The Antitrust Attorney Blog

Antitrust for Kids: Back to School with Tough New Rules—The Draft Merger Guidelines

September 5, 2023 | Bona Law PC

You may remember Gordon—in many ways, he was dominant in the 5^th grade, and though his behavior was questionable at times, he was very popular.

I’m writing this story because Gordon is starting a new school year and has ascended to MIDDLE SCHOOL. Very cool, but very intimidating—even for Gordon. For one thing, there is an entirely new set of rules about how students are supposed to behave.

In elementary school, there are rules, of course, but they’re intuitive (no pushing, no yelling, please share) and all kids are encouraged to form friendships with all other kids. You can walk to lunch with any other kid you choose to. You can play at recess with any group of kids you want to. This made things easy for Gordon who was a natural at buddying-up with classmates and forming new relationships with ease.

In middle school, things aren’t the same—there’s actually a rule against the buddy system that feels contrary to everything Gordon previously knew. Basically, the rule is: you cannot run around in friendship packs—or duos even—unless they are teacher approved. Why? The principal says the school is trying to eliminate friend groups that are probably going to cause trouble—by, for example, ganging up against the weaker kids who aren’t popular and don’t like gym, or getting too powerful on the playground and pestering the younger kids. The rule is not against combinations that will cause trouble, only that probably will.

You’re likely wondering how it will be determined whether a particular friend group meets that standard. Good question. Apparently, the test is not whether the parents and students —experts on who’s who in the ever-changing social dynamics of middle schools—believe a certain combination spells trouble. The principal and teachers will decide based on dusty old textbooks with opinions written years and years ago (we’re talking 1970s) about tween society.

Query whether that’s the best way. But that’s the way the teachers want to do things.

Did it work out? The school year just started, so it’s too soon to tell and the rules are in purgatory—they’re being publicly tested but are not official yet.

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Lessons from the FTC’s Settlement of the Amgen/Horizon Merger Challenge

September 5, 2023 | Bona Law PC

Authors: Steven Cernak and Luis Blanquez

In case you missed it on the eve of a holiday weekend, the FTC and several states settled their challenge of Amgen’s acquisition of Horizon last Friday. The case might have seemed like an odd one to antitrust and merger practitioners looking only at the last few decades of merger review; however, both the challenge and the settlement offer some lessons for future merging parties — and perhaps even the FTC itself.

Parties, Transaction, Challenge, Settlement

Both Amgen and Horizon are large pharmaceutical companies. According to the original complaint, each company produces drugs for which there are few if any competitors. Even according to that complaint, Amgen and Horizon do not compete with, supply to, or buy from each other.

The parties described the transaction as allowing Amgen to use its broader distributional reach to bring Horizon’s products to more consumers. The FTC, and later several states, alleged that Amgen was proficient at wringing profit out of its monopolized drugs in various ways, especially with pharmacy benefit managers (PBMs). The enforcers feared that Amgen would do the same with Horizon’s drugs, especially by bundling Amgen and Horizon drugs. The parties disputed that they had the ability or incentive to engage in such behavior but still offered to enter an order promising not to take such actions.

The FTC challenged the transaction in its internal tribunal and sought a preliminary injunction in federal court in the Northern District of Illinois to prevent the closing of the transaction. The states later joined that challenge. The parties countered with both antitrust arguments and constitutional challenges to the FTC’s structure and procedures, much as other parties like Illumina have.

Last Friday, the parties and enforcers settled all the challenges. The parties agreed to not bundle any Amgen product with Horizon’s two key products––Tepezza or Krystexxa––its medications used to treat thyroid eye disease (TED) and chronic refractory gout (CRG) or offer certain rebates to exclude or disadvantage any product that would compete with Tepezza or Krystexxa. Amgen agreed to seek FTC approval for any acquisition of pharmaceuticals competitive with Horizon’s. Finally, Amgen will submit to a compliance monitor and make annual reports for the fifteen-year duration of the order. Further details and analysis of the proposed order are here.

Analysis of the Challenge

The FTC’s challenge of the transaction might have looked different to merger review practitioners familiar only with challenges of proposed mergers of current competitors; however, the theory behind the challenge has some history. Unfortunately for the FTC, the last several decades worth of that history did not support the challenge.

When Congress passed and amended Clayton Act Section 7, it did not prohibit all mergers; instead, it prohibited only those whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” This standard does not require the FTC to show that the merger will have the proscribed competitive effect with certainty, but it must establish that the competitive effect is more than a mere possibility.

Both Congress and the courts have emphasized that something more than a mere possibility is necessary for a successful Clayton Act Section 7 challenge. The Congressional report described the necessary finding as follows: “The use of these words means that [the amended Clayton Act] would not apply to the mere possibility but only to the reasonable probability of the prescribed effect.” (emphasis added).

