It may take voting machine manufacturer Election Systems & Software Inc. several months to partly unwind its controversial $5 million deal as required by a settlement with the Justice Department’s Antitrust Division. But at least one customer is already happy with the agreement: The state of Maryland.
On Monday, the Justice Department announced a proposed settlement with ES&S to divest many of the assets, including the software, intellectual property and equipment it bought from rival Diebold Inc. in September. The company also agreed to waive employee non-compete and non-disclosure agreements so the buyer could recruit some of its staff.
Maryland has a particular interest in the case, said John Tennis, an Assistant Attorney General in the antitrust unit of the state’s Attorney General’s office, because the state had planned to purchase a new voting system before the fall 2010 elections.
The bids were due last fall, he said. Six days before the deadline, ES&S announced that it was buying Diebold’s voting machine unit, Premier Election Solutions Inc.
Maryland had received only two bids on the new systems: one was from ES&S and one from Premier. Under Maryland law, those two were the only companies certified to offer voting systems.
Maryland still considered two bids for a little while, Tennis said, but saw that ES&S was selling off large parts of the company it had just acquired.
“We determined that Premier could not perform the bid,” he said, “and we didn’t want to deal with just one bidder.”
ES&S did not directly address the proposed settlement, but said in a statement provided by spokeswoman Kimberly Gurzick that the company has “supported more than 1,000 smooth running election events for former Premier customers.” The company also said in the statement it has “fully cooperated” with the Justice Department to address the “concern among some regarding the structure of our industry.”
Some opponents of the deal privately question whether the settlement can create a viable competitor with Premier’s products without the knowledge of the employees that created and maintained them.
“How do you come in when the intellectual property of the product is tied to specific people who know a whole lot of information and can’t be there?” asked one critic, who spoke on condition of anonymity because negotiations with a buyer are still going on. ”Unless they choose to move, that company is at a significant disadvantage to compete.”
But going to court was not a option, Maryland’s Tennis said. “ES&S has been dismantling Premier, so even if a court said you need to divest all of Premier, there was not much left, from what we can tell, to divest,” he said. “I don’t think we could get a remedy as good as the one being accomplished here.”
Under a proposed agreement filed Monday, the Justice Department will require voting machine manufacturer Election Systems & Software Inc. to sell off much of the intellectual property, software, and equipment it acquired from Diebold Inc. last year when it purchased rival Premier Election Solutions Inc.
The controversial $5 million deal, which closed in September, combined the two largest providers of voting machine equipment and gave ES&S control over more than 70 percent of the market.
The deal was not subject to a mandatory federal antitrust review because it was too small, but the DOJ started reviewing the deal after it was public.
The Justice Department along with nine states filed a complaint along with the proposed settlement in federal court in Washington, D.C. on Monday afternoon.
According to the proposed final judgment, ES&S will sell many of the assets it acquired from Diebold, including Premier’s design plans, software and hardware, to a still to-be-determined buyer. Competitor Hart InterCivic Inc. is a likely possibility.
The settlement will require the company to license to the buyer a technology called AutoMARK that helps disabled voters mark a ballot.
The acquiring firm will be permitted to recruit Premier’s employees, and ES&S will waive all non-disclosure or non-compete agreements for six months.
The settlement also allows Premier’s current customers to switch their service contracts to the acquiring firm if they choose, essentially forcing ES&S to re-bid the existing service contracts it acquired in September.
ES&S will no longer be able to submit bids on new voting equipment system contracts with Premier’s equipment.
“The proposed settlement will restore competition, provide a greater range of choices and create incentives to provide secure, accurate and reliable voting equipment systems now and in the future,” said Molly Boast, a deputy in the Antitrust Division, in a statement.
Christine Varney, who heads the Division, recused herself from the review because her former law firm, Hogan & Hartson, represented ES&S before the DOJ.
Many customers considered ES&S and the Diebold unit to be the closest competitors, according to the complaint. In three recent bids worth between $1 million and $6 million, for example, the two were the closest bidders.
