Event Driven Takeaways
- The DOJ undertakes red team-blue team drills when it is “seriously” considering litigation, said a former agency attorney who held a leadership position at the DOJ. The DOJ held such exercises to weigh the pros and cons of a lawsuit against Dow/DuPont, a case which ended in a consent decree in June 2017.
- Red team-blue team drills help DOJ personnel pinpoint strengths and weaknesses in their litigation strategy.
- Other reliable indicators for the expected outcome of an investigation include the size of the team working on a case and the intensity of depositions. Red team-blue team exercises are “not the first and only tea leaf,” said a former DOJ official who previously coordinated government investigations and is now in private practice.
Red team-blue team exercises indicate that the DOJ is considering litigation against Monsanto/Bayer, but other factors are critical in determining whether US regulators will file an action to block the deal, former DOJ attorneys told Event Driven.
“I'd be surprised if they were going through a red-blue team exercise if they were not seriously considering litigation, but it does not mean they've definitely decided to litigate,” said the first former DOJ attorney, who held a leadership position at the agency.
Importantly, some mergers which did not face litigation were nonetheless still the subject of red team-blue team drills. For example, the
DOJ held exercises to weigh the pros and cons of a lawsuit against Dow/DuPont, a case which ended in a consent decree.
“Litigation prep is always conducted with an eye towards litigation,” according to Jim Tierney, a former DOJ attorney who oversaw the agency’s antitrust enforcement in the tech and financial services sectors and is now a partner at the law firm Orrick, Herrington & Sutcliffe. “Red team-blue team prep is most often used in a close case.”
Tierney stated that during his time at the DOJ, some cases underwent red team-blue team sessions but did not result in litigation. “Red team-blue team sessions are pretty common,” he said.
According to Tierney, the DOJ will meet and collaborate with the companies throughout its investigation, but less so during the tail-end of its review and in litigation prep. “Throughout the process, the parties can meet with the team to discuss their side and what the DOJ still has issues with, and then you approach a decision,” Tierney said.
As
first reported by Event Driven, the DOJ has been conducting red team-blue team exercises in consideration of the Monsanto/Bayer deal. The companies are cooperating with regulators and aiming to complete their transaction in early 2018, a Bayer spokesperson said.
Former DOJ attorneys typically are not permitted to discuss the details of any individual case in which the agency had prepared for litigation but ultimately decided not to sue. They said that in general, however, red team-blue team exercises are useful in creating a unified view within the agency.
In particular, the exercises help the DOJ identify potential weaknesses, whether on market size, product market, or some other issue. Another helpful component for DOJ litigators is figuring out which witnesses can nail down key points.
Although DOJ team members routinely discuss the strengths and weaknesses of any case, a proper red/blue team exercise is essentially a mock trial without the presence of actual witnesses, according to a former DOJ official who previously coordinated government investigations and is now in private practice. Agency litigators present arguments in a formal fashion, and DOJ leaders will often observe the exercise. For any case in which there is a remedy but the remedy was not obvious at the outset of the DOJ’s investigation, the agency will likely conduct a red team-blue team exercise, the former official said.
Beyond red team-blue team exercises, there are usually other warning signs that a deal faces regulatory trouble. Notable indicators include the size of the team working on a case and the intensity of depositions.
“Litigation teams do increase and often involve pulling in folks from other sections,” said Spencer Weber Waller, interim associate dean at Loyola University Chicago School of Law. Waller, who previously worked at the DOJ, noted that “prospective defendants are normally given a chance to pitch the front office, particularly if they have a credible structural fix to propose.” There may also be an extension of the HSR clock if deadlines are approaching and meaningful settlement talks are underway, he said.
An expanding litigation team is “not a good sign,” said Tierney, who noted that bringing more litigation-savvy attorneys onto the team is also a sign that the agency is leaning toward litigation.
According to the former DOJ official who previously coordinated government investigations, it would not be unusual for 20 people at the DOJ to work on a case that is headed toward litigation. This increase, coupled with intensifying discussions between the agency and merging parties, should mean that red team-blue team exercises are “not the first and only tea leaf,” the former official said.
Advisors to a merging party can push DOJ staff to be relatively transparent about the government’s concerns, and those advisors will then convey to the client their perception of what needs to happen in order for the agency to let the deal proceed. But ultimately the merging firms must decide whether a remedy is reasonable enough to form the basis of an agreement with regulators, said the former official.
--Ryan Lynch and Matt Tracy