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DOJ and FTC Issue Draft Merger Guidelines
- Bial, Joseph J
- Brachman, Paul D.
- Dearborn, Meredith R.
- Finch, Andrew C.
- Forrest, Katherine B.
- Isaacson, William A.
- Michael, William B.
- Rubin, Jacqueline P.
- Soven, Joshua H.
- St. Matthew-Daniel, Eyitayo “Tee”
- Synnott, Aidan
- Tannenbaum, Brette
- Crane, Daniel A.
- Kelly, Marta P.
- Nagley, Jared P.
- Sobel, Yuni Yan
July 19, 2023 Download PDF
- The Antitrust Division of the Department of Justice (DOJ) and Federal Trade Commission (FTC) have published a draft set of new merger guidelines.
- Some concepts in the new guidelines are similar to those in the existing guidelines. However, several of the new guidelines differ significantly from existing guidelines and could in certain circumstances lead to challenges to deals that in the past would not have faced agency action.
- The agencies are accepting public comments on the draft guidelines until September 18. The agencies said that they “will use the public comments to evaluate and update the draft before finalizing the guidelines.”
On July 19, 2023, the DOJ and FTC issued much-anticipated draft merger guidelines. These guidelines would replace both of the agencies’ 2010 Horizontal Merger Guidelines and the DOJ’s 2020 Vertical Merger Guidelines (which were rescinded by the FTC in September 2021). The new guidelines are a substantial departure from existing guidelines in a number of respects. Potentially the most significant change is that the guidelines lower the threshold market concentration level at which the agencies would presume a merger to be illegal. They also introduce a presumption that a merger resulting in a market share for the merged firm of greater than 30% would be illegal if it also resulted in a relatively modest increase in market concentration or if it entrenched or extended the firm’s market position. The new guidelines also assert that the agencies could challenge mergers furthering a trend toward market or industry sector consolidation.
The federal antitrust analysis of mergers is generally governed by Section 7 of the Clayton Act, which prohibits acquisitions the effect of which “may be substantially to lessen competition, or to tend to create a monopoly.” The guidelines are meant to help the agencies determine whether a merger falls into this category and should be enjoined.
It is important to emphasize that the agencies’ merger guidelines themselves do not have the force of law and are not binding on courts, though the agencies assert that the new draft guidelines are based on “binding propositions of law to explain core principles that the Agencies apply.” In addition, the existing merger guidelines have been cited favorably by courts in a number of litigated merger cases. In what may be an attempt to bolster the credibility of the guidelines with the courts, the guidelines for the first time include citations to “binding legal precedent,” while at the same time stating that these citations “do not necessarily suggest that Agencies would analyze the facts in those cases identically today.” It remains to be seen to what degree the courts will adopt the guidelines and the application of the guidelines could vary from case to case, depending on particular facts. And it is notable that the guidelines are being released at a time when the courts have rejected the aggressive legal interpretations advanced by the DOJ and FTC in a number of merger challenges in federal court.
Notable changes from existing guidelines
Lower threshold for presumed illegality of horizontal mergers. Both the old and new guidelines contain a presumption that a merger is illegal if it increases market concentration above a certain threshold. Market concentration is measured using the Herfindahl-Hirschman Index (HHI). HHI is calculated by adding together the squares of the market shares of the firms in the relevant market. The higher the HHI, the higher the market concentration, and a market with only one firm would have an HHI of 10,000. The existing guidelines identify two categories of mergers that “often warrant scrutiny”: those in “moderately concentrated markets” with an HHI between 1,500 and 2,500 where the merger would result in an HHI increase of more than 100; and those in “highly concentrated markets” with an HHI above 2,500 where the merger would result in an HHI increase of more than 100. If a merger in a highly concentrated market would result in an HHI increase of more than 200, the current guidelines presume that the merger will “be likely to enhance market power.”
By contrast, under new guideline 1, the agencies would determine a merger to be illegal if it results in a post-merger HHI over 1,800, with an increase greater than 100. This was the threshold found in merger guidelines in effect from 1982 to 2010. The new guidelines also state that a merger that results in an HHI increase of greater than 100 and a firm with greater than 30% market share are presumed to be illegal. This metric is not in the existing guidelines. The 30% figure comes from a 1963 Supreme Court case, United States v. Philadelphia National Bank. The upshot is that the DOJ and FTC are likely to determine more deals are presumptively illegal, and the parties will need to submit evidence and argument to rebut that presumption.