After ES&S bought Premier, it got rid of the firm’s sales, product design and certification teams and used ES&S resources to service Premier’s customers. The move made it difficult for regulators to take the deal apart, according to government’s filing.
“It looks like they got as much as they could have considering that the parties immediately after the transaction was consummated started frantically scrambling the eggs,” Robert Lande, a professor at the University of Baltimore School of Law, said in an interview.
Sen. Chuck Schumer (D-N.Y.), who oversaw a congressional review of the deal as chairman of the Senate Rules Committee and urged the Justice Department to investigate, praised the DOJ’s settlement with ES&S. “This decision will restore competition to an industry that is critical to our democracy,” Schumer said in a statement. “If left unchallenged, this merger would have created a virtual monopoly that could have done serious harm to the idea of free and fair elections.”
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The sale of a unit of Diebold Inc. that makes voting machines to its larger competitor, Election Systems and Software, is coming under increased scrutiny from both governmental and private entities as new details emerge.
We reported last month that the Justice Department was investigating the merger over concerns that it would be anticompetitive.
Last week, Florida’s Attorney General, Bill McCollum, said his office was also studying the sale to see if it concentrated too much power in one company.
This weekend, an election watchdog group, Black Box Voting, released a letter it sent to DOJ outlining its concerns about the deal.
The newly combined firm would control around 75 percent of the market for voting machines, according to Black Box, which argues that the merger “will put a single company in a position to shut down federal elections at will.”
According to Black Box, the merger raises concerns that, for large parts of the country, one company would control information about who is eligible to vote, which absentee ballots are accepted, and how votes are counted. Local election officials are also locked in to purchase software and service fees, the letter says.
The letter also raises questions about who owns the privately-held companies, and the companies’ ties to individuals who had previously been convicted of bid-rigging and unfair trade practices.
A rival voting-machine manufacturer, Hart InterCivic, has filed suit in federal court in Delaware in order to stop the deal.
The firms’ public relations strategy in announcing the $5 million sale also raised eyebrows. The companies waited until the deal had closed to make a formal announcement and sidestepped federal antitrust reporting procedures that require the parties in a transaction that meets a threshold size to alert regulatory agencies of their intentions, then wait 30 days to proceed.
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The Justice Department is investigating the controversial sale of a Diebold Incorporated unit that makes voting machines to its larger competitor, Election Systems and Software, according to two people familiar with the matter.
The sale, announced in September, has raised concerns from voting-rights groups and Sen. Chuck Schumer (D-N.Y.), who urged DOJ to investigate in a letter to Attorney General Eric Holder. Last week, the New York Times proposed that the Antitrust Division try to block the sale.
Another voting-machine manufacturer, Hart InterCivic, filed its own suit asking a federal judge in Delaware to stop the deal. ES&S controls 68% of the market for voting machines with the Diebold purchase, the complaint alleges.
Hart Intercivic’s complaint also accuses Diebold and ES&S of engaging in other anti-competitive behavior, including raising prices on services once customers had already signed on to a bid.
The Schumer-chaired Senate Rules and Administration Committee, which has an oversight role on federal elections, is conducting its own review of the deal.
The $5 million sale also raised eyebrows for the firms’ public relations strategy. The companies waited until the deal had closed to make a formal announcement, and sidestepped federal antitrust reporting requirements that require the parties of a transaction that meets a threshold size to alert the Justice Department and the Federal Trade Commission of their intentions, then wait 30 days to proceed.
The mechanics of voting have been subject to heightened scrutiny since the 2000 Florida election stalemate and the infamous hanging chads it produced.
Diebold has been the target of criticism over the reliability of its touch-screen machines and over a chief executive who was a top fundraiser for George W. Bush’s 2004 campaign. Diebold posted a third-quarter loss today based on a $31.4 million loss on the sale.
A spokeswoman for the Justice Department declined to comment, and attorneys for Diebold, ES&S and Hart InterCivic did not respond to requests for comment.