Articles Posted in Mergers & Acquisitions

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Authors:  Steven Cernak and Luis Blanquez

As we have reported numerous times (most recently here), the Federal Trade Commission has been making headlines with some controversial changes to U.S. merger review procedures, disputes over its voting rules, and personnel changes. But while the FTC was making headlines, the other federal antitrust enforcer, the Department of Justice Antitrust Division, was launching the three antitrust enforcement actions we summarize below.  Now that Jonathan Kanter has been confirmed as the Assistant Attorney General in charge of the Division, we expect the pace of actions to only pick up.

American/JetBlue

In July 2020, American Airlines and JetBlue Airways announced the formation of the “Northeast Alliance.” The Alliance is a series of agreements between the two competitors relating to their respective operations at Boston’s and New York City’s four major airports. The agreements commit the two airlines to pool revenues and coordinate on “all aspects” of network planning except pricing at the four airports. The companies sought and, after making a few minor tweaks, received approval from the Trump Administration Department of Transportation in January 2021.  Shortly thereafter, the Alliance began operation.

In September 2021, the Biden Administration, joined by several states, sued the two companies alleging that the Alliance was a civil violation of Sherman Act Section 1 under the rule of reason.  The complaint describes the Alliance as effectively a merger of the two companies’ operations in Boston and New York that will reduce choice for consumers. Because the Alliance is effectively a partial merger, the complaint uses Clayton Act Section 7 analysis, including HHI calculations for various city-pairs that will be affected by the Alliance, to predict the negative effects on consumers.

In November 2021, the parties moved to dismiss the case. Their main argument is that in a Section 1 case, the complaint must allege anticompetitive effects that have already occurred. Predictions of potential anticompetitive effects, while sufficient for a Section 7 merger challenge, are insufficient here. The complaint does not allege any negative competitive effects, such as reduced flights, since the Alliance’s inception. In fact, as the motion and the companies’ monthly press releases since the lawsuit make clear, the capacity of the two airlines in the four airports has only increased. As of this writing, the Division and their state partners have not yet responded to the motion.

Penguin Random House/Simon & Schuster

In November 2021, the Department of Justice Antitrust Division filed a civil antitrust lawsuit to block Penguin Random House’s proposed acquisition of its close competitor, Simon & Schuster.  As alleged in the complaint, this acquisition would enable Penguin Random House, which is already the largest book publisher in the world, to exert outsized influence over which books are published in the United States and how much authors are paid for their work.

As described in the complaint, the publishing industry is already highly concentrated. Publishers compete to acquire manuscripts, which they edit, package, market, distribute and sell as books.  Publishers pay authors advances for the rights to publish their books. In most cases, the advance represents an author’s total compensation for their work. Just five publishers, known as the “Big Five,” are regularly able to offer high advances and extensive marketing and editorial support, making them the best option for authors who want to publish a top-selling book.

While smaller publishers occasionally win the publishing rights to anticipated top-selling books, they lack the financial resources to regularly pay the high advances required and absorb the financial losses if a book does not meet sales expectations. The complaint alleges that Penguin Random House, the world’s largest publisher, and Simon & Schuster, the fourth largest in the United States, compete head-to-head to acquire manuscripts by offering higher advances, better services and more favorable contract terms to authors.

This is a good example of how the Antitrust Division analyzes the existence of monopsony power and the way it sometimes harms competition in input markets.  In this case, the proposed merger would result in lower advances for authors and ultimately fewer books and less variety for consumers. It would also put Penguin Random House in control of close to half the market for acquiring publishing rights to anticipated top-selling books, leaving hundreds of individual authors with fewer options and less leverage.

U.S. Sugar/Imperial Sugar

During the same month of November, the new chief of the Antitrust Division––Jonathan Kanter–– filed his first merger challenge to stop United States Sugar Corporation from acquiring its rival, Imperial Sugar Company. The complaint alleges that the transaction would leave an overwhelming majority of refined sugar sales across the Southeast in the hands of only two producers.  As a result, American businesses and consumers would pay more for refined sugar, a significant input for many foods and beverages.

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Author: Luis Blanquez

“The legislature hereby finds and declares that there is great concern for the growing accumulation of power in the hands of large corporations. While technological advances have improved society, these companies possess great and increasing power over all aspects of our lives. Over one hundred years ago, the state and federal governments identified these same problems as big businesses blossomed after decades of industrialization. Seeing those problems, the state and federal governments enacted transformative legislation to combat cartels, monopolies, and other anti-competitive business practices. It is time to update, expand and clarify our laws to ensure that these large corporations are subject to strict and appropriate oversight by the state.”  

Self-explanatory, isn’t it? This is just an extract from the draft Act. Indeed, while the antitrust world is watching the U.S. Senate due to the vast reforms going on, and the FTC continues to repeal unilaterally the Hart-Scott-Rodino (“HSR”) merger review process, something is also currently cooking in New York: The New York 21st Century Antitrust Act.

