CALDERWOOD & HARKNESS LLP
CONFIDENTIAL MEMORANDUM
ATTORNEY-CLIENT PRIVILEGED AND WORK-PRODUCT PROTECTED DO NOT DISTRIBUTE OUTSIDE LEGAL TEAM
Matter Number: 1032-00001
To: Howard Bellamy, Billing Partner, Antitrust & Competition Practice Group
From: Elaine Forsythe, Responsible Partner, Antitrust & Competition Practice Group Aaron Liu, Lead Associate, Antitrust & Competition Practice Group
Date: July 10, 2023
Re: State of Oregon v. Halcyon Semiconductor Americas Inc., Case No. 23CV-18274, Circuit Court of the State of Oregon, County of Multnomah — Post-MTD Strategy Reassessment
Copies (Internal): Monica Reyes, Working Associate (for case file)
I. EXECUTIVE SUMMARY
This memorandum sets forth our reassessment of the defense strategy for Halcyon Semiconductor Americas Inc. ("Halcyon Americas" or the "Company") following the Honorable Robert Castañeda's July 7, 2023 order denying Halcyon Americas's Motion to Dismiss ("MTD") the civil complaint filed by the Oregon Attorney General's office (the "AG") in the above-captioned matter. The purpose of this memorandum is to provide Howard Bellamy, as Billing Partner, with a comprehensive view of the current posture of the case, the implications of the court's ruling, our revised defense strategy, the discovery plan, expert retention recommendations, settlement considerations, and an updated budget analysis.
Overview of the MTD Denial. The court denied the MTD in its entirety, rejecting both of our principal arguments: (1) that the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") preempts the AG's state antitrust enforcement action in light of the early termination of the HSR waiting period, and (2) that the AG's complaint fails to state a claim under ORS 646.730 because it does not plausibly allege a relevant product market or a substantial lessening of competition. Judge Castañeda's order is thorough and, in our assessment, largely consistent with the prevailing weight of authority on both issues. We do not recommend pursuing an interlocutory appeal.
Key Takeaway. The case will proceed to discovery, which commences on July 21, 2023 pursuant to the court's scheduling order. It is imperative that we immediately pivot from a procedural defense posture to a merits-based defense, develop an affirmative economic case centered on market definition and procompetitive efficiencies, and begin evaluating Halcyon Americas's settlement posture in parallel with vigorous litigation preparation.
Summary of Recommendations. We recommend the following course of action:
1. Expert Retention. Retain Dr. Franklin Morrow, Principal of Stonebridge Analytics LLC, as the defense expert economist. Dr. Morrow's expertise in semiconductor and technology merger analyses, combined with his experience testifying in state and federal antitrust proceedings, makes him ideally suited to counter the AG's market-definition and competitive-effects arguments. Estimated engagement cost through trial or settlement resolution is approximately $600,000–$700,000.
2. Aggressive discovery on Market Definition and Competitive Effects. Prepare for and execute an assertive discovery plan focused on developing the factual record necessary to support a broader market definition than the AG has proposed, to demonstrate procompetitive efficiencies arising from the transaction, and to rebut the AG's vertical foreclosure theory.
3. Internal Settlement Assessment. Begin an internal assessment of acceptable settlement parameters, including a behavioral remedy framework (e.g., FRAND licensing commitments, interoperability obligations, non-discrimination commitments, independent compliance monitor, and modest civil penalty) that would preserve the transaction while satisfying the AG's stated concerns. We do not recommend proactively proposing settlement at this time, but we should be prepared to engage constructively if the court or the AG initiates discussions.
4. Local Counsel Coordination. Continue close coordination with local counsel Grantham Davis & Kowalski LLP ("GDK"), specifically Thomas Kowalski (partner) and Rachel Ingram (associate), on Oregon procedural matters, local filings, third-party subpoena service, and protective order negotiations.
Client Briefing. Priya Nagarajan, U.S. Deputy General Counsel of Halcyon Semiconductor Americas Inc., and Katrin Schreiber, General Counsel of Halcyon Semiconductor AG, should be briefed separately on the content of this memorandum, the MTD denial, and the revised strategy. Elaine Forsythe will conduct that briefing on July 11, 2023, or as soon thereafter as schedules permit.
II. BACKGROUND
A. The Transaction
On September 8, 2022, Halcyon Semiconductor AG ("Halcyon AG"), a German-domiciled Aktiengesellschaft and global semiconductor manufacturer, acting through its wholly owned U.S. subsidiary, Halcyon Semiconductor Americas Inc. (a Delaware corporation, EIN 84-3921057, headquartered at 4500 Great America Parkway, Suite 300, Santa Clara, California 95054), entered into an Agreement and Plan of Merger (the "Merger Agreement") to acquire 100% of the outstanding shares of Meridian Photonics Inc. ("Meridian"), a Delaware corporation (EIN 93-1284563) headquartered at 1820 NW Everett Street, Suite 400, Portland, Oregon 97209.
The total purchase price was $2.15 billion, payable in cash at closing. The acquisition was funded through a $2.2 billion senior secured term loan facility (Term Loan B), arranged and led by Vereinigte Kreditbank AG as administrative agent, with Nordmark Capital Group and Pacific Rim Commercial Bank as syndicate members. Of the $2.2 billion facility, $2.15 billion was drawn at closing to fund the purchase price, with the remaining $50 million contributed from Halcyon Americas's existing cash on hand to cover transaction expenses and post-closing working capital requirements. Callister Blackwood & Co. served as Halcyon AG's exclusive investment banking advisor on the transaction, with Jonathan Reiss, Managing Director, leading the advisory engagement.
Halcyon Americas filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 on October 3, 2022 (HSR File No. 20221003-1847). On November 14, 2022, the Federal Trade Commission granted early termination of the waiting period. Neither the FTC nor the U.S. Department of Justice Antitrust Division issued a second request for additional information and documentary material, and neither agency took any action to challenge the transaction prior to or following the close.
The transaction closed on January 31, 2023. Since that date, Meridian has operated as a wholly owned subsidiary of Halcyon Semiconductor Americas Inc. No Oregon state-level antitrust pre-notification was required under applicable law, and no such notification was made.
