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The U.S. Department of Justice ("Department") has announced the settlement of a complaint alleging that Qualcomm Incorporated ("Qualcomm") asserted control over Flarion Technologies, Inc. ("Flarion") before the expiration of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act").  Qualcomm had agreed to acquire Flarion in a transaction that was subject to an HSR Act waiting period.  The Department’s complaint alleged that Qualcomm failed to comply with the waiting period and obtained "operational control of Flarion’s business" before receiving clearance from the agencies.  As part of the settlement, Qualcomm agreed to pay $1.8 million in civil penalties, without admitting to any violation of the HSR Act.

Background

The HSR Act requires companies planning acquisitions or mergers that meet certain thresholds to file premerger notification documents with the Department and the U.S. Federal Trade Commission.  The HSR Act also requires that the parties to a contemplated transaction subject to the HSR Act observe a 30-day waiting period during which the antitrust agencies have an opportunity to investigate the proposed transaction.  At the end of the initial 30-day waiting period, the antitrust agencies can issue a request for additional information (a "Second Request"), which effectively precludes the companies from closing the proposed transaction until they have received clearance from the antitrust agencies.  Prior to receiving clearance from the antitrust agencies, the HSR Act prohibits the companies from consummating the proposed transaction or otherwise combining or coordinating their business activities or operations. 

The Complaint

In July 2005, Qualcomm agreed to acquire Flarion in a transaction that was subject to the premerger notification and waiting period requirements of the HSR Act.  As a consequence, the parties were required to remain independent until they had received clearance from the antitrust agencies. 

According to the complaint, as part of the merger agreement Flarion agreed to certain restrictions that "restricted Flarion’s discretion to conduct its affairs" pending the closing of the transaction.  For example, Flarion agreed not to enter into agreements to license its intellectual property, to enter into agreements that involved the obligation to pay or receive $75,000 or more in a year or $200,000 or more in the aggregate, or to present business proposals to customers or prospective customers, unless it received Qualcomm’s consent.  In addition, the Department’s complaint alleges that "on multiple occasions Flarion sought Qualcomm’s review and consent before it marketed products and services to customers and potential customers" prior to receiving antitrust clearance for the transaction.  The complaint also alleges that Flarion submitted draft customer proposals for Qualcomm’s review, that Flarion requested Qualcomm’s approval for price quotations and discounts as well as for hiring new employees, and that Qualcomm discouraged Flarion from pursuing certain business opportunities. 

The Department concluded that Qualcomm effectively acquired Flarion prior to the expiration of the HSR Act waiting period through the merger agreement’s restrictions on Flarion’s business activities as well as through Qualcomm’s alleged review of and influence over Flarion’s marketing activities.

The Department’s Enforcement Action Reflects Continuing Interest in Enforcing the HSR Act Waiting Periods

This enforcement action does not appear to signal a departure from the previous enforcement practices of the antitrust enforcement agencies.  This action is consistent with prior actions that the agencies have taken to enforce the HSR Act waiting periods.  Where it appears that the parties to a proposed transaction have begun to coordinate their day-to-day operations, it is likely that the agencies will take enforcement action.  On the other hand, the antitrust agencies continue to recognize that the parties to a proposed transaction have legitimate needs to interact prior to the close of the transaction, such as to plan for the post-closing consolidation of the businesses.  The agencies also recognize that it is legitimate for parties to agree to certain restrictions that are designed to preserve the value of the assets being acquired pending the closing of the transaction, even though they may arguably restrict to some degree the freedom of one of the parties to act.  The question is always one of degree, and parties to any transaction subject to the HSR Act should always take steps to ensure that the activities that they undertake during an HSR waiting period do not cross over the line and constitute the combination or coordination of their businesses.