The two U.S. antitrust authorities—the U.S. Department of Justice’s (DOJ’s) Antitrust Division and the Federal Trade Commission (FTC) (collectively, the “Agencies”)—have jointly proposed new Draft Merger Guidelines to replace the 2010 Horizontal Merger Guidelines and 2020 Vertical Merger Guidelines. The Draft Guidelines will be finalized after a 60-day public comment period.
The Guidelines are intended to “help the public, business community, practitioners, and courts understand the factors and frameworks the Agencies consider when investigating mergers.” Prior editions of the Guidelines have been frequently used by courts as a guide in reviewing requests to enjoin or unwind transactions. However, the Guidelines are not binding on courts, which use them only to the extent they are persuasive and helpful.1
Compared to prior editions of the Guidelines going back to 1982, the new Draft Guidelines take a more antagonistic stance towards dealmaking generally and endorse the use of theories of harm that have not been accepted by modern courts. For example, the Draft Guidelines rely heavily on structural presumptions (for both horizontal and vertical deals) and advise that the Agencies will investigate conglomerate effects theories to consider whether a deal entrenches or expands a firm’s dominant position. The Draft Guidelines are largely unsurprising and track the theories and modes of analysis that antitrust law practitioners have observed from the Agencies for the past two years. Unfortunately, they do not offer specific guidance to companies seeking to understand the antitrust risk of a potential transaction. The Draft Guidelines set forth 13 sweeping principles that reflect the ideology of the Agencies’ leadership, many of which are in conflict with modern case law and not particularly useful in helping firms assess the types of transactions courts are likely to deem unlawful. Firms engaging in M&A can continue to expect extended U.S. antitrust review of mergers involving a large company as the buyer, firms in a vertical relationship, or a so-called nascent competitor (particularly in light of the Agencies’ proposed changes to the Hart-Scott-Rodino notification process).2
However, it remains to be seen whether the Draft Guidelines, once finalized, will translate to success in court for the Agencies. Since 1982, the Merger Guidelines have proven an effective tool for courts presiding over merger challenges because they were based on precedent and sound economics and provided a methodology that the courts could apply, with consumer-welfare being the guiding principle for assessing the competitive effects of a merger.
The Draft Guidelines, however, provide a host of reasons unrelated to consumer welfare for challenging deals and do not reflect how courts have applied the law in merger cases for many decades. Indeed, only 11 of the 46 cases cited in the Draft Guidelines were decided after 2000, and the only cited case to be decided since 2020 is not a merger case. The Agencies’ reliance primarily on case law from the 1960-1970s is a reflection of the prevailing view by Chair Lina Khan and Assistant Attorney General (AAG) Jonathan Kanter of how the law should be applied rather than an accurate summarization of how the judicial branch applies the law today. Some of the theories advanced in the Draft Guidelines have been flatly rejected by courts over the last several years, including in merger challenges brought under this Administration. So, while the Draft Guidelines may provide companies contemplating transactions useful insight into how the FTC and the DOJ are analyzing mergers today and what information may be of interest to them in investigations, for the most part they do not reflect how a court would ultimately analyze whether a deal may substantially lessen competition. Companies should expect courts to be highly skeptical of provisions in the Draft Guidelines that are inconsistent with modern case law and to apply the law in a manner that is consistent with recent precedent.
