The U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) (collectively, the “Agencies”) released for public comment draft Merger Guidelines that outline how the agencies evaluate proposed deals.[1] The Agencies have periodically updated their Merger Guidelines, with the last such update in 2010.

The Agencies describe the draft Guidelines as simply another update[2] to address “the realities of how firms do business in the modern economy.”[3] But many stakeholders view the draft as an attempt to overhaul merger review fundamentally in keeping with the Biden Administration’s aggressive Neo-Brandeisian approach to antitrust enforcement. The Merger Guidelines reflect the recent ongoing higher scrutiny of proposed mergers, including some theories not applied in the past fifty years and others that have failed recently in federal court.

Although not binding law, the Merger Guidelines are an important indicator of the Agencies’ current analysis of and approach to deals, which can help parties try to avoid issues when structuring a deal or inform advocacy to the Agencies during often lengthy merger reviews (which the Agencies are separately proposing to overhaul and apply increased scrutiny over). Ultimately, however, parties that are willing and able to litigate have an opportunity to defend their deal against an Agency challenge in federal court. Courts typically have been deferential to past iterations of the Merger Guidelines, although that may change with this new iteration of the Guidelines as it appears to reject aspects of the prior Guidelines and depart from recent court precedent.

The Agencies are seeking public comment for 60 days, ending September 18, 2023. Final Guidelines are then expected in fall 2023 or early 2024.

Key Provisions

The Agencies specify three “core goals” for the Merger Guidelines to: (1) “reflect the law as written by Congress and interpreted by the highest courts,” (2) be “accessible,” and (3) “reflect the realities of our modern economy.”[4] The draft Guidelines consolidate the previously separate Horizontal Merger Guidelines and Vertical Merger Guidelines into one document and set out thirteen principles to accomplish the Agencies’ three goals and guide the reviews of deals:

1. Mergers should not significantly increase concentration in highly concentrated markets;
2. Mergers should not eliminate substantial competition between firms;
3. Mergers should not increase the risk of coordination;
4. Mergers should not eliminate a potential entrant in a concentrated market;
5. Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete;
6. Vertical mergers should not create market structures that foreclose competition;
7. Mergers should not entrench or extend a dominant position;
8. Mergers should not further a trend toward concentration;
9. When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series;
10. When a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform, or to displace a platform;
11. When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers;
12. When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition; and
13. Mergers should not otherwise substantially lessen competition or tend to create a monopoly.

Key Differences from Prior Guidelines

The draft Guidelines make several significant substantive departures from prior guidelines, which were first introduced in 1968 and revised several times over the following decades.

1. A New Test for Markets and Departure from the Consumer Welfare Standard

One such development that the draft Merger Guidelines turn away from is the consumer welfare standard that has served as a foundational antitrust principle since the 1970s. Under the consumer welfare standard, the permissibility of a proposed merger is evaluated based on its potential harms to consumers rather than harms to specific competitors. The Biden Administration has criticized this approach as being too narrowly focused and failing to capture other harmful conduct that arises when corporations increase their size and power.

Under the draft Guidelines, the Agencies will implement a new test to identify unlawful mergers. The new test is presented as an expansion of the small but significant and non-transitory increase in price (SSNIP) test used in prior guidelines, and will now analyze predicted activity for both an increase in price “or other worsening of terms.” The draft Guidelines refer to this as the SSNIPT test but offer only a vague, conceptual explanation of how the test will be implemented.

The draft Guidelines also acknowledge several specific types of markets that the Agencies could use to analyze the competitive effects. These include cluster markets, bundled products markets, one-stop shop markets, innovation markets, and labor markets.

2. More Mergers Presumed Illegal

The draft Guidelines lower the threshold to presume mergers—both horizontal and vertical—are illegal. For horizontal mergers (i.e., those between companies with competing products), the Agencies rewind the stated Herfindahl-Hirschman Index (HHI) thresholds for measuring when a proposed merger is likely to raise competition issues to the much lower thresholds from the 1982 guidelines. Practically speaking, this adjustment will cause the agencies to condemn significantly more mergers.

The new draft Guidelines also remove the safe harbor for transactions in unconcentrated markets. In the prior Horizontal Merger Guidelines, the Agencies stated that “[m]ergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.”[5] No such safe harbor exists in the new draft Guidelines.

HHI Revisions

Also, the Guidelines introduce a market share test. Under this test, a merger where the merged firm will have a share greater than 30% and the change in HHI will be greater than 100 will be presumed to substantially lessen competition or tend to create a monopoly.

For vertical mergers (i.e., those between companies at different levels of the supply chain), the Guidelines presume anticompetitive harm if the combined firm will control a market for products used by the firm’s rivals. The draft Guidelines state: “If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.”[6] Further, unlike the prior Vertical Merger Guidelines, the new draft Merger Guidelines do not recognize procompetitive benefits of vertical mergers, like the elimination of double marginalization.

3. Focus on Statutory Text and Little Reliance on Case Law Developments

The Agencies portray the draft Guidelines as rigorously adhering to the mandates in the various antitrust statutes and decades old Supreme Court precedent. In doing so, the Guidelines in many ways minimize more recent federal appellate circuit court and federal district court precedent. For example, the draft Guidelines cite to the DOJ’s loss in U.S. Sugar only to point to the application of the Brown Shoe practical indicia but ignore the holding that rejected the government’s overly narrow market definition. United States v. U.S. Sugar Corp., No. 22-2806, slip op. at 11 (3d Cir. July 13, 2023).