Mergers involving dominant firms. New guideline 7 describes the agencies’ approach to analyzing a merger involving a “dominant” firm and states that mergers “entrenching or extending an already dominant position” may violate the Clayton Act. Quite significantly, the agencies assert that in determining whether a firm 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.” Notably, “dominance” does not have a defined meaning in existing U.S. antitrust law, and the definition of dominance in the guidelines is well shy of the definition of monopoly power. As such, firms that fall well short of having monopoly power could be labelled “dominant” by the agencies and face challenges under the new guidelines.
If a firm is found to be “dominant,” the agencies will ask whether the merger “may entrench the dominant position through any mechanism consistent with market realities that lessens the competitive threats the merged firm faces.” The agencies will also ask whether the merger could “enable the merged firm to extend a dominant position from one market into a related market, thereby substantially lessening competition in the related market.” Here, the guideline gives examples such as the possibility that the merged firm would engage in tying or bundling. Courts have long held that such conduct, depending on the circumstances, may be lawful and procompetitive. However, the agencies state that they “will not assess” whether the tying, bundling or other conduct “would itself violate any law, but instead will assess whether such conduct, if it were to occur, may tend to extend the firm’s dominant position.”
Mergers furthering a trend toward concentration. New guideline 8 states that a merger could violate the law “if it contributes to a trend toward concentration.” In making this determination, the agencies will ask whether the merger is in a “market or industry sector where there is a significant tendency toward concentration,” which could either be horizontal or vertical in nature. They will also ask “whether the merger would increase the existing level of concentration or the pace of that trend.” According to the guidelines, this could be “established by a significant increase in concentration, such as a change in HHI greater than 200, or it may be established by other facts showing the merger would increase the pace of concentration.”
Similarities with existing guidelines
While there are significant changes in the new guidelines, they do retain and expand upon several concepts from the existing guidelines.
Competition between the merging firms as measure of harm. Both sets of guidelines outline how the agencies may look to the degree of competition between the merging firms to predict whether a merger may substantially lessen competition. If there is “substantial” competition between the firms, the existing guidelines state that the elimination of that competition as a result of the merger could have adverse competitive effects. New guideline 2 states that “if evidence demonstrates substantial competition between the merging parties prior to the merger, the Agencies can determine that the merger may substantially lessen competition.” The new guidelines list a “variety of indicators to identify substantial competition,” including evidence that the two firms make strategic decisions with reference to each other, evidence that there is customer substitution between the firms and evidence of “competitive actions by one of the merging firms” impacting the other merging firm.
Increase in risk of coordination as competitive harm. According to new guideline 3, “a merger may substantially lessen competition when it meaningfully increases the risk of coordination among the remaining firms in a relevant market or makes existing coordination more stable or effective.” If the market is highly concentrated, there has been a history of attempted or actual coordination, or a “maverick” firm is being eliminated, the agencies will “presume that most-merger market conditions are susceptible to coordinated interaction.” Other factors could also lead the agencies to make such a conclusion, including whether “a firm’s behavior can be promptly and easily observed by its rivals”; whether “a firm’s prospective competitive reward from attracting customers away from its rivals will be significantly diminished by likely responses of those rivals” (which would “reduce the benefits of competing more aggressively” and render a market “more susceptible to coordination”); and whether coordination among the firms in a market would be “profitable or otherwise advantageous.” The existing guidelines also recognize that certain mergers could harm competition “by enabling or encouraging post-merger coordinated interaction among firms in the relevant market.”
Harms to potential competition. New guideline 4 states that “[m]ergers can substantially lessen competition by eliminating a potential entrant,” noting that the harm is greater in more concentrated markets. The guideline recognizes that harm could arise in two ways. The first is by the elimination of an “actual potential” competitor where one of the merging firms “had a reasonable probability of entering the relevant market” and the entry had “a substantial likelihood” of deconcentrating the market “or other significant procompetitive effects.” The second is by the elimination of a “perceived potential” competitor, that is, a “a firm that is perceived by market participants as a potential entrant.” (Notably, these theories of harm to potential competition were asserted by the FTC in its challenge to the Meta-Within deal. The court in that case accepted that harms to potential competition could violate the Clayton Act, but found that the FTC failed to establish that it was likely to succeed on the merits in light of the evidence presented.) The existing guidelines also recognize that a “merger between an incumbent and a potential entrant can raise significant competitive concerns,” but they do not go into as much detail as the new guidelines — and they do not include a discussion of actual potential versus perceived potential competition.
