On Sept. 18, 2023, 19 Democratic state attorneys general (AGs) filed public comments to the Draft Merger Guidelines (Draft Guidelines) proposed by the U.S. Department of Justice and the Federal Trade Commission (the Agencies) earlier this year. The Agencies are seeking to update the Merger Guidelines for the first time since 2010. According to Agency leaders, the Draft Guidelines are intended “to reflect the realities of how firms do business in the modern economy” and allow the Agencies to “keep pace” as “markets and commercial realities change.”

The AGs — including those from California, the District of Columbia, Illinois, New York, Pennsylvania and Washington — submitted comments on nearly all the Draft Guidelines and recommended revisions to additional sections and appendices on market definition and evidence. Although the AGs’ comments do not bind the Agencies or federal courts, they offer a glimpse at state antitrust enforcement priorities and may signal how the AGs will look to interpret federal and state competition laws. As the AGs note in the summary of their comments, “the Merger Guidelines have long served as important tools for state antitrust enforcement.”

Here are some of the significant changes the AGs recommend:

• No safe harbors: The AGs support a strong structural presumption disfavoring horizontal mergers that increase concentration in already concentrated markets. But they caution that “a presumption should not create a safe harbor” by implying that mergers are lawful unless they increase concentration in already concentrated markets. Instead, the AGs recommend that the Draft Guidelines state explicitly that market shares are not the only evidence of market concentration. The AGs also support the Agencies’ omission of safe harbors for vertical mergers that fall below a given market share threshold.
• More evidence in investigations: The Draft Guidelines list evidence that enforcers have typically relied on in merger investigations. The AGs approve of that list and further encourage the Agencies to consider any evidence of higher costs or lower quality when reviewing mergers. This would include, for example, (1) results of natural experiments relating to the relevant markets, (2) analogous mergers, and (3) the merging parties’ internal documents. The AGs also discourage “overreliance” on empirical economic analysis in evaluating mergers, noting that “law is not economics” and that “other forms of evidence can be, and should be, relied on.”
• Scrutiny for serial acquisitions: The AGs support the Draft Guidelines’ recognition of serial acquisitions but urge the Agencies to go further by identifying characteristics of such acquisitions that would indicate potential anticompetitive effects. According to the AGs, these could include:
  • Defensive acquisitions, “where the acquiring firm seeks to preserve its dominance by buying a potential threat”;Paying an “anticompetitive premium” for an acquisition target;Killer acquisitions, “where the acquiring firm shuts down the acquired company’s products, services, or innovation”;Reverse killer acquisitions, where “the acquirer refrains from continuing organic expansion to avoid competing with the acquired company’s products, services, or innovation”;Channeling innovation, specifically, “into the hands of incumbents able to control the pace or direction of innovation in their preferred path”;Stealth acquisitions, which are structured to avoid HSR reporting and scrutiny;Systematic targeting of nascent or potential competitors; and
  • Post-acquisition exclusivity, where “a target deal[s] with competitors and industry players more generally before its acquisition but no longer does so after its acquisition.”

The AGs further recommend that the Agencies evaluate serial acquisitions for so-called “flywheel” effects, where one or more types of potentially anticompetitive conduct reinforce themselves.

• Addressing innovation and potential competition: The AGs urge the Agencies to evaluate — and potentially challenge — mergers that may harm innovation and nascent competition, even if they do not present current competitive concerns. The AGs assert that “analyses focused on price, output effects, diversion ratios, and HHIs are often unhelpful in assessing potential competition”; the AGs instead encourage the Agencies to investigate other facts that may be more germane to a nascent-competition inquiry:
  • Markets with regulatory checkpoints for pipeline innovations, such as those for pharmaceuticals;
  • Potential competitors’ current and historical innovation capabilities, managerial experience, or competitive strength in research and development;
  • Potential competitors’ similarity (or lack thereof) to acquiring firms;
  • Whether a potential competitor is reasonably perceived as a potential new market entrant;
  • Acquiring firms’ past behavior with respect to acquiring potential competitors; and
  • Acquiring firms’ actions that signal interest in potential competitors or the market for potential competitors.

Ultimately, the impact of the AGs’ input on the Draft Guidelines remains to be seen, but their recommendations may signal state-level enforcement trends to come. In particular, the AGs’ critiques of market share thresholds and economic analysis, combined with their endorsement of evaluating market characteristics and facts particular to a given transaction, may create uncertainty in state antitrust investigations and introduce new challenges for transacting parties.

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