March 28, 2018

Think Twice Before Exchanging Due Diligence Information With a Competitor

Competitors exploring mergers or acquisitions may find themselves under a microscope regarding what information they exchange in the process. On March 20, 2018, the Federal Trade Commission (FTC) reaffirmed its longstanding commitment to monitoring competitors who exchange sensitive competitive information — like price projections, customer lists or future product offerings — during pre-merger negotiations and due diligence. Improper information exchange can occur as “standalone conduct or during the merger process,” the FTC explained in its recent web posting. The FTC cited past enforcement actions from prior administrations, illustrating instances where information exchanges lacked a procompetitive and “legitimate business purpose” or were not properly firewalled — signaling continuity of the agency’s enforcement priorities. The FTC also provided practical tips for companies looking to implement protocols to avoid antitrust violations during the pre-merger due diligence review and negotiation process.

Information Exchanges

Federal and state antitrust laws prohibit competitors from forming agreements to harm competition. But, under certain circumstances, they also can violate the antitrust laws by exchanging sensitive competitive information. Information exchange creates the opportunity for competitors to reach implicit, if not explicit, agreements that can harm competition. For example, competitors that receive each other’s future pricing information might use that information to facilitate unlawful price fixing if the transaction does not go forward, or to monitor one another’s compliance with a previously agreed unlawful scheme. Courts and the antitrust authorities generally evaluate information exchanges under the comparatively relaxed “rule of reason” standard, and exchanges that have more potential for anticompetitive effects than procompetitive benefits are deemed unlawful. U.S. v. U.S. Gypsum Co., 438 U.S. 422 (1978).

The antitrust laws prohibit anticompetitive information exchanges regardless of whether they are standalone exchanges or part of otherwise procompetitive pre-merger or pre-acquisition negotiations. In the context of mergers, acquisitions or other competitor collaborations, information exchanges may be problematic if the parties do not take sufficient precautions to ensure that competitors’ sensitive competitive information is not used in an anticompetitive way during the due diligence phase or before the transaction is consummated. This could occur, for example, where the parties ultimately decided not to proceed with a transaction, but they already possessed each other’s current and future pricing information.

That said, there are procompetitive justifications for exchanging sensitive competitive information if the exchange is properly executed. In the context of due diligence for a potential acquisition or merger, the transaction itself usually will provide the procompetitive justification for the exchange. The key is that any pre-merger or pre-acquisition review must be narrowly defined and monitored to ensure it is reasonably tailored to further the deal and is not a sham for anticompetitive collusion between the parties.

HSR Reporting Thresholds Not a Barrier to Antitrust Enforcement

The antitrust laws apply regardless of the size of the parties and whether the deal is reportable under the Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act). Critically, the FTC and the Department of Justice’s Antitrust Division (DOJ) recently have investigated several mergers and acquisitions that were not subject to HSR reporting thresholds. As with any agency investigation, these reviews create the opportunity for the agencies to uncover anticompetitive information exchanges. For example:

  • In December 2017, the DOJ announced a settlement with TransDigm Group Inc., a manufacturer of restraint systems used on commercial airplanes, related to its February 2017 acquisition of two competitors. The transaction was not reportable under the HSR Act. But the DOJ still required divestment to cure the anticompetitive effects of the merger.
  • In July 2013, the FTC announced a settlement with Solera Holdings, Inc. to divest parts of its business as a condition of acquiring a competitor in the yard management systems software market. The deal was worth only $8.7 million and therefore not reported under the HSR Act.

Although the DOJ and FTC did not report that improper information exchange occurred during either of these transactions, the antitrust agencies often uncover improper exchanges during the merger review process, which may affect merger clearance or potentially invite a separate complaint that the parties already have conspired unlawfully in violation of the antitrust laws.

Agency Action Against Anticompetitive Information Exchanges

The FTC’s web posting reaffirmed this longstanding analytical framework. It also provided practical guidance for compliance in a variety of applications.