In June 2021 New York’s proposed 21st Century Antitrust Act (Senate Bill S933A) passed the State Senate. The remaining steps before that bill becomes law are passage by the Assembly and the signature of the Governor, both of which are expected at some point next year. When that happens, the proposed law will radically amend the long-standing Donnelly Antitrust Act. This is potentially a much bigger deal than it may seem. Not just for the state of New York, but also for the future of U.S. antitrust law more generally. Why? Basically, because if the Act becomes law, it will import the well-known and more far-reaching “abuse of dominance” standard from the European Union ––targeting companies with market shares as low as 30% in NY; and will establish––for the first time––a state premerger notification system in the U.S.

General Scope but with a Specific Focus on Big Tech and Importing the Abuse of Dominant Position Standard

The Donnelly Act applies to any conduct that restrains any business, trade or commerce or in the furnishing of any service in New York. N.Y. Gen. Bus. Law § 340. The New Antitrust Act has the same scope but introduces two important wrinkles.

First, even though it generally applies to all sectors and industries, it expressly addresses and calls out anticompetitive behavior in the Big Tech industry. This is clearly in line with all the recent proposed antitrust bills and monopolization cases at federal level.

Second, it also imports the well-known and more far- reaching “abuse of dominant position” standard from Article 102 the Treaty of Functioning of the European Union. Until now, under the current standards applied by courts under Section 2 of the Sherman Act, Big Tech has been able successfully to challenge or defeat many of the unilateral action complaints filed in federal court. The New Antitrust Act explicitly acknowledges this: “effective enforcement against unilateral anti-competitive conduct has been impeded by courts, for example, applying narrow definitions of monopolies and monopolization, limiting the scope of unilateral conduct covered by the federal anti-trust laws, and unreasonably heightening the legal standards that plaintiffs must over-come to establish violations of those laws.” A good example of such limitations are refusal to deal cases in the U.S. But, if passed, this is going to change next year. NY’s Attorney General is going to have not only the authority to enforce the New Antitrust Act, but also the powers to define what constitutes––under New York Antitrust law––an abuse of a dominant position. As a European antitrust attorney who currently practices antitrust law in the U.S., this is indeed very interesting news.

While NY’s Attorney General will need to provide further guidance, for now the New Antitrust Bill states that a dominant position may be established by direct or indirect evidence.

Direct evidence may include, for example, the unilateral power of a monopolist to set prices, terms, conditions, or standards; unilateral power to dictate non-price contractual terms without compensation; or other evidence that an entity is not constrained by meaningful competitive pressures, such as the ability to degrade quality without suffering reduction in profitability. Under the Act, if the direct evidence is sufficient to show a dominant position, conduct that abuses that dominant position is unlawful without regard to a defined relevant market (or the conduct’s effects in that market). This seems to be––for the first time–– in line with a “per se” analysis under Section 1 of the Sherman Act. How the NY Attorney General is going to determine the existence of a dominant position, without even first defining the relevant antitrust market(s) concerned, remains to be seen.

A dominant position may also be established by indirect evidence. For instance, the Act incudes a presumption of a dominant position when a seller enjoys a market share of 40% or greater and 30% or greater for a buyer. This is a significantly lower threshold than the one currently used in federal cases brought under the Sherman Act. But the determination of a dominant position requires a much more detailed analysis of barriers to entry, potential competition, and purchasing power downstream, among many others. That’s without even considering the special circumstances of all the digital and technological markets where Big Tech companies are present. Once again, we will have to wait until we see further guidance from NY’s Attorney General under the newly acquired rulemaking powers to flesh out the definition of dominant position.

As for the existence of an abuse, the Act enumerates a non-exhaustive list of anticompetitive behavior: conduct that tends to foreclose or limit the ability or incentive of actual or potential competitors to compete, such as leveraging a dominant position in one market to limit competition in a separate market, or refusing to deal with another person with the effect of unnecessarily excluding or handicapping actual or potential competitors. With the new abuse of dominance standard in play, it will be interesting to watch how these theories of harm develop in NY, and how much tension they create with existing federal antitrust case law.

The Act, in a very cryptic one-line paragraph, excludes any procompetitive effects as a defense to offset or cure competitive harm. This seems to create a “per se” liability to any abuse of a dominant position, which would be problematic both under U.S. federal law and EU Competition law.

Under EU Competition law, not every exclusionary effect is necessarily detrimental to competition. Competition on the merits may result in the elimination of less efficient competitors from the market. See for instance C-209/10 Post Danmark I, or C-413/14 Intel. Indeed, aside from very few “by nature” abuses which are considered presumptively unlawful (and even under these the European Commission must still carry out a competition analysis if the dominant firm provides evidence on the contrary), a full-blown effects analysis is always required. See T-201/04 Microsoft.

Not only that, even if a specific conduct is found to constitute an abuse of a dominant position and restricts competition, a person can always attempt to show that its conduct is objectively justified. This applies to any alleged abuse, including “by nature” abuses. More information on treatment of exclusionary conduct in the EU may be found in: Guidance on the Commission’s Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings.

First State Premerger Notification System in the U.S.

