United States: The Federal Trade Commission "Takes Its [Divestiture] Orders Seriously, And Parties Should Too"

On July 6, 2020, the Federal Trade Commission (FTC) announced¹ that Alimentation Couche-Tard Inc. and its former affiliate, CrossAmerica Partners LP (collectively, ACT), would pay a $3.5 million civil penalty for alleged violations of consent orders entered in connection with ACT's 2018 acquisition of Holiday Companies (Holiday). The FTC alleged that ACT violated the consent orders by (i) failing to complete the required divestitures by the ordered deadline, (ii) failing to maintain certain divestiture assets as an ongoing business, and (iii) failing to provide an accurate and complete description of its efforts to maintain the viability of the divestiture assets and to complete the divestitures.²

An examination of the FTC's enforcement action provides lessons for parties considering transactions that may result in a consent order, as well as parties currently subject to consent orders.

Requirements of ACT's Consent Order

In July 2017, ACT agreed to acquire Holiday, whose assets included gas stations and convenience stores in 10 states, a food commissary, and a fuel terminal.³ To secure FTC approval of the proposed acquisition, ACT entered into an Agreement Containing Consent Order (Consent Agreement) in which the parties agreed, among other things, to comply with the proposed Decision and Order (Order) requiring the divestiture of ten gas stations in Minnesota and Wisconsin to a buyer acceptable to the FTC.⁴ Once the proposed Order was accepted for public comment, ACT was free to close the primary transaction subject to an Order to Maintain Assets, which required ACT to "maintain the viability, marketability, and competitiveness" of the divested assets, prevent "the wasting or deterioration" of the divested assets, continue to operate the divested assets in the ordinary course of business, and maintain relationships with suppliers, customers, employees and other business partners.⁵ The Order to Maintain Assets also required ACT to submit compliance reports every 30 days until the Order was finalized.⁶ Prior to the issuance of the Order to Maintain Assets, the Consent Agreement required ACT to submit interim compliance reports every 30 days.⁷

On February 15, 2018, the FTC issued the final Order, which required ACT to complete the divestitures within 120 days of the date the Order was issued to an approved buyer (or buyers), giving ACT until June 15, 2018 to divest the 10 gas stations.⁸

ACT's Alleged Failure to Complete the Required Divestitures by the Ordered Deadline

Pursuant to the FTC's Rules of Practice and Procedure, parties must file an application for approval of a proposed divestiture buyer and the FTC must accept comments on the application for 30 days before approving the application.⁹ The approval must contain a statement of reasons for approval and responses to any comments received.¹⁰ To comply with these requirements, the FTC's approval process necessarily takes longer than 30 days, and typically takes significantly longer than 30 days.

ACT submitted three separate applications to the FTC to approve its proposed divestiture buyers-two before the June 15, 2018 divestiture deadline (on May 15, 2018 and June 6, 2018) and one after the divestiture deadline (on July 10, 2018) because of the FTC's concerns with the original buyer proposed by ACT.¹¹ ACT did not complete its divestitures until September 17, 2018 and September 26, 2018 (more than three months after the divestiture deadline).

ACT's Alleged Failure to Maintain Certain Divestiture Assets as an Ongoing Business

The FTC also alleged that ACT failed to maintain one of the divested gas stations, located in Hibbing, MN, as an ongoing business as required by the Order to Maintain Assets. This location was owned by ACT, but operated by a third-party dealer pursuant to a lease and franchise agreement, which had a termination date of August 31, 2018. On August 24, 2018, the dealer notified ACT that it would not renew the agreement and would cease operations on August 31, 2018. The gas station closed on August 31 and remained closed until after it was divested on September 26, 2018.

ACT's Alleged Failure to Provide Accurate and Complete Information in Compliance Reports

The FTC further alleged ACT's compliance reports were deficient in two material respects:

First, ACT failed to provide sufficient information regarding the status of the divestitures, including descriptions of substantive contacts with proposed buyers or even the name of any potential buyers.¹³ ACT provided these details in late June 2018 after the FTC requested supplemental information about ACT's divestiture efforts.¹⁴

Second, ACT did not provide detailed information regarding its efforts to maintain the Hibbing, MN gas station as an ongoing business or preserve its relationship with the existing operator.¹⁵ Furthermore, ACT did not inform the FTC that this location had closed prior to divestiture until June 19, 2019.¹⁶

Civil Penalties for Order Violations

Section 5(l) of the FTC Act authorizes the FTC to seek civil penalties in federal district court for violations of divestiture orders.¹⁷ For continuing violations, each day the violation continues is a separate offense for which a civil penalty can be assessed.¹⁸ The current maximum civil penalty is $43,280 per day, subject to annual adjustment.¹⁹

The maximum civil penalty here could have been in the tens of millions of dollars given the significant time ACT was alleged to be not in compliance with the Order. Had the matter been litigated, however, the court would have examined a number of factors in setting the amount of any civil penalty, including the good or bad faith of the party, public injury, ability to pay, eliminating benefits derived from the violation, and vindicating the FTC's authority.²⁰

Takeaways

Parties should be mindful of the time necessary for the FTC's required processes for approving divestiture buyers and plan accordingly. Divestitures in merger investigations require significant time and resources to identify potential buyers, conduct due diligence, negotiate divestiture agreements, and give the FTC an opportunity to review both the buyer and the divestiture agreements.

