DOJ And FTC Issue Draft Merger Guidelines

• Published date: 03 August 2023
• Subject Matter: orporate/Commercial Law, Antitrust/Competition Law, M&A/Private Equity, Corporate and Company Law, Antitrust, EU Competition
• Law Firm: Arnold & Porter
• Author: Mr Michael L. Bernstein, Debbie Feinstein, