Revised Horizontal Merger Guidelines issued by FTC and DOJ
Posted Sep 09 2010 7:32pm
This 2 by 4 is a piece of dimensional lumber used in construction in North America. The nominal size is 2 by 4 inches but the actual size is 1.5 by 3.5 in (38 by 89 mm) In American folklore it is often used as a club to get someone's attention. During the anti-trust case, United States versus Microsoft, Judge Penfield Jackson gave this analogy to reporters for the New York Times. He had a trained mule who could do all kinds of wonderful tricks. One day somebody asked him: "How do you do it? How do you train the mule to do all these amazing things?" "Well," he answered, "I'll show you."He took a 2-by-4 and whopped him upside the head.The mule was reeling and fell to his knees, and the trainer said: "You just have to get his attention." U.S. v Microsoft, United States Court of Appeals District of Columbia, June 28, 2001. Photo and caption by Michael Holley
On August 19, the Federal Trade Commission (”FTC”) and Department of Justice (”DOJ”) issued revised Horizontal Merger Guidelines (”guidelines”). First adopted in 1968 and revised in 1992 , the guidelines are an outline of the primary “analytical techniques, practices and enforcement policies” used to evaluate mergers and acquisitions of actual or potential competitors under federal antitrust laws, including Section 7 of the Clayton Act, 15 U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.
As the first major revision in 18 years, the FTC and DOJ assert that the guidelines are not a change in policy, but a clarification of the merger review process. In 2006, both agencies issued “ Commentary on the Horizontal Merger Guidelines ,” the first step towards the refinement of the guidelines. The agencies jointly announced the project in September 2009. They posed a number of questions for public comment and conducted a series of workshops this past winter. As a result, 51 parties provided comments for the revisions. The agencies further considered 31 written comments to the proposed revisions issued on April 20.
According to the FTC Press Release , the guidelines are primarily aimed to “help the agencies identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or likely will have no competitive impact on the marketplace.” In addition, the guidelines are intended to assist private parties, courts and antitrust practitioners. Representatives of both agencies had the following to say:
“Because of the hard work of all involved at both agencies, private parties and judges will be better equipped to understand how the agencies evaluate deals. That improvement in clarity and predictability will benefit everyone,” said FTC Chairman Jon Leibowitz…
“The revised guidelines better reflect the agencies’ actual practices,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The guidelines provide more clarity and transparency, and will provide businesses with an even greater understanding of how we review transactions.”
Clarify that merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use a variety of tools to analyze the evidence to determine whether a merger may substantially lessen competition.
Introduce a new section on “Evidence of Adverse Competitive Effects.” This section discusses several categories and sources of evidence that the agencies, in their experience, have found informative in predicting the likely competitive effects of mergers.
Explain that market definition is not an end itself or a necessary starting point of merger analysis, and market concentration is a tool that is useful to the extent it illuminates the merger’s likely competitive effects.
Provide an updated explanation of the hypothetical monopolist test used to define relevant antitrust markets and how the agencies implement that test in practice.
Update the concentration thresholds that determine whether a transaction warrants further scrutiny by the agencies.
Provide an expanded discussion of how the agencies evaluate unilateral competitive effects, including effects on innovation.
Provide an updated section on coordinated effects. The guidelines clarify that coordinated effects, like unilateral effects, include conduct not otherwise condemned by the antitrust laws.
Provide a simplified discussion of how the agencies evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power.
Add new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.
Analysis by private parties is mixed. Constantine Cannon LLP writes that the guidelines “reflect a more tolerant approach to mergers, stressing the need to ‘avoid unnecessary interference with . . . competitively beneficial’ mergers.” In support, Constantine Cannon cites the increased Herfindahl-Hirschman Index (”HHI”) thresholds and statements clarifying that coordination can be legal.
On the other hand, Weil Gotshal writes that the guidelines “appear to provide the agencies with more tools… [and] offer less predictability regarding which analytical methodology will be applied.” Of primary concern is the decreased emphasis on market definition and increased emphasis on a fact-specific process with a variety of analytical tools. Revised definitions may create narrower relevant markets which will negate any benefits of higher HHI thresholds. The newly enumerated categories of evidence may lead to broader document requests and longer investigations. In providing many alternative techniques and theories, the agency has provided “few true guidelines to assist parties considering a transaction.”
Commissioner J. Thomas Rosch issued a separate concurring statement , in which he “acknowledged” flaws in the guidelines. According to Commissioner Rosch, the following substantial changes since the 1992 revisions are not reflected in the new guidelines:
First, the Commission is increasingly challenging mergers in preliminary injunction and administrative (Part 3) proceedings… Second, economic theories embedded in the 1992 Guidelines emphasized price effects almost exclusively. Increasingly, the Agencies and courts have considered nonprice effects, like effects on quality, variety, and innovation, to be no less important. Third, for a variety of reasons, many, if not most, courts have relied on empirical evidence instead of economic evidence, and have considered economic evidence as corroborative of that empirical evidence, if they have considered it at all… As previously discussed, that in turn has led the staff reviewing mergers ex ante to devote more attention to the empirical evidence that can be presented and defended at trial.
As a result, Commissioner Rosch believes the guidelines do not reflect the way staff at the FTC conduct ex ante merger reviews or the information courts should be told about merger analysis.
According to Commissioner Rosch, the guidelines possess the following additional flaws:
Stakeholder perspectives were considered unequally. As a result, the guidelines overemphasize “economic formulae and models based on price theory.” Commissioner Rosch credits the large influence of the defense bar, academics, and other kindred souls and at least one private meeting held with the leadership of the ABA Antitrust Section.
The economic theories of the revised guidelines are improperly based wholly or partially on margins (prices minus incremental costs). Although the draft guidelines acknowledge in two footnotes that “high margins are not in themselves of antitrust concern,” Section 4.1.3 discusses the role of margins in critical loss analysis and as an indication of the sensitivity of demand to price.
The guidelines say little about non-price competitive effects (ie., how a transaction affects quality, service innovation, and product variety). See page 2 of the guidelines, “[f]or simplicity of exposition, these Guidelines generally discuss the analysis in terms of… price effects.”
The guidelines fail to offer a clear framework for analyzing non-price considerations. Commissioner Rosch supports this claim with four non-exhaustive illustrations of guideline deficiencies.
Commissioner Rosch’s statement raises many questions about the future of the guidelines. Are the revised guidelines an accurate statement of current practices? Will the issuance of the guidelines lead to a greater number of enforcement actions? How will courts square this administrative document with prior merger and acquisition case law? Only time will tell.