The new Act also will establish a separate premerger notification system in New York where buyers––regardless of where they are incorporated––will have to notify the NY Attorney General sixty days before the closing of any transaction where any of the parties involved exceed the applicable reporting thresholds, set at assets or annual net sales in New York exceeding $9.2 million, which is currently 2.5% of the current federal HSR threshold. The sixty-day notification is double the thirty-day period applicable under the HSR Act.

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Yang Yang

Author: Yang Yang

Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

See also Yang’s previous article on this website: Antitrust Merger Control in China: Notifiable Transactions under the People’s Republic of China Anti-Monopoly Law

On October 23, 2021, the Chinese legislative authority released a draft amendment for public comments to China’s Anti-Monopoly Law (“AML”)1, with a public comment period open until November 21, 2021.2 The amendment is controversial because of the hefty fines on antitrust violations imposed in China by the State Administration for Market Regulation (“SAMR”). Internet platforms have been the most heavily fined by the SAMR, partially due to the use of a calculation method for monetary fines based on gross sales.3

Still No Clarification on the Definition of “Sales”, Which Serves as the Base for Monetary Fines

One of the most controversial legal matters for antitrust enforcement in China is the definition of “sales” as the basis for the calculation of monetary fines. The SAMR has the power to impose a fine between 1 to 10 percent of the “sales” generated by the firm in the preceding year. Even though both the current AML and the amendment are silent on the definition of “preceding year,” the SAMR has been considering for this purpose the year when the investigation is officially initiated.

Similarly, according to the published cases of the SAMR, the word “sales” refers to all sales from the firm as a whole, rather than just the firm’s sales from the relevant products and geographic markets.

With these two factors in mind, under the new draft, the calculation of “sales” would significantly impact firms doing business in China. Indeed, once the SAMR discovers the existence of a cartel or a Resale Price Maintenance (RPM) provision in one product market, it would consider all sales from the firm(s) involved as the basis for the calculation of the monetary fine.

But the main reason why this matter is controversial is the fact that––according to Chinese Administrative Law––administrative fines must be commensurate with the underlying violation in degree, importance and effects, among others. Considering the size of a firm as a whole, even 1 percent of the total sales would be heavier than any underlying violation.

For example, in the Alibaba Group decision, the parent company owns and operates shopping platforms, including Taobao.com and Tmall.com4. There, the abusive conduct refers to the alleged exclusive-dealing agreements since 2015, where Alibaba “forced” some major downstream merchants to enter the “Strategic Merchant Framework Agreement”, the “Joint Business Plan”, the “Memorandum of Strategic Cooperation” and other agreements. In those agreements Alibaba required that such major merchants would not access other competing online platforms. Despite the conduct only involving exclusive-dealing agreements with certain major merchants, the sales as the basis for calculating the monetary fines were the total sales of Alibaba Group in 2019, the year preceding the year when the government initiated the investigation.

Another example is the fine on Meituan, a platform well known for food-delivery.5 In this decision, the relevant market was the online food-delivery platform, implying that the violating abusive conduct all occurred in this market. But, the basis for the fine was still the total sales of the group, RMB 114,747,995,546 in 20206, which also included sales from travel and other businesses, like drug-delivery and flower delivery. Such non-food-delivery businesses in 2020 generated approximately 46% of the sales for this public company7.

Hub-and-Spoke Agreements Constitute a Third Kind of Illegal Agreement

Article 18 of the amendment provides that Operators shall not organize other operators to reach monopoly agreements or provide substantive assistance to other operators in reaching monopoly agreements. This clause essentially accepts “hub-and-spoke” agreements as a third kind of illegal agreement in addition to horizontal agreements between/among competitors and vertical agreements between/among merchants and distributors.

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Author:  Steven J. Cernak

The Federal Trade Commission continues to take subtle steps that, in total, will end up significantly changing the merger review process under the Hart-Scott-Rodino Act. We have already covered some of the earlier actions:  withdrawal of the 2020 Vertical Merger Guidelines, withdrawal of one long-standing HSR rule interpretation and threats to the rest, and the routine issuance of threatening letters to parties closing after the end of HSR’s waiting period. This week, the FTC took another such step when it announced that it would now “routinely” require many parties involved in mergers to obtain prior approval from the FTC for many future transactions.

Before 1995, the FTC had often included a “prior approval” provision in any order settling its review of a merger that it had found to be anticompetitive. That provision required the parties to seek FTC approval for any future merger, usually for the next ten years though usually limited to the markets involved in the original merger. In 1995, the FTC issued a Policy Statement explaining that it would no longer routinely require such prior approval provisions and, instead, would simply rely on HSR’s requirement for most large mergers to be reported to the antitrust agencies prior to consummation.  Earlier this year, the FTC rescinded that 1995 Policy Statement. This week, the FTC announced its replacement.

To understand the import of the new policy, you must understand how the HSR merger review process has worked in practice. The parties to most mergers and similar transactions above the threshold set by Congress (and automatically updated each year) must file certain forms and documents with both the FTC and the Department of Justice Antitrust Division before closing.  The reviewing agency, say, the FTC, then has thirty days to investigate and determine if it will allow the transaction to proceed or seek more information through a “second request.”

