CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED COMMUNICATION ATTORNEY WORK PRODUCT

CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
New York Office: 1301 Avenue of the Americas, 35th Floor, New York, NY 10019 San Francisco Office: 555 California Street, Suite 2800, San Francisco, CA 94104
Matter Number: 1032-00001
MEMORANDUM
TO: Priya Nagarajan, U.S. Deputy General Counsel, Halcyon Semiconductor Americas Inc. Katrin Schreiber, General Counsel, Halcyon Semiconductor AG
FROM: Elaine Forsythe, Partner, Antitrust & Competition Practice Group, Calderwood & Harkness LLP Aaron Liu, Associate, Antitrust & Competition Practice Group, Calderwood & Harkness LLP
DATE: October 22, 2023
RE: Analysis of Proposed Behavioral Consent Decree — State of Oregon v. Halcyon Semiconductor Americas Inc., Case No. 23CV-18274, Circuit Court of the State of Oregon, County of Multnomah
CC: Howard Bellamy, Partner, Calderwood & Harkness LLP (Billing Partner) Thomas Kowalski, Grantham Davis & Kowalski LLP (Oregon Local Counsel)
I. Executive Summary
The purpose of this memorandum is to provide Halcyon Semiconductor AG ("Halcyon AG") and Halcyon Semiconductor Americas Inc. ("Halcyon Americas" and, together with Halcyon AG, "Halcyon" or the "Company") with a comprehensive analysis of the term sheet for the proposed consent decree agreed in principle by the parties on October 20, 2023, following court-ordered mediation before the Honorable Patricia Loomis (Ret.). The mediation commenced on October 6, 2023, and the parties engaged in four sessions of substantive negotiations before reaching agreement on the material terms described herein.
Our overall recommendation is that Halcyon should accept the proposed behavioral remedy terms and authorize counsel to finalize and execute the consent decree.
The settlement represents a highly favorable outcome for Halcyon for several critical reasons. Most importantly, the proposed consent decree avoids any divestiture of any portion of the Meridian Photonics Inc. ("Meridian") business — the core strategic concern that has animated Halcyon's defense of this action since the Oregon Attorney General's complaint was filed in April 2023. The consent decree fully resolves the enforcement action brought by Attorney General Diane Calloway under Oregon Revised Statutes ("ORS") Sections 646.730 and 646.775, and imposes only time-limited behavioral commitments with a five-year duration, expiring on or about November 8, 2028.
The total direct monetary cost of the settlement is modest by any measure: a civil penalty of $1,500,000, payable to the State of Oregon within thirty days of entry of the decree, plus estimated compliance monitor fees of approximately $875,000 over the five-year term. Internal compliance implementation costs are estimated at $250,000 to $500,000. The total settlement-related costs therefore range from approximately $2,625,000 to $2,875,000 — a sum that is de minimis relative to the $2.15 billion acquisition price, Halcyon AG's annual consolidated revenue (€9.3 billion in FY 2022), and the substantial ongoing defense costs that would be required to take this matter through trial.
By contrast, continued litigation would expose Halcyon to significant remaining defense costs, a meaningful risk of an adverse judgment that could include injunctive relief up to and including partial or full divestiture of the Meridian business, and substantial operational disruption arising from the ongoing uncertainty of a contested enforcement action. We assess the risk of an adverse outcome at trial as moderate-to-high, given the strength of the Attorney General's market-share evidence, the court's denial of Halcyon's Motion to Dismiss, and the court's apparent sympathy toward behavioral restrictions at the preliminary injunction hearing on September 22, 2023.
In sum, the proposed consent decree preserves the full strategic value of the Meridian acquisition while resolving the most significant legal threat to Halcyon's integration plans at a reasonable and manageable cost. We urge the Company to provide written authorization to proceed.
II. Procedural Background
A. The Acquisition and Federal Review
On September 8, 2022, Halcyon Semiconductor AG, acting through its wholly owned U.S. subsidiary Halcyon Semiconductor Americas Inc. (a Delaware corporation, EIN 84-3921057), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Meridian Photonics Inc. (a Delaware corporation, EIN 93-1284563), pursuant to which Halcyon agreed to acquire 100 percent of the issued and outstanding shares of Meridian's common stock for aggregate consideration of $2.15 billion in cash. The acquisition was structured as a reverse triangular merger, with a newly formed acquisition subsidiary of Halcyon Americas merging with and into Meridian, with Meridian surviving as a wholly owned subsidiary of Halcyon Americas.
As required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), 15 U.S.C. § 18a, Halcyon Americas and Meridian filed their respective premerger notification forms with the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice on October 3, 2022 (HSR File No. 20221003-1847). Following a review of the filing, the FTC granted early termination of the initial thirty-day statutory waiting period on November 14, 2022. Notably, neither the FTC nor the DOJ Antitrust Division issued a second request for additional information or documentary material, indicating that the federal antitrust authorities did not identify concerns sufficient to warrant extended review of the transaction. No Consent Order, Complaint, or other enforcement action was initiated at the federal level.
The acquisition was financed through a $2.2 billion senior secured term loan facility arranged and led by Vereinigte Kreditbank AG, Frankfurt, as administrative agent, with Nordmark Capital Group and Pacific Rim Commercial Bank participating as syndicate members. Of the total facility, $2.15 billion was drawn at closing to fund the merger consideration, with Halcyon contributing approximately $50 million from its existing cash on hand to cover transaction-related costs and expenses.
The transaction closed on January 31, 2023. Since that date, Meridian has operated as a wholly owned subsidiary of Halcyon Semiconductor Americas Inc. Meridian's principal offices remain at 1820 NW Everett Street, Suite 400, Portland, Oregon 97209, and Meridian continues to employ approximately 1,200 individuals at that location, including its engineering, manufacturing support, and commercial teams. The Meridian management team has been substantially integrated into Halcyon's organizational structure, with former Meridian senior leadership reporting to Halcyon Americas' executive team.
