Merger-Antitrust-Guidelines-General-Dynamics-300x253

Authors: Steven Cernak and Luis Blanquez

As we explained in a prior post, the new draft merger Guidelines issued recently by the FTC and DOJ cite to several older court opinions that may be unfamiliar to antitrust practitioners who have been focused for decades exclusively on earlier versions of the Guidelines. In the last post, we covered two such cases, Philadelphia National Bank and Pabst. Below, we cover three more of such newly “classic cases:” General Dynamics, Marine Bancorporation and Protect & Gamble.

General Dynamics

It is not surprising that the New Guidelines cite General Dynamics seven times; after all, the case has been cited in hundreds of opinions and even more law review articles and treatises. Nor are some of the citations surprising. For example, one citation (FN 93) quotes the case for the proposition that “other pertinent factors” besides market share might mandate a conclusion that competition would not be lessened by a merger. Similarly, citations about market definition make sense because the definitions of both the product and geographic markets were contentious points in the opinion.  But for reasons we explain below, the citations to the case for parts of the New Guidelines that would challenge mergers on the basis of just an increase in concentration, while accurate, seem out of step with the opinion as a whole.

General Dynamics is a 1974 opinion with the 5-4 majority opinion written by Justice Stewart.  Eight years before, Justice Stewart had written the dissent in Von’s Grocery. In that dissent, Justice Stewart penned one of his most famous quotes (no, not that one): “The sole consistency that I can find is that, in litigation under § 7, the Government always wins.” More substantively, Justice Stewart took issue with the majority’s market definition analysis. Instead of simply assuming a “Los Angeles grocery” market as the majority did, Justice Stewart would have applied a “housewife driving test” that, despite the antiquated name, was similar to the hypothetical monopolist test of later Guidelines. Also, instead of assuming anticompetitive effects from “high” market shares and increasing competition, as did the majority, Justice Stewart would have considered other pertinent factors, like low barriers to entry, turnover of firms, and changes to the Los Angeles population.

Eight years later, Justice Stewart applied similar concepts in General Dynamics, but this time for the majority. In this case, one Midwest coal supplier gradually purchased the voting securities of another Midwest coal producer. The DOJ produced evidence of high and increasing concentration in coal markets. Depending on the geographic market, the share represented by the top four firms went from 43-55% to 63-75% as the shares were being acquired. The lower court, however, found that there was cross-elasticity of demand among coal and other energy sources, like oil, natural gas, nuclear, and geothermal energy, so the proper product market was a broader “energy market.” Justice Stewart spoke approvingly of such a market analysis but, because of the analysis we describe below, found it unnecessary to opine on market definition. Significantly, the dissent agreed with the lower court that reviewing evidence of cross-elasticity of demand was appropriate; however, it thought that evidence supported a finding of a submarket for coal for certain customers, especially electric utilities. (The majority and dissent had similar disagreements about the geographic market definition.)

More important to the lower court and Justice Stewart were “other pertinent factors” that made shares of past production unhelpful in predicting future competitive effects of the merger. Here, the selling company’s reserves of coal were much smaller than its past or current production.  For example, it controlled less than 1% of the coal reserves in Illinois, Indiana, and western Kentucky. As a result, its future competitive strength was much worse than a review of any current market shares would indicate. Again, the dissent did not dispute that such “other pertinent factors” were relevant to the analysis; however, it thought the facts did not support finding the seller to be so weak going forward and that much of that evidence came from post-acquisition transactions.

Given the overall facts and tone of both opinions in General Dynamics, it is odd that the New Guidelines cite it for support for challenging mergers that further a trend toward concentration.  The New Guidelines accurately quote Justice Stewart’s opinion:

[The Court’s] approach to a determination of a “substantial” lessening of competition is to allow the Government to rest its case on a showing of even small increases of market share or market concentration in those industries or markets where concentration is already great or has been recently increasing…

But in the opinion, that sentence is followed by these three sentences:

…the question before us is whether the District Court was justified in finding that other pertinent factors affecting the coal industry and the business of the appellees mandated a conclusion that no substantial lessening of competition occurred or was threatened by the acquisition of United Electric. We are satisfied that the court’s ultimate finding was not in error. In Brown Shoe v. United States we cautioned that statistics concerning market share and concentration, while of great significance, were not conclusive indicators of anticompetitive effects … (cleaned up)

The New Guidelines citation to General Dynamics in its footnote 93 for the proposition that “other pertinent factors” besides concentration trends should be considered in merger analysis probably better reflects the overall tenor of the case’s opinions.

Marine Bancorporation

The Guidelines mention Marine Bancorporation seven times to highlight that when a merger eliminates a potential entrant into a concentrated market, it may substantially lessen competition or tend to create a monopoly. Marine Bancorp., 418 U.S. 602, 630 (1974).

The Guidelines explain that to determine whether one of the merging parties is a potential entrant, the Agencies examine:

  • whether one or both of the merging firms had a reasonable probability of entering the relevant market other than through an anticompetitive merger. The Agencies’ starting point for assessment of a reasonable probability of entry is objective evidence. For instance whether the firm has sufficient size and resources to enter; evidence of any advantages that would make the firm well-situated to enter; evidence that the firm has successfully expanded into other markets in the past or already participates in adjacent or related markets; evidence that the firm has an incentive to enter; or evidence that industry participants recognize the company as a potential entrant Marine Bancorp., 418 U.S. 636–37 (1974); and,
  • whether such entry offered “a substantial likelihood of ultimately producing deconcentration of [the] market or other significant procompetitive effects.” If the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant, unless there is substantial direct evidence that the competitive effect would be de minimis.

