Assessing domination: DOJ and FTC reinvigorate antitrust enforcement

November 2023  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

November 2023 Issue

Upon entering the White House on 20 January 2021, President Biden set out a number of key priorities for his administration, among which was reinvigorating US antitrust enforcement to address the many ways mergers can weaken competition, and harm consumers, workers and businesses.

To that end, in July 2021 the president issued an executive order directing the Department of Justice (DOJ) and the Federal Trade Commission (FTC) to review the extant horizontal and vertical merger guidelines and consider whether there was a compelling need to revise them.

The agencies have, in fact, amended the merger guidelines several times since the first guidelines were released in 1968, subsequently in 1982, 1984, 1992, 1997, 2010 and 2020. However, despite this relatively regular updating, President Biden bemoaned the framework established in the 1982 guidelines, offering that the US chose the wrong path due to following the misguided philosophy of people like legal scholar Robert Bork, pulling back on enforcing laws to promote competition.

“The DOJ and FTC are quite capable of determining whether a proposed transaction will comply with US federal antitrust laws, specifically section 7 of the Clayton Act and section 2 of the Sherman Act,” says Gerald A. Stein, a partner at Norton Rose Fulbright. “Indeed, the agencies are stocked with some of the best and brightest antitrust attorneys and economists in the country.

“However, the agencies have had consistent shortfalls in court when they refuse to acknowledge market realities and try to block transactions based on economic theories that they are trying to advance,” he continues. “Parties to the proposed transaction have done a far better job providing evidence in court that defeats the government’s arguments that a given transaction is likely to lessen competition.”

To address such governmental deficiencies, as well as other shortfalls in previous iterations of the antitrust legislation, in January 2022 the DOJ and FTC announced a broad initiative to evaluate potential updates and revisions to the horizontal merger guidelines issued in 2010 and the vertical merger guidelines issued in 2020.

That initiative, which also featured ‘listening sessions’ during which members of the public could voice their concerns, in turn led to new draft merger guidelines seeking public comment. The guidelines, released jointly by the DOJ and FTC on 19 July 2023, are intended to explain how the agencies will assess whether future mergers and acquisitions may violate US antitrust law.

“Open, competitive, resilient markets have been a bedrock of America’s economic success and dynamism throughout our nation’s history,” stated Lina M. Khan, chair of the FTC, upon release of a draft update of the existing merger guidelines. “Faithful and vigorous enforcement of the antitrust laws is key to maintaining that success.

“With these draft merger guidelines, we are updating our enforcement manual to reflect the realities of how firms do business in the modern economy,” she continues. “Informed by thousands of public comments – spanning healthcare workers, farmers, patient advocates, musicians and entrepreneurs – these guidelines contain critical updates while ensuring fidelity to the mandate Congress has given us and the legal precedent on the books.”

According to the DOJ, as markets and commercial realities change, it is vital that the US adapts its law enforcement tools to keep pace so that it can protect competition in a manner that reflects the intricacies of the modern US economy. “Simply put, competition today looks different than it did 50 or even 15 years ago,” said Jonathan Kanter, assistant attorney general at the DOJ. “There will be a substantial process for the public to review and provide comments before we finalise these guidelines.”

In essence, the draft merger guidelines, while also not legally binding like their predecessors, do reflect the agencies’ current thinking in antitrust enforcement – giving substance to the Biden administration’s promise to more vigorously pursue antitrust enforcement.

Moreover, the guidelines will apply to and effect every industry in the US. Some of the more active industries likely to be on the agencies’ radar include agriculture, technology and healthcare, as well as companies that sell goods and services and also operate platforms that host their competitors’ goods and services.

Thirteen guidelines

The new DOJ and FTC draft guidelines build upon, expand and clarify frameworks set out in previous versions. In summary, the agencies set forth 13 guidelines – which are not mutually exclusive, and a given merger may implicate multiple guidelines – to be used when determining whether a merger is unlawfully anticompetitive under the antitrust laws, as outlined below.