If the FTC goes the latter route, the parties then spend months providing the additional documents and information. After the parties certify full compliance with the second request, the FTC must choose to allow the transaction to proceed or sue to enjoin it. By that point months into the investigation, the parties and the FTC often agree to modifications to the transaction — typically, divestiture of certain assets to a buyer — that the FTC thinks will solve any competition concerns.

The details of that agreement are then memorialized. After this week’s statement, that document now will routinely provide that the parties, for future transactions, must seek prior approval from the FTC under terms and timelines set by the FTC, not HSR. Such prior approval requirements certainly will cover future transactions in the markets affected by the original transaction; however, the FTC might also seek broader prior approval provisions in certain cases. Also, the FTC might seek such prior approval requirements even if the parties choose to abandon the proposed transaction, whether prior to or after the FTC sues to enjoin it. Finally, the FTC likely will insist on prior approval before any buyer of divested assets can resell them.

Benefits Expected by the FTC

The FTC sees three main benefits from this new policy. First, it thinks that parties to “facially anticompetitive” transactions will not pursue them in the first place because of fear of imposition of these prior approval requirements for all future transactions. Second, the FTC will be able to preserve its resources by having fewer mergers to review and challenge and, for those subject to prior approval provisions, reviewing them under timelines and rules more FTC-friendly than HSR. Finally, the FTC will be able to review before consummation any deals that would be too small to trigger HSR filing requirements.

Other Likely Effects

The FTC’s assessment of potential effects seems both one-sided and simplistic. Certainly, the new policy will raise the costs to the parties of making HSR submissions on “facially anticompetitive” mergers and so should reduce their number; however, the costs of the risk of prior approval provisions also will fall on other mergers challenged by the FTC, at least some of which reasonable antitrust minds might have found to be not “facially anticompetitive.” Because parties will not be sure that their “good” merger will be mistakenly challenged as a “bad” one, they might hesitate to pursue mergers beneficial to consumers. So, the new policy could reduce both “bad” and “good” mergers.  The FTC’s new policy implicitly assumes that the benefit to the FTC from not needing to challenge the bad ones outweighs the costs to consumers from losing the benefits of the good ones never pursued.

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Author:  Steven J. Cernak

Remember when UPS ran TV commercials, complete with jingles, trying to make logistics something that everyone cares about? No need now. Now, everyone knows how supply chain issues can affect toilet paper supplies, microchips for cars and, perhaps, even make Santa late with toys and decorations for Christmas.

With every supplier, distributor, retailer, and wholesaler scrambling to scrounge supplies and ship finished goods in some reasonably efficient and cost-effective manner, some harried supply chain executives might be tempted to take some bold and dangerous steps. Just as we have done a couple times during the pandemic, your friendly neighborhood antitrust lawyers are here to remind you of the old rules that still apply and speculate on how antitrust might affect these issues in the future.

Price Fixing and Price Gouging Rules Remain the Same

In a time of crisis, one tempting bold but possibly dangerous step for an executive to take is to directly contact or signal intentions to a competitor. For instance, a CEO might want assurance that any price increase to help recover increased transportation costs will be matched by the competitor. Depending on how the conversation goes, antitrust enforcers and courts could find a price fixing agreement — and, as the enforcers have made clear, price fixing is still per se illegal, even during a pandemic or other crisis. An agreement among competitors to boycott logistics providers raising their prices would meet a similar fate.

On the other hand, so-called price gouging does not violate the U.S. federal antitrust laws, as we explained here. So that CEO contemplating a price increase to cover increased transportation costs need not worry about federal antitrust issues; some states, however, do have non-antitrust laws that prohibit price gouging under certain circumstances.

Joint Ventures Might Help

Instead of jail time for price fixing, that phone call between competitor CEO’s could lead to joint efforts that could ease the business pain while staying on the right side of the antitrust laws.  As we explained here, the antitrust rules regarding joint ventures do not change in a crisis and some joint efforts among competitors, if implemented properly, do not violate the antitrust laws.  So if that CEO call will lead to joint research on new shipping methods; a new jointly-run warehouse; or lobbying the local legislature for regulatory relief, the antitrust laws likely will not stand in the way. Looks like some CEO’s are already thinking about joint ventures.

Bottlenecks Turn Out to be Monopolies?

While the antitrust laws have not changed, the changed economic conditions might lead to new outcomes. For instance, bottlenecks in the supply chain might start to look more like monopolies and so be subject to restrictions on monopolizing actions.

As we explained here, the first element in a monopolization claim under the U.S. antitrust laws is finding that the defendant is a “monopolist.” Usually, that process means defining a market and then seeing if the defendant has a high market share; however, the market share method is used more often only because the data are available to make the estimate. What a court really is trying to measure is the ability of the defendant to control its own price, that is, to price with little regard to how competitors might react. The supply chain crisis has uncovered several bottleneck companies that, at least in certain geographic areas, can name their price. As we described above, those high prices themselves would not violate the antitrust laws; however, any additional actions by that company to exclude new competition and maintain that pricing power could be a violation. Look for actions against such companies in the future.