This is known as actual potential competition. The Guidelines also describe that under perceived potential competition, the acquisition of a firm that is perceived by market participants as a potential entrant can substantially lessen competition by eliminating or relieving competitive pressure. And in FN 42 the draft includes that this elimination of present competitive pressure is sometimes known as an anticompetitive “edge effect” or a loss of “perceived potential competition.” E.g., Marine Bancorp., 418 U.S. at 639.

Procter & Gamble

The Guidelines mention Procter & Gamble six times to explain how the Agencies examine (i) whether one of the merging firms already has a dominant position that the merger may reinforce, and (ii) whether the merger may extend or entrench that dominant position to substantially lessen competition or tend to create a monopoly in another market.

The Guidelines highlight that to identify whether one of the merging firms already has a dominant position, the agencies look to whether (i) there is direct evidence that one or both merging firms has the power to raise price, reduce quality, or otherwise impose or obtain terms that they could not obtain but- for that dominance, or (ii) one of the merging firms possesses at least 30 percent market share. Procter & Gamble Co., 386 U.S. 568, 575 (1967).

If this inquiry reveals that at least one of the merging firms already has a dominant position, the Agencies then examine whether the merger would either entrench that position or extend it into additional markets. As a mechanism of whether a merger may entrench a dominant position, the Guidelines include, among others, entry barriers. A merger “may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing.” Procter & Gamble Co., 386 U.S. 568, 578 (1967).

As in the case of General Dynamics, it is puzzling to see how the Guidelines cherry pick with the citations of Marine Bancorp and Protect & Gamble. Indeed, both cases discuss potential entry in concentrated markets and whether one of the merging firms already has a dominant position that the merger may extend to substantially lessen competition. But they also criticize––at length––the PNB 30% structural presumption and lack of economic analysis, something the Agencies completely ignore in this draft.

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Philadelphia-National-Bank-and-Pabst-Mergers-Antitrust-300x225

Authors: Steven Cernak and Luis Blanquez

As we explained in a prior post, the new draft merger Guidelines issued recently by the FTC and DOJ cite to several older court opinions that might not be familiar to antitrust practitioners who have been focused for decades exclusively on earlier versions of the Guidelines. Below, we cover two more of such newly “classic cases:” Philadelphia National Bank and its presumptions about market shares and competition and Pabst, which the new Guidelines cite for its language on trends in concentration.

Philadelphia National Bank (PNB)

The New Guidelines mention PNB seven times to basically highlight the Supreme Court’s position that possible economies from a merger cannot be used as a defense to illegality. And they do so by including a footnote with the well-known cite from the same case: “Congress was aware that some mergers which lessen competition may also result in economies, but it struck the balance in favor of protecting competition.”

The Guidelines fully develop this argument in Guideline 1. This Guideline first explains that concentration refers to the number and relative size of rivals competing to offer a product or service to a group of customers. It further states that when a merger between competitors significantly increases concentration and results in a highly concentrated market, the Agencies presume that a merger may substantially lessen competition based on market structure alone.

The entire text of the Guideline is grounded on the PNB case and what Assistant Attorney General Jonathan Kanter mentioned in June 2023 during his speech at the Brookings Institution’s Center on Regulation and Markets Event “Promoting Competition in Banking”

In that case, in 1961 the DOJ challenged the merger of the second and third largest commercial banks in metropolitan Philadelphia. The district court allowed the merger that would have created a bank with 30 percent of the relevant market, raising the two-firm concentration ratio from 44 percent to 59 percent. The Supreme court reversed the case and established the precedent that certain mergers are so clearly likely to lessen competition that they must be prohibited in the absence of clear evidence to the contrary:

[A] merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects. 374 U.S. at 363

In other words, without attempting to specify the smallest market share that would still be considered to threaten undue concentration, the Supreme Court confirmed that a post-merger market share of 30 percent or higher unquestionably gave rise to the presumption of illegality. Later on, in General Dynamics––a case we will discuss in our next article––the Court approved a merger with market shares above 30% because “other pertinent factors” indicated the merger would not substantially lessen competition. (The New Guidelines do not discuss that aspect of General Dynancs, despite mentioning the case in the same footnote.)

That’s why for the last 40 years the Government has been making its prima facie case by simply showing 30 percent of the market is involved in the merger, abandoned that 30 percent presumption, focusing instead on competitive effects and other relevant factors that might affect them, such as the structure of the market and potential entry.

As former Commissioner Joshua D Wright and Judge Douglas Ginsburg wrote in Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance:

The problem for today’s courts in applying this semicentenary standard is that the field of industrial organization has long since moved beyond the structural presumption upon which the standard is based. The point is not that 30 percent is an outdated threshold above which to presume adverse effects upon competition; rather, it is that market structure is an inappropriate starting point for the analysis of likely competitive effects. Market structure and competitive effects are not systematically correlated. Nor does the rebuttable nature of the 30 percent presumption reduce it to a mere annoyance, an exercise the clutters up litigation but is soon enough dispatched by the defendant’s showing; the practical effect of beginning the analysis of a merger with an essentially irrelevant presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, as though the law prohibited all mergers except those that could be proved acceptable by their proponents.

The article describes all the flaws about this outdated structural presumption. Despite those flaws, PNB has never been officially overruled and these New Guidelines might just give it new life, at least until the courts get involved.

Pabst

The new Guidelines cite U.S. v. Pabst three times, all in connection with the new Guideline that the effect of a merger “may be substantially to lessen competition” if it “contributes to a trend toward concentration.” The 1966 case reversed a lower court and found that evidence of the probable anticompetitive effect of the merger of Pabst and its brewery competitor Blatz in 1958 was sufficient to find a Section 7 violation.