Increased Focus on Market Structure: The Reprise of Philadelphia National Bank
In 1963, the U.S. Supreme Court in Philadelphia National Bank held that “[a] merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market, is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.” The Court established a rebuttable presumption of illegality for mergers where the combined firm would possess a market share of at least 30 percent post-merger. The Court later adopted a more sophisticated, effects-based analysis starting with its watershed decision in United States v. General Dynamics Corp., 415 U.S. 486 (1974).3 There, the Court held that “statistics concerning market share and concentration, while of great significance, were not conclusive indicators of anticompetitive effects.” 4 Since then, courts have consistently viewed market share and concentration statistics only as possible evidence of competitive effects rather than as an independent reason to block a merger. For instance, when the FTC recently asked a district court to enjoin Microsoft’s acquisition of Activision Blizzard due to a “trend toward concentration in the industry,” the district court declined, explaining “[the FTC] fails to explain how this trend is anticompetitive here.”5
Although Philadelphia National Bank has not been formally overturned and the Agencies always cite to the structural presumption in their complaints, the evolution of the merger guidelines over the last four decades have illustrated the Agencies’ understanding that market shares are only one piece of the puzzle (consistent with General Dynamics and the willingness of modern courts to consider evidence that rebuts the structural presumption). The 2010 Guidelines indicate that the Agencies would not challenge a merger unless there was a likelihood of “adverse competitive effects” such as higher prices, reduced output, or diminished innovation. In contrast, under the Draft Guidelines, an increase in concentration may be considered an independent reason to challenge a merger, even in some markets the 2010 Guidelines would consider only “moderately concentrated.” Further, the Draft Guidelines advise that the Agencies might challenge mergers even in unconcentrated markets if they determine the merger is part of a “trend towards concentration” in a given industry, or that the merger is part of a “pattern or strategy of multiple small acquisitions” in the same industry by the same buyer.
De-Emphasizing Market Definition
Market definition is another topic where the Draft Guidelines diverge from the 2010 Guidelines and modern case law. The Draft Guidelines advise that “significant substitutes” may be excluded from a relevant market where the Agencies believe loss of competition among a narrow group of products may be harmful. The Draft Guidelines emphasize the Agencies’ view that “fuzziness” is inherent in defining a relevant market and that certain circumstances warrant “including some substitutes and excluding others.” What’s more, the Draft Guidelines state that direct evidence of head-to-head competition between the merging parties or direct evidence that one of the parties has market power “can demonstrate that a relevant market exists in which the merger may substantially lessen competition.”
Where the Draft Guidelines have gone, courts seem unlikely to follow. Defining the relevant market in which to assess the potential anticompetitive effects of a merger is a fact-intensive exercise, and courts assess a plethora of evidence to determine whether the merging parties’ products or services are reasonably interchangeable. While it is true that “[s]ome substitutes may be closer, and others more distant,” courts are unlikely to apply an unduly narrow market definition that excludes “significant substitutes.” It is even more unlikely that courts will dispense with defining a market altogether merely because the merging parties compete head-to-head.
Harsher Treatment of Vertical Mergers
The Draft Guidelines take a highly skeptical view of mergers between firms at different levels of the same supply chain, departing from its prior guidance and the prevailing case law. In the 2020 Vertical Merger Guidelines, which were withdrawn under this Administration, the Agencies explicitly acknowledged that “vertical mergers often benefit consumers” and that such deals are less likely to harm consumers than mergers between competitors. Courts made similar statements in each of the three vertical merger challenges they have reviewed in this century; each challenge was rejected.6
Most notably, the Draft Guidelines establish a presumption of illegality for vertical mergers in which either of the parties has at least 50 percent market share. This is contrary to the case law developed by courts, which holds that in vertical mergers: “[T]he government cannot use a short cut to establish a presumption of anticompetitive effect through statistics about the change in market concentration. Instead, the government must make a fact-specific showing that the proposed merger is likely to be anticompetitive.”7
Vertical mergers in which neither party has 50 percent share may still be challenged for a variety of reasons, including evidence of “a trend toward vertical integration” or an assessment by the Antitrust Agencies that “the nature and purpose of the merger is to foreclose rivals.” In our experience, such theories are often used by the Agencies to launch extended investigations of vertical deals, although they have no basis in case law.
In addition, the Draft Guidelines discuss somewhat more conventional “vertical foreclosure” theories of harm, in which a merger creates “a firm that controls products or services that its rivals may use to compete.” Consistent with the approach taken by the Agencies in recent vertical merger cases, the Draft Guidelines state that a “merger may substantially lessen competition or tend to create a monopoly regardless of the claimed intent of the merging companies or their executives.” Further, the Agencies “will give little weight to … speculative claims about reputational harms” and “are unlikely to credit claims or commitments to protect or otherwise avoid harming their rivals that do not align with the firm’s incentives.”
