The Federal Trade Commission (FTC) has filed a petition in federal court seeking a temporary restraining order and preliminary injunction to halt the sale of Black Knight Inc. to Intercontinental Exchange Inc. (ICE).
The petition was filed Monday in U.S. District Court for the Northern District of California, San Francisco Division. The FTC said it chose the district for its petition because ICE’s Mortgage Technology business unit is headquartered in San Francisco.
The FTC had said on March 9 it would move to block the sale, originally announced in May 2022. The commission initiated an administrative proceeding by filing an administrative complaint against the deal, stating the sale would drive up costs, reduce innovation, and reduce lenders’ choices for tools necessary to generate and service mortgages.
In its petition to the federal court, the FTC states it “requires the aid of this court to maintain the status quo and prevent interim harm to competition during the pendency of an administrative proceeding on the merits.”
It adds, “The administrative hearing on the merits will begin on July 12, 2023. That administrative hearing will determine the legality of the acquisition and will provide all parties a full opportunity to conduct discovery and present testimony and other evidence regarding the likely competitive effects of the acquisition.”
The FTC states in its petition that ICE’s Encompass loan origination system (LOS) and Black Knight’s Empower LOS are the two largest systems in the U.S. Both companies also offer ancillary services, it states, including Black Knight’s Optimal Blue product pricing and eligibility engine (PPE), “software that allows a lender to identify potential loan rates for a borrower, determine the borrower’s eligibility for a given loan, and lock in the loan’s terms for the borrower.”
“Black Knight’s Optimal Blue is the clear industry leader, serving lenders that originate as much as 40% of the nation’s residential mortgages each year,” the FTC’s petition states.
ICE’s Encompass Product and Pricing Service PPE (EPPS) is a close second, it notes.
In a move taken in hopes of appeasing the FTC, ICE and Black Knight Inc. announced March 7 that they had reached an agreement to sell Black Knight’s Empower LOS to a subsidiary of Constellation Software Inc. Under terms of the agreement, the Empower sale is subject to ICE closing its acquisition of Black Knight, as well as to other "customary closing conditions," the companies said.
Based on the potential sale of Empower, the overall price to acquire Black Knight was reduced from $13 billion to $11.7 billion, the companies said.
In its petition seeking an injunction and restraining order, the FTC states that the proposed sale of Empower does not resolve its concerns about the anticompetitive nature of the deal.
“Defendants cannot meet their burden of showing that the proposed remedy will restore competition,” the petition states. “The proposed remedy does not attempt to address the reasonably probable anticompetitive effects in the relevant PPE markets that will arise from ICE’s acquisition of Optimal Blue. Even with respect to the relevant LOS markets, the proposed remedy fails to provide Constellation with the ability, resources, and incentive to replace the intensity of the competition between ICE and Black Knight.”
The FTC states that, among other issues, the sale of Empower fails to “transfer a standalone business to Constellation and would require Constellation to rely on its post-acquisition competitor, ICE, to supply many ancillary services to Empower customers via a resale agreement. This arrangement would create a risk of continuing entanglements and conflict between ICE and Constellation, and it would limit the flexibility with which Constellation could innovate, discount, and offer the array of services Black Knight operates in conjunction with Empower today.”
It adds that lenders and consumers benefit from the competition between ICE and Black Knight, and “they should not be forced to bear the risk of a divestiture that fails to maintain this competition.”
The petition tells the court the FTC believes it is “likely to succeed in proving that the effect of the acquisition may be substantially to lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton [Antitrust] Act or Section 5 of the FTC Act, and that the merger agreement and acquisition constitute unfair methods of competition in violation of Section 5 of the FTC Act.”
Without the temporary restraining order and preliminary injunction, the petition states, ICE and Black Knight “have represented that they will close the acquisition immediately following a vote of Black Knight shareholders scheduled for April 28, 2023.”
The petition adds that “preliminary relief is warranted and necessary. Should the commission rule, after the full administrative proceeding, that the acquisition is unlawful, reestablishing the status quo would be difficult, if not impossible, if the acquisition has already occurred in the absence of preliminary relief.”
Judge Araceli Martinez-Olguin, the federal judge assigned to the case, has not yet ruled on the petition.