The key issue was whether the DOJ had done enough to show one or more of these geographic markets: the entire United States; the three-state area of Wisconsin, Illinois, and Michigan; or just Wisconsin. Writing for the Court, Justice Black found that the evidence of “the steady trend toward concentration in the beer industry” was sufficient for a violation, no matter how the geographic market was defined.

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Authors: Steven Cernak and Luis Blanquez

On July 19, 2023, the FTC and DOJ Antitrust Division issued the draft of their long-anticipated Merger Guidelines. Like prior iterations, these Guidelines are meant to explain to potential merging parties how the agencies will evaluate their proposed transactions. Earlier versions included input from noted experts across the antitrust community and so also proved persuasive to many courts evaluating challenges to mergers by the agencies. Time will tell if these Guidelines have the same power when they are finalized after the comment period expires in late September.

Below, we provide a very short summary of these new Guidelines. But one notable feature of these Guidelines is their heavy reliance on caselaw, much of it decades old, rather than near-exclusive reliance on the latest economic thinking. The result is that many cases that antitrust practitioners might not have read in years, if ever, might suddenly be important again. Because we here at Bona Law have frequently written about such “classic antitrust cases,” we will cover two of those “suddenly classic” cases below and a few more in subsequent articles.

New Guidelines Summary: Antagonism Towards Mergers

Government agencies usually challenge proposed mergers and similar transactions under Clayton Act Section 7. That statute requires a challenger to show that the effect of the transaction “may be substantially to lessen competition or tend to create a monopoly.” Key here is that the statute does not require proof that the bad effect has already happened or even that it is certain to happen, only that it probably will happen in the future. (We covered this topic in a recent Fifth Circuit amicus brief supporting Illumina.) So these new draft Guidelines, like all other prior versions, explain the factors that the agencies will consider when making that prediction.

Compared to prior Guidelines, however, these new draft Guidelines list more and different reasons why the agencies will challenge mergers. They list thirteen different factors, violation of any one of which would be a reason to try to stop the merger. For example, the prior Guidelines often started with market definition and concentration levels but then analyzed further to see if those factors really would lead to competitive harm. These new draft Guidelines, by contrast, expand the ways markets might be defined; return to lower thresholds for determining when markets are “highly concentrated” and the transaction will significantly increase concentration; and explain that mergers involving highly concentrated markets or firms with 30% or more share of the market almost certainly will be challenged without further analysis. Also, transactions in markets trending toward consolidation will be challenged. Finally, mergers that substantially reduce competition in labor markets will be challenged. If this draft represents how the agencies will review mergers, look for much longer reviews and many more challenges.

How HSR Shifted the Focus of Merger Review Away from the Courts

Before Hart-Scott-Rodino was passed in 1976, the only way for the agencies to stop a proposed merger was to go to court. The result was a decent number of court opinions on merger law, including several from the Supreme Court.

HSR triggered a requirement for parties to most large transactions to file their intentions with the two federal agencies and allow review before closing. (We recently discussed the proposed changes to HSR.) While only a small percentage of such filings triggered close reviews, those extended reviews often took many months before the agencies decided to challenge them in court. By that time, many parties decided to abandon the transactions. The results of these process changes were fewer merger opinions from courts and a greater emphasis on the analysis at the agencies. As that analysis, as embedded in prior versions of the Guidelines, evolved away from that used by courts in earlier cases, a significant gap opened between the opinions and the Guidelines. Now that this new draft is, in many ways, returning to the analysis of those earlier opinions and citing many of them for support, antitrust practitioners will need to learn, or relearn, some of those old cases (as we predicted many months ago).

New Classic Cases – Brown Shoe

One of the most important classic antitrust case is Brown Shoe Co. v. United States, mentioned more than a dozen times by the new Guidelines for numerous propositions, including vertical mergers and, especially, market definition.

In Brown Shoe, the government challenged the merger between Brown Shoe and Kinney on horizontal restraints and vertical foreclosure issues. The parties argued different market definitions. The United States proposed a broad product market including all shoes. Defendants, on the contrary, segmented the product market by age and sex of customers, together with the price and quality of the shoes.

The district court concluded that men’s shoes, women’s shoes, and children’s shoes were different product markets and determined that competition was “sufficiently threatened in these submarkets to condemn the merger.” Defendants challenged the issue of market definition all the way up to the Supreme Court.

The Supreme Court affirmed the decision of the district court and basically adopted the district court’s reasoning on the market definition issue, with a particular focus on the “interchangeability” and the “unique characteristics and uses” tests.

In the Court own words:

The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. However, within this broad market, well defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes. The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.

As eloquently highlighted in Antitrust Law: An Analysis of Antitrust Principles and Their Application by Areeda and Hovenkamp, this case––while still valid––has a limited application on today’s antitrust merger analysis:

[w]hile the Supreme Court insisted on a market definition, it did so for a very different purpose than we use merger analysis for today. To be sure, in a horizontal merger case it is still important to know where output movements are threatened among the post-merger firm and its competitors, but the movement contemplated in Brown Shoe was in the opposite direction from what we consider now. Today the concern is that the post-merger firm might be able to raise prices without causing too much output to be lost to its rivals. In contrast, the Brown Shoe concern was that by reducing its price (or improving quality at the same price), the post-merger firm could deprive rivals of output, thus forcing them out altogether or relegating them to niche markets.