B. Meridian's Business
Meridian Photonics Inc. is a leading designer and manufacturer of silicon photonics transceivers and co-packaged optics ("CPO") modules for data-center and telecommunications applications. Meridian's CPO technology integrates photonic and electronic components directly onto a switch or compute package, enabling higher bandwidth, lower power consumption, and greater density compared to traditional pluggable optical transceiver modules. This technology is considered critical to the next generation of hyperscale data-center infrastructure.
In fiscal year 2022, Meridian generated approximately $385 million in total revenue and employed approximately 1,200 people across its Portland, Oregon headquarters and additional facilities in the United States. Meridian holds 47 active U.S. patents related to CPO technology, covering aspects of silicon photonics waveguide design, packaging integration techniques, and signal processing methods.
Meridian was founded by Dr. Samuel Ashford, who served as Chief Executive Officer from inception through the closing of the acquisition. Linnea Johansson served as Meridian's Chief Financial Officer during the same period. Both Dr. Ashford and Ms. Johansson have continued in advisory capacities during the post-closing integration process and are Halcyon-affiliated witnesses for purposes of this litigation.
Of particular relevance to this case, Meridian's key Oregon-based customers include:
• Cascadia Cloud Services Inc., which operates three hyperscale data centers in Prineville and The Dalles, Oregon. Cascadia's fiscal year 2022 spend on Meridian CPO modules was approximately $62 million, making it one of Meridian's largest single customers.
• Northstar Digital Infrastructure LLC, a colocation and wholesale data-center operator with facilities in Hillsboro, Oregon. Northstar's fiscal year 2022 spend on Meridian CPO modules was approximately $28 million.
These two Oregon-based customers feature prominently in the AG's complaint and will be significant fact witnesses and potential sources of third-party discovery.
C. The AG's Enforcement Action
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 a broad range of documents and information related to the Meridian acquisition, the CPO transceiver market, Halcyon's competitive strategy, and the Company's interactions with Oregon-based customers.
One week later, on April 17, 2023, Oregon Attorney General Diane Calloway, acting through Senior Assistant Attorney General Marcus Trujillo of the Antitrust Division of the Oregon Department of Justice, filed a civil complaint in the Circuit Court of the State of Oregon for the County of Multnomah, Case No. 23CV-18274. The complaint alleges that Halcyon Americas's acquisition of Meridian violates ORS 646.730 (prohibiting agreements, combinations, or conspiracies in restraint of trade) and ORS 646.775 (authorizing the AG to seek injunctive relief and civil penalties for violations of Oregon's antitrust statutes). The AG seeks declaratory and injunctive relief — including, potentially, divestiture of the Meridian business — as well as civil penalties and costs.
The AG's office has retained outside counsel to assist with the litigation: Ashworth & Pendleton LLP, a well-regarded Portland litigation firm. The A&P team is led by Constance Yee (partner) and Derek Holmgren (associate). Additionally, the AG has retained Dr. Evelyn Ng of Ridgeline Economic Consulting LLC (1501 Fourth Avenue, Suite 900, Seattle, Washington 98101) as its expert economist.
Calderwood & Harkness LLP opened its engagement on April 17, 2023, the day the complaint was filed. The engagement letter between the firm and Halcyon Semiconductor Americas Inc. was executed on April 18, 2023, and provides for a fee cap of $3,800,000, exclusive of disbursements and local counsel fees. Grantham Davis & Kowalski LLP was engaged as Oregon local counsel on the same date.
D. Litigation History to Date
The procedural history of this case to date is as follows:
• May 5, 2023: Halcyon Americas filed its Answer to the AG's complaint, consisting of paragraph-by-paragraph denials and the assertion of several affirmative defenses, including: (i) federal preemption under the HSR Act; (ii) procompetitive efficiencies arising from the transaction; (iii) the failing-firm doctrine (asserted as a precautionary defense based on certain financial metrics of Meridian prior to the acquisition, though we acknowledge this defense faces factual challenges given Meridian's $385 million revenue); and (iv) failure to demonstrate a substantial lessening of competition in any properly defined relevant market.
• May 19, 2023: Halcyon Americas filed its Motion to Dismiss the AG's complaint, advancing two principal arguments: (1) that the HSR Act's pre-merger notification and waiting-period framework, including the grant of early termination, preempts the AG's state antitrust enforcement action; and (2) that the AG's complaint fails to state a claim upon which relief can be granted under ORS 646.730 because it does not adequately allege a plausible relevant product market or a substantial lessening of competition. The AG filed its opposition on June 16, 2023, and Halcyon Americas filed its reply on June 30, 2023.
• July 7, 2023: The court (Hon. Robert Castañeda) denied the Motion to Dismiss in its entirety. The order is analyzed in detail in Section III below.
• July 21, 2023: Pursuant to the court's scheduling order entered on May 15, 2023, discovery is set to commence and initial disclosures are to be exchanged on this date.
III. ANALYSIS OF THE COURT'S JULY 7 ORDER DENYING THE MOTION TO DISMISS
A. Federal Preemption Ruling
Court's Holding. The court held that the HSR Act's pre-merger notification and waiting-period framework does not preempt state antitrust enforcement actions, even where the federal antitrust agencies have granted early termination of the HSR waiting period.
Court's Reasoning. Judge Castañeda's analysis of the preemption question was thorough and addressed both express and implied preemption. The key points of the court's reasoning are as follows:
First, the court held that early termination under the HSR Act is not an affirmative approval of the transaction. The court emphasized that the grant of early termination merely signifies that the federal agencies have concluded their initial review and have determined that the statutory waiting period may be terminated prior to its natural expiration. Critically, the agencies retain the authority to challenge the transaction at any time following early termination, and early termination carries no precedential or preclusive effect. The court cited the FTC's own public statements to this effect, noting that the Commission has repeatedly disclaimed any interpretation of early termination as an endorsement or approval of a merger.
