"What a sweet deal was won by Latham & Watkins and Fried Frank."

That was the initial—and dismayed—take of American Antitrust Institute Advisory Board member Stephen Calkins when the Justice Department last year for the first time agreed to arbitrate a merger challenge rather than litigate it in federal court.

(Pause for a double take: Arbitrate a merger challenge? Just … why?)

But it turns out, the sweet deal went to the Justice Department—and American taxpayers—after arbitrator Kevin Arquit, a partner at Kasowitz Benson Torres, on Monday sided with the government.

It's too soon to say if binding arbitration will be a viable new path for merger challenges, but the historic case gave Trump antitrust enforcers a way to come across as both pro-enforcement and pro-business—not an easy needle to thread.

For the parties—industrial aluminum producer Novelis Inc., represented by a Latham team led by Dan Wall and Mandy Reeves, and Aleris Corp., represented by litigators including Fried Frank's Nathaniel Asker—arbitration offered some obvious advantages.

They got faster resolution, a single dispositive issue and a green light to close their merger (subject to a hold separate order) while the proceedings were pending.

The Antitrust Division, on the other hand, seemed like it was practically giving away the farm. DOJ lawyers weakly explained that they favored arbitration "in order to lessen the burden on the court and reduce litigation costs to the merging parties and to the United States," and because "Federal policy has long favored arbitration as an efficient and economical alternative dispute resolution."

Since 1996, the DOJ under the Administrative Dispute Resolution Act has had the option of pursuing arbitration in a merger challenge—but until now, it has never attempted to do so.  Probably for a good reason.  

AT&T/ Time Warner aside, Antitrust Division lawyers almost always win their merger challenges in court. (And if it ain't broke … ) Plus so few of these cases actually go to trial. There's public policy value in building precedent and providing guidance to other companies contemplating mergers. 

The Novelis/ Aleris arbitration, on the other hand, was strictly confidential, and Arquit was only authorized to write a five-page, non-public decision, which cannot be appealed.  

Given his uniquely powerful role in the outcome, both sides had to agree to his appointment. 

One of the country's leading antitrust lawyers, Arquit worked at the Federal Trade Commission from 1986 to 1992, serving as general counsel and director of the Bureau of Competition, where he made his mark as a tough enforcer. But he's also spent decades representing corporate clients as co-head of the global antitrust and competition practice at Weil, Gotshal & Manges and head of the antitrust practice at Simpson Thacher & Bartlett before joining Kasowitz in 2019.

Arquit declined comment.

As an arbitrator, he had a narrow mandate. His task was not to determine the ultimate question of whether the merger would substantially lessen competition in a relevant line of commerce. Instead, the only issue before him was market definition. 

That is, does aluminum auto body sheet, which per DOJ is used by automakers to "make vehicles lighter, so they can satisfy consumer demand for larger vehicles while enhancing fuel efficiency, safety, and performance," constitute a relevant product market? 

If so, the merger is deeply problematic. Novelis and Aleris are two of only four aluminum auto body sheet suppliers in North America. Under DOJ's theory, a major divestiture would be necessary for the merger to pass muster. 

Or as Novelis asserted, was DOJ's theory "completely divorced from commercial reality"?

The company's lawyers from Latham argued that "there is strong competition between steel and aluminum—at least for those parts as to which automakers will consider aluminum as a steel substitute. Each side in this battle is investing heavily in innovation (with steel making its product lighter and aluminum making its product stronger) and pitching its price and value proposition to the automakers."

Arquit sided with the government. His decision means that Novelis must divest Aleris's entire aluminum auto body sheet operations in North America.  

Moreover, because the government prevailed, Novelis (per the terms of the arbitration agreement) is required to "reimburse the United States for the fees and expenses of its attorneys, as well as any other costs including experts' fees, incurred in connection with the arbitration." 

Had the company lost in district court, they wouldn't have had to cover those costs. Think of it as a small windfall for the U.S. Treasury, which no doubt can use the money.

"This first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge," Antitrust Division head Makan Delrahim said in a news release. "As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstances and I look forward to applying the learning from this case to future matters."