As a rough approximation the boundaries of such a market might be about the same as the boundaries of a relevant market under today’s definitions. When one takes more dynamic considerations into account, however, there are fundamental differences. For example, the focus on excess capacity in merger cases today typically examines excess capacity held by the post-merger firms’ rivals to see if their output increase will offset the post-merger firm’s anticipated output reduction. [52] By contrast, under the Brown Shoe rationale one might want to see if the post-merger firm has sufficient excess capacity so as to be able to steal sales from smaller rivals. Under modern analysis in product-differentiated markets we want to know whether rivals will be able to reposition themselves closer to the post-merger firm, thus increasing competitive pressures on it. By contrast, under the Brown Shoe analysis, rival firms configure themselves away from the post-merger firm in order to avoid competing with it on price. Indeed, this concern that smaller rivals would be relegated to niche markets played an important part in the litigation. [53]

Further, under the modern analysis that identifies express or tacit collusion as the feared harm, the merger tends to affect all of the firms in the market the same way. That is, if the merger tends to make collusion or interdependent pricing more likely, the non merging firms will benefit as well as the merging firms and price will increase across the market. In very sharp contrast, the analysis in Brown Shoe saw the post-merger firm as benefitting at the expense of nonmerging rivals in the same market. In this sense Brown Shoe was very much a “unilateral effects” case—the benefits of the merger accrued to Brown Shoe alone.

Further, today’s merger concern with price increases as opposed to price reductions makes relevant a new set of questions that were simply not within the purview of Brown Shoe, namely, what are the effects of a merger between relatively adjacent firms in a product-differentiated market. [54]

New Classic Cases – Falstaff

The new Guidelines cite U.S. v. Falstaff four times in the section discussing potential competition. That 1973 case, and the new Guidelines, discussed both varieties of potential competition: actual potential competition and perceived potential competition. (We discussed both varieties, as well as Falstaff, in the context of the Meta/Within merger here and here.)

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Authors: Steve Cernak and  Luis Blanquez

This week a federal judge in California denied a preliminary injunction to block Microsoft’s $68.7 billion merger with Activision Blizzard Inc. Both parties may now move ahead and close the deal––subject to further clearance in the UK and Canada––before the July 18 contractual deadline. The FTC has decided to appeal the Court order. We do not yet know the grounds for the appeal but the Court hammered hard almost every single argument from the agency.

The Order includes a detailed background of this case. In a nutshell, the FTC alleges in its complaint that Xbox-maker Microsoft would be incentivized to block Sony PlayStation access to crucial Activision games, especially the very popular Call of Duty game. Below we discuss the main three key antitrust issues involved.

Market Definition

If any, this might be the only partial victory for the FTC in this case.

The Judge states in the Opinion that at this stage of the litigation the FTC need only make a “tenable showing” and she must accept the market definition proposed by the FTC: The Gen 9 consoles market––with Microsoft’s Xbox and Sony’s PlayStation as the only competitors. But at the same time, she did not shy away from highlighting her doubt about the FTC’s market definition surviving a full-blown court review and that she would likely also include Nintendo’s Switch. Why? Because despite its content and functional differences with the Xbox and PlayStation, the FTC failed to consider whether its price, portability, and battery are factors the customer balances when deciding which console to purchase, and because many of the most popular Activision games are available on the three consoles.

As to the FTC’s additional proposed markets of the multigame content library subscription services and cloud gaming, the Court assumed––without deciding––they were each their own product market.

This is as good as it gets for the FTC in this Opinion.

The Clayton Act Requires Competition to be Harmed Substantially, Which is a Higher Standard

A vertical merger involves companies at different levels of the supply chain and are usually less problematic from an antitrust point of view. That’s why for almost fifty years neither the FTC nor the DOJ rarely challenged them. But that has recently changed under the Biden administration and the new head of the FTC Lina M. Khan.

Indeed, this case is the third recent challenge to a vertical merger. The other two were the Illumina’s acquisition of Grail (currently on appeal to the Fifth Circuit; Bona Law filed an amicus brief supporting Illumina’s position) and the Meta-Within transaction. The latter was another unsuccessful attempt by this FTC to block a vertical merger.

All of these challenges have one thing in common: the FTC’s aggressive stretching of the Clayton Act’s coverage. And this last case is no different. Here the District Court–– citing the well-known AT&T acquisition of TimeWarner in 2018 (See United States v. AT&T, 310 F. Supp. 3d 161, 189–92 (D.D.C. 2018) states that:

“[T]he outcome “turn[s] on whether, notwithstanding the proposed merger’s conceded procompetitive effects, the [g]overnment has met its burden of establishing, through ‘case-specific evidence,’ that the merger of [Microsoft] and [Activision], at this time and in this remarkably dynamic industry, is likely to substantially lessen competition in the manner it predicts.” See AT&T, 916 F.3d at 1037.

In the Court’s own words: “it is not enough that a merger might lessen competition—the FTC must show the merger will probably substantially lessen competition. That the combined firm has more of an incentive than an independent Activision says nothing about whether the combination will “substantially” lessen competition. See UnitedHealth Grp., 630 F. Supp. 3d at 133 (“By requiring that [the defendant] prove that the divestiture would preserve exactly the same level of competition that existed before the merger, the Government’s proposed standard would effectively erase the word ‘substantially’ from Section 7”).

Thus, like the ALJ in the Illumina case, and the District Court in the AT&T case, Judge Scott Corley once again finds in this case that the FTC did not show anything more than a “mere possibility” of substantial lessening of competition. This is not the right legal test as we have stated in a recent amicus brief in the Illumina case.

Ability and Incentive: Both Necessary to Show a Foreclosure Theory

One of the keystones of the antitrust policy under the Biden-administration has been to challenge previous case law on how to block problematic transactions, both horizontal and vertical. But so far, the agency has not been particularly successful.

