CVS CVS Health Corporation

By Brent Kendall 

WASHINGTON -- A federal judge on Monday sharply questioned the Justice Department's decision to green-light CVS Health Corp.'s nearly $70 billion acquisition of Aetna Inc., and said he may order CVS to halt its integration of Aetna's assets while he considers the merger's implications.

It is highly unusual for a judge to make such an announcement, since Justice Department antitrust enforcers had approved the deal in October under the condition the companies sell Aetna's Medicare drug business to preserve competition. The companies sold those assets to WellCare Health Plans Inc.

When the Justice Department identifies concerns with a merger -- and reaches an agreement with the merging companies to address them -- a federal law called the Tunney Act requires the government to file the proposed settlement for approval by a federal court, which determines whether the deal is in the public interest.

Such settlements are almost universally approved, often without a judge calling a hearing. But U.S. District Judge Richard Leon -- who was a central figure in AT&T Inc.'s merger with Time Warner Inc. -- made clear he would play an active role. He said at a terse hearing Monday -- in which he sought no input from either the Justice Department or the companies -- that he was concerned that the department hadn't adequately addressed the potential competitive harms raised by the merger.

"I am concerned that your complaint raises anticompetitive concerns about one-tenth of 1% of this $69 billion deal," said the judge, who sits on the U.S. District Court in Washington, D.C.

Judge Leon, whose courtroom style can be unorthodox, is looming large over the current antitrust landscape. In June, he issued a scathing opinion rejecting the Justice Department's challenge to the AT&T-Time Warner deal. His ruling in that case is now on appeal, with a high-stakes hearing set for Thursday.

In this case, the judge expressed, with equal vehemence, his skepticism about the department declining to challenge the CVS-Aetna merger more forcefully.

The judge's combined actions have left frustrations at the Justice Department, with officials there finding his latest position ironic in light of his rejection of the DOJ's AT&T lawsuit challenging a merger, according to a person familiar with their thinking.

Among other things, Judge Leon cited objections by the American Medical Association, which argued the merger would substantially reduce competition in health care to the detriment of patients. The judge said he was eager to review other public comments on the settlement before making up his mind.

Judge Leon, who was nominated to the court by President George W. Bush, said he is considering requiring that CVS hold the Aetna assets separate for now, which he said "seems to me more than reasonable." If he does so, it could cause considerable disruption for the newly merged company, since CVS began integrating Aetna's assets immediately after the deal closed last week.

He ordered the companies and the Justice Department to file legal papers by Dec. 14, and scheduled another court hearing for Dec. 18.

A spokesman for the merged business said the two companies no longer are separate entities, raising questions about how they could disentangle themselves if the judge ordered it. "CVS Health and Aetna are one company, and our focus is on transforming the consumer health experience, " the spokesman said.

Judge Leon has made waves in antitrust settlements before. During the Obama administration, he warned in 2011 that he might not approve a Justice Department settlement that allowed Comcast Corp. to acquire control of NBCUniversal.

The judge ultimately approved the agreement, but he chose to hold annual oversight hearings and required the government to report back on how many online-content companies used an arbitration provision in the settlement.

Antitrust practitioners said they couldn't remember a judge ever forcing substantial changes to a merger in a Tunney Act review.

James Tierney, a former Justice Department antitrust lawyer now with the Orrick law firm, said the department and the companies were handling the CVS-Aetna case in a traditional way. "What's happening here is consistent with the Tunney Act and decades of precedent," he said.

The act gives judges the authority to make sure that Justice Department antitrust settlements address the harms the government has identified, but it doesn't give courts free-roaming ability to require the department to challenge other aspects of a merger the department didn't find problematic, Mr. Tierney said.

The merger combines CVS's sprawling network of pharmacies and its pharmacy-benefit manager business with Aetna's health insurance practices focused on employers, Medicare and Medicaid managed-care. The companies argued that the vertical integration of their businesses would lead to better integrated, more efficient care for consumers.

In an earlier court session last week, Judge Leon appeared surprised that the companies had already closed the merger and said he wouldn't be a "rubber stamp" for the settlement.

Merging parties normally begin integrating their units after receiving government antitrust approval, without waiting for a court to formally sign off.

Over the weekend, the Justice Department filed court papers arguing that Judge Leon had a limited role in the matter, with no authority to raise objections that the government hadn't. And it said the judge already had signed a preliminary order that effectively allowed the companies to move forward on their merger.

Justice Department lawyers -- including antitrust chief Makan Delrahim -- turned out in large numbers for Monday's hearing, filling two rows of the courtroom.

Judge Leon addressed the government contingent, saying he did have authority to ensure that the Justice Department hadn't settled the case so narrowly as to make a "mockery" of the judicial system. He spoke for less than 10 minutes without hearing from either the department or CVS, then adjourned the session.

Mr. Delrahim, upon exiting, declined to comment.

Write to Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

December 03, 2018 19:33 ET (00:33 GMT)

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