Second, the court concluded that Oregon's antitrust statutes, codified in ORS Chapter 646, are exercises of the state's traditional police power to protect its citizens from anticompetitive conduct. The court noted that federal antitrust law and state antitrust law have long been understood to operate as complementary, rather than conflicting, enforcement regimes. Congress, in enacting the HSR Act, did not express any intent to displace or diminish state enforcement authority over mergers and acquisitions affecting commerce within the state's borders.
Third, the court cited the absence of any express or implied preemption provision in the HSR Act that would displace state enforcement authority. The court examined the text and legislative history of the HSR Act and found no indication that Congress intended the federal pre-merger notification framework to serve as an exclusive regulatory mechanism that would bar states from exercising their independent antitrust enforcement powers.
Fourth, the court distinguished cases involving affirmative federal regulatory approval — such as mergers subject to approval by the Federal Communications Commission, the Surface Transportation Board, or banking regulators — from the HSR Act's purely procedural waiting-period framework. The court reasoned that where a federal regulatory body has exercised substantive approval authority over a transaction, preemption arguments carry greater force, but that the HSR Act imposes no such substantive approval requirement.
Assessment. In our view, Judge Castañeda's preemption ruling is well-reasoned and consistent with the weight of authority from other state courts and federal circuit precedent regarding the parallel nature of state and federal antitrust enforcement. The Supreme Court's longstanding recognition of state antitrust enforcement as complementary to federal enforcement, as articulated in cases such as California v. ARC America Corp., 490 U.S. 93 (1989), provides a strong foundation for the court's analysis. We are not aware of any persuasive contrary authority that would give us a reasonable prospect of success on appeal.
Moreover, as a practical matter, interlocutory appeal of a motion-to-dismiss denial is exceedingly difficult to obtain in Oregon. Oregon does not readily permit interlocutory appeals of such denials absent certification under ORS 19.225, which requires a showing that the order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal would materially advance the ultimate termination of the litigation. Given the weight of authority supporting the court's preemption ruling, we do not believe we could satisfy this standard. Mandamus is an extraordinary remedy available only in narrow circumstances, and we do not believe the present facts warrant its pursuit.
Recommendation. We recommend against pursuing an interlocutory appeal of the preemption ruling. The resources required to brief and argue such an appeal — with a low probability of success — would be better directed toward building the merits defense during the discovery period.
B. Failure to State a Claim Ruling
Court's Holding. The court held that the AG's complaint adequately alleges a plausible relevant product market and a substantial lessening of competition sufficient to survive a motion to dismiss under Oregon pleading standards.
Court's Reasoning. Judge Castañeda addressed the sufficiency of the AG's complaint on several dimensions:
Relevant Product Market. The AG has proposed a relevant product market defined as "co-packaged optics transceiver modules for data-center applications." The court found this market definition to be sufficiently specific and supported by factual allegations in the complaint. In particular, the AG alleges that CPO modules are not interchangeable with traditional pluggable transceiver modules for next-generation, high-bandwidth data-center applications because CPO modules offer fundamentally different performance characteristics — including integrated photonic-electronic packaging, lower power consumption per gigabit, and higher port density — that are not achievable through traditional pluggable form factors. The court credited these allegations as plausible at the pleading stage and concluded that they describe a product market in which demand-side substitutability is limited.
Market Concentration. The court noted the AG's market-share allegations with apparent concern. According to the complaint, the combined post-merger market share of Halcyon Americas and Meridian in the U.S. CPO transceiver market is approximately 58% (Meridian at approximately 44% and Halcyon's legacy CPO business at approximately 14%). The AG further alleges that the next-largest competitor, Luminos Systems Corp., holds approximately 22% of the market, followed by Crestwave Optical Technologies Ltd. at approximately 11%, with the remaining approximately 9% distributed among fringe competitors. The court found that these market-share figures create a plausible inference of market power.
HHI Analysis. The court also addressed the AG's Herfindahl-Hirschman Index ("HHI") analysis. The AG alleges that the pre-merger HHI in the U.S. CPO transceiver market was 2,818, increasing to 4,050 post-merger — a delta of 1,232 points. The court observed that these figures substantially exceed the thresholds at which mergers are presumed likely to enhance market power under applicable merger guidelines (generally, post-merger HHI exceeding 2,500 with a delta exceeding 200). While the court acknowledged that HHI analysis is ultimately an evidentiary matter to be resolved on a developed record, it found the AG's allegations sufficient to state a claim.
Vertical Foreclosure Theory. The court addressed the AG's vertical foreclosure theory — specifically, the theory that Halcyon, as a designer and manufacturer of power management integrated circuits and other controlling semiconductor components used in data-center switching and routing equipment, could degrade interoperability between Meridian's CPO modules and competitors' switch application-specific integrated circuits ("ASICs"). The court found this theory to be cognizable at the pleading stage, noting that vertical theories of anticompetitive harm are recognized in merger analysis and that the AG has alleged specific mechanisms by which foreclosure could occur.
Oregon Nexus. Finally, the court noted the AG's allegations regarding specific Oregon-based customers — Cascadia Cloud Services Inc. and Northstar Digital Infrastructure LLC — as supporting both the AG's standing to bring the enforcement action and the requisite nexus between the challenged conduct and commerce within the State of Oregon.
Assessment. The court applied a permissive pleading standard, as is appropriate at the motion-to-dismiss stage. This ruling does not foreclose our ability to challenge the AG's market definition through expert economic testimony at summary judgment or at trial. Indeed, the court's opinion expressly acknowledges that market definition is "ultimately a question of fact and economic analysis to be resolved on a developed evidentiary record." This language is significant and confirms that the central battleground of this case will be the market definition fight.
We believe we have strong arguments that the AG's proposed market definition is unreasonably narrow, and that a properly defined relevant product market would include all optical transceivers for data-center applications — both pluggable and co-packaged — in which Halcyon Americas and Meridian's combined share would be materially lower. We also believe we can effectively challenge the AG's HHI analysis by demonstrating that static concentration metrics are misleading in a nascent, rapidly evolving market. These arguments, however, require the development of a robust factual and expert record, which underscores the importance of the discovery plan and expert retention discussed below.