Again, in the Court’s own words:

“As a threshold matter, the FTC contends it need only show the transaction is “likely to increase the ability and/or incentive of the merged firm to foreclose rivals.” [ ] For support, it cites its own March 2023 decision in Illumina, 2023 WL 2823393, at *33. The FTC in Illumina reasons:

[t]o harm competition, a merger need only create or augment either the combined firm’s ability or its incentive to harm competition. It need not do both. Requiring a plaintiff to show an increase to both the ability and the incentive to foreclose would per se exempt from the Clayton Act’s purview any transaction that involves the acquisition of a monopoly provider of inputs to adjacent markets. 2023 WL 2823393, at *38 (cleaned up) (emphasis added).

The FTC in Illumina, however, provides no authority for this proposition, nor could it. Under Section 7, the government must show a “reasonable probability of anticompetitive effect.” Warner, 742 F.2d at 1160 (emphasis added). If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability, then a party’s incentive to foreclose is irrelevant.”

Judge Scott Corley makes clear in her Order that to establish a likelihood of success on the merits for a foreclosure theory in this case, the FTC must show that the combined firm (1) has the ability to withhold Call of Duty, (2) has the incentive to withhold Call of Duty from its rivals, and (3) competition would probably be substantially lessened as a result of the withholding.

The Court held that while Microsoft may have the ability to foreclose competition because it would own the Call of Duty franchise, it has no incentive to do so. The Judge supports her conclusion on the fact that: (i) immediately upon the merger’s announcement, Microsoft committed to maintain Call of Duty on its existing platforms and even expand its availability, entering a new agreement to extend Activision’s obligation to ship Call of Duty at parity on PlayStation, (ii) sent Valve a signed letter agreement committing to make Call of Duty available on Steam for ten years, and (iii) expanded Call of Duty to non-Microsoft platforms, bringing Call of Duty to Nintendo’s Switch.

In addition, the Judge noticed that the deal plan evaluation model presented to the Microsoft Board of Directors to justify the Activision purchase price (iv) relied on PlayStation sales and other non-Microsoft platforms post-acquisition, and (v) reflected access to mobile content as a critical factor in favor of the deal.

The Court further concluded that (vi) Microsoft’s witnesses’ testimony consistently confirmed the lack of Microsoft’s plans to make Call of Duty exclusive to Xbox, (vii) Call of Duty’s cross-platform play was critical to its financial success, and (viii) agreed with Microsoft’s arguments anticipating irreparable reputational harm in case of foreclosing Call of Duty from PlayStation.

The judge reached the same conclusion on the likelihood of Microsoft blocking access through online subscription services. As for cloud gaming, the Court was also persuaded by Microsoft’s recent agreements with five cloud-streaming providers to freely license Activision games––including Call of Duty––for ten years, a key factor for the European Commission to also clear the transaction in the EU few months ago.

Following this ruling, Microsoft and UK antitrust officials have agreed to suspend litigation and focus on trying to reach an agreement on how the acquisition might be modified to address any competition concerns.

Supreme Court Case Law Obligates Merger Challenges to Address the Deal and Certain Proposed Fixes

The FTC desperately tried to also show that Microsoft’s binding offer was just a “proposed remedy” that may not be considered until the remedy phase, after a Section 7 liability finding.

As support, it relies on its own 2023 Illumina decision and E.I. du Pont, 366 U.S. But once again the Court disagrees with the FTC:

E.I. du Pont does not support the Commission’s holding. It involved a remedy proposed after a finding of a Section 7 violation. The Court held: “once the Government has successfully borne the considerable burden of establishing a violation of law, all doubts as to the remedy are to be resolved in its favor.” E.I. du Pont, 366 U.S. at 334. E.I. du Pont says nothing about whether the merger-challenging plaintiff must address offered and executed agreements made before any liability trial, let alone liability finding; that is, whether the FTC must address the circumstances surrounding the merger as they actually exist.” This same point is key to the Illumina appeal currently pending in the Fifth Circuit.

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Authors: Steven Cernak and Luis Blanquez

During the last week of June 2023, the Federal Trade Commission proposed making the most drastic changes to the Hart-Scott-Rodino form since the form was created in 1978. According to FTC Chair Lina M. Khan’s statement, joined by Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya “This marks the first time in 45 years that the agencies have undertaken a top-to-bottom review of the form that businesses must fill out when pursuing an acquisition that must be notified in accordance with the HSR Act.”

As we have previously described, HSR is the program under which the parties to most large transactions must submit the form and certain documents to the US antitrust agencies prior to closing the deal. The HSR form has always been short but complicated, with decades of formal regulations and informal interpretations, even lore, behind each of its sections.

Much of that history will go by the wayside if the final changes are anything like this initial proposal. The form — along with the documents and data it requires — will more closely resemble the much more onerous premerger notification schemes in other jurisdictions and will significantly lengthen the time and increase the expense of future HSR Act filings. Unfortunately, the current proposal does not envision the higher thresholds or “short forms” for obviously benign transactions present in those other jurisdictions.