First, mergers should not significantly increase concentration in highly concentrated markets. The agencies will examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. If so, the agencies will presume that a merger may substantially lessen competition based on market structure alone.

Second, mergers should not eliminate substantial competition between firms. The agencies will examine whether competition between the merging parties is substantial, since their merger will necessarily eliminate competition between them.

Third, mergers should not increase the risk of coordination. The agencies will examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is, according to the agencies, inherently vulnerable and the agencies will presume that the merger may substantially lessen competition. In a market that is not yet highly concentrated, the agencies will investigate whether facts suggest a greater risk of coordination than market structure alone would suggest.

Fourth, mergers should not eliminate a potential entrant in a concentrated market. The agencies will examine whether, in a concentrated market, a merger would eliminate a potential entrant or eliminate current competitive pressure from a perceived potential entrant.

Fifth, mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete. When a merger involves products or services rivals use to compete, the agencies will examine whether the merged firm can control access to those products or services to substantially lessen competition and whether they have the incentive to do so.

Sixth, vertical mergers should not create market structures that foreclose competition. The agencies will examine how a merger would restructure a vertical supply or distribution chain. According to the agencies, at or near a 50 percent share, market structure alone indicates the merger may substantially lessen competition. Below that level, the agencies examine whether the merger would create a “clog on competition… which deprives rivals of a fair opportunity to compete”.

Seventh, mergers should not entrench or extend a dominant position. The agencies will examine whether one of the merging firms already has a dominant position that the merger may reinforce. They will also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.

Eighth, mergers should not further a trend toward concentration. If a merger occurs during a trend toward concentration, the agencies will examine whether further consolidation may substantially lessen competition or tend to create a monopoly.

Ninth, when a merger is part of a series of multiple acquisitions, the agencies may examine the whole series. If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the agencies will consider the cumulative effect of the pattern or strategy.

Tenth, when a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform or to displace a platform. Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The agencies consider the distinctive characteristics of multi-sided platforms carefully when applying the other guidelines.

Eleventh, when a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers. The agencies will apply the guidelines to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.

Twelfth, when an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition. Acquisitions of partial control or common ownership may in some situations substantially lessen competition.

Finally, mergers should not otherwise substantially lessen competition or tend to create a monopoly. The guidelines are not exhaustive of the ways that a merger may substantially lessen competition or tend to create a monopoly.

“The revised guidelines are a complete makeover of previous guidelines,” asserts Mr Stein. “For starters, they are the first to combine horizontal and vertical theories. The key focus, however, of the revised guidelines is to address what the agencies perceive as an increase in market concentration over many areas of industry, including agriculture, high technology and healthcare.

“This is reflected in several guidelines that now contain market share thresholds and reduced Herfindahl-Hirschman Index thresholds,” he continues. “The revised guidelines also focus on theories of actual and potential competition and the impact of transactions on labour markets. The agencies have been applying these concepts since the start of the Biden administration – so the revised guidelines do not mark a change in this approach, but rather a codification of their approach.”

Tenor of the guidelines

With public consultation on the proposed guidelines having ended on 18 September 2023 (although there have been some formal requests made to the agency to extend the deadline), the power the DOJ and FTC now hold to determine a merger’s effect on competition in the modern economy is significant, with dissenting voices likely to be minimal or inconsequential.

“I expect that there will be thousands of public comments and it is possible that the deadline may be extended,” suggests Mr Stein. “I also do not think any public comment will significantly change any of the content of the revised draft guidelines. Rather, the tenor of these guidelines will further entrench the agencies on their enforcement positions and will result in an increase in litigated cases.

“However, the irony is that despite the Biden administration’s purported aim being to allow middle- and small-market players to compete against larger players, smaller companies will be unable to afford to sustain protracted government investigations followed by litigation, so they are more apt to either forgo a transaction that would otherwise enable them to better compete, or to more readily abandon a transaction in the face of government scrutiny.”

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Fraser Tennant