Maryland District Court Denies DOJ’s Attempt To Halt Merger Based On Competition For A Single NSA Contract
11/01/2022On October 11, 2022, Judge Catherine C. Blake of the United States District Court for the District of Maryland denied the U.S. Department of Justice’s (“DOJ”) motion to preliminarily enjoin the $440 million acquisition of a company with expertise in specialized software development, cyber, and analytics by a larger consulting firm. Ruling that DOJ failed to show that the proposed transaction would cause anticompetitive harm in violation of federal antitrust laws, the Court was unwilling to grant the “extraordinary remedy” of blocking the merger and permitted the parties to close the transaction. United States v. Booz Allen Hamilton Inc. et al., No. 1:22-cv-01603 (D. Md. Oct. 11, 2022).
Defendant Booz Allen Hamilton (“Booz Allen”) is a consulting firm with experts in analytics, digital solutions, engineering, and cyber that provides services on some of the most innovative programs for governments worldwide, including their most sensitive agencies. Defendant EverWatch is a company that specializes in providing defense, intelligence, and mission support technology and services to the U.S. Government. DOJ alleged that Defendants have been the primary competitors intending to bid to win a contract to build and supply operational modeling and simulation services for the National Security Agency (“NSA”). These modeling and simulation services are used by the NSA to analyze and employ intelligence information and data. In March 2022, Booz Allen signed an agreement to acquire EverWatch. Three months later, DOJ sued Defendants under Section 1 of the Sherman Act and Section 7 of the Clayton Act. Among other things, DOJ claimed that the acquisition agreement was a restraint of trade and reduced competition for the NSA contract. In July 2022, DOJ petitioned the Court for a preliminary injunction to prevent the proposed merger from moving forward under Section 1 of the Sherman Act.
The Court’s opinion extensively analyzed the likelihood that DOJ’s claims would succeed on the merits. In assessing the Sherman Act Section 1 claim, the Court held that DOJ did not establish a likelihood that Defendants’ agreement unreasonably restrained trade under either a “quick look” or “rule of reason” theory. Under a “quick look” approach, an illegal agreement must pose an “intuitively obvious” restraint on trade—for example, an agreement that expressly limits output, fixes price, or bans competitive bidding. The Court reasoned that even if Defendants’ proposed acquisition “may harm one customer on a single contract,” that would not impose such extreme or obvious restraints.
Turning to its “rule of reason” analysis, the Court found that the DOJ did not meet its “initial burden to prove that the challenged restraint has a substantial anticompetitive effect.” First, DOJ failed to show direct evidence showing that the proposed merger had actual detrimental effects on competition. While DOJ cited informal statements made by Defendants’ lower-level employees on the day of the merger announcement, the Court found these remarks were merely “contemporaneous statements reflect[ing] the individual perception of specific employees, not broad corporate strategy.” The Court noted that other evidence suggested that higher-level executives instructed employees to continue “full steam ahead” with the competition to win the NSA contract. The Court also found that DOJ failed to show anticompetitive harm through indirect evidence. The Court rejected the argument that Defendants’ transaction would necessarily incentivize them to provide higher cost or lower quality services, finding that such a view suffered from “tunnel vision.” The Court instead emphasized the strong incentives to maintain a competitive bid, such as Defendants’ long term financial interests, reputation in the industry, the desire to win other contracts, and NSA control over contractor fees.
Finally, the Court found that DOJ did not properly define an economic market—a “necessary predicate” to assessing a merger’s “ability to lessen or destroy competition.” By asserting that the relevant market is the market for “signals intelligence modeling and simulation,” DOJ proposed a market defined by the specific preferences of the NSA in relation to a single contract for a particular product. The Court found that this definition was artificially narrow given the nature of modeling and simulation services along with the existence of other industry contractors that could provide reasonably interchangeable services.
Because DOJ failed to show competitive harm, it was also unable to prove that actual and imminent irreparable harm was likely without preliminary relief, or that the balance of equities and consideration of the public interest supported an injunction. Accordingly, the Court denied DOJ’s motion and the Court permitted “defendants the ability to merge on their own terms, if they so choose.” The Court did decline to enter a final judgment in Defendants’ favor and ordered the parties to meet and confer and submit proposals for further proceedings.