B. The Oregon AG Enforcement Action
Notwithstanding the absence of any federal challenge to the acquisition, the Oregon Department of Justice commenced an investigation of the transaction in the spring of 2023. On April 10, 2023, the Oregon Attorney General's office issued a Civil Investigative Demand ("CID") to Halcyon Semiconductor Americas Inc. pursuant to ORS 646.760, seeking extensive documentation regarding the acquisition, Halcyon's and Meridian's pre-merger competitive strategies, pricing data, customer contracts, and internal analyses of the competitive effects of the merger. Halcyon Americas responded to the CID through counsel, producing responsive documents on a rolling basis while preserving objections to the scope and relevance of certain categories of requested materials.
Just seven days after issuance of the CID, and before Halcyon Americas had completed its response, the Attorney General's office filed a Complaint for Injunctive Relief and Civil Penalties in the Circuit Court of the State of Oregon for the County of Multnomah on April 17, 2023. The case was assigned to the Honorable Robert Castañeda, Circuit Judge, and designated Case No. 23CV-18274. The Complaint was filed by Senior Assistant Attorney General Marcus Trujillo, of the Antitrust Division of the Oregon Department of Justice, who serves as lead counsel for the State. The AG's office also retained outside counsel — the law firm of Ashworth & Pendleton LLP, with lead partner Constance Yee and associate Derek Holmgren handling the day-to-day litigation — to supplement its litigation resources.
The Complaint sets forth the following principal allegations:
First, the AG alleges that the relevant product market is the market for co-packaged optics ("CPO") transceivers sold to U.S. hyperscale data center operators and cloud infrastructure providers. CPO technology represents a next-generation approach to optical interconnects in which optical components are integrated directly onto or adjacent to the switch ASIC package, offering significant advantages in power efficiency, bandwidth density, and latency compared to traditional pluggable optical transceivers.
Second, the AG alleges that the relevant geographic market is the United States.
Third, the AG alleges that the post-merger combined entity holds a market share of approximately 58 percent of the U.S. CPO transceiver market, which the AG estimates to have generated total revenues of approximately $875 million in fiscal year 2022. The AG further alleges that the Herfindahl-Hirschman Index ("HHI") for the relevant market increased from 2,818 pre-merger to 4,050 post-merger, reflecting an HHI delta of 1,232 — levels that substantially exceed the thresholds identified in the 2010 Horizontal Merger Guidelines as indicative of "highly concentrated" markets (HHI above 2,500) and transactions that are "presumed to be likely to enhance market power" (HHI delta above 200).
Fourth, the AG's theory of competitive harm centers on two principal mechanisms: (a) the elimination of Meridian Photonics as an independent innovator and competitive force in the CPO transceiver market, where Meridian was the fastest-growing participant prior to the acquisition; and (b) vertical foreclosure, whereby Halcyon would allegedly leverage its integration of Meridian's CPO modules with Halcyon's existing analog and mixed-signal semiconductor business (including power-management integrated circuits) to degrade interoperability between Meridian CPO modules and third-party switch ASICs, thereby disadvantaging competitors and raising barriers to entry.
The Complaint specifically names two Oregon-headquartered customers of Meridian as having been affected by the acquisition: Cascadia Cloud Services Inc. ("Cascadia"), which purchased approximately $62 million in Meridian CPO modules in fiscal year 2022, and Northstar Digital Infrastructure LLC ("Northstar"), which purchased approximately $28 million in Meridian CPO modules in the same period. Both companies are described in the Complaint as having expressed concerns to the AG's office regarding the potential for post-merger price increases and reduced product choice.
The Complaint seeks injunctive relief under ORS 646.775, including the potential for divestiture of Meridian's CPO business, as well as civil penalties under the same statute. The prayer for relief is broadly drafted and does not specify a particular monetary amount or a particular structural remedy, leaving the scope of relief to be determined by the Court.
C. Key Litigation Milestones Leading to Mediation
The following summarizes the principal procedural events in the case from the filing of the Complaint through the mediation that produced the term sheet under review:
May 5, 2023: Halcyon Americas, through Calderwood & Harkness LLP and Oregon local counsel Grantham Davis & Kowalski LLP, filed its Answer to the Complaint. The Answer denied the material allegations of the Complaint, raised fourteen affirmative defenses (including federal preemption, failure to state a claim, and the efficiencies defense), and reserved all rights to seek dismissal of the action.
May 19, 2023: Halcyon Americas filed a Motion to Dismiss the Complaint pursuant to ORCP 21 A(8). The motion advanced two principal arguments: (a) that the Oregon AG's enforcement action was preempted by federal law, on the ground that the FTC's grant of early termination of the HSR waiting period constituted an implicit federal determination that the transaction did not violate Section 7 of the Clayton Act, and (b) that the Complaint failed to state a claim upon which relief could be granted because the AG's alleged relevant product market — U.S. co-packaged optics transceivers — was artificially narrow and did not account for the broader pluggable optics market in which Halcyon and Meridian held a combined share of less than 15 percent.
July 7, 2023: The Court issued a written opinion denying the Motion to Dismiss. In a twelve-page ruling, Judge Castañeda held that early termination of the HSR waiting period does not constitute a substantive adjudication of the competitive effects of a merger and therefore does not preempt state antitrust enforcement actions under the Oregon Antitrust Act, ORS 646.705 et seq. The Court further held that the AG had adequately pleaded a plausible relevant product market, noting that the question of whether the market should be defined as co-packaged optics transceivers or the broader pluggable optics market was a factual dispute to be resolved at trial or on summary judgment based on a full evidentiary record. The denial of the Motion to Dismiss was a significant adverse development for Halcyon, though not unexpected given the procedural posture and the deferential standard applicable to motions testing the sufficiency of the pleadings.
July 21, 2023: Following the Court's ruling on the motion to dismiss, discovery commenced. The parties exchanged initial disclosures pursuant to UTCR 5.010 and agreed upon an initial discovery schedule, including deadlines for document production, interrogatory responses, and the identification of fact and expert witnesses.
