Depriving Wrongdoers of Ill-Gotten Gain

Depriving Wrongdoers of Ill-Gotten Gain

Division Update Spring 2015

Over the last year, the Antitrust Division twice secured disgorgement of unlawful profits from defendants as a condition of settling lawsuits brought under the Clayton and Sherman Acts. Last month, the Division and the New York Attorney General obtained $7.5 million in disgorgement from the operators of an unlawful joint venture in the New York City “hop-on, hop-off” bus tour market. A few months earlier, the Division required Flakeboard to disgorge more than $1 million in ill-gotten profits resulting from an unlawful agreement that enabled Flakeboard to take the customers of its acquisition target, SierraPine, in the middle of the Division’s merger investigation. As a part of the same settlement, the Division secured $3.8 million in civil penalties from Flakeboard and SierraPine for “gun jumping” in violation of Section 7A of the Hart-Scott-Rodino (HSR) Act.

Disgorging $7.5 Million from an Anticompetitive Joint Venture

Each year, over two million visitors to New York City spend about $100 million on “hop-on, hop-off” bus tours. These guided tours visit the city’s most popular tourist spots and allow passengers to “hop off” buses at sights that interest them and “hop on” another bus operated by the same provider when they are ready to continue the tour.

Between 2005 and 2009, Coach USA Inc. and City Sights LLC competed vigorously and tourists benefited from the fare discounts, improved service, and novel ticket packages that resulted. In March 2009, competition ended. That is when Coach and City Sights formed Twin America, a joint venture that gave the companies a monopoly over the New York City hop-on, hop-off bus tour market and enabled them to immediately raise tour prices by about 10 percent.

After forming their unlawful joint venture and increasing prices to consumers, Coach and City Sights spent years trying to evade antitrust enforcement. Five months after forming Twin America, and within weeks of receiving subpoenas from the New York Attorney General, Coach and City Sights applied to the Surface Transportation Board (STB) for approval of the formation of Twin America, even though Federal law required that an STB application be made before the transaction was consummated. Coach and City Sights then claimed that the STB had exclusive jurisdiction over the joint venture and spent months using their belated regulatory filing to forestall antitrust scrutiny. In February 2011, the STB rejected the formation of Twin America as not in the public interest because the joint venture “possess[ed] excessive market power” and could “raise rates without competitive restraint and otherwise conduct its operation to the detriment of consumers.” The STB also specifically expressed concern about Coach and City Sights’s procedural tactics, noting that its “processes may have been manipulated to avoid the [New York Attorney General’s] inquiry.” After the STB reaffirmed its ruling in January 2012, Coach and City Sights spun off Twin America’s nominal interstate services to divest the STB of jurisdiction, and continued to operate Twin America in New York City.

In late 2012, with the matter no longer before the STB, the Division and the New York Attorney General sued Coach, City Sights, and Twin America in New York Federal court. After more than two years of vigorous litigation, the defendants agreed to a settlement requiring them to relinquish all of City Sights’s Manhattan bus stop authorizations. 

 2010 Keyspan $12, 2011 Morgan Stanley $4.8, 2014 Flakboard $1.15, 2015 Twin America $7.5

The Division insisted as part of the settlement that Coach and City Sights disgorge $7.5 million in ill-gotten profits that they obtained by operating Twin America in violation of the antitrust laws.

This disgorgement amount was in addition to $19 million Coach and City Sights had already agreed to pay to settle related private consumer litigation that was brought after the Division and New York Attorney General filed their lawsuit.

If approved by the court, the settlement will represent the first time that the Division has obtained disgorgement in a consummated transaction challenged under Section 7 of the Clayton Act.

Deterring Unlawful Premerger Coordination

The Division continues to challenge efforts by companies to sidestep the merger review process, including violations of the HSR Act’s premerger notification and waiting period provisions. Last year, the Division discovered that Flakeboard America Limited and SierraPine engaged in illegal premerger coordination, commonly referred to as “gun jumping,” while Flakeboard’s proposed acquisition of three SierraPine mills was under antitrust review by the Division. Specifically, the parties conspired, during the HSR waiting period, to restrain trade by coordinating the closure of a SierraPine mill and allocating customers of that mill to Flakeboard.

Before the proposed acquisition, SierraPine made particleboard at mills in Springfield, Oregon, and Martell, California, that competed with Flakeboard’s particleboard mill in Albany, Oregon. The Springfield and Martell mills were included in the proposed acquisition, along with a third SierraPine mill that produced medium-density fiberboard. After announcing the proposed acquisition on January 14, 2014, and before the expiration of the HSR Act’s mandatory premerger waiting period, Flakeboard and SierraPine coordinated to close SierraPine’s particleboard mill in Springfield, Oregon, and move the mill’s customers to Flakeboard’s Albany mill.

This unlawful coordination led to the permanent shutdown of the Springfield mill on March 13, 2014, and enabled Flakeboard to profit by securing a significant number of SierraPine’s Springfield mill customers for its Albany mill. The defendants’ conduct constituted a per se unlawful agreement to restrain trade in violation of Section 1 of the Sherman Act, and prematurely transferred operational control, and therefore beneficial ownership, of SierraPine’s particleboard business to Flakeboard, in violation of the HSR Act.

To ensure that Flakeboard was not unjustly enriched and to deter future violations, the Division insisted that Flakeboard disgorge $1.15 million in profits obtained from the improper customer transfer. In addition, to resolve the HSR Act violation, Flakeboard and SierraPine agreed to pay a combined $3.8 million fine, the second-highest civil penalty for “gun jumping” in Division history.

Civil Penalties for Gun Jumping Violations

 
Notably, the settlement followed Flakeboard and SierraPine’s earlier abandonment of the underlying transaction on September 30, 2014, after the Division expressed concerns about the transaction’s likely anticompetitive effects in the sale of medium-density fiberboard to customers in California, Oregon, and Washington.