Courts, however, have found this type of evidence both probative and persuasive. In AT&T/Time Warner, the DOJ argued that testimony from Time Warner executives related to the combined firm’s post-merger incentives “should be ‘discount[ed]’ as potentially biased because it was given by interested employees of a defendant company.”8 The court’s response: “Poppycock!” The Microsoft/Activision Blizzard court similarly credited testimony from Microsoft executives related to Microsoft’s proposed commitment to continue supplying Call of Duty to its console competitor Sony post-merger in determining the merged firm would not have an incentive to foreclose Sony post-merger.9 Contrary to the FTC’s assertion that Microsoft’s proposed commitment was not relevant to its prima facie burden, the court held that “the FTC must address the circumstances surrounding the merger as they actually exist. The caselaw … contradicts the FTC’s position.”10 Companies should thus continue to operate under the assumption that courts do in fact consider executive testimony and proposed remedies probative to the analysis of whether the Agencies have satisfied their prima facie burden.
Lower Burden of Proof for Potential Competition Theories
The Draft Guidelines instruct that “mergers should not eliminate a potential entrant in a concentrated market.” Potential competition theories of harm are not new—courts have opined on the legality of many mergers where the Agencies alleged that the deal was likely to harm competition by eliminating a potential new entrant over the last several decades. The Supreme Court has acknowledged two potential competition theories: actual potential competition and perceived potential competition.11 The Draft Guidelines address both theories, but the discussion of the actual potential competition theory is most striking.
The Supreme Court has identified two necessary conditions for application of the actual potential competition theory: 1) the potential entrant must have “feasible means” for entering the market (other than through an acquisition), and 2) the entry offers “a substantial likelihood of ultimately producing deconcentration of that market or other significant procompetitive effects.”12 Courts have applied a variety of tests to assess whether the those conditions exist in the context of any given transaction. Most recently, the Meta/Within court, applying the “reasonable probability standard, held that a plaintiff must prove “a likelihood [of entry] noticeably greater than fifty percent.”13
The Draft Guidelines, however, suggest a much lower burden of proof. The Agencies will interpret evidence that a firm has “sufficient size and resources” or “any advantages” that would make the firm well-suited to enter, the firm operates in an adjacent market or has successfully entered other markets, that the firm has an incentive to enter, or that industry participants recognize the company as a potential entrant as relevant to the query of whether entry is feasible. Notably, the Draft Guidelines state that “evidence that the company considered organic entry as an alternative to merging generally suggests that, absent the merger, entry would be reasonably probable. The Meta/Within court flatly rejected this type of evidence as “impermissibly speculative” and cautioned against courts “veer[ing] into the realm of ephemeral possibilities.”14
As to the second condition—likelihood of deconcentration—if a firm had a reasonable probability of entering the relevant market, the Draft Guidelines contemplate a presumption that such entry would result in deconcentration “unless there is substantial direct evidence that the competitive effect would be de minimis.” The Supreme Court has held that proving a likelihood of deconcentration is an essential element of the plaintiff’s prima facie case.15 Courts are highly unlikely to apply the presumption contemplated by the Draft Guidelines and effectively shift the burden of proof for this condition to the merging parties. That burden will remain with the Agencies.
New Concern About Conglomerate Mergers: Return of “Entrenchment”
Consistent with recent actions by the FTC, the Draft Guidelines express concern about conglomerate mergers, deals in which the parties are neither actual nor potential competitors and have not vertical relationship. Most notably, the Draft Guidelines refer to the “entrenchment theory” espoused in the Supreme Court’s 1968 decision to unwind the acquisition of Clorox by Procter & Gamble. In that case, P&G, a large, diversified consumer packaged goods company that did not make bleach, acquired Clorox, a company that produced the leading bleach brand and no other products. The Supreme Court held the merger harmed consumers through the “entrenchment” of Clorox’s leading position. Because P&G was better capitalized and could realize economies of scope in marketing and distribution, “[a] new entrant would be much more reluctant to face the giant Procter than … the smaller Clorox.” This case was heavily criticized by antitrust commentators for treating greater efficiency as a harm to competition, despite the likely benefits for consumers in the form of lower prices and greater output. Although the case was never formally overturned, the Antitrust Agencies abandoned the theory in the 1982 Merger Guidelines and did not rely on it again until the FTC’s recent complaint to block the Amgen/Horizon merger. From the 1980s to the present day, the Supreme Court has consistently viewed efficiencies that benefit consumers as procompetitive, even if the efficiencies result from a concentrated market structure. It seems unlikely the Supreme Court would decide P&G the same way today. Nevertheless, the Draft Guidelines state that “mergers should not entrench or extend a dominant position” and “[i]n a market that is already concentrated, merger enforcement should seek to preserve the possibility of eventual deconcentration,” signaling a return to 1960s-era conglomerate effects theories.