Over the last several decades, relatively few developments have occurred through Supreme Court decisions. With the introduction of the Hart-Scott-Rodino (HSR) Act that required pre-merger notification and agency review, merging parties became meaningfully less likely to litigate challenges to mergers all the way up to the Supreme Court. Therefore, most of the developments in antitrust case law and academic thinking occurred outside the highest court.

Then-Judge Kavanagh’s dissent in the DOJ’s challenge of the proposed merger between Anthem and Cigna provides a helpful guide to the modern judicial approach and may help predict how courts are likely to receive any new Guidelines. He wrote: “[T]he fact that a merger such as this one would produce heightened market concentration and increased market shares (and thereby potentially harm other insurers that are competitors of Anthem and Cigna) is not the end of the legal analysis. Under current antitrust law, we must take account of the efficiencies and consumer benefits that would result from this merger. Any suggestion to the contrary is not the law.” United States v. Anthem, Inc., 855 F.3d 345, 377 (D.C. Cir. 2017) (Kavanaugh, J., dissenting).

The Agencies’ omission of these developments parallels what they have signaled as a retreat from the policies that they believe wrongly approved prior mergers and caused harm as a result. However, federal courts remain bound by the court precedent from the past decades, establishing daylight between what the Agencies consider in reviewing proposed transactions and what the Agencies may need to prove before a federal court to block the transaction.

4. Minimize Focus on Market Definition and Market Shares in Some Situations

Prior Merger Guidelines focused extensively on defining a relevant antitrust market and determining the market shares of competitors. This exercise included HHI calculations, which, as discussed above, remain in the new draft Guidelines but with lower thresholds for presumed harm to competition. Beyond the thresholds, the Guidelines stress the Agencies’ flexibility in defining a relevant antitrust market. The Guidelines emphasize that “[r]elevant markets need not have ‘precise metes and bounds’” and that “fuzziness” is “inherent” when defining relevant markets.[7] The draft Guidelines also indicate that direct evidence of competition can reveal a relevant antitrust market without the need for conducting a traditional market analysis. This departure from rigid market analysis is consistent with the Agencies’ current practice of looking at proposed mergers and their implications more broadly.

5. New Focus on Labor

Most notable among the Agencies’ changes is a new focus on labor markets. The Agencies, through their new SSNIPT test, will now evaluate whether the combined entity would offer worse terms for employees or contractors, that might include a decrease in the wage offered to workers or a worsening of their working conditions or benefits. Specifically, Appendix 3 of the draft Guidelines outlines that the Agencies can identify labor markets using the same market definition tools as traditional product markets. The analysis may evaluate if workers could be targeted for lower wages, less favorable terms of employment (e.g., education, experience, certification, or work location). This has not been a traditional focus of the merger review process in the United States. The draft of the new HSR form that the Agencies recently released reflects this increased attention to calling for information from merging parties about labor markets as part of their pre-merger filing.[8]

6. New Focus on Platforms

The new draft Guidelines indicate that mergers involving multi-sided platforms can give rise to competitive concerns that are neither horizontal nor vertical. The Agencies will consider “competition between platforms, competition on a platform, and competition to displace the platform.”[9] As part of this effort, the draft Guidelines signal that the Agencies are likely to scrutinize acquisitions by platforms of nascent competitors and any transaction that could entrench the status of the platform or inhibit the growth or adoption of a new platform.

7. Curtailed Role of Economics and No More Efficiencies Justifications

The draft Guidelines deemphasize the analysis of economic effects and instead focus on market structure. The approach to antitrust embodied by prior Merger Guidelines embraced a prominent role for economic analysis as a way to understand the proposed merger’s potential effect on competition. Such analysis included weighing potential harms of a proposed merger against the potential benefits, including procompetitive efficiencies the parties and consumers would realize through the merger. The new draft Merger Guidelines devote meaningfully less attention to economic analysis and minimize the role of efficiency justifications. Regarding such evidence of procompetitive benefits, the Merger Guidelines stress that the Agencies “may” review such evidence and that efficiencies “cannot justify a merger that may tend to create a monopoly.”[10]

Takeaways

Between the new Merger Guidelines and the new HSR form, the Agencies under the Biden Administration are adding substantially to the process of merger clearance and signaling that more deals will receive tougher regulatory scrutiny. The Merger Guidelines attempt to inject additional factors into assessing competitive harm and defining markets, including some factors that do not appear to lend themselves to easy quantification, such as a small but significant “worsening of terms” in defining a relevant market under the new “SSNIPT” test. These new criteria and the lower structural thresholds for presumptive harm suggest that aggressive enforcement will continue during the Agencies’ merger review period, but it is unclear whether this posture will lead to more blocked deals where antitrust laws and judicial precedent remain unchanged and in tension with some of the Agencies’ proposed changes.

Given the increased burdens of clearing a proposed merger and the higher scrutiny proposed mergers are likely to face, corporate counsel should involve antitrust counsel early in the deal process.

[1] U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger Guidelines (July 19, 2023).

[2] Fed. Trade Comm’n, FTC and DOJ Seek Comment on Draft Merger Guidelines (July 19, 2023).

[3] See U.S. Dep’t of Justice, Justice Department And FTC Seek Comment on Draft Merger Guidelines (July 19, 2023).

[4] Fed. Trade Comm’n, FTC and DOJ Seek Comment on Draft Merger Guidelines (July 19, 2023), available at https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines.

[5] U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (Aug. 19, 2010).

[6] U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger Guidelines (July 19, 2023).

[7] Id.

[8] See Client Alert, FTC Proposes Significant Expansion and Changes to HSR Merger Notification Form (July 7, 2023).

[9] U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger Guidelines (July 19, 2023).

[10] Id.

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