The FTC will be accepting comments on its current proposal until late August. It will consider those comments before issuing the final form and instructions, likely later this year. While the details of the new form might change in the coming months, most of the current proposals likely will survive. To begin to prepare for that new day, here are some of the highlights:

  • Provision of details about transaction rationale and details surrounding investment vehicles or corporate relationships. This might include diagrams of a transaction’s structure, the timeline for the acquisition, and all related agreements between the parties at the time of the filing, among others;
  • The disclosure of required foreign merger control filings becomes mandatory;
  • Provision of information describing horizontal overlaps, and non-horizontal business relationships such as supply or licensing agreements;
  • Provision of projected revenue streams, transactional analyses and internal documents describing market conditions, and structure of entities involved such as private equity investments. This means an expansion on the scope of 4(c) and (d) documents, including, for example, drafts (not just final versions) of responsive documents and other non-transaction related documents;
  • Provision of details regarding previous acquisitions undertaken within the ten years prior to the acquisition filed, including information about all officers and board members, significant creditors and holders of non-voting securities, or minority shareholders (including now minority investors from companies controlled by the ultimate parent company), among many others;
  • Disclosure of information that screens for labor market issues by classifying employees based on current Standard Occupational Classification system categories.
  • Disclosure of subsidies from foreign entities of concern that Congress believes can distort the competitive process or otherwise change the business strategies of a subsidized firm in ways that undermine competition following an acquisition. Under the Merger Filing Fee Modernization Act of 2022, the agencies are required to collect information on subsidies received from certain foreign governments or entities that are strategic or economic threats to the United States.

Implementation of anything like these changes will move the HSR system even further from what Congress envisioned when it passed HSR in 1976. Then, the bill’s sponsors predicted that only the 150 largest deals each year or so would require a filing — over the last twelve months, nearly 2100 filings were made. Congress envisioned that even the “second requests” would require only documents and data that had already been “assembled and analyzed by [the parties]” — now, second requests usually take nearly a year to complete. These changes to the initial form and submission promise to add weeks to every filing, not just the problematic ones, as the parties assemble documents and data that they saw no need to analyze. Odd that the FTC sees as necessary such drastic changes to a notification program that its Introductory Guide has described as a “success” since at least 2009.

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Authors:  Molly Donovan & Luke Hasskamp

You may recall Liv, age 8—the new kid. Last we heard, Liv was getting pushed around by Paul, Greg and Adam (“PGA” for short) because she dared to build a mini-golf course in an attempt to challenge PGA’s longstanding position as the best and only mini-golf in town.

PGA was not happy about the new competition and unilaterally announced that any kid who played with Liv would be banned from the PGA’s more reputable course.

As we ended things last time, the town kids spoke with an antitrust lawyer and ultimately forced PGA to end the boycott. We thought that would be this story’s end, but what happened next was a real shock.

Liv and PGA were unsatisfied with the resolution forced upon them by the players. They each lawyered up as Liv accused PGA of abusing its dominant position in the mini-golf world causing Liv tens of dollars in antitrust damages. Turns out, the lawyer fees started adding up fast, and PGA could not continue to the fight.

As Liv and PGA spoke privately about how to resolve their dispute, they came up with a surprising idea that (they believed) would end PGA’s legal fees and satisfy Liv’s desire for a meaningful seat at the mini-golf table that could end her “new kid” stigma: why not merge? Liv and PGA could join forces permanently, becoming a mini-golf behemoth that would end the rivalry and potentially increase profits for all.

Great solution! Everything is neatly wrapped up and most importantly, by all accounts, Liv and PGA are seemingly good friends.

Wrong! The town government hates the idea. Why should the only two competitors in the mini-golf market be allowed to team up? Liv and PGA—now referred to as PGA Plus*—couldn’t stop the lawyer-fee-bleed after all. They had to keep their antitrust lawyers on retainer to gear up for their next battle: this time, against the town.

But is it really plausible that Liv and PGA want to be BFFs, living hand-in-hand in perpetuity? Is some contingent secretly going behind closed doors encouraging the government to tank the deal?**

If the new alliance is legit, how will PGA Plus defend the merits of a merger that unquestionably eliminates all existing (and probably all possible) competition?

We’ll wait and see as events continue to unfold in this thrilling antitrust tale.

Moral of the Story: One antitrust problem can lead to another. A dominant company like PGA can raise the specter of antitrust scrutiny by engaging in unilateral anticompetitive conduct or by collaborating or combining with another horizontal firm.

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Author: Molly Donovan

A new episode of the “If I Were You” podcast is ready! You can listen to it here. Featuring guest host Luis Blanquez and guest commentators Andreas Reindl and Marc Freedman of Van Bael & Bellis, a leading independent firm based in Brussels and London with an outstanding competition law practice. If you’re not a podcaster, read Andreas’ and Marc’s thoughts about antitrust enforcement in US and EU labor markets here:

This Episode Is About: Antitrust enforcement in UK an EU labor markets

Why: The UK’s competition authority (Competition and Markets Authority) recently issued antitrust guidance to UK employers so it’s a good time for an update and check-in on this subject

The Five Bullets: In-house lawyers, if I were you, I would educate your employment team about the following antitrust risks in UK and EU labor markets.

  • The CMA’s guidance encourages businesses, their lawyers and recruiters to avoid:
    1. No-poaching agreements: 2 or more businesses agree not to approach or hire each other’s employees (or not to do so without the other employer’s consent).
    2. Wage-fixing agreements: 2 or more businesses agree to fix employees’ pay or other employee benefits. This includes agreeing to the same wage rates or setting maximum caps on pay.
    3. Information sharing: 2 or more businesses share sensitive information about terms and conditions that a business offers to employees.
  • The guidance does not mention that businesses can violate UK antitrust law by reaching labor-related agreements even if they do not compete in the downstream market. The product market of concern is labor (not the goods or services produced by labor).
  • Enforcement in the UK is real: the CMA has been aggressive in prosecuting and levying very significant fines on companies that infringe UK antitrust law. The CMA has other sanctions at its disposal, including – unlike many other European antitrust authorities – possible criminal liability and individual director disqualifications. CMA’s guidance signals a change in enforcement priorities with a marked increase in antitrust scrutiny of labor markets.
  • EU companies may be behind the curve in terms of compliance based on a perception that labor markets are not an area of competition concern. This needs to change: there’s been a recent uptick in enforcement activity in labor markets by a number of Member State competition authorities and there are clear signals that the European Commission is actively looking at labor markets as well.
  • If you’re a UK or EU employer and realize you’ve already crossed the line, you need a lawyer’s assessment to decide the most appropriate strategy that mitigates the risks. Strategies range from stepping away from the agreement and documenting that decision to making a leniency application. Whether or not to communicate a withdrawal to the other agreeing parties is a difficult one that should be thought through on a case-by-case basis. To avoid this difficult situation, make compliance a top priority and incorporate labor-related conduct into antitrust compliance policies, trainings and protocols for internal reporting.

