. District Judge Richard J. Leon, who is presiding over the mandatory Tunney Act review of the remedy in the CVS/Aetna transaction, said that he will take the highly unusual step of scheduling live witness testimony to aid his assessment of whether the remedy negotiated between the US Department of Justice Antitrust Division (the Division) and the merging parties is in the public interest.

The Tunney Act (formally known as the Antitrust Procedures and Penalties Act) is a US law that provides for federal courts to review negotiated remedies between the Division and the parties to transactions that the Division has concluded are likely to substantially lessen competition or tend to create a monopoly. In the US, both the Division and the Federal Trade Commission (FTC) review mergers, but only the Division must follow Tunney Act procedures to obtain judicial approval for any conditions that it seeks to place on a merger.

When the Division requires remedies as a condition to approving a transaction, those remedies are reflected in a consent decree negotiated between the merging parties and the Division. After negotiating the terms of a consent decree with the merging parties, the Division initiates a court proceeding by filing a complaint alleging that the transaction would violate the antitrust laws, together with the agreed-upon consent decree and a competitive impact statement that sets out the basis for the Division’s conclusion that the proposed remedies would resolve the competitive concerns described in the complaint. The Tunney Act requires the Division to provide notice of the proposed decree and to give the public the opportunity to comment on it. Before entering the proposed decree, the court must review any public comments, and the Division’s responses to those comments, to determine whether approving the decree would be in the public interest.

Although the Tunney Act explicitly provides courts with broad leeway to take any number of actions in assessing whether a decree is in the public interest (including by holding hearings, taking testimony of government officials or the parties, appointing expert witnesses, or admitting amicus curiae or third party intervenors), federal courts have a long history of deferring to the Division and approving consent orders with little more than a cursory review. Judges frequently approve consent orders after reviewing only written submissions and without holding any hearings, often within days of the Division filing its response to public comments. As a result, Tunney Act approval typically is perceived as little more than a formality, and it is routine for parties to close a transaction while Tunney Act procedures are pending.

There have been some instances since the Tunney Act came into effect in 1974 where courts have looked somewhat more closely at proposed consent decrees. Judges sometimes hold hearings where they ask lawyers for the Division or the merging parties to explain their positions further. In a few, rare cases, judicial scrutiny has led the Division and the merging parties to withdrawn the originally proposed consent decree and submit a modified decree to address concerns raised during the Tunney Act review.

Still, Judge Leon’s decision to hear live witness testimony in connection with his Tunney Act review of the CVS/Aetna consent decree is unprecedented. Judge Leon is the same federal judge who denied the Division’s request for a preliminary injunction in its challenge against the AT&T-Time Warner merger last year, which was the first litigated Division challenge of a vertical merger in decades. The CVS/Aetna merger also raises vertical issues, but the Division’s complaint and the proposed remedy focused instead on a relatively narrow horizontal overlap in Medicare Part D plans. Judge Leon has taken an unusually hostile view of the Division’s approach in CVS/Aetna, stating that he will not serve as a rubber stamp for a cosmetic remedy. Judge Leon also chastised the parties early in the process for closing the transaction while Tunney Act proceedings were pending, even though it is typical for merging parties to do so. Perhaps most significantly, Judge Leon appeared unconcerned about whether the scope of witness testimony could address competitive impact of vertical aspects of the merger that are not the subject of the remedy agreement. The Division has pushed back, arguing that the judge only has authority under the Tunney Act to evaluate the proposed remedy for the horizontal issues identified in the complaint, and not to review the Division’s conclusions about vertical aspects of the transaction where it did not identify competition concerns.

The proceedings are certainly worth watching as they unfold, as Judge Leon’s unprecedented call for live witness testimony suggests that he harbors serious reservations about whether the proposed consent decree in CVS/Aetna would be in the public interest. If the evidentiary hearing creates a record that leads Judge Leon to reject the proposed consent order, parties to future mergers being reviewed by the Division would face a new level of uncertainty from the risk of any negotiated settlement not surviving Tunney Act review, particularly if the decision is based in whole or in part on concerns about aspects of the transaction that were not challenged in the Division’s complaint. That uncertainty could dissipate over time if such an outcome were reversed on appeal or proven by subsequent experience to be an outlier. But in the short term, such an outcome could also serve to highlight a key point of divergence in merger control procedures at the Division and FTC and build support for legislative proposals that would require the FTC to satisfy the same Tunney Act procedures that the Division must follow.

If Judge Leon rejects the proposed consent order, parties to future mergers being reviewed by the Division would face a new level of uncertainty from the risk of any negotiated settlement not surviving Tunney Act review.


americas, antitrust, mergers and acquisitions