C. Implications of the Ruling
The denial of the MTD carries several important implications for the trajectory of this case:
First, the case will proceed through full discovery and, absent resolution by dispositive motion or settlement, to trial. We should proceed on the assumption that the case will be tried, while simultaneously evaluating opportunities for resolution short of trial.
Second, the court's treatment of the preemption argument signals a degree of skepticism toward procedural and jurisdictional defenses in this matter. Going forward, the defense must rest on the economic merits — specifically, on demonstrating that the AG's proposed market definition is too narrow, that the transaction generates substantial procompetitive efficiencies, that the market is dynamic and rapidly growing with viable competitors and ease of entry, and that the AG's vertical foreclosure theory is speculative and unsupported by post-merger conduct.
Third, the court's acceptance of the AG's HHI figures as facially problematic means that Halcyon Americas bears a practical burden of coming forward with affirmative evidence to rebut the structural presumption of anticompetitive effects. While the legal burden of proof remains with the AG, the reality is that a post-merger HHI of 4,050 with a delta of 1,232 creates a significant evidentiary headwind that we must overcome through expert economic analysis and factual evidence of market dynamism, efficiencies, and competitive alternatives.
Fourth, the court's willingness to entertain the AG's vertical foreclosure theory — even at the pleading stage — means we must take this theory seriously and prepare a comprehensive rebuttal. This will require both expert economic analysis and factual evidence demonstrating that Halcyon lacks the ability and incentive to engage in foreclosure conduct.
IV. REVISED DEFENSE STRATEGY
A. Core Merits Defense Themes
In light of the court's ruling and the case's progression to the discovery phase, we have refined our core defense themes as follows:
1. Broader Market Definition. The linchpin of our merits defense is the argument that the AG's proposed relevant product market — "co-packaged optics transceiver modules for data-center applications" — is unreasonably narrow and does not reflect the competitive realities of the optical transceiver industry. We will argue that the properly defined relevant product market should encompass all optical transceivers for data-center applications, including both pluggable and co-packaged form factors. Data-center operators evaluate and procure optical transceivers based on a range of performance and cost criteria, and in many applications, pluggable transceivers and CPO modules are viable alternatives. Even where CPO modules offer performance advantages for next-generation deployments, the existence of supply-side substitutability — semiconductor and photonics companies can and do shift production between pluggable and co-packaged form factors — further supports a broader market definition.
In a broader market encompassing all optical transceivers for data-center applications, the combined market share of Halcyon Americas and Meridian is significantly lower than the 58% figure alleged in the AG's complaint, and the corresponding HHI analysis is far less concerning. Dr. Morrow's analysis will be critical in developing and supporting this argument with rigorous economic evidence, including analysis of demand-side and supply-side substitutability, cross-elasticity of demand, and industry sourcing patterns.
2. Dynamic, Rapidly Growing Market. The CPO market is a nascent technology market experiencing rapid growth. The total U.S. CPO market was approximately $875 million in fiscal year 2022, and industry analysts project significant compound annual growth rates as hyperscale data-center operators increasingly adopt CPO technology for next-generation deployments. In such a dynamic market environment, static market-share snapshots are unreliable predictors of future competitive conditions. Market shares are likely to shift substantially as existing competitors expand capacity, new entrants invest in CPO technology, and customer adoption patterns evolve. The AG's reliance on a single-year snapshot of market shares to infer lasting market power is analytically flawed and will be challenged through expert testimony.
3. Procompetitive Efficiencies. The combination of Halcyon's established analog and mixed-signal integrated circuit design expertise with Meridian's 47 CPO-related patents and advanced silicon photonics manufacturing capabilities generates substantial procompetitive efficiencies that benefit consumers, including Oregon-based data-center operators. These efficiencies include: (a) cost savings from vertical integration, as Halcyon can now incorporate its proprietary power management and signal conditioning ICs directly into Meridian's CPO module designs, eliminating third-party component costs and reducing manufacturing complexity; (b) accelerated innovation cycles, as the combined entity's larger R&D organization and complementary technical expertise enable faster development of next-generation CPO products; and (c) improved product performance and lower end-user prices, as the efficiency gains flow through to customers in the form of higher-performing CPO modules at competitive prices. These efficiencies are merger-specific — they could not be achieved through arm's-length transactions or licensing arrangements — and they are verifiable through documentary evidence and expert analysis.
4. Viable Competitors and Ease of Entry. The U.S. CPO transceiver market is served by capable, well-resourced competitors with expanding product lines. Luminos Systems Corp., with an approximately 22% market share, is a well-funded company with significant R&D investment in CPO technology and a growing product portfolio. Crestwave Optical Technologies Ltd., with an approximately 11% market share, is a major Chinese photonics manufacturer with a growing presence in the U.S. market. Additional semiconductor firms and photonics companies — including established players in the broader optical transceiver market — are positioned to enter or expand in the CPO segment as demand grows. The barriers to entry in CPO manufacturing, while meaningful, are not insurmountable for firms with existing semiconductor or photonics capabilities. These competitive dynamics undercut the AG's theory that the Halcyon-Meridian combination will result in a durable lessening of competition.
5. No Evidence of Actual Anticompetitive Conduct Post-Merger. Since the acquisition closed on January 31, 2023, Halcyon Americas has not engaged in any of the anticompetitive conduct that the AG's complaint theorizes. Halcyon has not degraded interoperability between Meridian CPO modules and third-party switch ASICs. Halcyon has not raised prices to Oregon-based or other customers. Halcyon has not discriminated against any customer or competitor in the supply of CPO modules or semiconductor components. The AG's theories of harm are, at this point, entirely speculative and unsupported by any post-merger evidence. While the absence of post-merger anticompetitive conduct is not dispositive — the AG need not prove actual harm, only a likely substantial lessening of competition — it is a powerful fact that undercuts the urgency and plausibility of the AG's claims.
6. Halcyon's Commitment to Open Standards. Halcyon Americas has publicly committed to compliance with the Optical Internetworking Forum ("OIF") 400ZR and 800ZR interoperability standards. These industry-standard specifications govern the interoperability of optical transceiver modules with switch and routing equipment, and they are maintained by a multi-stakeholder industry body that includes data-center operators, equipment manufacturers, and semiconductor companies. Halcyon's commitment to these open standards is inconsistent with the AG's theory that Halcyon would use its position to degrade interoperability and foreclose competitors. This commitment is not merely a litigation position — it reflects Halcyon's pre-existing business strategy and public statements dating back to before the acquisition.