August 15, 2023: The Oregon AG filed a Motion for Preliminary Injunction, seeking behavioral restrictions on Halcyon pending trial. The requested relief included (a) an order requiring Halcyon to maintain the interoperability of Meridian CPO modules with third-party switch ASICs, (b) an order prohibiting Halcyon from conditioning sales of Meridian CPO modules on the purchase of other Halcyon semiconductor products, and (c) an order requiring Halcyon to license Meridian's CPO-related patents to requesting licensees on reasonable terms. The AG supported its motion with declarations from representatives of Cascadia Cloud Services and Northstar Digital Infrastructure, as well as an economic analysis prepared by Dr. Evelyn Ng of Ridgeline Economic Consulting LLC.
September 8, 2023: Halcyon Americas filed its Opposition to the Motion for Preliminary Injunction. The opposition was supported by the Declaration of Dr. Franklin Morrow of Stonebridge Analytics LLC, Halcyon's retained economic expert. Dr. Morrow's declaration challenged the AG's proposed market definition, identified significant procompetitive efficiencies arising from the merger, and opined that the AG had not demonstrated a likelihood of irreparable harm sufficient to justify the extraordinary remedy of a preliminary injunction. The opposition also included declarations from senior Halcyon and Meridian personnel regarding the Company's integration plans and ongoing commitment to customer service and product interoperability.
September 22, 2023: The Court held a hearing on the preliminary injunction motion. At the hearing, Judge Castañeda engaged in extensive questioning of both sides and indicated that while he was not prepared to rule on the motion that day, his initial assessment was that at least some behavioral restrictions might be warranted to preserve the competitive status quo pending trial. Critically, the Court also encouraged the parties to pursue settlement discussions, observing that a negotiated resolution could address the competitive concerns identified in the Complaint while avoiding the disruption and expense of protracted litigation. The Court appointed the Honorable Patricia Loomis (Ret.), a former Multnomah County Circuit Judge with substantial mediation experience, to serve as mediator.
October 6, 2023: Formal mediation commenced before Judge Loomis. The mediation sessions included senior representatives of both parties — including Halcyon Americas' U.S. Deputy General Counsel Priya Nagarajan and Senior Assistant Attorney General Marcus Trujillo — as well as the respective outside counsel teams.
October 20, 2023: Following four mediation sessions conducted over a two-week period, the parties reached an agreement in principle on a term sheet for a proposed consent decree. The term sheet sets forth the material terms of the behavioral remedy and civil penalty that would resolve the Oregon AG's enforcement action. This memorandum provides our detailed analysis of those terms.
III. Term-by-Term Analysis of the Proposed Consent Decree
We turn now to a detailed examination of each material term of the proposed consent decree as reflected in the October 20, 2023 term sheet. For each term, we describe the obligation, assess its practical and strategic impact on Halcyon, and provide our recommendation.
A. Term 1: FRAND Licensing Commitment for Meridian CPO Patents
1. Description of the Obligation
Under the proposed consent decree, Halcyon commits to offering licenses on Fair, Reasonable, and Non-Discriminatory ("FRAND") terms for all forty-seven (47) of Meridian's United States patents related to co-packaged optics technology. This obligation applies to any party that requests a license to one or more of the covered patents, without limitation as to the identity, size, or market position of the requesting licensee. The FRAND licensing obligation would take effect upon entry of the consent decree and remain in force for a period of five (5) years, expiring on or about November 8, 2028.
The term sheet identifies the covered patents by reference to the patent list attached as Appendix A to the mediation materials. We have reviewed this list against Halcyon's internal patent portfolio records and confirmed that the forty-seven patents listed are specifically directed to CPO technology — including silicon photonics integration, optical engine architectures, transceiver packaging methodologies, and wavelength-division multiplexing techniques applicable to co-packaged optics modules. Importantly, the scope of the FRAND commitment is expressly limited to these forty-seven CPO-related U.S. patents and does not extend to Halcyon's substantially larger portfolio of analog, mixed-signal, and power-management semiconductor patents.
2. Assessment.  Halcyon and Meridian do not currently maintain a broad licensing program for the forty-seven CPO-related patents. Prior to the acquisition, Meridian had entered into a limited number of cross-license agreements with certain competitors, including a 2019 cross-license with Luminos Systems Corp. covering specific packaging and integration patents, and a 2021 cross-license with Crestwave Optical Technologies Ltd. covering wavelength-division multiplexing techniques. These existing cross-licenses would remain in effect according to their terms and would not be superseded by the FRAND obligation. However, the consent decree's FRAND commitment would require Halcyon to offer licenses to a potentially broader universe of licensees, including companies that do not currently have any licensing relationship with Halcyon or Meridian.
Several factors mitigate the potential competitive impact of this obligation:
First, the FRAND standard does not require royalty-free licensing. Halcyon retains the ability to charge royalties for use of the covered patents, provided that the royalty rates and other license terms are fair, reasonable, and non-discriminatory. This means that the FRAND obligation could, in fact, create a new revenue stream for Halcyon — particularly if competitors such as Luminos Systems Corp. (which holds approximately 22% of the U.S. CPO market) and Crestwave Optical Technologies Ltd. (which holds approximately 11%) elect to seek licenses to the full portfolio of covered patents rather than relying on their existing limited cross-licenses.
Second, the obligation is confined to the forty-seven CPO-related patents and does not extend to Halcyon's broader semiconductor IP portfolio. Halcyon's analog and mixed-signal patent portfolio — which comprises more than 3,800 active U.S. patents — is not affected by this commitment. This is a critically important limitation, as it preserves Halcyon's freedom to operate and enforce its intellectual property rights across its core semiconductor business lines.
Third, the five-year sunset provision means that the FRAND obligation terminates automatically on or about November 8, 2028, after which Halcyon regains full discretion over the licensing of its CPO patents. This time limitation provides Halcyon with a clear path back to its preferred IP strategy while addressing the AG's concern about potential exclusionary conduct in the near term.
Fourth, as Dr. Morrow's analysis has demonstrated, the U.S. CPO transceiver market is projected to grow at a compound annual growth rate ("CAGR") of approximately 28% through 2027, driven by the accelerating adoption of CPO technology by hyperscale data center operators. In a market experiencing this rate of expansion, the potential for competitors to use licensed technology to erode Halcyon's market position is substantially mitigated by the overall growth of the addressable market. In other words, even if FRAND licensing enables some incremental competition, the expanding pie means that Halcyon's absolute revenues and unit volumes are likely to continue growing.
