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.
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.
According to Assistant Attorney General Kanter, the merger would eliminate aggressive competition in the supply of refined sugar that leads to lower prices, better quality, and more reliable service. This deal would substantially lessen competition at a time when global supply chain challenges already threaten steady access to important commodities and goods.
If U.S. Sugar is permitted to acquire Imperial Sugar, Imperial’s production would be folded into the United Sugars cooperative, leaving two significant sugar producers in the region. As alleged in the complaint, because transportation costs make up a significant portion of the total price customers pay for refined sugar, the nearest sugar producers tend to be a customer’s best competitive options. The complaint alleges that U.S. Sugar’s proposed acquisition of Imperial Sugar will further consolidate an already concentrated market for refined sugar. If the transaction is allowed to proceed, United Sugars and Domino would control the vast majority of refined sugar sales in the region, enhancing the likelihood going forward that they will coordinate with each other and refrain from competing aggressively.
U.S. Sugar said it plans to fight the lawsuit. “We disagree with the Justice Department’s decision and fully intend to litigate this matter,” U.S. Sugar said in a news release. “The facts will ultimately show that U.S. Sugar’s acquisition of Imperial Sugar will result in increased production and distribution of refined sugar, provide a more secure sugar supply for American farmers, food producers and consumers, and protect American jobs. This transaction will improve supply chain logistics and will not result in higher prices or any harm to customers and consumers. We look forward to making our case in court.” Meanwhile, the National Confectioners Association, which represents candy companies that use sugar, has just announced it support the Justice Department’s move. The stakes are high here.
Two take-aways from these initial actions by the Biden Antitrust Division: First, these actions, while not outlandish, are aggressive. One can imagine how the parties might have thought that any legal challenge would be avoided, either completely after plenty of persuasion or partially after making certain promises. Still, the Division instead chose to challenge the transaction and take the risk of a complete loss.
Second, the Division took these actions without changing any of the antitrust rules or disowning the Horizontal Merger Guidelines or similar guidance from past administrations. The Division did not wait for new legislation, bemoan antitrust’s consumer welfare standard, or focus only on certain hot industries. Instead, the Division, as in other administrations, took on challenges that it thinks it can support under the current law and precedent. While the Division faces a real risk of loss in all these matters, it has sent the signal to all parties that it is not waiting for new laws or rules to aggressively enforce the antitrust laws as it reads them.
These early enforcement actions by the Division stand in contrast to the FTC’s focus on rules, procedures, and personnel but no new large enforcement action. While it is possible that such distractions continue even after the Democrat majority is restored soon, it seems more likely that the FTC will join the Division in aggressively enforcing the antitrust laws as they are written and interpreted now. (In fact, as we were finalizing this article, the FTC announced a challenge of a huge vertical merger.) All the wrangling over rules and personnel might be a longer-term play to try to more permanently change the culture of the body so that any changes outlast the current administration. As a result, parties can expect aggressive enforcement no matter which enforcement agency is on the other side of the table.