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Author: Luis Blanquez

A company using a blockchain––or perhaps even the blockchain itself––, with a sizeable share of a market, could be a monopolist subject to U.S. antitrust laws. But monopoly by itself isn’t illegal. Rather, a company must use its monopoly power to willfully maintain that power through anticompetitive exclusionary conduct.

Thus, a monopolization claim requires: (i) the possession of monopoly power in the relevant market––i.e. the ability to control output or raise prices profitability above those that would be charged in a competitive market; and (ii) the willful acquisition or maintenance of that power as distinguished from attaining it by having a superior product, business acumen, or even an accident of history. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

The monopolist may also have a legitimate business justification for behaving in a way that prevents other firms from succeeding in the marketplace. For instance, the monopolist may be competing on the merits in a way that benefits consumers through greater efficiency or a unique set of products or services.

There are many ways a company may willfully acquire or maintain such monopoly power through anticompetitive exclusionary conduct. Some of them include exclusive supply or purchase agreements, tying, bundling, predatory pricing, or refusal to deal.

In this article we briefly discuss the refusal to deal theory of harm in the context of web3.

What is Web3?

The internet is an evolving creature. Thirty years ago, web 1.0 was all about browsing and reading information. As a consumer you had access to information, but few were able to publish online.

In the early 2000s the current web 2.0. arrived, and everyone started publishing their own web content and building communities. The problem today is that we have a centralized internet. Very few companies––big online platforms such as Google, Facebook or Amazon––control and own everyone’s online content and data. And they even use all that data to make money through, for instance, targeted advertising.

That’s why web3 is a necessary step in the right direction. As a consumer you can now access the internet without having to provide your personal data to these online gatekeepers. And you don’t need to give up ownership of the content you provide. Plus, you own your digital content and can execute digital agreements using crypto currencies. If wonder how is all that possible, the answer is through a new infrastructure called blockchain.

You can read a broader discussion of antitrust guidelines for companies using blockchain technology here.

Refusal to Deal with Competitors or Customers

Competitors and Rivals

First, an illegal refusal to deal may occur when the monopolist refuses to deal with a competitor or rival. Under US antitrust laws such claims are challenging and rarely successful.

Although a company generally has no duty to deal with its rivals, courts have found antitrust liability in some limited scenarios when a monopolist (i) unilaterally outright refuses to sell a product to a rival that it made available to others (Verizon Commc’ns, Inc. v. Law Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 407–09 (2004), see also Aspen Skiing, 472 U.S. at 601; Otter Tail Power Co. v. United States, 410 U.S. 366, 377-78 (1973); OR (ii) had a prior voluntary and presumably profitable course of dealing with a competitor, but then terminated the relationship, giving up short-term profit from it in order to achieve an anticompetitive end. See Pac. Bell Tel. Co. v. linkLine Commc’ns, 555 U.S. 438, 442, 451 (2009), Novell, Inc. v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013), cert. denied, 572 U.S. 1096 (2014).

Applied to the web3 world, this means that the validators of a blockchain could face antitrust scrutiny only if they had monopoly power, and (i) they previously allowed a competitor access to its blockchain but later agreed to exclude that rival, or (ii) sacrifice short-term profits without a reasonable business justification. This is, of course, unlikely considering the decentralized structure of blockchains and their need for gas fees to keep validators’ business profitable and the chain secured. When the validators are decentralized, they are not a single economic entity for purposes of the antitrust laws. But the risk would still differ depending on the blockchain and the level of decentralization.

What we might eventually see, however, is a company with monopoly power using a blockchain to exclude its rivals from the market through different anticompetitive conduct. For instance, we might see restrictions to only use one blockchain, to use smart contracts to impose loyalty rebates and other barriers to switch between blockchains, conditioning the use of one blockchain for a specific application or product by restricting the use of other blockchain or non-blockchain rivals’ infrastructure, or to require suppliers upstream or end customers downstream, to use the same blockchain for different products or applications.

Customers

Second, a refusal to deal may also take place when a monopolist refuses to deal with its customers downstream or suppliers upstream. A monopolist’s refusal to deal with customers or suppliers is lawful so long as the refusal is not the product of an anticompetitive agreement with other firms or part of a predatory or exclusionary strategy. Note, however, that a monopolist cannot decline to deal with customers as retaliation for those customers’ dealings with a competitor. That is often called a refusal to supply and is in a different doctrinal category than a refusal to deal. But, beyond these anticompetitive exceptions, private companies are typically free to exercise their own independent discretion to determine with whom they want to do business.

This test is broader than the one for competitors and requires a case-by-case legal and economic analysis to determine whether anticompetitive conduct exists. And web3 is not any different in this respect.

The Apple App Store and web3

Let’s take the Apple App Store as an example.