We do note one potential concern: the term sheet does not define "FRAND" with specificity, and the meaning of FRAND terms has been the subject of extensive litigation in other contexts, particularly in the standard-essential patent arena. To the extent that a licensee disputes whether a particular royalty rate or license term offered by Halcyon satisfies the FRAND standard, there is a risk of collateral disputes that could consume time and resources. We address this concern in Section VI below, where we recommend that the final decree language include a more detailed definition of FRAND terms, potentially by reference to comparable industry frameworks such as those adopted by ETSI (European Telecommunications Standards Institute) or IEEE.
3. Recommendation.  This term is acceptable. The time-limited and FRAND-standard nature of this commitment limits the downside to Halcyon while maintaining the Company's patent monetization rights. The five-year sunset and the narrow scope of the covered patent portfolio are particularly favorable features. We recommend that Halcyon accept this obligation, subject to the negotiation of more specific FRAND definitional language in the final consent decree as discussed in Section VI.
B. Term 2: Interoperability Obligation (OIF 400ZR/800ZR Standards)
1. Description of the Obligation
The proposed consent decree would require Halcyon to maintain backward-compatible interoperability between Meridian CPO modules and third-party switch ASICs that conform to the Optical Internetworking Forum ("OIF") 400ZR and 800ZR implementation agreements. The OIF is an industry consortium that develops interoperability agreements and implementation specifications for optical networking equipment. The 400ZR and 800ZR standards define the technical specifications for coherent pluggable and co-packaged optics modules operating at 400 gigabits per second and 800 gigabits per second, respectively, and are widely adopted in the data center interconnect market.
This obligation would remain in force for a period of five (5) years from the date of entry of the consent decree, expiring on or about November 8, 2028, coterminous with the other behavioral commitments.
2. Assessment.  The interoperability obligation is, in practical terms, one of the least burdensome provisions of the proposed consent decree, because it largely codifies Meridian's existing engineering practices and product design philosophy. Meridian's current CPO modules are designed and certified to comply with OIF 400ZR and 800ZR standards, and Meridian has been an active participant in the OIF standards development process since 2017. Maintaining compliance with these standards is not only consistent with Halcyon's stated business strategy but is, in fact, a competitive necessity in a market where customers demand multi-vendor interoperability as a prerequisite for procurement.
The AG's core theory of competitive harm in this case was that Halcyon would exploit its vertical integration — combining Meridian's CPO modules with Halcyon's own switch ASIC and power-management IC capabilities — to degrade or eliminate interoperability between Meridian CPO modules and the switch ASICs manufactured by Halcyon's competitors. This theory posited that Halcyon could, over time, introduce proprietary modifications to Meridian's CPO modules that would work optimally with Halcyon's own ASICs but would function poorly, or not at all, with third-party ASICs. The interoperability obligation directly neutralizes this theory of harm by requiring Halcyon to maintain compatibility with the published industry standards.
Several aspects of this obligation merit particular attention:
First, the obligation is framed in terms of maintaining backward-compatible interoperability with "currently published" OIF 400ZR and 800ZR standards. This formulation is important because it does not require Halcyon to support proprietary or non-standard interfaces developed by individual competitors. The obligation is limited to the industry-consensus standards adopted through the OIF's formal process.
Second, the obligation does not constrain Halcyon from developing next-generation CPO products that incorporate capabilities beyond the current OIF 400ZR/800ZR specifications. Halcyon is free to innovate at the leading edge of CPO technology, including the development of products at higher data rates (e.g., 1.6 Tbps and beyond) or with enhanced features, provided that its existing standard-compliant modules continue to maintain backward compatibility. This preserves Halcyon's ability to compete on the basis of technological innovation — a critical element of the Company's long-term competitive strategy.
Third, Dr. Morrow has opined that maintaining interoperability is not merely benign but affirmatively procompetitive, as it expands the addressable market for Meridian's CPO modules by ensuring compatibility with the broadest possible range of customer environments. Halcyon's stated business strategy since the acquisition has been to grow Meridian's customer base beyond its pre-merger installed base, and interoperability with third-party ASICs is essential to that objective.
From an operational perspective, Halcyon's engineering teams are already engaged in OIF standards compliance testing as part of their standard product development and certification process. The consent decree obligation would formalize this existing practice but would not require any material change in engineering resource allocation or product development priorities.
3. Recommendation.  This term is acceptable. It imposes minimal incremental burden on Halcyon given the Company's existing compliance with OIF standards and is fully consistent with Halcyon's stated market strategy of expanding Meridian's CPO customer base. We recommend that the final decree language clarify that the interoperability obligation pertains to OIF 400ZR and 800ZR standards as published and in effect at the time of decree entry, as further discussed in Section VI.
C. Term 3: Non-Discrimination in Supply
1. Description of the Obligation
The proposed consent decree would prohibit Halcyon from conditioning the supply of Meridian CPO modules on a customer's purchase of Halcyon power-management integrated circuits or any other Halcyon semiconductor components. In other words, Halcyon may not engage in tying or bundling arrangements that require a customer to buy Halcyon products as a precondition for purchasing Meridian CPO modules.
The term sheet does not include an explicit sunset date for this obligation. However, the general structure of the proposed consent decree contemplates a five-year term for all behavioral commitments, and we anticipate that the final decree language will confirm that the non-discrimination obligation is coterminous with the other behavioral provisions, expiring on or about November 8, 2028.
2. Assessment.  This provision directly addresses the second principal theory of harm advanced in the AG's Complaint: that Halcyon would leverage Meridian's dominant position in the CPO transceiver market (approximately 38% pre-merger Meridian share, 58% combined post-merger) to force customers to purchase Halcyon's analog and power-management ICs as a condition of accessing Meridian's CPO modules. This classic tying theory is a standard antitrust concern in vertical merger cases and was specifically cited by the AG's outside counsel, Constance Yee of Ashworth & Pendleton LLP, in the preliminary injunction briefing.