More Merger Challenges Coming

As we have detailed here and here, the FTC is modifying their merger review processes and making it clear that they plan to challenge more mergers, irrespective of any supply chain issues.  And because the number of filings under the Hart-Scott-Rodino Act is way up, the FTC and DOJ Antitrust Division will have that many more chances to challenge mergers. So expecting more merger challenges is an easy prediction.

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Yang YangAuthor: Yang Yang. Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

Merger Control in China

According to Article 20 of the Anti-Monopoly Law of the People’s Republic of China (“Chinese AML”)1, a transaction is subject to a mandatory notification obligation at the State Administration of Market Regulation (SAMR) before being consummated or implemented if the transaction constitutes a “concentration” of undertakings or business operators, which meets or exceeds the relevant thresholds set forth in the Provisions of the State Council on the Notification Thresholds of the Concentrations of Undertakings.2

According to the Turnover Threshold Regulation, the concentrations not meeting the turnover threshold are still subject to the investigation of SAMR regardless of whether they are closed if the SAMR has evidence indicating potential anticompetitive effects of such concentrations.

In Summary, according to all Chinese AML, Turnover Threshold Regulation and the departmental rule, the circumstances when a concentration would fall within the Chinese merger regime would be as follows:

  • Mandatory Notification: Concentration and Turnover Thresholds. For failure to comply with this notification, SAMR has the power to reverse the consummated transaction and can impose a monetary penalty up to RMB 500,000 Yuan (approximately USD 70,000).
  • Voluntary Notification by Parties.
  • Where the turnover thresholds are not triggered, but evidence shows that there may be potential anti-competitive effects, SAMR has the power to initiate a review of the concentration.

Concentration

Under the Chinese AML and the current rules, any of the following transactions may constitute a “concentration” of undertakings:

  • a merger of business operators by absorption;3
  • a merger of business operators by new establishment;4
  • a business operator acquiring control of another business operator through an equity acquisition;5
  • a business operator acquiring control of another business operator through an asset acquisition;6
  • a business operator acquiring control of another business operator through contracts or other means;7 or
  • a jointly-controlled company by two or more business operators also referred to as a joint venture.8

Turnover Thresholds

Turnover thresholds may be triggered when:

  • in the preceding fiscal year, (i) the combined worldwide turnover of the parties participating in the concentration exceeds RMB10 billion (approximately US$1.6 billion) and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million); or;
  • in the preceding fiscal year, (i) the combined turnover within China of the parties participating in the concentration exceeds RMB2 billion (approximately US$315 million), and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million).

Revenues will be calculated on a group basis for each party participating in the concentration. And, “turnover within China” shall include the business operator’s import of products or services into mainland China from countries or regions outside of China, and shall exclude the export of its products and/or services from mainland China to countries or regions outside of China.

According to Guiding Opinions of Notifications of Concentrations, the turnover includes all the revenue from sales of products and provision of services in the preceding year, exclusive of relevant taxes and surcharges.9

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Authors: Steven Cernak and Luis Blanquez

FTC Chairwoman Lina Khan keeps up her frenetic crusade to change the practice of antitrust enforcement. The new––and surely not last––change: the vertical merger guidelines.

On Wednesday, September 15, 2021, the FTC held an open virtual meeting to discuss the following:

Here, we will only discuss the first two items. For more background on these and other recent changes at the FTC, see our previous articles:

The FTC Continues the HSR Antitrust Process’s “Death of a Thousand Cuts”

FTC Guts Major Benefit of Antitrust HSR Process for Merging Parties

FTC Withdraws Vertical Merger Guidelines and Commentary

As expected, the FTC on a 3-2 vote decided to withdraw its approval of the Vertical Merger Guidelines, issued jointly just last year with the Department of Justice Antitrust Division (DOJ), and the FTC’s Vertical Merger Commentary.

According to the FTC’s press release, the guidance documents include unsound economic theories that are unsupported by the law or market realities. The FTC is withdrawing its approval to prevent industry or judicial reliance on this allegedly flawed approach. The FTC reaffirmed its commitment to working closely with the DOJ to review and update the agencies’ merger guidance.

The statements by the various Commissioners show the deep divisions within the FTC since Khan joined the Commission, not just about these Guidelines but more generally about how to enforce the antitrust laws and how to run the FTC.  The statement by the FTC majority asserts that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies. The statement explains the majority’s concerns with the Guidelines’ treatment of the purported pro-competitive benefits of vertical mergers, especially its treatment of the elimination of double marginalization.

The dissenting Statement of Commissioners Phillips and Wilson starts with a bang: “Today the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware.” The statement goes on to not only lament the confusion the withdrawal will generate but contrast the process used when the Guidelines were issued — months of public input and debate — with the process used for their withdrawal — no public input and, seemingly, no discussion even at the FTC outside the offices of three Commissioners.