In the web2 world, Apple has created a “walled garden” in which Apple plays a significant curating role. Developers can distribute their apps to iOS devices only through Apple’s App Store and after Apple has reviewed an app to ensure that it meets certain security, privacy, content, and reliability requirements. Developers are also required to use Apple’s in-app payment processor (IAP) for any purchases that occur within their apps. Subject to some exceptions, Apple collects a 30% commission on initial app purchases and subsequent in-app purchases.

There are currently several related ongoing antitrust investigations and litigations worldwide about Apple’s conduct with its App Store. In the U.S., the Court of Appeals from the Ninth Circuit on the Epic Games saga held that Apple should not be considered a monopolist in the distribution of iOS apps. But this ruling also came with a string attached. The judge concluded that Apple did violate California’s unfair competition law and could not maintain anti-steering rules preventing users from learning about alternate payment options. If you want to learn more (see here). Both companies have recently asked the Ninth Circuit for a rehearing and the stakes are high.

Companies in web3 are now starting to deal with similar potentially anticompetitive behavior from web2 big tech companies. Uniswap, StepN and Damus are just three of many recent examples.

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Author:  Aaron Gott

In May of 2023, Minnesota enacted a new law that broadly bans employee non-compete agreements with few exceptions and also limits the use of forum-selection and choice-of-law clauses in employment agreements. You can read that law here (jump to 66.12).

Note: the Federal Trade Commission is also contemplating a ban on employee non-compete agreements, but we don’t know what that will look like until the final rule is published. We’ve written about the FTC’s proposed rule here and here.

In other words, Minnesota is the new California, which already broadly bans non-competes and prevents employers from getting around California law with forum-selection and choice-of-law clauses to obtain a more favorable law or a more receptive judicial audience outside the state. We’ve been advising both employers and employees on California’s non-compete law for almost a decade.

That isn’t to say Minnesota’s law is now exactly the same as California’s, which we’ve discussed at length in the past. Here’s a quick and dirty run-down of Minnesota’s new law.

  1. Minnesota’s new non-compete law becomes effective July 1, for new agreements only

Minnesota’s new non-compete law becomes effective July 1, 2023. But it only applies prospectively, i.e. to agreements executed on July 1, 2023 or later. This means that employers can still seek to enforce their existing employment non-compete provisions.

It’s important to keep in mind, though, that a sea change in legislative policy like this can often affect judicial decisions relating to the old policy (i.e. existing agreements) down the road. When the Minnesota courts get used to the new paradigm, their view of the old paradigm is likely to change.

  1. Minnesota’s new non-compete ban is broad

The ban is quite broad—it prohibits all non-compete agreements between employers and employees, including executives, those who otherwise have access to trade secrets and other proprietary information, and those who could take considerable customer goodwill with them when they leave.

It also applies to workers, whether they are employees or independent contractors.

There are two direct exceptions: non-competes in connection with the sale of a business, and non-competes in connection with the dissolution of a business.

  1. But Minnesota’s new non-compete ban has limits

The new law is quite specific in two ways: it applies to “covenants not to compete” that apply to an employee’s conduct “after termination of the employment.”

Since the new law only covers “covenants not to compete,” it applies only to (1) “work for another employer for a specified period of time,” (2) “work in a specified geographical area” and (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement”. Further, the law specifically excludes some other types of agreements: nondisclosure agreements and other agreements to protect trade secrets, as well as nonsolicitation agreements.

And since the law only covers work “after termination of the employment,” it does not apply to agreements not to compete during employment. Minnesota’s law allows garden leave arrangements, which means employees remain employees for a certain amount of time, during which they are paid but do not work, and cannot compete.

  1. Minnesota’s new non-compete law grants fees to prevailing employees

This is one area where Minnesota is doing something different than California: employees who prevail in enforcing their rights under the new law can recover attorney’s fees from the employer. This means greater risk and a changed playing field for employers who seek to protect their business interests.

  1. Under Minnesota’s new non-compete law, an unenforceable non-compete doesn’t void the entire contract

Even if a provision of an employment agreement is found unenforceable as a prohibited non-compete, only the prohibited non-compete is void—not the entire contract.

  1. Minnesota businesses should act quickly

Minnesota businesses need to act quickly for a couple of different reasons. The first is that they need to bring their current agreements and templates into compliance with the law in less than 30 days.

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Law Library Books

Author: Jarod Bona

Law school exams are all about issue spotting. Sure, after you spot the issue, you must describe the elements and apply them correctly. But the important skill is, in fact, issue spotting. In the real world, you can look up a claim’s elements; in fact, you should do that anyway because the law can change (see, e.g., Leegin and resale price maintenance).

And outside of a law-school hypothetical, it usually isn’t that difficult to apply the law to the facts. Of course, what makes antitrust law interesting is that it evolves over time and its application to different circumstances often challenges your thinking. Sometimes, you may even want to ask your favorite economist for some help.

Anyway, if you aren’t an antitrust lawyer, it probably doesn’t make sense for you to advance deep into the learning curve to become an expert in antitrust and competition doctrine. It might be fun, but it is a big commitment to get to where you would need to be, so you should consider devoting your extra time instead to Bitcoin or deadlifting.

But you should learn enough about antitrust so you can spot the issues. This is important because you don’t want your company to violate the antitrust laws, which could lead to jail time, huge damage awards, and major costs and distractions. And as antitrust lawyers, we often counsel from this defensive position.

It is fun, however, to play antitrust from the offensive side of the ball. That is, you can utilize the antitrust laws to help your business. To do that, you need a rudimentary understanding of antitrust issues, so you know when to call us. Bona Law represents both plaintiffs and defendants in antitrust litigation of all sorts.

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