The practical impact of this obligation on Halcyon's commercial operations is manageable but will require some organizational attention. Specifically:
First, Halcyon is not prohibited from offering customers bundled pricing packages or volume discounts that encompass both Meridian CPO modules and Halcyon power-management ICs. The prohibition is limited to conditioning the supply of CPO modules on the purchase of other products — i.e., Halcyon cannot refuse to sell CPO modules to a customer that declines to purchase Halcyon's power-management ICs, nor can it impose materially different prices or delivery terms on customers based on whether they purchase other Halcyon products. Voluntary bundled offers, however, remain permissible.
Second, Halcyon's sales organization will need to implement clear internal policies, guidelines, and training to ensure compliance with this obligation. Sales personnel must understand the distinction between permissible bundled offers (which provide discounts or incentives for multi-product purchases) and impermissible tying (which conditions access to one product on the purchase of another). We recommend that the Company's commercial compliance team, in coordination with the compliance monitor (discussed below), develop and disseminate written policies addressing this distinction prior to the entry of the consent decree.
Third, this obligation may have the beneficial effect of preserving Halcyon's relationships with its most important CPO customers. The AG's Complaint specifically named Cascadia Cloud Services Inc. (approximately $62 million in FY 2022 Meridian CPO purchases) and Northstar Digital Infrastructure LLC (approximately $28 million in FY 2022 Meridian CPO purchases) as Oregon-based customers that had expressed concern about potential post-merger tying arrangements. The non-discrimination obligation provides these customers with a formal assurance that they will continue to have access to Meridian CPO modules without being compelled to alter their procurement practices for other semiconductor components. This assurance may, in turn, strengthen customer loyalty and reduce the risk of customer defection to competing CPO suppliers.
Fourth, it is important to note what this obligation does not prohibit. Halcyon remains fully free to compete for power-management IC business on the basis of price, quality, performance, and service. The obligation prohibits only the coercive tying of CPO module sales to power-management IC purchases; it does not prevent Halcyon from marketing its power-management ICs to CPO module customers, nor does it prevent Halcyon from offering competitive pricing for multi-product orders. In other words, Halcyon can still win power-management IC business from CPO module customers — it simply cannot force that outcome by withholding or restricting CPO module supply.
3. Recommendation.  This term is acceptable. It is consistent with Halcyon's publicly stated commitment to customer choice and does not impair Halcyon's ability to engage in legitimate competitive activity in the power-management IC market. We recommend acceptance, subject to confirmation in the final decree language that the five-year sunset applies to this obligation as well.
D. Term 4: Independent Compliance Monitor
1. Description of the Obligation
The proposed consent decree provides for the appointment of Kirkdale Compliance Group LLC, with offices at 233 South Wacker Drive, Suite 4100, Chicago, Illinois 60606, as an independent compliance monitor. The monitor's appointment would be for a term of five (5) years, coterminous with the behavioral obligations, expiring on or about November 8, 2028.
The monitor is required to submit semi-annual reports to the Oregon Attorney General's office assessing Halcyon's compliance with all behavioral provisions of the consent decree. The costs of the monitor engagement are to be borne entirely by Halcyon, and the term sheet estimates these costs at approximately $175,000 per year, or approximately $875,000 over the full five-year term.
2. Assessment.  The appointment of an independent compliance monitor is a standard feature of behavioral consent decrees in antitrust enforcement actions. Monitoring provisions serve the dual purpose of assuring the enforcing authority that the respondent is adhering to its obligations and providing the respondent with an independent source of guidance and validation regarding its compliance practices.
The scope of the monitor's mandate, as described in the term sheet, encompasses review of Halcyon's compliance with all three behavioral commitments: the FRAND licensing obligation, the interoperability obligation, and the non-discrimination in supply obligation. To fulfill this mandate, Halcyon is required to provide the monitor with reasonable access to relevant personnel, documents, and data. The term sheet does not specify the precise parameters of "reasonable access," and we anticipate that the final decree language will need to address this issue in greater detail.
The semi-annual reporting cadence is standard in consent decree practice. Other recent behavioral consent decrees in the technology and semiconductor sectors have employed reporting frequencies ranging from quarterly to annually; the semi-annual schedule is a reasonable middle ground that provides adequate oversight without imposing an excessive administrative burden on Halcyon.
The estimated total cost of the monitoring engagement — approximately $875,000 over five years — is modest by the standards of both the transaction and Halcyon's overall financial position. To put this figure in context, the $875,000 total monitoring cost represents approximately 0.041% of the $2.15 billion acquisition price and less than 0.002% of Halcyon AG's annual consolidated revenue of €9.3 billion in FY 2022. The annual cost of approximately $175,000 is well within Halcyon Americas' existing compliance budget.
We note one area of potential concern: the monitor's access to Halcyon's internal documents and data could, if not properly circumscribed, extend to competitively sensitive information — including proprietary technology, customer pricing data, and strategic business plans — that Halcyon has a legitimate interest in protecting. Although the monitor is appointed as an independent party and is presumably subject to professional confidentiality obligations, we recommend that the final consent decree include explicit confidentiality protections governing the monitor's access to and handling of competitively sensitive information. We further recommend that the decree establish a protocol for resolving disputes about the scope of the monitor's access, including the ability of Halcyon to seek review by the Court if it believes a particular information request exceeds the scope of the monitor's mandate.
We have reviewed publicly available information regarding Kirkdale Compliance Group LLC and find it to be a credible monitoring firm with relevant experience. Kirkdale has served as compliance monitor in connection with at least three other consent decrees entered in state and federal antitrust proceedings, including two matters involving technology companies. The firm's engagement team includes former federal enforcement officials and compliance professionals with expertise in the technology sector.
3. Recommendation.  This term is acceptable. It represents a standard consent decree feature with manageable costs and scope. We recommend acceptance, subject to the negotiation of appropriate confidentiality protections and information access protocols in the final decree language.