B. Defensive Posture on Vertical Foreclosure Theory
The AG's vertical foreclosure theory requires particular attention and a carefully developed defense. The theory rests on the premise that Halcyon, as a designer and manufacturer of power management ICs and other controlling semiconductor components, could exploit its vertical integration with Meridian to degrade the interoperability between Meridian's CPO modules and third-party switch ASICs manufactured by competitors. In essence, the AG theorizes that Halcyon could subtly modify the electrical or firmware interfaces of its power management ICs — which are used in data-center switching equipment — to favor Meridian's CPO modules and disadvantage competing CPO products, thereby leveraging its position in the upstream semiconductor market to foreclose competition in the downstream CPO module market.
Our defense of this theory will proceed on multiple fronts:
First, we will demonstrate that Halcyon's power management ICs are commodity semiconductor components with many available substitutes. The market for power management ICs used in data-center equipment is served by numerous competitors, including Sterling Reach Partners LLC, Westmark Enterprises, Fenmore Group, Glenrock Group, and others. Halcyon does not possess market power in this upstream market, and any attempt to degrade interoperability through modifications to its power management ICs would simply cause customers to switch to competing IC suppliers, resulting in lost revenue for Halcyon with no competitive benefit.
Second, we will establish that Halcyon has no market power in the ASIC or switch-chip market. The AG's foreclosure theory implicitly assumes that Halcyon controls a chokepoint in the data-center hardware value chain. In reality, the major switch ASIC manufacturers — Dunmore Industries, Intel/Barefoot Networks, Marlowe & Co., and others — are independent companies over which Halcyon exercises no control. Halcyon cannot unilaterally alter the interface specifications of switch ASICs manufactured by these companies.
Third, we will emphasize that the OIF 400ZR/800ZR interoperability standards are maintained by a multi-stakeholder industry body that Halcyon cannot unilaterally control or modify. These standards define the optical and electrical interface specifications that ensure interoperability among CPO modules, switch ASICs, and other data-center components. Compliance with these standards is a market requirement driven by data-center operators, and any departure from the standards by Halcyon would render its products — both Halcyon's ICs and Meridian's CPO modules — incompatible with standard-compliant equipment, destroying customer demand for both.
Fourth, and critically, we will need expert economic testimony from Dr. Morrow to demonstrate that the AG's vertical foreclosure theory fails as a matter of economic logic. Vertical foreclosure is economically rational only when the foreclosing firm can profitably raise rivals' costs or exclude them from the market while recouping its losses through higher prices or greater sales in the downstream market. Given Halcyon's business model — in which Meridian's CPO modules are designed and marketed to work seamlessly with all major switch ASICs from multiple manufacturers — any degradation of interoperability would destroy customer demand for Meridian's own products, making foreclosure economically irrational. Dr. Morrow should be prepared to present this analysis through a formal economic model and supporting empirical evidence.
V. DISCOVERY PLAN
A. Initial Disclosures
Initial disclosures under the Oregon Rules of Civil Procedure are due July 21, 2023, pursuant to the court's scheduling order. Aaron Liu will coordinate with Priya Nagarajan and the Company's litigation support team to identify key custodians at Halcyon Americas and Meridian whose files are likely to contain relevant documents and information. The initial disclosures should identify the individuals likely to have discoverable information relevant to the claims and defenses in this action, along with the subjects of their knowledge, and should provide copies of or descriptions of all documents and electronically stored information that Halcyon Americas may use to support its defenses.
We should also identify and catalogue the key documents already collected and produced (or identified for production) in response to the AG's April 10, 2023 Civil Investigative Demand. The CID response will form the baseline for our document production obligations in discovery, and we should ensure consistency between the CID production and our formal discovery responses.
Rachel Ingram of GDK will assist with the preparation and service of initial disclosures in compliance with Oregon procedural requirements.
B. Document Production — Our Obligations
We anticipate that the AG will serve broad document requests seeking, at a minimum, the following categories of materials:
• Pre-acquisition deal documents: Callister Blackwood & Co. investment banking presentations, board of directors materials (for both Halcyon AG's supervisory and management boards and Meridian's board), competitive analyses prepared in connection with the transaction, synergy models, due diligence reports, and internal memoranda evaluating the competitive landscape and strategic rationale for the acquisition.
• Internal Halcyon and Meridian communications: Emails, instant messages, presentations, and memoranda regarding CPO market competition, pricing strategies and decisions, customer relationships, competitive intelligence, and assessments of competitors such as Luminos Systems Corp. and Crestwave Optical Technologies Ltd.
• Post-closing integration documents: Integration plans, organizational restructuring documents, product roadmaps for the combined entity's CPO product line, interoperability plans and specifications, and communications regarding the integration of Meridian's Portland-based operations with Halcyon Americas's Santa Clara headquarters.
• Customer communications: All communications between Halcyon Americas, Meridian, and Oregon-based customers, particularly Cascadia Cloud Services Inc. and Northstar Digital Infrastructure LLC, including pricing communications, contract negotiations, supply commitments, and any complaints or concerns raised by these customers regarding the acquisition.
Production Strategy. We will review and produce documents responsively but will assert the attorney-client privilege and work-product protection over all communications with counsel (including Calderwood & Harkness LLP, GDK, and any prior outside counsel engaged by Halcyon or Meridian) and over all materials prepared in anticipation of litigation or in connection with the provision of legal advice. We will prepare a detailed privilege log for all withheld documents.
For competitively sensitive materials — including pricing data, customer-specific revenue information, cost structures, product roadmaps, and internal competitive assessments — we will designate such documents as "Confidential" or "Attorneys' Eyes Only" under the terms of the protective order to be negotiated with the AG's office (see Section V.G below). This designation will restrict access to such materials to counsel and experts and will prevent disclosure to the AG's staff or to any third party.
