Arbitration: DOJ Unearths Arcane Statutory Power to Arbitrate (and Win) Merger Dispute
In United States v. Novelis, the DOJ filed a civil antitrust lawsuit in the US District Court of the Northern District of Ohio seeking to block Novelis, Inc., a Canadian corporation headquartered in Atlanta, Georgia, from acquiring Aleris Corporation, a Delaware corporation headquartered in Cleveland, Ohio. The basis of the merger challenge was that the transaction would combine two of only four North American producers of aluminum auto body sheet (ABS) and that Aleris was a new and disruptive rival supplier of aluminum ABS whose expansion into the North American market immediately impacted pricing. Novelis and Aleris argued, to the contrary, that they compete with suppliers of steel for automotive parts as well as suppliers of aluminum.
Rather than litigate the dispositive issue of market definition, the DOJ agreed with the merging companies to submit the issue to binding arbitration – the first time the DOJ used its arbitration authority to resolve an enforcement action – a significant departure from its standard practice of litigating merger challenges in federal district court.
The authority for a federal agency to engage in arbitration derives from a little known statute, the Administrative Dispute Resolution Act of 1996, 5 U.S.C. Sections 571 et seq. and the Antitrust Division’s implementing regulations promulgated thereunder, 61 Fed. Reg. 36, 896 (July 15, 1996), which authorizes federal agencies to use arbitration when the parties consent and the balance of public interest factors favor arbitration. Pursuant to the regulations, the DOJ will pursue arbitration in those civil cases where time permits and there is a reasonable likelihood that alternative dispute resolution would shorten the time necessary to resolve a dispute or otherwise improve the outcome for the United States.
The DOJ’s rationale for invoking arbitration was to allow it to resolve the dispositive issue of market definition efficiently and effectively, thus saving taxpayer resources. Additionally, the DOJ noted the benefits of having specialty decision-makers, rather than generalist judges, preside over complex issues, to the benefit of the defendants and the public. The parties agreed that if the DOJ lost on the market definition, then it would have no case as it would not be able to prove competitive harm. The companies at first balked out of concern that their ability to conduct discovery would be limited; however, ADRA allows for a process where fact discovery is completed in federal court before the case is referred to an arbitrator for a decision, and the parties negotiated the terms of the arbitration, including timing and discovery, among other things.
The arbitrator ruled for the DOJ, holding that the aluminum auto body sheet constitutes a relevant product market, as the DOJ had alleged. Accordingly, Novelis will be required to divest Aleris’ entire aluminum ABS operations in North America to preserve competition in the relevant market. According to DOJ:
This first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge. As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstance…[t]his arbitration procedure provided certainty and allowed the defendants to close their transaction subject to foreign regulatory review….
The DOJ’s agreement to use arbitration as a tool to resolve a merger dispute, and the likelihood that it will do so prospectively, is a significant development which may signal a trend in enforcement proceedings and is noteworthy for potential merger participants. It is also noteworthy that although here, it was the DOJ that suggested the use of arbitration, arbitration may be used as an alternative means of dispute resolution whenever all parties consent, at the instance of any party. Indeed, this option might be especially recommended where there is a premium on the need for subject matter experts to make the key assessments at issue.