The FTC pledged to work with DOJ to update vertical merger guidance to better reflect how the agencies will review such transactions in the future. Just an hour later, DOJ issued a statement explaining that they are reviewing both the Horizontal Merger Guidelines and the Vertical Merger Guidelines and, as to the latter, have already identified several aspects of the guidelines, such as the treatment of and burdens for the elimination of double marginalization, that deserve close scrutiny.  (We raised those issues when the Guidelines went through public debate last year.)  DOJ expects to work closely with the FTC to update the Guidelines so, perhaps, we will have new Guidance at some point in the future.

FTC Staff Presents Report on Nearly a Decade of Unreported Acquisitions by the Biggest Technology Companies

During the same meeting, FTC presented findings from its inquiry into the hundreds of past acquisitions by the largest technology companies that did not require reporting to antitrust authorities at the FTC and DOJ, generally because they were below HSR thresholds. Launched in February 2020, the inquiry analyzed the terms, scope, structure, and purpose of these transactions by Alphabet Inc., Amazon.com, Inc., Apple Inc., Facebook, Inc., and Microsoft Corp. between Jan. 1, 2010 and Dec. 31, 2019.

“While the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing, this study highlights the systemic nature of their acquisition strategies,” said Chair Khan. “It captures the extent to which these firms have devoted tremendous resources to acquiring start-ups, patent portfolios, and entire teams of technologists—and how they were able to do so largely outside of our purview.”

The Commission voted 5-0 to make the report public. Chair Khan and Commissioners Chopra and Slaughter each issued separate statements. While the report did not recommend any changes to the merger review process, we expect that the FTC may utilize the report’s findings to recommend changes in the HSR process.

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Authors: Steve Cernak and Luis Blanquez

New management at the FTC keeps reviewing all aspects of the Hart-Scott-Rodino (HSR) premerger notification process.  On August 26, the current head of the Bureau of Competition posted a change to a long-standing FTC informal interpretation about how potential HSR filers should view debt repayments when determining if the transaction is large enough to warrant a filing.  That particular change could affect many transactions; however, perhaps more importantly, the announcement also described potential larger changes in how the FTC develops and promulgates interpretations of the complicated HSR process.  Any such changes could be more examples of the “death of a thousand cuts” for the current HSR process that at least one commissioner has decried and that we discussed recently.

As we have explained, the Hart-Scott-Rodino Act requires companies to file notice of mergers and similar transactions over a certain size before they can close the deal. The first step in complying with HSR’s notification requirements is to determine whether the transaction satisfies the size of transaction test.  Because that determination can be difficult, given HSR’s complicated rules that cannot anticipate every potential deal structure, merging parties have often sought informal interpretations from FTC Premerger Notification Office (PNO) staff.

For at least 15 years, PNO staff has interpreted HSR rules to exclude from the size of the transaction calculation of the payoff of a target’s debt by the acquiring person in transactions involving the acquisitions of voting securities and noncorporate interests (though not of assets). The rationale was that the purchaser of a majority of an issuer’s stock automatically acquires the issuer’s preexisting liabilities and so that fact presumably is reflected in the stock’s acquisition price.

Effective September 27, the FTC will withdraw that informal interpretation. According to the FTC blog post, it appears that some merging parties have structured their deals to take advantage of this interpretation and avoid an HSR filing. Target companies may take on debt shortly before the merger and then have the acquiring person retire it as part of the transaction, thus reducing the size of the transaction, perhaps to a level whereby the parties can avoid a filing.

At the margin, this change likely will result in more HSR filings. It will affect those transactions where the size of the transaction matters, such as transactions of private equity firms focused on the “middle market” near the current HSR threshold of $92M.

If the main reason for the change is that the FTC is seeing transactions structured as described in the blog post, it is not clear why application of 801.90 is insufficient. That regulation allows the FTC to disregard any device used for the purpose of avoiding the HSR filing obligation.  Indeed, the PNO staff pointed to 801.90 last September as it modified a bright-line rule regarding extraordinary dividends into a more “holistic review” to determine reportability. A similar change could have been made here, suggesting that the more important reason for the change simply is an FTC change in policy about the interpretation.

Such changes in informal interpretations happen often, but a few aspects of last week’s post hint at potential larger future changes.

Last week’s post states that the FTC is in the process of reviewing “the voluminous log of informal interpretations [by PNO staff] to determine the best path forward.”  Implicit in that statement and the rest of the post is that one “path forward” would be to eliminate the informal interpretations and rely only on the formal rules and interpretations approved by commissioners and created with assistance from the Department of Justice.  Any such move would be unfortunate.

While the informal rules do not have the force of law (as the post correctly notes), they do represent the best current thinking of the PNO staff, who reviews the thousands of filings and related questions each year. The formal rules regulating the HSR process are already very complicated and it seems foolhardy at best to think any set of humans, especially if they do not regularly deal with HSR intricacies, will be able to anticipate all potential HSR questions in devising new rules.

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Authors:  Steven J. Cernak and Luis Blanquez

On August 3, 2021, the Federal Trade Commission Bureau of Competition announced what might seem like a small technical change to the Hart-Scott-Rodino merger review process: Some proposed mergers would receive form letters at the end of the 30-day initial review period saying that an antitrust investigation remains open and that the FTC might challenge the transaction if the parties close it. The FTC blamed the recent surge in HSR filings for the change. While seemingly small, the new process is another step by the FTC that reduces a major benefit of the HSR process—likely closure.