The Supreme Court in Brown Shoe clearly drew the “certainties/probabilities/possibilities” distinction:

Congress used the words ‘may be substantially to lessen competition’ (emphasis supplied), to indicate that its concern was with probabilities, not certainties. Statutes existed for dealing with clear-cut menaces to competition; no statute was sought for dealing with ephemeral possibilities. Mergers with a probable anticompetitive effect were to be proscribed by this Act.

Courts recognize only a few ways that the FTC or any challenger can successfully show a probability of a lessening of competition or tendency to create a monopoly.

First, challengers like the FTC can allege that the parties to the proposed transaction currently compete. Such a “horizontal” merger can lessen competition or create a monopoly by allowing the merged parties to unilaterally raise prices or otherwise harm consumers or implicitly coordinate with the remaining competitors on similar actions. Here, the FTC did not allege that any of Amgen’s or Horizon’s products currently compete.

Second, challengers can allege that one of the parties is a “potential competitor” of the other party. Such “potential competition” mergers can lessen competition or create a monopoly by eliminating the current threat or actual entry into a new market by one of the parties to the transaction. Here, the FTC did not allege that Amgen or Horizon is a potential entrant into any of the markets in which the other party competes.

Third, challengers can allege that the parties have or could have a supplier-customer relationship. In certain circumstances, such “vertical” mergers can lessen competition or create a monopoly in a few ways, principally by foreclosing access to rival firms to inputs, customers, or something else they need to effectively compete with the merged parties. Here, the FTC did not allege that Amgen and Horizon are in or could be in a supplier-customer relationship.

Instead, the FTC appeared to rely on the “entrenchment” variant of the “conglomerate” competition theory, claiming that “Post-Acquisition, Amgen will possess the ability and incentive to sustain and entrench its dominant positions in the markets for [Horizon’s products].”

Under this theory, the FTC alleged that after the acquisition, Amgen would have both the ability and incentive to more effectively exploit the alleged monopoly power already possessed by Horizon. Unfortunately for the FTC, this theory has been abandoned as discredited since the 1970s. According to the latest version of the ABA Antitrust Law Developments, “[After Procter & Gamble in 1967], courts and the FTC applied the entrenchment theory very cautiously and liability has not been found in any case on this theory since the 1970s . . . and its subsequent antitrust decisions suggest it is unlikely that the Court will again apply [the theory].” Even the FTC itself just three years ago told an international body that “[c]onglomerate mergers that raise neither vertical nor horizontal concerns are unlikely to be problematic under U.S. merger law.”

And there is good reason for courts to have grown skeptical of the theory — it cannot support an allegation that the probable effect of a proposed merger “may be substantially to lessen competition, or to tend to create a monopoly.”

Certainly, the theory cannot support an allegation that the proposed merger probably will tend to create a monopoly. After all, under the theory, the seller’s products already enjoy monopoly power. The proposed merger would not have created any monopoly power. Here, the FTC alleged that Horizon already enjoys a monopoly with its two key products.

The theory also could not support an allegation that the proposed merger probably will substantially lessen competition. Because the theory required so many possible actions by both the parties to the transaction and third parties, the potential anticompetitive harm is nothing more than the “ephemeral possibility” that the Supreme Court has correctly said is not covered by the Clayton Act.

Here, as detailed by the parties in their brief, the following actions had to occur before the ephemeral possible harm alleged by the FTC would occur: The handful of products identified in the FTC’s Amended Complaint had to overcome significant clinical development and regulatory hurdles; AND at that hypothetical and uncertain time, those other products, though differentiated from Horizon’s products, must threaten them competitively; AND at that same uncertain future time, the alleged competitive position of Amgen’s products must not have changed such that Amgen will have the ability and incentive to bundle them with Horizon’s products in ways that will harm competition.

But even if the parties were wrong and the actions did happen, the FTC could have acted at that time by bringing a monopolization challenge. Now, if those ephermeral possibilities do occur, the FTC will have an easier time alleging a violation of the consent order.

Lessons for Parties and the FTC

For future merging parties in the pharmaceutical industry, this FTC action (and Chairwoman Khan’s statement accompanying the settlement) make clear that the agency will flyspeck every proposed transaction and challenge many more than in the past. These include the Pfizer/Seagen or Biogen/Reata pending transactions, for instance. As Henry Liu, Director of the FTC’s Bureau of Competition highlighted in the press release: “Today’s proposed resolution sends a clear signal that the FTC and its state partners will scrutinize pharmaceutical mergers that enable such practices, and defend patients and competition in this vital marketplace.” The FTC’s ongoing investigation of PBMs means that FTC actions in this area might not be confined to merger challenges.