The Draft Guidelines also endorse theories about “monopoly leverage” through tying and bundling strategies, the idea that a large company which acquires a monopolist may extend the monopoly to other product areas through bundled offers. This idea originates from the European Commission’s initial decision in the General Electric/Honeywell case (although it was rejected by the European Court of First Instance on appeal).16
Nascent Competitors
Consistent with their practice over the past six years, the Antitrust Agencies advise that when a dominant firm acquires a “nascent threat” to its market position (whether or not the nascent threat is a current competitor), this may violate Section 2 of the Sherman Act (in addition to Section 7 of the Clayton Act, the statute most often used to challenge mergers). Although this theory has not yet been tested in court, the Antitrust Agencies have caused parties to abandon a number of mergers under this theory in recent years. The Antitrust Agencies argue that the standard of proof in such cases is only whether the target “may be characterized as a ‘nascent threat,’ even if the impending threat is uncertain and may take several years to materialize.” This argument relies on the Agencies’ interpretation of the U.S. Court of Appeals for the District of Columbia Circuit’s 2001 opinion in the Microsoft litigation, which did not involve a merger. The D.C. Circuit may have a chance to clarify Microsoft’s application in merger cases during the FTC’s ongoing suit to unwind Meta Platforms’ acquisitions of Instagram and WhatsApp.17
Focus on Harm to Labor
Consistent with the Agencies’ hyperfocus on labor issues, the Draft Guidelines memorialize the approach the Agencies have taken in recent merger investigations related to potential harm to labor. The Draft Guidelines state that “when a merger involves competing buyers, the Agencies examine whether it may substantially lessen competition for workers or other sellers.” Whether or not labor effects are a cognizable antitrust harm has been a hotly contested topic over the last several years. The Draft Guidelines cite a case involving a conspiracy to limit compensation in violation of Section 1 of the Sherman Act to support the Agencies’ assertion that they “will consider whether workers face a risk that the merger may substantially lessen competition for their labor.” While one court has accepted such a theory in the context of a merger case, it remains to be seen whether courts will broadly adopt the Agencies’ view.
Scrutiny of Minority Investments by Non-Competitors
The Draft Guidelines state that the acquisition of a minority stake in a firm “may present significant anticompetitive concerns” for one of three reasons: 1) the investor may gain influence over the target’s competitive conduct through voting, board appointment, or other governance rights; 2) the minority interest may align the target’s incentives with its rivals; 3) the investment may enable sharing of nonpublic, competitively sensitive information.
These three basic concerns were also stated in the prior edition of the Guidelines in reference to the acquisition of a minority stake in a competitor (which is known as “cross-ownership”). The new Draft Guidelines extend these same concerns to the ownership by a third party of minority interests in competitors, which the Draft Guidelines call “common ownership.”
Progressive academics have for the several years used the phrase “common ownership” to describe shareholdings in competitors by large asset management firms offering retirement savings vehicles to the public. Such commentators made various calls for antitrust officials to force mass divestments of shareholdings in large cap competitors by the leading asset managers, which would have led to an unprecedented restructuring of capital markets. However, this never gained traction with the Antitrust Agencies, which in 2017 stated: “Creating across-the-board limitations on common ownership without sufficient evidence of anticompetitive effects could impose unintended real-world costs on businesses and consumers by making it more difficult to diversify risk.”18 Although the Antitrust Agencies under this Administration are less likely to be so candid, that statement remains true. The Draft Guidelines appear to be using the phrase “common ownership” in a more limited sense to apply to rare cases in which shareholdings by a third party in competitors cause some articulable harm under conventional antitrust principles; this gives a nod to the “common ownership” debate without imposing the radical changes requested by commentators.