Monica Reyes will take the lead on coordinating the document review process, with support from a review team to be staffed as necessary. Rachel Ingram at GDK will assist with Oregon-specific discovery obligations and any local procedural requirements.
C. Document Requests to the AG
We should serve affirmative document requests on the AG's office and its counsel, Ashworth & Pendleton LLP, seeking the following categories of materials:
• The AG's investigative file, including all documents and communications obtained in connection with the Civil Investigative Demand, including responses to the CID from third parties such as Cascadia Cloud Services Inc., Northstar Digital Infrastructure LLC, and any other market participants contacted by the AG during its investigation.
• Correspondence with Oregon-based customers, including all communications between the AG's office (or A&P on its behalf) and Cascadia Cloud Services Inc., Northstar Digital Infrastructure LLC, and any other Oregon data-center operators regarding the Halcyon-Meridian transaction, the CPO transceiver market, pricing, competitive alternatives, and any concerns about the acquisition's competitive effects.
• Communications with federal antitrust agencies, including any and all communications between the AG's office (or A&P) and the Federal Trade Commission, the U.S. Department of Justice Antitrust Division, or any other federal agency regarding the Halcyon-Meridian transaction, the CPO transceiver market, or the AG's investigation and enforcement decision. This request is designed to probe whether the AG obtained any information, analysis, or encouragement from federal agencies that influenced the decision to bring this state enforcement action, notwithstanding the FTC's grant of early termination. While the AG may resist this request on grounds of law enforcement privilege or deliberative process, we should press for production and be prepared to brief the issue if necessary.
• Pre-complaint communications between the AG's office and A&P, including the timeline of A&P's engagement by the AG, the scope of A&P's pre-filing investigation, and any memoranda, reports, or analyses prepared by A&P in connection with the AG's decision to bring the enforcement action. This information will help us understand the genesis and evolution of the AG's theory of the case.
D. Depositions — Anticipated Defense Depositions
We anticipate taking depositions of the following witnesses:
1. Dr. Samuel Ashford, Founder and Former CEO, Meridian Photonics Inc. Dr. Ashford is a critical fact witness with deep knowledge of Meridian's competitive position in the CPO market, the market dynamics and growth trajectory of the CPO industry, the reasons why Meridian's board and shareholders chose to accept Halcyon's acquisition offer, and his assessment of the procompetitive benefits of the transaction (including the synergies between Halcyon's analog IC expertise and Meridian's silicon photonics technology). As a former CEO who remains affiliated with the combined entity in an advisory capacity, Dr. Ashford is a Halcyon-affiliated witness. We should prepare him to testify favorably regarding the transaction's competitive effects and efficiencies. His testimony on the competitive significance of Luminos, Crestwave, and other market participants will be particularly important.
2. Linnea Johansson, Former CFO, Meridian Photonics Inc. Ms. Johansson is a key fact witness on Meridian's financial condition prior to the acquisition, the company's revenue composition and growth trends, its customer relationships (particularly with Cascadia and Northstar), pricing practices and competitive pricing dynamics, and the financial rationale for the sale to Halcyon. As the former CFO, she will have direct knowledge of the financial data underlying both the AG's market-share calculations and our efficiency claims. Ms. Johansson is also Halcyon-affiliated and should be prepared to testify consistently with our defense themes.
3. AG Staff Witnesses. We should depose Senior Assistant Attorney General Marcus Trujillo and/or other AG staff witnesses who were involved in the investigation and the decision to bring the enforcement action. These depositions will explore the factual basis for the AG's claims, the investigation process, the information obtained through the CID, and the AG's contacts with federal agencies, Oregon-based customers, and other market participants. We should also depose any AG-retained industry consultants or fact witnesses who provided input during the investigation phase.
4. Dr. Evelyn Ng, AG's Expert Economist. Dr. Ng's deposition will be taken after expert reports are exchanged, in accordance with the scheduling order. The deposition will challenge her market definition methodology, her market-share calculations, her HHI analysis, and the assumptions and economic models underlying her competitive effects and vertical foreclosure opinions. Dr. Morrow should participate in preparing the deposition outline for Dr. Ng.
E. Depositions — Anticipated AG Depositions of Halcyon Witnesses
We should anticipate that the AG will seek to depose the following Halcyon-affiliated witnesses:
• Priya Nagarajan, U.S. Deputy General Counsel, Halcyon Semiconductor Americas Inc. The AG is likely to seek a corporate representative deposition under ORCP 39 C(6), designating Ms. Nagarajan as the Company's representative on topics including the strategic rationale for the Meridian acquisition, the post-closing integration process, competitive strategy in the CPO market, and the Company's interactions with Oregon-based customers. Preparing Ms. Nagarajan for this deposition is a high priority and should commence immediately.
• Halcyon Americas business unit heads responsible for the CPO product line, sales, and customer relationships, including any senior managers who oversee the Meridian business unit post-acquisition. These witnesses may be questioned about pricing decisions, competitive intelligence, product roadmaps, and customer interactions.
• Dr. Tobias Wendt, CEO, Halcyon Semiconductor AG. The AG may attempt to depose Dr. Wendt as the ultimate decision-maker on the Halcyon AG board regarding the Meridian acquisition. We should resist this deposition on grounds of burdensomeness, arguing that Dr. Wendt is a senior executive of a foreign parent corporation and that a corporate designee with knowledge of the relevant topics is a sufficient and less burdensome alternative. If the AG insists, we should be prepared to brief the issue for the court, citing the well-established principle that apex depositions of senior executives are disfavored where the information sought can be obtained through other, less burdensome means.
Preparation Strategy. We should begin preparing Priya Nagarajan and any likely corporate designees immediately. Preparation sessions should cover the core defense themes, anticipated areas of questioning, document familiarization, and techniques for handling difficult questions regarding pre-acquisition deal documents that may contain unfavorable characterizations of market position or competitive effects.
F. Third-Party discovery
Third-party discovery will be an important component of our defense, both to develop favorable evidence and to understand the factual basis for the AG's claims.