Mergers resulting in harms to rivals. New guideline 5 states that “a merger may substantially lessen competition by giving a firm control over access to a product, service, or customers that its rivals use to compete.” The inquiry, according to the guidelines, is to determine whether the merged firm has “the ability and incentive to make it harder for rivals to compete.” While the concept of raising rivals’ costs appears in the DOJ’s existing Vertical Merger Guidelines, the new guidelines say that “[t]his concern applies to any transaction involving access to products, services, or customers rivals use to compete, whether or not they involve traditional vertical supply and distributor relationships.” According to the guidelines, “the Agencies are unlikely to credit claims or commitments to protect or otherwise avoid harming their rivals that do not align with the firm’s incentives.” This is notable in light of recent government losses in vertical merger challenges where courts found that commitments made by the deal parties sufficiently addressed competitive concerns. The new guideline also discusses the potential that a merger might harm competition by giving the merged firm access to its rivals’ competitively sensitive information.
Mergers resulting in market structures that foreclose competition. Another theory of harm carried over from the Vertical Merger Guidelines is that vertical mergers could in certain circumstances allow the merged firm to foreclose its competitors from a market. Unlike the Vertical Merger Guidelines, new guideline 6 contains a structural presumption that a merger is presumed to be illegal if the merged firm would have in excess of a 50% share of a product market to which its rivals need access. The new guideline also states that even with a share below 50%, a merged firm could be found to foreclose competition if “plus factors” are present. Such plus factors include a “trend toward vertical integration,” a merger with a “nature and purpose . . . to foreclose rivals,” the involvement of a relevant market that is already concentrated and a merger that raises barriers to entry.
Application to specific scenarios
Serial acquisitions. Guideline 9 focuses on “multiple small acquisitions in the same or related business lines,” which the agencies may examine as part of an industry trend or as part of an overall pattern of serial acquisitions by the acquiring firm. Although the draft guidelines do not cite the recent academic literature on “horizontal ownership,” where a common set of investors own significant shares in corporations that are horizontal competitors in a product market, guideline 9 seems motivated to address this phenomenon. The draft states that the agencies will pay particular attention to historical evidence of the firm’s acquisition patterns and implications for the acquiring firm’s incentives, as revealed by documents and testimony.
Multi-sided platforms. Guideline 10 of the draft introduces a new idea to the merger guidelines: multi-sided platforms. Some of the agencies’ apparent concerns involve conventional antitrust analysis. For example, the merger of two platforms that previously competed might be analyzed using ordinary horizontal merger analysis. Significantly, however, the draft also states that “[m]ergers involving platforms can give rise to competitive problems, even when a firm merging with the platform has a relationship to the platform that is not strictly horizontal or vertical.” This could prove a significant departure from prior practice insofar as it suggests that the agencies might challenge mergers that involve neither horizontal nor vertical relationships. Among the patterns that the agencies say they will consider are acquisitions of platform participants by platform operations which could entrench the platform’s position by depriving rivals of participants, acquisitions of firms that facilitate participation on multiple platforms and acquisitions of firms that provide important benefits to platforms. The agencies signal that they are especially interested in mergers that might create conflicts of interest, such as discrimination by a platform in favor of its own services.
Mergers involving buyer-side power, including labor markets. Guideline 11 repeats an idea that first entered the Horizontal Merger Guidelines in 2010—that mergers among buyers may be anticompetitive because they create monopsony power. The draft goes into far greater detail on labor market monopsony as a special concern in mergers: “Where a merger between employers may substantially lessen competition for workers, that reduction in labor market competition may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality.” The draft contains little guidance on how the agencies will assess whether a merger is likely to cause harm to employees, but does provide one potentially significant clue: “In light of their characteristics, labor markets are often relatively narrow.” This statement implies that the agencies will be disinclined to accept arguments that employees can easily switch between types of jobs, preferring instead to see human capital as closely tied to narrowly defined job types.
Acquisitions of partial ownership. Guideline 12 largely continues an idea already present in the 2010 Horizontal Merger Guidelines—that acquisitions involving partial ownership or minority interests may harm competition. This concern is closely related to the one discussed in guideline 9 involving serial acquisitions, but could also come into play if a firm makes only one small, noncontrolling acquisition. The agencies identify three ways in which such acquisitions may harm competition. First, the acquiring firm may obtain the ability to influence the behavior of the target firm in ways that diminish competition. Second, the acquisition may diminish the acquiring firms’ own incentives to compete. Third, the acquisition may allow the acquiring firm access to sensitive, nonpublic information from the target firm that could enable it to shift its own behavior in anticompetitive ways.
Other scenarios. Finally, guideline 13 is a catch-all statement that the previously identified patterns are not the only ones in which a merger may harm competition. It also adds some scenarios the agencies will be watching, including mergers that enable a firm to evade regulatory constraints, allow a firm to exploit a unique procurement process or dampen a firm’s incentives to innovate.
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