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How to Deal with U.S. Government Enforcers in Antitrust Investigations

August 24, 2023 | Bona Law PC

Authors: Jon Cieslak & Molly Donovan

Having recently defended an investigation brought by the U.S. Department of Justice Antitrust Division—which was closed without prosecution of our client—we had the opportunity to reflect on ways that lawyers can navigate the high-stakes interactions with government enforcers who are investigating antitrust or other white-collar violations. Those interactions involve a number of fine lines that require real-time judgment calls specific to each situation. That said, we think these “rules of thumb” are generally applicable and will help lawyers and their clients navigate the process as smoothly and favorably as possible.

(Although this article is not focused on subpoena compliance, you can listen to our podcast on subpoena compliance here.)

Always be truthful. This should go without saying, but your credibility is everything. Once an enforcer suspects that a client or the lawyers have not been forthcoming, problems get worse. If you realize you’ve provided incorrect information to the government inadvertently, correct it at the first opportunity.
Be transparent about process. In many cases, particularly if you want to limit the scope of a subpoena through negotiations with the enforcer, it is helpful to share information about your investigative process. Disclosing how you’ve searched for documents, what you have (and have not) produced, and what employees you have talked to can help you build credibility and persuade the enforcer not to require additional information. Plus, enforcers don’t like being surprised down the road about what has/has not been provided.
Focus on the facts. Ultimately, the enforcer will decide whether or not to pursue charges based on the facts of the case. It’s important to make sure that you provide the enforcer with all the facts that help your client, particularly those that provide defensible context for otherwise incriminating facts, even if the subpoena does not specifically ask for them.
While you should provide information promptly, you do not need to please. Even if your client takes a defensive posture, and is not formally cooperating, it is often prudent to provide government enforcers with information they’re requesting—probably in writing or in the form of an attorney proffer. It is also wise to cooperate in a timely fashion and to be responsive. But there are limits: you’re not required to satisfy every request and you can negotiate timelines. You should also exercise caution, in particular, when the government asks to speak or meet with your client directly. (See the next pro tip).
Don’t lose what control you have. Being interviewed by the government is very stressful—even for a client who feels they’ve done nothing wrong or has nothing to hide. People sometimes say things they don’t mean because they’re trying to please the interviewer. People like to try to help or protect colleagues and being asked questions about what friends and associates have/have not done can put clients in very uncomfortable situations. Sometimes the lawyer thinks she understands all the details, but a client says something new and unexpected during an interview. It may not be “bad,” but surprises are almost always harrowing. What does all this mean? If you’re not required to put your client in the hot seat, don’t. Consider alternative ways to get the government the information being requested—like an attorney proffer.
If there is an interview, remember these 5 things:

1. Always be truthful (see pro tip #1).
2. Tell your client it is okay to stop the interview to speak privately as necessary. In any event, take regular breaks to check in with your client and discuss any surprises.
3. This is not a deposition, so the best advice to clients is usually to provide all responsive information they can remember when answering each question.
4. “I don’t know” is better than making something up. Don’t make something up—this doesn’t help the enforcer or you.
5. In advance of the interview, be sure your client has not destroyed or tried to hide any materials or potentially relevant documents. Be sure your client has not discussed the investigation with anybody besides lawyers. Coordinating “stories” with friends/colleagues is not okay.

Aggression is unnecessary. Communications among the lawyers should remain cordial. We’ve never seen aggression or hostility go well. In particular, insulting the government’s investigation is not a good idea. The enforcer believes she is investigating for a good reason.
Give your client consistent reminders. Remind your client what she needs to do to maintain the attorney/client privilege and not to do anything that might make her situation worse (destroying evidence/coordinating her story with others). For example, after a government interview, remind your client that everything that was asked and said should be kept confidential.

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Still More “Suddenly Classic” Antitrust Cases from the New Merger Guidelines: General Dynamics, Marine Bancorporation and Procter & Gamble

August 7, 2023 | Bona Law PC

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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More “Suddenly Classic” Antitrust Cases from the New Merger Guidelines: Philadelphia National Bank and Pabst

August 1, 2023 | Bona Law PC

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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Agencies Issue New Draft Merger Guidelines and Create More Classic Antitrust Cases

July 24, 2023 | Bona Law PC

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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The FTC Keeps Digging Its Own Grave: Microsoft-Activision Merger Deal Can Move Ahead Says Federal Judge in California

July 14, 2023 | Bona Law PC

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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End of an Era: The FTC Proposes Significant Changes to the HSR Form

July 6, 2023 | Bona Law PC

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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Antitrust for Kids: As Rivals Become Friends, The Government Gets Angry (The PGA Mini-Golf Tale Continued)

July 5, 2023 | Bona Law PC

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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If I Were You…I’d Listen to this Podcast about Antitrust in Employment Markets in the UK and EU

June 29, 2023 | Bona Law PC

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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