E. Term 5: Civil Penalty
1. Description.  The proposed consent decree requires Halcyon to pay a civil penalty of $1,500,000 to the State of Oregon. The penalty is payable within thirty (30) days of entry of the consent decree by the Court.
2. Assessment.  Under ORS 646.775, the Attorney General is authorized to seek civil penalties for violations of the Oregon Antitrust Act. The statutory penalty framework permits the imposition of penalties on a per-violation basis, and in a case involving the conduct at issue here — an allegedly anticompetitive merger affecting multiple customers and transactions over a period of months — the maximum aggregate penalty exposure could be substantially higher than the $1,500,000 figure agreed upon in the term sheet.
From a financial perspective, the $1,500,000 civil penalty is nominal relative to the relevant benchmarks. As a percentage of the $2.15 billion acquisition price, the penalty represents approximately 0.07%. Relative to Halcyon AG's annual consolidated revenue of €9.3 billion in FY 2022, the penalty is negligible. The payment does not constitute an admission of liability — the consent decree will contain standard language providing that Halcyon neither admits nor denies the allegations set forth in the AG's Complaint. This "no admit/no deny" formulation is customary in consent decree practice and serves to protect Halcyon from any adverse collateral estoppel or res judicata consequences in other proceedings.
It is also significant that the proposed settlement includes no ongoing royalty, profit-disgorgement, or restitution component. The $1,500,000 civil penalty is a one-time payment that fully satisfies the State's monetary claims. There is no mechanism in the proposed decree for the State to seek additional monetary relief in the future, absent a material breach of the consent decree's terms.
3. Recommendation.  This term is acceptable. The penalty amount is de minimis in the context of this transaction and Halcyon's financial position, and it eliminates the Company's exposure to potentially much larger penalties that could be assessed following an adverse judgment at trial. We recommend acceptance without modification.
F. Term 6: No Divestiture Requirement
1. Description.  The proposed consent decree does not require the divestiture of any portion of Meridian Photonics Inc.'s business, assets, or operations. No structural remedy of any kind is included in the proposed settlement. Halcyon retains 100 percent ownership and operational control of Meridian as a wholly owned subsidiary.
2. Assessment.  This is, without question, the most significant and favorable element of the proposed settlement.
From the inception of this litigation, the central risk to Halcyon has been the possibility that the Court could order a structural remedy — partial or full divestiture of the Meridian business — if the AG prevailed at trial. The AG's Complaint expressly sought injunctive relief that included the possibility of divestiture, and the enforcement posture adopted by AG Calloway's office throughout this proceeding has been aggressive. Indeed, during the mediation sessions, Senior AAG Trujillo initially took the position that some form of structural relief was necessary to restore competition in the CPO transceiver market, and it was only after extensive negotiation — including multiple presentations by Dr. Morrow regarding the procompetitive efficiencies of the merger — that the AG's office agreed to accept a purely behavioral remedy.
The removal of divestiture from the table represents a major concession by the Attorney General's office and vindicates the strategic decision to defend the case vigorously through the motion-to-dismiss stage and into discovery. We believe that the AG's office ultimately concluded that the behavioral commitments in the proposed consent decree — FRAND licensing, interoperability, and non-discrimination — adequately address the competitive concerns identified in the Complaint without the disruption, cost, and uncertainty that would attend a divestiture.
The practical significance of this outcome cannot be overstated. Halcyon retains:
•  Full ownership and operational control of Meridian Photonics Inc. as a wholly owned subsidiary of Halcyon Semiconductor Americas Inc.;
•  All forty-seven (47) of Meridian's U.S. patents related to co-packaged optics technology, subject only to the time-limited FRAND licensing obligation;
•  Meridian's Portland, Oregon workforce of approximately 1,200 employees, including the engineering team responsible for the design and development of Meridian's next-generation CPO products;
•  All of Meridian's customer relationships, including the major accounts with Cascadia Cloud Services, Northstar Digital Infrastructure, and other hyperscale data center operators;
•  The procompetitive efficiencies identified by Dr. Morrow in his expert analysis, including estimated annual cost savings of approximately $90 million from the vertical integration of Halcyon's analog IC expertise with Meridian's silicon photonics capabilities. These efficiencies arise from the elimination of redundant design and manufacturing processes, the optimization of power management and signal integrity across the integrated CPO module and ASIC stack, and the acceleration of product development cycles through co-engineering of optical and electronic components.
In short, the core strategic rationale for the $2.15 billion acquisition is fully preserved under the proposed consent decree. The behavioral commitments impose time-limited and manageable constraints on specific aspects of Halcyon's commercial practices, but they do not impair the Company's ability to realize the operational, technological, and financial benefits that motivated the acquisition.
3. Recommendation.  This term is highly favorable and represents the cornerstone of the proposed settlement. We strongly recommend acceptance.
IV. Comparison to Continued Litigation Risk
Having analyzed each term of the proposed consent decree individually, we now turn to an assessment of the risks and costs that Halcyon would face if it declined the proposed settlement and continued to litigate the case through trial. This comparative analysis further supports our recommendation to accept the proposed terms.
A. Risk of Adverse Judgment at Trial
The Court's denial of Halcyon's Motion to Dismiss on July 7, 2023 established that the AG's claims survive threshold scrutiny. While a motion to dismiss is decided under a deferential standard that requires the Court to accept the plaintiff's factual allegations as true, the ruling nonetheless confirms that the AG's Complaint presents facially plausible claims under the Oregon Antitrust Act and that the Court is prepared to allow those claims to proceed to trial.
The AG's market-share evidence presents a formidable challenge for Halcyon at trial. The combined post-merger market share of approximately 58 percent in the alleged relevant market, an HHI of 4,050, and an HHI delta of 1,232 are all well above the thresholds typically associated with presumptively anticompetitive mergers under the Horizontal Merger Guidelines and their state-law analogs. Under established precedent in both federal and state antitrust jurisprudence, a combined market share of this magnitude creates a rebuttable presumption that the merger is likely to substantially lessen competition. While Halcyon has strong arguments to rebut this presumption — including Dr. Morrow's analysis of the AG's overly narrow market definition, the significant procompetitive efficiencies generated by the merger, and the dynamic nature of the rapidly growing CPO market — the ultimate outcome at trial would depend on a battle of the experts and the Court's assessment of contested factual issues.