Parties should identify potential divestiture buyers with the FTC's expectations in mind. The FTC has considerable discretion when approving divestiture buyers and considers a number of factors, including whether: (a) there are substantive antitrust concerns with a proposed buyer because it is already active in, or is actively attempting to enter, the relevant market; (b) the proposed buyer has the financial capability and incentive to acquire the assets and operate them competitively; and (c) the proposed buyer has the ability to maintain or restore competition in the market.²¹

Parties should proactively maintain divestiture assets to the extent feasible. The purpose of a divestiture is to maintain pre-merger competition, and the FTC wants to ensure the divestiture buyer acquires assets that have not deteriorated and are operating at pre-divestiture levels. Thus, parties should closely monitor the status of divesture assets, anticipate issues that may arise, and take proactive steps to maintain the viability and competitiveness of those assets, including maintaining supplier, customer, employee, and other business relationships.

Compliance reports should be accurate, detailed, and complete. In March 2019, the FTC announced that it would be incorporating language into its orders requiring more detail in compliance reports to allow the FTC to determine independently whether the parties are in compliance.²² This decision was in reaction to what the FTC saw as a trend toward respondents not taking compliance reporting obligations sufficiently seriously.²³ As the ACT matter illustrates, the failure to submit detailed and accurate compliance reports can constitute an independent order violation, which the FTC is willing to enforce by seeking civil penalties.

Engage with the FTC early, often, and transparently throughout the divestiture process. The FTC expects parties to comply with its divestiture orders and will monitor the parties' actions. Parties should maintain an open dialogue with the FTC to ensure that any concerns surface and are addressed in a timely fashion.

Footnotes

1 Press Release, FTC, Alimentation Couche-Tard Inc. and CrossAmerica Partners LP Agree to Pay $3.5 Million Civil Penalty to Settle FTC Allegations That They Violated 2018 Order (July 6, 2020); Statement of the Commission, In re Alimentation Couche-Tard Inc., Docket No. C-4635 (July 6, 2020).

2 Complaint at 2, Fed. Trade Comm'n v. Alimentation Couche-Tard Inc., No. 1:20-CV-1816 (D.D.C. July 6, 2020).

3 Press Release, Alimentation Couche-Tard Inc., Couche-Tard Announces Having Signed an Agreement for the Acquisition of Holiday an Important Convenience Store Player in the Upper Midwest U.S. Region (July 10, 2017).

4 Agreement Containing Consent Orders, In re Alimentation Couche-Tard Inc., Docket No. C-4635 (FTC Nov. 22, 2017); Decision and Order, In re Alimentation Couche-Tard Inc., Docket No. C-4635 (FTC Nov. 22, 2017).

5 Order to Maintain Assets at 6, In re Alimentation Couche-Tard Inc., Docket No. C-4635 (FTC Dec. 15, 2017).

6 Id. at 12.

7 Agreement Containing Consent Order, In re Alimentation Couche-Tard Inc., Docket No. C-4635, at 2.

8 Decision and Order at 8, In re Alimentation Couche-Tard Inc., Docket No. C-4635 (FTC Feb. 15, 2018).

9 16 C.F.R. § 2.41(f).

10 Id. § 2.41(f)(3).

11 Complaint at 8-9, Fed. Trade Comm'n v. Alimentation Couche-Tard Inc., No. 1:20-CV-1816 (D.D.C. July 6, 2020).

12 Id. at 10-11.

13 Id. at 10.

14 Id.

15 Id. at 11.

16 Id.

17 15 U.S.C. § 45(l).

18 Id.

19 16 C.F.R. § 1.98(c).

20 See United States v. Reader's Digest Ass'n, 494 F. Supp. 770, 772 (D. Del. 1980).

21 See FTC, A Guide for Respondents: What to Expect During the Divestiture Process at 2 (June 2019).

22 See FTC, Competition Matters Blog, Compliance Reports: Reinforcing a Commitment to Effective Orders (Mar. 11, 2019).

23 Id.

Originally published July 15, 2020.