Cascadia Cloud Services Inc. (500 NW Greenwood Avenue, Prineville, Oregon 97754). Cascadia is the AG's most significant Oregon-based customer witness, given its $62 million in fiscal year 2022 Meridian CPO module purchases and its operation of three hyperscale data centers in Oregon. We anticipate that the AG has already obtained, or will seek to obtain, information from Cascadia regarding its CPO module procurement practices, pricing, switching costs, and evaluation of competitive alternatives. We should consider issuing our own third-party subpoena to Cascadia for documents and testimony regarding its evaluation of CPO module suppliers other than Meridian, including Luminos Systems Corp., Crestwave Optical Technologies Ltd., and any other current or potential CPO suppliers. Evidence that Cascadia actively evaluates and could switch to alternative suppliers would directly support our broader market definition and competitive alternatives arguments. Thomas Kowalski at GDK will handle service of the subpoena in Oregon.
Northstar Digital Infrastructure LLC (3300 NE Shute Road, Hillsboro, Oregon 97124). The same analysis applies to Northstar, although its fiscal year 2022 Meridian spend of $28 million makes it a somewhat less critical witness than Cascadia. Northstar's testimony and documents regarding competitive alternatives and switching costs could nonetheless provide useful corroborative evidence. We should evaluate whether the incremental benefit of a Northstar subpoena justifies the cost, and proceed if the cost-benefit analysis is favorable.
Luminos Systems Corp. (Austin, Texas). Luminos is the AG's own alleged second-largest competitor in the CPO transceiver market, with an approximately 22% market share. Evidence from Luminos regarding its product roadmap, capacity expansion plans, R&D investment, customer wins, and ability to serve as a competitive constraint to the combined Halcyon-Meridian entity would directly support our defense themes. A third-party subpoena to Luminos for documents related to its CPO business, expansion plans, and competitive positioning would be highly valuable. Because Luminos is a Texas-based company, service of a subpoena would need to be handled through appropriate interstate mechanisms, though Luminos may also be subject to the jurisdiction of the Oregon court if it conducts business in the state.
Crestwave Optical Technologies Ltd. (Shenzhen, China). Crestwave holds approximately 11% of the U.S. CPO transceiver market and is an important competitive constraint. However, as a People's Republic of China-domiciled entity, enforcement of a subpoena issued by an Oregon state court may be impractical. We should explore alternative means of obtaining relevant evidence, such as seeking discovery of U.S. sales records through U.S.-based distributors, importers, or customers that purchase Crestwave CPO products. We may also consider seeking voluntary cooperation from Crestwave if the company perceives a business interest in demonstrating its competitive viability in the U.S. market.
G. Protective Order
We will negotiate a stipulated protective order with the AG's office and Ashworth & Pendleton LLP to govern the handling of confidential business information produced in discovery. The protective order should include, at a minimum:
• A "Confidential" designation for business information that is competitively sensitive but may be reviewed by counsel, experts, and designated client representatives.
• An "Attorneys' Eyes Only" designation for the most competitively sensitive materials — including customer-specific pricing data, revenue information, cost structures, product roadmaps, and internal competitive analyses — restricting access to outside counsel, retained experts, and the court only, and excluding AG staff and any non-legal personnel from review.
• Provisions governing the use and handling of designated materials at depositions and hearings, including procedures for marking and sealing exhibits.
• Provisions for the return or destruction of designated materials at the conclusion of the litigation.
Thomas Kowalski at GDK will file the stipulated protective order with the court once the parties have reached agreement on its terms. If the AG's office resists an adequate "Attorneys' Eyes Only" tier, we should be prepared to move the court for an appropriate protective order.
VI. EXPERT RETENTION — DR. FRANKLIN MORROW / STONEBRIDGE ANALYTICS LLC
A. Recommendation to Retain
We strongly recommend the immediate retention of Dr. Franklin Morrow, Principal of Stonebridge Analytics LLC (1700 K Street NW, Suite 850, Washington, DC 20006), as Halcyon Americas's expert economist in this matter.
Dr. Morrow holds a Ph.D. in Economics from the Massachusetts Institute of Technology and has spent more than twenty years specializing in industrial organization economics with a particular focus on technology markets, including semiconductors, optical networking, and data-center infrastructure. He has been retained as a testifying expert in numerous antitrust proceedings in both federal and state courts, including merger challenges, monopolization cases, and private antitrust litigation. His experience includes prior engagements involving semiconductor market definition disputes, vertical integration analyses, and the quantification of merger efficiencies. He has published extensively in peer-reviewed economics journals and is a recognized authority in his field.
Dr. Morrow is well-positioned to counter the AG's market-definition and competitive-effects arguments. His familiarity with semiconductor and photonics industry dynamics will be critical to our broader market definition argument, and his experience quantifying procompetitive efficiencies will support our affirmative defense. Importantly, Dr. Morrow has no conflicts that would preclude his engagement in this matter.
The estimated engagement cost for Dr. Morrow and his Stonebridge Analytics team through trial (or settlement resolution) is approximately $600,000 to $700,000, based on Stonebridge's standard rates and the anticipated scope of work, which includes market definition analysis, competitive effects analysis, efficiencies quantification, rebuttal of the AG's expert report, deposition preparation and testimony, and trial preparation and testimony. This estimate may be refined as the scope of discovery and the scheduling order become clearer.
B. Scope of Expert Work
Dr. Morrow's engagement should encompass the following areas of analysis:
1. Market Definition Analysis. Dr. Morrow will develop and present an economic analysis supporting a broader relevant product market definition than the AG's proposed "co-packaged optics transceiver modules for data-center applications." Specifically, Dr. Morrow will analyze demand-side substitutability (the degree to which data-center operators can and do substitute between CPO modules and traditional pluggable transceivers based on price, performance, and application requirements) and supply-side substitutability (the ability of optical transceiver manufacturers to shift production between pluggable and co-packaged form factors in response to changes in relative prices and demand). Dr. Morrow will apply standard economic methodologies, including the hypothetical monopolist test (SSNIP test), to determine whether the AG's narrow market definition satisfies the economic criteria for a properly defined relevant product market.
