Yesterday (July 19, 2023), the DOJ Antitrust Division and the FTC released the long-anticipated proposed Merger Guidelines. As has also been long-anticipated, the proposed Guidelines reflect a much-stiffened enforcement philosophy. Throughout the text, the proposed Guidelines provide citations to Supreme Court cases from the 1960s and 1970s (and some even older) that will send many antitrust lawyers back to the library to re-read opinions that have not been part of mainstream antitrust thinking for decades, as the Agencies and courts have relied far more heavily on economic principles than Brown Shoe factors in assessing the likely competitive impact of a proposed transaction.
A full analysis of what these Guidelines may mean for merger enforcement will require some time – as well as the possible revision of the draft following the 60-day notice and comment period – but here are a few important observations based on a day-one review of the text:
- Structural Presumption Standards. Guideline 1 rejects the structural presumption thresholds that were loosened in the 2010 Horizontal Merger Guidelines and reverts to the post-merger HHI threshold of 1800 and an HHI increase of 100 as sufficient to rise a rebuttable presumption of an unlawful merger. Guideline 1 also adds a new structural presumption that mergers are unlawful if the merged firm’s market share is greater than 30% and the change in the HHI is greater than 100. This means that an acquisition by a firm with a 28% market share of a firm with only a 2% market share would be presumptively unlawful.
Guideline 1 would also mean the death knell for claims by broadcasters of a safe harbor for radio and television broadcast station mergers where the merged firm market share was below 40%. These claims were based on a misreading of a 1997 speech by then AAG Joel Klein, but broadcasters have always argued for it anyway. With Guideline 1’s 30% market share threshold for a structural presumption, this argument is fully and totally dead.
- Potential Entry Standards. Guideline 4 deals with the acquisition of “actual potential” and “perceived potential” entrants. Under the proposed guideline, it is no longer the case that there had to be a reasonable probability of the potential entrant actually entering the market. Instead, if a market participant could “reasonably consider one of the merging firms to be a potential entrant,” then that could be a basis for blocking the merger, even if that firm could not actually enter the market. There is a lot of room here for market participants opposed to the merger to create havoc, by claiming to have “objective evidence” that they believe one of the merging firms could have entered the market independently but for the proposed acquisition.
And with regard to proof of actual potential entry, the Guidelines state that subjective evidence that the company considered organic entry absent the merger can indicate a reasonable probability that the company would have entered – but what if the company considered it and rejected the idea? Why does that suggest that entry would be “reasonably probable” absent the merger?
Furthermore, the guidelines state that the “Agencies will usually presume” that such entry by one of the merging parties would have been competitively significant. This is a vastly different treatment of potential entry than the guidelines adopt in Article IV, which seems to reiterate the current standards of timeliness, likelihood, and sufficiency of potential entry in situations in which the parties seek to argue that potential entrants will keep the market competitive in the future. The only thing that’s consistent is that the Guidelines place the burden of persuasion on the merging parties.
- Labor Markets. As expected, the Guidelines (Guideline 11) focus on labor markets: “The Agencies will consider whether workers face a risk that the merger may substantially lessen competition for labor.” Notable in this section is the adoption of worker “attributes” as market-defining characteristics beyond education/skills. There is also repeated discussion of individual worker issues – “the individual needs of workers may limit geographical and work scope of the jobs that are competitive substitutes;” “workers may seek not only a paycheck but also work that they value in a workplace that matches their preferences.” How can individual workers’ interests and needs, which vary as much as the human experience, be accounted for in a unified market definition? The guidelines don’t say.
- Entrenchment and Extension. Guideline 7 reaches back to some of the older cases that condemned mergers that may “entrench” or extend a dominant position. Interestingly, the guidelines equate a 30% market share with evidence of a dominant position – a figure well below current monopoly standards and more in line with a European concept of dominance.
Of note in addition to the somewhat vague notion of entrenchment, is that a merger may be condemned for extending a dominant position into new markets – relying on the 1972 decision in Ford Motor. While the Agencies don’t typically permit firms to claim an out-of-market benefit as helping a company’s deal, the Guideline now state that an out-of-market impact can hurt a deal.
Also of interest is the acceptance of “potential tying” as a harm, i.e., that the merger might lead the merged firm to leverage its position by tying or bundling, and therefore lessening competition in the related market. While there is some old judicial acceptance of this theory, the idea behind Section 7 is to address mergers in their incipiency, not potential violations of the Sherman Act’s prohibition on tying. The inclusion of potential tying and bundling as reasons to block a deal evidences the breadth of the bases for blocking deals that the proposed Guidelines embrace.
- Trend Toward Concentration. In a short, but potentially important section, Guideline 8 would condemn mergers that will “further [a] trend toward concentration.” It’s difficult to see why “furthering a trend toward concentration” is tantamount to “may substantially lessen competition or tend to create a monopoly.” Doesn’t a merger itself have to cross the line of illegality – rather than just setting up the possibility that the next deal may cross it?
And Guideline 8 lacks clarity. The trend toward concentration can be established, it tells us, “as a steadily increasing HHI exceeds 1,000 and rises toward 1,800.” Over what period of time? With what speed? How steady is “steadily”? And with somewhat circular logic, the guideline tells us that the fact that a merger would increase the pace of the trend toward concentration “may be established by other facts showing the merger would increase the pace of concentration.”
Time will tell if these proposed Guidelines are changed after the comment period and the extent to which they receive judicial acceptance. The reason that the enforcement agencies and the courts moved on from the concepts central to many of the 1960s and 1970s merger decisions relied on by these guidelines was the recognition that economic principles and concern for consumer welfare were more reliable and principled bases for sound antitrust enforcement than subjective judgments about possible future conduct or suitably benign market structures. The current Administration justifies increased litigation on the grounds that even losing cases advances antitrust doctrine by defining the edges of permissible conduct. These proposed Guidelines presage more of this approach.