United States: FTC Announces Major "Second Request" Reforms

The Federal Trade Commission (the "FTC") has announced major reforms that could meaningfully reduce the burdens for parties responding to the "Second Requests" they issue. Second Requests are the informal name for the extensive requests for information and data issued by the FTC or the U.S. Department of Justice ("DOJ") when investigating transactions that they believe may raise significant competitive concerns. The announced reforms, applicable to all transactions whose Hart-Scott-Rodino filings were submitted on or after February 17, 2006 and which result in a Second Request issued by the FTC, are primarily focused on (1) limiting the number of employees whose files need to be searched for responsive documents; (2) reducing, to two years prior to issuance of the Second Request, the time period for which parties have to provide responsive documents; (3) requiring parties to recover information from backup tapes less frequently; and (4) streamlining the procedures for logging documents withheld as privileged. Parties to antitrust sensitive transactions, particularly those involving large companies with many employees, may be able to reap significant benefits from the announced reforms.

Highlights of the FTC’s Second Request reforms

Following is a summary of some key highlights of the revised FTC Second Request procedures:

Custodian presumption. The FTC will presumptively agree to identify and request responsive documents from no more than thirty-five company employees. This significantly narrows the burden a company bears in collecting and processing responsive documents which, under the prior Second Request procedures, could easily require the search of many more than thirty-five employees even following negotiations with FTC staff to narrow the scope of the custodian list.

There are, however, several important limitations to this new approach.

First, it is only a presumption—the staff may request that the Director of the Bureau of Competition authorize staff to exceed the presumptive limit.

Second, the FTC is authorized to request documents from "central" or "company" files regardless of whether they are contained in the files of employees in the search groups, and these files do not count against the thirty-five employee limit. Parties should be aware that this limitation to the custodian presumption may significantly increase their production burden; we have been involved in many transactions in which these central files were extremely voluminous.

Third, in order to take advantage of this presumption, parties must agree to the following concessions:

• Access to employees. Parties must agree to designate and make available at least one employee to meet with staff to discuss the company’s business operations, to assist the FTC in designating those thirty-five employees that would have custody of the most relevant documents, and to assist the FTC in identifying ­relevant data. Parties must also agree to make their employees available to the FTC on a reasonable basis. This requirement is a minor one given that even before the announced reforms both the FTC and the DOJ operated with the understanding that parties and their counsel would work closely with them to identify the employees most likely to hold relevant documents.

• Expanded review periods. Under the prior approach, once a party certified that it has substantially complied with a Second Request, the FTC typically had thirty days to decide whether or not it would challenge the transaction. Now, in order to take advantage of the newly enacted procedures, parties must commit to reach agreement with the FTC on the timing of document submission (i.e., parties will have to agree to submit all responsive documents thirty days prior to certification—giving the FTC an extra thirty days—or to submit documents on a "rolling" basis or other basis agreeable to the FTC).

Additionally, the parties must agree that if the FTC brings a litigation challenge to the transaction, they will join the FTC in proposing a scheduling order to the court that contains at least a sixty-day discovery period. During this period the FTC would be allowed to seek discovery of employees besides those in the initial group of thirty-five or less. Given that only a small number of transactions that are the focus of Second Requests ultimately result in litigation, this requirement will have limited effect on most parties. However, this new requirement could significantly affect those who do end up in adjudicative or administrative proceedings challenging their transactions.

Two-year relevant time period. The presumption will be that a party will only have to produce those documents that fall within a time period extending from two years prior to the issuance of the Second Request to 45 days prior to certification of the Second Request (or from its completion of production if the party has provided the FTC with the additional 30 day review period). This time limitation, however, does not apply to requests for data. Additionally, it is only a presumption and will not apply where the FTC believes it needs a longer time period in order to analyze the competitive effects of a particular transaction. This loophole could be significant if used frequently.

Empirical data. The staff will now inform parties about the competitive effects theories under consideration and the types of empirical analyses that may prove useful in the investigation. In exchange for making this information available, the FTC hopes to encourage parties to provide helpful and responsive data, to openly communicate with the FTC about how such data is maintained, and to allow the FTC staff to access company employees or officers who are knowledgeable about such data.

Preservation of backup tapes. The FTC will presume that backup tapes will be required only if responsive documents are not available through other more accessible sources. Even in those cases where backup tapes are still required, a party will only have to preserve them for two calendar days that have been identified by staff.

Partial privilege log. Rather than requiring parties to produce a log of all responsive documents withheld from submission to the FTC based on privilege, the FTC will now allow a party to elect to produce a partial privilege log (which contains substantially less information than a complete log) for all of the custodians in the party’s search group, in conjunction with a complete privilege log for a small subset of these custodians if the FTC requests one. In order to take advantage of this streamlined provision, however, parties must agree that the FTC may be allowed to request a Complete Log for all of the custodians in certain situations (most notably when the FTC brings judicial or administrative proceedings against the party).

Depending on how broadly they are applied in practice, the announced reforms could meaningfully reduce the burdens associated with Second Requests issued by the FTC, potentially saving parties millions of dollars in large antitrust investigations. Although the FTC has structured its key reforms as "presumptions," and not rules, the likelihood is that many FTC issued Second Requests will fall within the more streamlined approach embodied in these new reforms. Even in cases where the FTC feels a need to move beyond the announced presumptions, their existence should help limit the overall scope and time period of the documents requested.

The benefits to parties, however, are not without cost, as anyone seeking to benefit from the most important of the reforms—the limitation on custodians—must agree to conditions that can, in certain circumstances, significantly delay the timetable for resolution of the FTC’s objections to a transaction. However, for most transactions receiving Second Requests, the trade-offs should be worth it. The most significant costs to a party occur only in those transactions that are likely to result in a judicial or administrative challenge by the FTC—itself only a small percentage of transactions receiving Second Requests.

It remains to be seen how these announced reforms will affect treatment of Second Requests issued by the other body with the power to issue them—the DOJ. Even absent the DOJ’s formal adoption of similar reforms in the near future, we expect that the DOJ will now be more receptive to informal agreements that seek to reduce the burdens associated with complying with the Second Requests that they issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.