On February 16, 2006, the Federal Trade Commission ("FTC") announced significant reforms to its merger review process.  These reforms, which apply only to the relatively small number of transactions that are subject to a detailed "Second Request" review, are intended to reduce the considerable burden, expense and delay associated with complying with a Second Request.[1]  These reforms relate only to the FTC’s merger review process and do not apply to the Department of Justice.

Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, parties to an HSR-reportable transaction must submit HSR notifications to the Department of Justice and FTC prior to consummating the transaction.  These filings initiate a 30-day waiting period during which time the parties may not close the transaction, which permits the reviewing agency to conduct a limited initial investigation of the competitive effects of the transaction.  At the end of this 30-day period, the reviewing agency will either (1) allow the waiting period to expire and permit the parties to proceed with the transaction or (2) extend the HSR review by issuing a request for additional information (often called a "Second Request").  While more than 95% of all HSR-reported transactions are cleared during the initial 30-day waiting period, parties to the remaining transactions incur substantial expense and burden in complying with a Second Request.

The FTC’s reforms to its merger review process are intended to reduce significantly the burdens of Second Request compliance.  In particular, Chairman Deborah Majoras of the FTC announced the following significant reforms:

1.      There will be a presumption that the FTC will not require a party to a transaction to search the files of more than 35 employees to comply with a Second Request, provided the party follows a number of procedural requirements.

This is perhaps the most significant of the FTC’s reforms.  Under current practice, the FTC often insists on production of documents from considerably more than 35 employees.  This results in significant burdens on the parties in terms of the cost and time required to comply with the Second Request, and can cause significant business disruption.  The FTC’s presumptive limit on the number of custodians will require the party to consent to a mutually agreeable schedule for the production of documents and certification of compliance with the Second Request.  Moreover, agency staff may seek approval from FTC management to require production of documents from more than 35 employees.  Nonetheless, this new presumption – if adhered to in practice – could reduce dramatically the cost in both time and expense of complying with a Second Request.

2.      There will be a presumption that the "relevant time period" for Second Request document production obligations will be from two years prior to the date on which the FTC issues the Second Request until 45 days prior to the date a party certifies compliance with the Second Request.

The antitrust agencies’ "model" Second Request currently requires a party to produce responsive materials for a three-year time period.  Reducing the relevant time period from three to two years will have a substantial impact on the quantity of documents and materials that a party must process, review and produce in connection with Second Request compliance.  Indeed, the FTC notes in its announcement of its reforms that, in the average Second Request document production, approximately 25% of the materials produced by the parties are more than two years old.  In practice, a 25% reduction in the volume of materials reviewed and produced would substantially reduce the expense and burden of Second Request compliance.

3.      There will be a presumption that (a) a party may elect to preserve backup tapes for only two calendar days identified by FTC staff, and (b) the FTC will generally not require production of documents contained on backup tapes.

The antitrust agencies’ "model" Second Request currently requires a party to preserve all existing backup tapes and to produce responsive documents and information contained on backup tapes.  While the FTC staff have often been willing to negotiate modifications to the Second Request that would ease burdens relating to backup tapes, these reforms formalize existing "best practice" and reduce the amount of negotiation required between the parties and staff.

4.      The FTC will permit parties to comply with a Second Request by submitting a modified "partial privilege log," in conjunction with a complete privilege log for a small subset of custodians.

The antitrust agencies’ "model" Second Request currently requires a party to produce a log of all responsive documents and information that the party withholds pursuant to a claim of privilege.  In large document productions, the preparation of a complete privilege log can impose substantial costs (and require a substantial amount of time) without providing significant countervailing benefit to the agencies.  Going forward, the FTC will modify its Second Request instructions to permit parties to submit a "partial privilege log" (containing the name of each custodian from whom responsive documents are withheld on the basis of a privilege claim and the total number of documents that are withheld under a claim of privilege).  If a party elects to submit a partial privilege log, the FTC staff may, within five business days after receipt of the partial privilege log, identify in writing five individuals or ten percent of the total number of custodians searched (whichever is greater) for which the party will be required to produce a complete privilege log.

5.      Additional Reforms.