2. Competitive Effects Analysis. Dr. Morrow will analyze the competitive effects of the Halcyon-Meridian transaction and demonstrate that the combined entity's post-merger market share of approximately 58% in the AG's narrow market does not reflect actual competitive dynamics in the optical transceiver industry. His analysis will address the limitations of the AG's HHI analysis (post-merger HHI of 4,050, delta of 1,232) in the context of a nascent, rapidly growing market where static concentration metrics are poor predictors of future competitive conditions. He will present evidence that Luminos Systems Corp. (approximately 22% share), Crestwave Optical Technologies Ltd. (approximately 11% share), and fringe competitors (approximately 9% combined share) provide meaningful and growing competitive constraints, and that barriers to entry are not insurmountable for firms with existing semiconductor or photonics capabilities.
3. Efficiencies Analysis. Dr. Morrow will quantify the procompetitive efficiencies arising from the vertical integration of Halcyon's analog and mixed-signal IC capabilities with Meridian's silicon photonics and CPO manufacturing capabilities. This analysis will estimate cost savings from vertical integration (elimination of third-party component costs, reduction in manufacturing complexity and supply chain friction), innovation acceleration (faster R&D cycles from combined technical expertise and shared IP portfolio), and improved product performance (higher-performing CPO modules at lower prices). Dr. Morrow will demonstrate that these efficiencies are merger-specific, verifiable, and likely to be passed through to consumers.
4. Vertical Foreclosure Rebuttal. Dr. Morrow will develop an economic model demonstrating that Halcyon lacks both the ability and the incentive to engage in vertical foreclosure through degradation of interoperability between Meridian's CPO modules and third-party switch ASICs. His analysis will demonstrate that: (a) Halcyon's power management ICs are commodity components with numerous substitutes, and Halcyon lacks market power in the upstream IC market; (b) the OIF 400ZR/800ZR interoperability standards framework is maintained independently by a multi-stakeholder industry body and cannot be unilaterally altered by Halcyon; (c) any attempt to degrade interoperability would be economically irrational because it would destroy customer demand for Meridian's own CPO modules, which are designed and marketed for compatibility with all major switch ASICs; and (d) data-center operators have the sophistication and bargaining power to detect and punish any attempt at foreclosure by switching to alternative CPO and IC suppliers.
5. Rebuttal of Dr. Evelyn Ng's Analysis. Once Dr. Ng's expert report is served, Dr. Morrow will prepare a comprehensive rebuttal report addressing methodological flaws, unsupported assumptions, and errors in her market definition analysis, market-share calculations, HHI analysis, competitive effects opinions, and vertical foreclosure theory. The rebuttal will include independent analysis where appropriate and will identify specific areas where Dr. Ng's conclusions are contradicted by the economic evidence.
C. Timing
Retention of Dr. Morrow and his team at Stonebridge Analytics LLC should be formalized immediately, during the week of July 10, 2023, to allow Stonebridge to begin data collection, industry research, and preliminary analysis concurrent with the commencement of discovery. Early engagement will enable Dr. Morrow to advise the litigation team on discovery priorities, including the identification of documents and data most relevant to his economic analysis.
Expert reports will be due in accordance with the court's scheduling order. While the specific deadlines have not yet been set, we anticipate that initial expert reports will be due approximately 60 to 90 days before any dispositive motions deadline or trial date, with rebuttal reports due 30 days thereafter. We should ensure that Dr. Morrow's engagement timeline is coordinated with the scheduling order to allow adequate time for a thorough and well-supported expert analysis.
VII. ASSESSMENT OF SETTLEMENT POSTURE
A. Litigation Risk Assessment
A candid assessment of the strengths and weaknesses of our litigation position is essential to inform both our defense strategy and our evaluation of settlement alternatives.
Strengths of Our Position:
• Strong procompetitive efficiencies story. The vertical integration of Halcyon's analog IC capabilities with Meridian's silicon photonics and CPO technology generates genuine, quantifiable, and merger-specific efficiencies that benefit consumers, including Oregon-based data-center operators. This is not a case where the efficiencies defense is pretextual — the combination creates real value.
• HSR early termination. While the court correctly held that early termination does not preempt state enforcement, the fact that the FTC granted early termination without issuing a second request is nonetheless a significant data point. It indicates that the federal agencies — which have access to the most sophisticated merger analysis capabilities in the country — did not identify competitive concerns sufficient to warrant further investigation. This fact, while not dispositive, is probative and can be presented to the trier of fact as evidence that the transaction is not anticompetitive.
• Nascent and rapidly growing market. The CPO market is in its early stages, with substantial projected growth. Static market-share snapshots in such markets are widely recognized as poor predictors of future competitive conditions. Courts and enforcement agencies have historically been more cautious about inferring lasting market power from high market shares in dynamic, technology-driven markets.
• No post-closing evidence of anticompetitive conduct. More than five months have passed since the acquisition closed, and there is no evidence that Halcyon has engaged in any of the anticompetitive conduct theorized by the AG — no price increases, no interoperability degradation, no customer discrimination. While the AG's theory is forward-looking, the absence of any actual harm undermines the urgency and credibility of its claims.
Weaknesses and Risks:
• Facially problematic HHI numbers. The AG's HHI analysis — post-merger HHI of 4,050 with a delta of 1,232 — substantially exceeds the thresholds at which mergers are presumed likely to enhance market power under the federal Horizontal Merger Guidelines and analogous state enforcement standards. While these numbers are calculated using the AG's narrow market definition, which we will challenge, they create a significant structural presumption that we must affirmatively rebut with economic evidence. If the trier of fact accepts the AG's market definition, the concentration metrics alone may be sufficient to establish a prima facie case.
• High combined market share. A combined market share of approximately 58% in the AG's proposed relevant market is high by any measure and creates a strong inference of market power. Even if we succeed in broadening the relevant market to include pluggable transceivers, the combined entity will still hold a significant share, and the AG will argue that the CPO segment is a distinct competitive space where the combination's effects are most acutely felt.
• Vertical foreclosure theory. While we believe the AG's vertical foreclosure theory is speculative and economically unsound, it is a recognized theory of anticompetitive harm in merger analysis. The court has already found it cognizable at the pleading stage, and if