Rather than a move against the largest asset managers, this development appears to be another step in Chair Khan’s and AAG Kanter’s targeting of private equity firms, to complement their push against “roll-up” acquisition strategies and sudden focus on “interlocking directorates.”
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The proposed new Guidelines are in draft form and will be finalized after a 60-day public comment period, which will end on September 18, 2023. Firms should consider submitting their views to the Antitrust Agencies at www.regulations.gov/docket/FTC-2023-0043. Although the Draft Guidelines will likely generate significant controversy, we do not expect the final guidelines to differ substantially from the published draft.
[1] United States v. H&R Block, Inc., 833 F. Supp. 2d 36, 52 n.10 (D.D.C. 2011).
[2] See Wilson Sonsini Alert: “FTC and DOJ Propose Radical Reforms to HSR Filings: Changes Would Impose Considerably Greater Burden on Merging Parties” (June 30, 2023).
[3] United States v. Baker-Hughes, Inc., 908 F.2d 981, 990 (D.C. Cir. 1990) (Thomas, J.) (“General Dynamics began a line of decisions differing markedly in emphasis from the Court's antitrust cases of the 1960s. Instead of accepting a firm's market share as virtually conclusive proof of its market power, the Court carefully analyzed defendants’ rebuttal evidence.”).
[4] Strangely, the Antitrust Agencies cite General Dynamics as support for the opposite conclusion.
[5] FTC v. Microsoft Corp., ___ F. Supp. 3d ____, 2023 WL 4443412, at *21 (N.D. Cal. July 10, 2023). For further discussion, see Wilson Sonsini Alert: “FTC Foreclosure Theory ‘Foreclosed’: FTC Loses Campaign to Block Microsoft’s Purchase of Activision” (July 13, 2023).
[6] United States v. AT&T, Inc., 310 F. Supp. 3d 161 (D.D.C. 2018) (“Further complicating the Government's challenge is the recognition among academics, courts, and antitrust enforcement authorities alike that ‘many vertical mergers create vertical integration efficiencies between purchasers and sellers.’”), aff’d 916 F.3d 1029 (D.C. Cir. 2019); United States v. UnitedHealth Group, 630 F. Supp. 3d 118, 130 (D.D.C. 2022) (“For a vertical merger … there is no shortly cut way to establish anticompetitive effects…”); Microsoft, 2023 WL 4443412, at *11 (“Vertical integration is ubiquitous in our economy and virtually never poses a threat to competition when undertaken unilaterally and in competitive markets”).
[7] United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019) (cleaned up and citation omitted).
[8] United States v. AT&T, Inc., 310 F. Supp. 3d 161, 218-19 (D.D.C. 2018).
[9] FTC v. Microsoft Corp., ___ F. Supp. 3d ____, 2023 WL 4443412, at *39 (N.D. Cal. July 10, 2023).
[10] Id.
[11] United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973); United States v. Marine Bancorp., 418 U.S. 602 (1974).
[12] United States v. Marine Bancorp., 418 U.S. 602, 633 (1974).
[13] FTC v. Meta Platforms, Inc., ___ F. Supp. 3d ____, 2023 WL 2346238, at *22 (N.D. Cal. Feb. 3, 2023).
[14] Id. at *27-28 (citing Falstaff, 410 U.S. at 570 (Marshall, J. concurring)).
[15] United States v. Marine Bancorp., 418 U.S. 602, 638-39 (1974).
[16] See General Electric / Honeywell, Commission Decision, Case No. Comp/M.2220 (2001), https://ec.europa.eu/competition/mergers/cases/decisions/m2220_en.pdf; General Electric / Honeywell, Judgment of the Court of First Instance, Case No. T-210/01 (2005), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62001TJ0210.
[17] See Wilson Sonsini Alert: FTC Defeats Facebook Motion to Dismiss Amended Complaint (Jan. 18, 2022).
[18] Statement of United States, OECD Roundtable: Common Ownership by Institutional Investors and its Impact on Competition (Dec. 2017), https://one.oecd.org/document/DAF/COMP(2017)10/en/pdf.