As this website has discussed frequently, the US was the pioneer among global competition law regimes in requiring parties to most large mergers and similar transactions to obtain approval from the jurisdiction’s enforcer before closing. Under HSR’s latest thresholds, both the buyer and seller for most transactions with values exceeding $92M must submit a form and certain documents and then wait for 30 days before closing the transaction.

Until recently, the reviewing agency, either the FTC or DOJ, would use that time to take one of three steps. If the agencies saw no competitive issues with the transaction and the parties requested it, the agencies would issue an “early termination” of the 30-day waiting period, post that information on the FTC website, and allow the parties to close the transaction. Second, the agencies could forego all communication with the parties and simply allow the 30-day period to expire. This “no news is good news” result also allowed the parties to close the transaction.

Third, the reviewing agency could determine that the transaction might be anti-competitive and so issue a “second request” for information to make a better determination. The prohibition on closing would continue until the parties submitted the requested information, usually months later, and waited again. (The agency usually would have expressed some interest in the transaction before issuing a second request, giving the parties one final shot at heading off the burdensome second request, as we discussed here.)

While the agencies saw the number of HSR filings significantly decline at the beginning of the pandemic, the number has been up sharply the last twelve months, often a multiple of year ago levels. To smooth the process and accommodate staffs working from home, the agencies moved to electronic submissions. Once the kinks were worked out of the system, filing parties also benefited from the streamlined process. Other actions the FTC has taken since the pandemic’s onset, however, have slowed the process and reduced the benefits parties receive from HSR.

First, the agencies suspended the early termination program early in 2021 to conserve resources.  That temporary suspension continues with no end in sight. Unfortunately, because most parties request early termination and receive it, the change in policy means that hundreds of transactions that posed no competitive issues have been delayed ten days or more for an unclear benefit from a shift in agency resources.

Second, in late 2020, the FTC sued Facebook for illegal monopolization through, among other actions, its acquisitions of Instagram and WhatsApp years earlier. Those two transactions had gone through the HSR process and the FTC did not try to block them.  As we have discussed and as the FTC has explicitly stated in its HSR guidance, successfully navigating the HSR process does not preclude either agency from later challenging the transaction.  But in that same Introductory Guide, the FTC also recognized that “the fact that [the agencies rarely challenge reviewed mergers post-consummation] has led many members of the private bar to view [HSR] as a helpful tool in advising their clients.”  HSR will be much less “helpful” if post-HSR challenges become more common and legal uncertainty increases.

That uncertainty will increase further with the August 2021 announcement from the FTC. In a new blog post, FTC Bureau of Competition Director Holly Vedova notes, “for deals that we cannot fully investigate within the requisite timelines [under the Hart Scott Rodino Act], we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful. Companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

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Authors: Luis Blanquez and Steven Cernak

Strong winds of change keep blowing in the antitrust world. In the past weeks we’ve witnessed two new major developments in the U.S.: (i) President Biden’s Executive Order to increase antitrust enforcement, and (ii) six antitrust bills issued by the House Judiciary Committee. That’s a lot to summarize in one article, so we’ve decided to just unwrap them below for you to decide how deep you want to keep digging.

  1. President’s Biden Executive Order on Promoting Competition in the American Economy

This month President Biden issued the Executive Order on Promoting Competition in the American Economy (the “Order”). The Order aims to reduce the trend of corporate consolidation, drive down prices for consumers, increase wages for workers and facilitate innovation. It establishes a Whole-of-Government effort to promote competition in the American economy by including 72 initiatives to enforce existing antitrust laws and other laws that may impact competition to combat what it sees as excessive concentration of industry and abuses of market power, as well as to address challenges posed by new industries and technologies.

The Fact Sheet further explains how the Order (i) encourages the leading antitrust agencies to focus enforcement efforts on problems in key markets and (ii) coordinates other agencies’ ongoing response to corporate consolidation.

Calling the DOJ and FTC to enforce the antitrust laws vigorously

The Order calls on the federal antitrust agencies, the Department of Justice (DOJ) and Federal Trade Commission (FTC), to enforce the antitrust laws vigorously. The Order acknowledges the overlapping jurisdiction of both agencies and encourages them to cooperate fully, both with each other and with other departments and agencies, in the exercise of their oversight authority.

In particular, the Order encourages the Chair of the FTC to exercise the FTC’s statutory rulemaking authority in areas such as (i) unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy, (ii) unfair anticompetitive restrictions on third-party repair or self-repair of items, such as the restrictions imposed by powerful manufacturers that prevent farmers from repairing their own equipment; (iii) unfair anticompetitive conduct or agreements in the prescription drug industries, such as agreements to delay the market entry of generic drugs or biosimilar; (iv) unfair competition in major Internet marketplaces; (v) unfair occupational licensing restrictions; (vi) unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and (vii) any other unfair industry-specific practices that substantially inhibit competition.