Dr. Morrow's analysis, while robust, would be contested at trial by the AG's expert economist, Dr. Evelyn Ng of Ridgeline Economic Consulting LLC. Dr. Ng's preliminary report, portions of which were attached to the AG's preliminary injunction motion, challenges Dr. Morrow's conclusions regarding both market definition and efficiencies. Dr. Ng argues that the CPO transceiver market is a distinct relevant market from the broader pluggable optics market based on customer switching costs, functional differences, and pricing data. She further argues that the claimed efficiencies are either speculative, non-merger-specific, or offset by anticompetitive effects. While we believe Dr. Morrow's analysis is more persuasive, we cannot be confident that the Court would adopt Dr. Morrow's views over Dr. Ng's in all respects.
The competitive landscape of the U.S. CPO transceiver market also weighs against Halcyon at trial. The next largest competitor, Luminos Systems Corp., holds approximately 22 percent of the market — a substantial gap from the combined entity's 58 percent share. The remaining market share is dispersed among smaller competitors, including Crestwave Optical Technologies Ltd. (approximately 11 percent) and several firms with single-digit market shares. This market structure — a dominant firm with a commanding lead over a distant second competitor — is precisely the type of configuration that courts have found likely to facilitate the exercise of market power.
If the case proceeded to trial, we assess the risk of an adverse finding — i.e., a determination that the acquisition violates ORS 646.730 — as moderate-to-high. We estimate the probability of such a finding at approximately 40 to 55 percent, with the range reflecting uncertainty about the Court's resolution of the contested market definition and efficiencies issues. In the event of an adverse finding, the Court would have broad discretion to fashion injunctive relief, potentially including partial or full divestiture of the Meridian business. While divestiture is an extraordinary remedy and courts have sometimes opted for behavioral alternatives even after finding a violation, the risk of a divestiture order cannot be discounted given the strength of the AG's concentration evidence and the Court's apparent concern about the competitive effects of the merger.
B. Preliminary Injunction Risk
As noted above, the preliminary injunction motion filed by the AG on August 15, 2023 remained pending and unresolved at the time the parties entered mediation. At the September 22, 2023 hearing, Judge Castañeda's tone and questioning suggested that he was sympathetic to at least some of the behavioral restrictions sought by the AG pending trial. While the Court did not rule on the motion, the tenor of the hearing indicated that a preliminary injunction imposing behavioral restrictions was a realistic possibility.
Had the preliminary injunction been granted, Halcyon would have been subject to court-ordered behavioral restrictions for the duration of the litigation — potentially twelve to eighteen months until trial — without any certainty of a favorable outcome. Moreover, the restrictions imposed through a preliminary injunction might have been more onerous or less precisely tailored than the negotiated terms of the proposed consent decree, because the Court would have been acting on an incomplete evidentiary record and would have been less attentive to the practical concerns of Halcyon's business than a negotiated resolution would be.
The proposed settlement moots the preliminary injunction motion entirely and provides Halcyon with certainty regarding the scope and duration of its behavioral obligations.
C. Estimated Remaining Defense Costs if Litigation Continues
Continued litigation would impose substantial additional costs on Halcyon. The following summarizes the current state of defense expenditures and the estimated costs of taking the case through trial:
Calderwood & Harkness LLP fees billed through approximately October 22, 2023: We estimate that approximately $2,400,000 of the $3,800,000 fee cap established in the engagement letter has been billed to date. This leaves approximately $1,400,000 remaining under the fee cap to cover the costs of finalizing the settlement. If the case were to proceed to trial, the remaining work — including completion of fact and expert discovery, summary judgment briefing, trial preparation, and trial itself — would almost certainly exceed the $3,800,000 fee cap, necessitating renegotiation of the engagement terms. We estimate that our additional fees through trial would be in the range of $1,200,000 to $1,800,000 beyond the current cap.
Grantham Davis & Kowalski LLP (Oregon local counsel) fees to date: Approximately $310,000 has been billed by local counsel through this date. If the case proceeded to trial, substantial additional work would be required for discovery management, witness preparation, and trial support in the Multnomah County Circuit Court. We estimate that local counsel fees through trial would increase by an additional $250,000 to $400,000.
Stonebridge Analytics LLC (Dr. Franklin Morrow) expert fees to date: Approximately $480,000 has been billed by Stonebridge Analytics for Dr. Morrow's economic analysis, report preparation, and consulting services. If the case proceeded to trial, Dr. Morrow would need to prepare for and sit for his expert deposition and provide trial testimony, which we estimate would add an additional $200,000 to $300,000 in expert fees.
Total estimated additional defense costs if case proceeds to trial: Aggregating the foregoing estimates, we project that continued litigation through trial would require approximately $1,500,000 to $2,500,000 in additional defense costs beyond amounts already incurred. This estimate does not include the costs of any post-trial proceedings, including potential appeals.
discovery burden: In addition to monetary costs, continued litigation would impose significant management burden on Halcyon. The AG's office has indicated its intent to take the depositions of Dr. Samuel Ashford (the founder and former CEO of Meridian Photonics) and Linnea Johansson (the former Chief Financial Officer of Meridian), among others. The AG has also signaled its intention to serve third-party subpoenas on Cascadia Cloud Services Inc. and Northstar Digital Infrastructure LLC to compel testimony and document production regarding the competitive effects of the merger. The preparation and management of these depositions would consume substantial legal and management resources.
D. Reputational and Market Considerations
Beyond the direct financial costs of continued litigation, Halcyon must also consider the indirect costs associated with the ongoing uncertainty of a contested enforcement action:
Market uncertainty: Prolonged litigation creates uncertainty for Halcyon's customers, suppliers, and investors. Halcyon AG's shares are listed on the Frankfurt Stock Exchange (FSE: HLC), and the pendency of a U.S. antitrust enforcement action — particularly one that raises the specter of divestiture — could adversely affect investor sentiment and share price. Resolution of the action through a consent decree that preserves the Meridian acquisition would remove this source of uncertainty and allow Halcyon to communicate a clear and positive narrative to the market.