The agency cited one recent and one not-so-recent enforcement action as examples of companies engaging in improper information exchanges. Both enforcement actions were taken during prior administrations – a sign of continuity across administrations with respect to this issue:

  • In 2013, the FTC settled an enforcement action against a hair transplant company based on its CEO “repeatedly exchang[ing] company-specific information about future product offerings, price floors, discounting practices, expansion plans, and operations and performance” with its competitor’s CEO during pre-merger negotiations. The FTC did not challenge the $163.5 million merger, but it found the exchange of this kind of detailed information “served no legitimate business purpose.”
  • In 1998, the FTC settled an enforcement action against two welded-seam aluminum tube manufacturers that were competitors for sharing “non-aggregated, customer-specific information, including current and future pricing plans” as part of pre-merger negotiations. The FTC also challenged the merger, valued at just under $30 million, as anticompetitive and required divestment as a remedy.

The FTC’s web posting additionally emphasized that pre-merger information exchange “may contribute to unlawful ‘gun jumping’ in violation of the HSR Act and Rules if it results in the buyer effectively gaining beneficial ownership of the seller prior to the close of the transaction.” Gun jumping typically involves “actual coordination of business activities during the HSR pre-merger period,” and unlawful information exchange can suggest this kind of coordination. Gun jumping violates the HSR Act, and companies are liable for damages of up to $41,484 per day if they take active steps to consummate their transaction before receiving clearance from the reviewing agency.

Avoiding Improper Information Exchange

The FTC’s web posting noted that antitrust counsel play a critical role in preventing unlawful information exchange. First, counsel should encourage and assist companies to design, maintain and audit effective protocols. For example, companies should design firewalls to ensure that employees with authority over topics of competitive significance do not have access to analogous competitor data. This might mean that a company needs to build electronic firewalls to prevent those employees from accessing the competitor’s information on the company’s computer. Alternatively, in a situation where a smaller company does not have an internal team that can review a competitor’s sensitive business information, a company may need to hire an outside third party to review the information and report back with a high-level summary of implications for the deal. In many cases, employees with authority over competitive business topics may be able to review aggregated summaries of their competitor’s data, even if they cannot review the individual data points.

Second, counsel should assist and encourage companies to monitor compliance with those protocols during pre-merger or pre-acquisition negotiations. In addition to taking steps to ensure that restricted employees cannot access a competitor’s sensitive information, the companies also should require those employees to sign antitrust confidentiality or non-disclosure agreements (NDAs) confirming they understand and agree that they are not permitted to review their competitor’s sensitive business information.

Third, if violations of the protocol do occur, counsel should assist the company in determining how, if at all, improperly disclosed information was actually used by the parties. Where the potential improper disclosure occurs in the context of a reportable transaction, the FTC’s web post recommends that companies “would be well advised to inform FTC staff about this before staff discovers the documents in the merger investigation.”

The FTC also provided some additional practical guidance for disclosing and receiving parties to mitigate their risk when sharing company information with competitors during a due diligence review.

Disclosing parties should:

  • “Share the least amount of information needed for effective due diligence.”
  • “Mask customer identities and aggregate all competitive information.”
  • “Redact documents and information to shield customer identities and other information.”
  • “Examine all materials made available to bidders that may raise competitive concerns, including schedules later added to data rooms.”
  • Prohibit “individuals with data room access from downloading or e-mailing confidential information in the data room.”
  • “Ensure document destruction instructions at the end of the due diligence process are clear, including penalties or consequences for a breach.”


Receiving parties should:

  • “Ensure all employees with access to confidential information understand the terms of all confidentiality and non-disclosure agreements.”
  • “Establish clean teams and employ third-party consultants for competitively sensitive information that must be exchanged.”
  • “Outside counsel should vet clean team members for the role, including any individuals added to a clean team at a later date.”
  • “Check that employees do not save confidential information meant only for due diligence or clean team members on accessible share drives within the company.”


Any company looking to merge, acquire, be acquired or explore a joint-venture with a competitor should consult very early in the process with antitrust counsel to design and implement an information exchange policy with appropriate firewalls to prevent the exchanged information from being used for anticompetitive purposes.

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