Also, the Order specifically addresses merger review by (i) encouraging antitrust agencies to revisit and update the Merger Guidelines (both horizonal and vertical) and (ii) challenge bad mergers previously cleared by past Administrations. Immediately after the publication of the Order, FTC and DOJ also issued a joint statement highlighting the fact that the current guidelines deserve a hard look to determine whether they are overly permissive, and how they will jointly launch a review of the merger guidelines with the goal of updating them to reflect a rigorous analytical approach consistent with applicable law.

In parallel, FTC has also passed this month some new resolutions updating its rulemaking procedures to set stage for stronger deterrence of corporate misconduct, and authorizing investigations into key law enforcement priorities for the next decade. As FTC’s chair Lina M. Khan stressed in a recent statement, priority targets include repeat offenders; technology companies and digital platforms; and healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals. Last but not least, FTC recently voted to rescind a 1995 policy statement that made it more difficult and burdensome to deter problematic mergers and acquisitions. The 1995 Policy Statement on Prior Approval and Prior Notice Provisions made it less likely that the Commission would require parties that proposed mergers that the Commission had determined would be anticompetitive to obtain prior approval and give prior notice for future transactions. By rescinding this policy statement, the FTC will be more likely to obtain prior notice of future transactions by those parties even beyond HSR notice requirements.

Grab your popcorn. Following President Joe Biden’s recent nomination of Jonathan Kanter as the new AAG for U.S. Department of Justice Antitrust Division, it is likely we will see some important antitrust enforcement action from both agencies very soon aimed at corporate concentration, especially the big tech sector.

New White House Competition Council

The Order establishes a new White House Competition Council, led by the Director of the National Economic Council, to monitor progress on finalizing the initiatives in the Order and to coordinate the federal government’s response to what it sees as the rising power of large corporations in the economy.

The Council will meet on a semi-annual basis––unless the Chair determines that a meeting is unnecessary––and will work across agencies to provide a coordinated response to overconcentration, monopolization, and unfair competition. The FTC and other independent agencies are welcome and expected to participate in this process.

Granted patents and the protection of standard setting processes

To avoid the potential for anticompetitive extension of market power beyond the scope of granted patents, and to protect standard-setting processes from abuse, the Order encourages the Attorney General and the Secretary of Commerce to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments issued jointly by the Department of Justice, the United States Patent and Trademark Office, and the National Institute of Standards and Technology on December 19, 2019.

Specific Industry Sectors addressed in the Order

Labor Markets

The Order encourages the FTC to: (i) ban or limit non-compete agreements, (ii) ban unnecessary occupational licensing restrictions that impede economic mobility, and (iii) along with DOJ, strengthen antitrust guidance to prevent employers from collaborating to suppress wages or reduce benefits by sharing wage and benefit information with one another.

The Order directs the Treasury Department to submit a report on the impact of what it sees as the current lack of competition on labor markets within 180 days and encourages the FTC and DOJ to revise the Antitrust Guidance for HR Professionals.

Healthcare

The Order (i) directs the Food and Drug Administration (FDA) to work with states and tribes to safely import prescription drugs from Canada, pursuant to the Medicare Modernization Act of 2003; (ii) directs the Health and Human Services Administration (HHS) to increase support for generic and biosimilar drugs, which can provide low-cost options for patients; (iii) directs HHS to issue a comprehensive plan within 45 days to combat high prescription drug prices and price gouging, (iv) encourages the FTC to ban “pay for delay” and similar agreements by rule; (v) encourages HHS to consider issuing proposed rules within 120 days for allowing hearing aids to be sold over the counter, (vi) underscores that hospital mergers can be harmful to patients and encourages the DOJ and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers; (vii) and directs HHS to support existing hospital price transparency rules and to finish implementing bipartisan federal legislation to address surprise hospital billing.

Transportation

The Order directs the Department of Transportation (DOT) to consider (i) issuing clear rules requiring the refund of fees when baggage is delayed or when service isn’t actually provided—like when the plane’s WiFi or in-flight entertainment system is broken and (ii) issuing rules that require baggage, change, and cancellation fees to be clearly disclosed to the customer.

The Order further encourages (i) the Surface Transportation Board to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly, and (ii) the Federal Maritime Commission to ensure vigorous enforcement against shippers charging American exporters exorbitant charges.

Agriculture

The Order expresses a concern on market concentration and helps ensure that the intellectual property system, while incentivizing innovation, does not also unnecessarily reduce competition in seed and other input markets beyond that reasonably contemplated by other laws.

In particular the Order directs the U.S. Department of Education (USDA) to consider issuing (i) new rules under the Packers and Stockyards Act making it easier for farmers to bring and win claims, stopping chicken processors from exploiting and underpaying chicken farmers, and adopting anti-retaliation protections for farmers who speak out about bad practices; (ii) new rules defining when meat can bear “Product of USA” labels, so that consumers have accurate, transparent labels that enable them to choose products made here; and (iii) a plan to increase opportunities for farmers to access markets and receive a fair return, including supporting alternative food distribution systems like farmers’ markets and developing standards and labels so that consumers can choose to buy products that treat farmers fairly.

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