Integration disruption: The ongoing litigation has the potential to delay or disrupt Halcyon's integration of Meridian's operations. Adverse interim orders — whether through a preliminary injunction or otherwise — could impose constraints on Halcyon's ability to achieve the operational efficiencies that motivated the acquisition. The proposed consent decree provides certainty regarding the scope of any restrictions, allowing Halcyon's integration team to plan and execute accordingly.
Competitive information disclosure: The public nature of trial proceedings presents a risk that competitively sensitive business information — including internal strategic analyses, customer pricing data, and product development roadmaps — could become part of the public record. While protective orders can limit public access to certain highly confidential materials, the trial process inevitably involves some degree of public disclosure. A negotiated settlement avoids this risk entirely.
V. Total Cost of Settlement vs. Litigation
A. Settlement Cost Summary
The following table summarizes the direct costs associated with the proposed settlement:
Internal compliance implementation costs include the establishment of a FRAND licensing desk to receive and process license requests, the formalization of interoperability testing protocols aligned with the consent decree requirements, and the development and dissemination of non-discrimination policies and training materials for the Halcyon and Meridian sales organizations.
B. Total Defense Costs Incurred to Date (Through Settlement)
The following table summarizes the defense costs incurred to date in connection with the Oregon AG enforcement action, through and including the costs expected to be incurred in connection with finalizing the consent decree:
We note that total Calderwood & Harkness fees remain within the $3,800,000 fee cap established in the engagement letter, exclusive of disbursements, local counsel fees, and expert fees, which are billed separately in accordance with the engagement terms.
C. Comparative Analysis: Settlement vs. Trial
The following comparative analysis illustrates the significant cost advantage of settlement:
Settlement scenario total (defense costs incurred + settlement-related costs): approximately $6,370,000 to $6,620,000. This figure is inclusive of all defense costs incurred to date, the civil penalty, estimated compliance monitor fees over five years, and estimated internal compliance implementation costs. It represents a known and bounded cost with no risk of divestiture or other adverse structural remedy.
Trial scenario total (defense costs incurred + estimated remaining litigation costs + potential adverse judgment): significantly higher, with far greater uncertainty and risk. The estimated additional defense costs alone would add $1,500,000 to $2,500,000 to the amounts already incurred. And in the event of an adverse judgment, the potential consequences — including divestiture of all or part of the Meridian business — would be catastrophic, fundamentally undermining the strategic rationale for the $2.15 billion acquisition and potentially destroying billions of dollars in value.
The settlement therefore represents a clear and compelling value proposition: it resolves the enforcement action at a manageable cost, eliminates the existential risk of divestiture, and provides Halcyon with the certainty needed to complete the integration of Meridian and realize the full benefits of the acquisition.
VI. Negotiation Points for Final Decree Language
While we recommend acceptance of the material terms reflected in the October 20, 2023 term sheet, several points should be addressed in the negotiation of the final consent decree language to protect Halcyon's interests and minimize the risk of future disputes. We recommend that counsel focus on the following issues during the drafting process:
1.  No Admission of Liability. The consent decree must include prominent and unambiguous language establishing that Halcyon neither admits nor denies the allegations set forth in the AG's Complaint, and that the entry of the consent decree does not constitute a finding or admission of any violation of the Oregon Antitrust Act or any other law. This language should be placed in the recitals of the decree and repeated in the operative provisions.
2.  Uniform Five-Year Sunset. The final decree language should confirm that the five-year term applies uniformly to all behavioral obligations, including the FRAND licensing commitment, the interoperability obligation, and the non-discrimination in supply obligation. As noted above, the term sheet does not include an explicit sunset date for the non-discrimination obligation, and this omission should be corrected in the final decree.
3.  Confidentiality Protocols for Compliance Monitor. The decree should include detailed provisions governing the compliance monitor's obligations with respect to the confidentiality of Halcyon's proprietary and competitively sensitive information. These provisions should specify the categories of information subject to heightened confidentiality protections, the measures the monitor must take to safeguard such information, and the limitations on the monitor's ability to share such information with the AG's office or third parties. We recommend that the decree incorporate a protocol substantially similar to the Confidentiality Agreement used in connection with the HSR filing process.
4.  Definition of FRAND Terms. The consent decree should define "Fair, Reasonable, and Non-Discriminatory" terms with sufficient specificity to prevent future disputes. We recommend that the decree reference comparable industry FRAND frameworks, such as those adopted by ETSI for standard-essential patents in the telecommunications sector, as a benchmark for interpreting the FRAND obligation. The decree should also specify a process for resolving disputes regarding whether a particular license offer satisfies the FRAND standard, such as referral to a neutral arbitrator selected by the parties or appointed by the Court.
5.  Scope of Interoperability Obligation. The final decree should clarify that the interoperability obligation requires Halcyon to maintain compatibility with the OIF 400ZR and 800ZR standards as published and in effect at the time of the decree's entry, and does not obligate Halcyon to support future OIF standards that have not yet been adopted or published at the time of entry. This clarification is important to prevent the obligation from expanding over time as the OIF develops new standards, potentially imposing engineering requirements that were not contemplated at the time of settlement.
6.  Dispute Resolution Mechanism. The decree should include a dispute resolution mechanism for alleged violations of the consent decree terms. We recommend a two-step process: first, mandatory mediation before a neutral mediator (potentially Judge Loomis, if available) for a period of thirty days; second, if mediation is unsuccessful, referral to the Court for formal enforcement proceedings. This structure would provide Halcyon with an opportunity to resolve disputes informally before incurring the cost and uncertainty of contested court proceedings.
7.  Modification Provision. The decree should include a provision allowing either party to petition the Court for modification of the decree's terms based on changed market conditions, technological developments, or other material changes in circumstances. Such provisions are standard in consent decrees of this nature and provide necessary flexibility to adapt the decree to evolving conditions without requiring th