In an Initial Decision announced May 7, Chief Administrative Law Judge D. Michael Chappell upheld a Federal Trade Commission complaint challenging the consummated merger of two prosthetics manufacturers that are top sellers of prosthetic knees equipped with microprocessors.
According to the FTC’s December 2017 administrative complaint, microprocessor prosthetic knees or MPKs, which use microprocessors to adjust the stiffness and positioning of the joint in response to variations in walking rhythm and ground conditions, provide a stable platform for amputees. MPKs reduce the risk of falling, cause less pain, and promote the health and function of the sound limb.
Judge Chappell found that the competition between Ottobock HealthCare North America, Inc., and Freedom Innovations, LLC, in the microprocessor prosthetic knee market has helped keep prices low and innovation high. A merger could lessen competition in the MPK market, the judge held.
Ottobock’s global headquarters are in Duderstadt, Germany, with main North American offices in Minneapolis and Toronto. Freedom Innovations is based in Irvine, Calif.
According to the complaint, Ottobock’s acquisition of FIH Group Holdings (the owner of Freedom Innovations) harmed competition in the U.S. market for MPKs by eliminating head-to-head competition between the two companies, removing a significant and disruptive competitor, and entrenching Ottobock’s position as the dominant supplier. After the acquisition closed in September 2017, Ottobock began integrating the Freedom Innovations business, including personnel and intellectual property.
The Relevant Market
“Freedom Innovations, a California company, was sold to Ottobock of Germany by a private equity seller in a transaction that was not reportable under the Hart–Scott–Rodino Antitrust Improvements Act of 1976,” said MoginRubin Counsel Jennifer Oliver. And, she said, “Judge Chappell declined to expand the relevant market definition to include other types of prosthetic knees, finding that microprocessor knees perform differently than other types of prosthetic knees and should be considered their own market.”
Judge Chappell explained that under the “unilateral effects theory,” a merger between firms selling differentiated products might hurt competition by enabling the new company to profit by unilaterally raising prices above pre-merger levels.
“For a merger to raise concerns about unilateral effects, not every consumer in the relevant market must regard the products of the merging firms as his or her top two choices,” the judge wrote in his 261-page ruling. It is enough that “a significant fraction” of customers – one that does not need to “approach a majority” – view products formerly sold by the other merging firm as their “next-best choice.”
The FTC bolstered its argument, the judge said, by demonstrating “for a significant fraction of clinic customers” the Ottobock and Freedom products “are the two top choices” in this prosthetic category and that they are direct competitors. The FTC also demonstrated that that such competition has helped clinic customers negotiate lower prices and has helped spur innovation of MPK products, the judge held.
Non-merging firms are sometimes able to reposition their products to offer “close substitutes” for the merging firms’ products. Just like entry into a market, the judge wrote, consideration has to be given to timeliness, likelihood, and sufficiency. However, he found, evidence does not support the conclusion that any other MPK makers are really ready to step in. No one is “poised to expand in a way that is timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract any potential anticompetitive effects resulting from the Acquisition,” Judge Chappell found.
Ottobock is required to divest the assets of Freedom Innovations to an FTC-approved buyer.
Immediately after the ruling, Freedom Innovations CEO Dave Reissfelder posted a statement saying the order was merely “a development in the case” and is not a final outcome. “We do not know when this case will be settled as a final matter, but this latest interim step has no bearing on and does not impact Freedom’s operations, products, customer relationships or other agreements. We will continue to compete vigorously and operate as an independent entity. The structure, resources, personnel – and most importantly, the mission – of Freedom remain unchanged.”