Gemstar-TV Guide Assessed $5.67 Million Civil Penalty for Illegal Premerger Coordination
In a settlement announced February 6, 2003, the Department of Justice and Gemstar-TV Guide resolved allegations of price-fixing, customer allocation and failure to comply with the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"). The allegations stemmed from Gemstar's and TV Guide's conduct prior to their merger in July of 2000. Such cases are often referred to as "gun-jumping" cases.
Gemstar and TV Guide were competitors in the provision of interactive program guides ("IPGs") to companies that provide packaged subscription television service. They had been engaged in protracted patent litigation and in mid-1999 entered into settlement negotiations that anticipated the formation of a joint venture to market IPGs. The discussions were ultimately unsuccessful, and in early August the parties began discussing the possibility of a merger or cross-license agreement. These discussions ultimately lead to the execution of an Agreement and Plan of Merger (the "Merger Agreement") on October 4, 1999.
According to the allegations of the Complaint, while Gemstar and TV Guide pursued joint venture discussions, the parties agreed to a "Slow Roll Agreement" whereby they would delay consummating or pursuing certain customer contracts. Thereafter, as early as execution of the Merger Agreement and prior to consummation of the merger or expiration of the waiting period required under the H-S-R Act (the "Interim Period"), the parties agreed to allocate customers between them and Gemstar began to control the price and other terms pursuant to which TV Guide would offer its services.
Specifically, the Complaint alleges that:
Gemstar's CEO prepared a chart setting forth the specific service-provider customers for whom each party would be responsible for during the Interim Period and set forth standard terms of sale;
- Gemstar required TV Guide to incorporate into its contracts specific terms and provisions from Gemstar's own contracts (e.g., its late penalty provision), and to include a covenant not to sue that covered TV Guide's parent (Gemstar);
- TV Guide submitted entire drafts of IPG contracts for Gemstar's approval and redlining, sought permission to extend deadlines for price discounts, and sought guidance on how to respond to counter-proposals from service providers;
- TV Guide intervened on behalf of Gemstar in pending settlement negotiations; and
- The parties further shared confidential information on new markets and met jointly with consultants to develop pricing and marketing strategies for these new markets.
The Complaint specifically alleged that Gemstar and TV Guide executives continued to engage in this conduct after having been advised by legal counsel that gun-jumping during a merger review process was illegal.
The Department of Justice alleged that the conduct of the Gemstar and TV Guide executives violated Section One of the Sherman Act and the H-S-R. Section One of the Sherman Act prohibits agreements in restraint of trade, including per se offenses such as price-fixing and market allocation agreements. The H-S-R Act prohibits parties from consummating a merger prior to expiration of a mandatory waiting period.
The Gemstar-TV Guide settlement is the second gun-jumping case to be resolved by the Department of Justice in the last year. The earlier matter, involving Computer Associates, implicated a merger agreement that contained extraordinary conduct of business restrictions limiting the premerger pricing terms used by the acquired party and otherwise limiting its ability to independently conduct its business. This emphasis on gun-jumping matters may reflect the need for increased vigilance in this area. As alleged, the Gemstar-TV Guide matter represents an egregious example of gun-jumping.
Until expiration of the waiting period under the H-S-R Act, parties cannot engage in conduct that may be perceived as a de facto merger. Competitors must ensure that they continue to compete in the ordinary course of business until consummation of the merger transaction. Thus, the merging companies may not:
Parties may conduct legitimate due diligence and engage in transition planning directed towards determining how the parties will conduct their operations after consummation. They may not, however, agree as to how they will conduct their operations prior to consummation. Further, parties must ensure that information exchanges conducted for purposes of due diligence or transition planning must be limited to that information which is reasonably necessary to pursue the activity and must be covered by an effective confidentiality agreement. Parties should limit the group of employees who are engaged in such joint activities and, if the parties are competitors, they should seek to ensure that the disclosure of any sensitive information is not made to an employee who is directly responsible for marketing, pricing or sales of any competing product.
Parties to a merger or other acquisition are often eager to begin any new business strategy that has driven them to agreement. It is imperative, however, that the parties ensure that they continue to conduct their business in the normal course until expiration of the waiting period and, in most cases, consummation of the transaction.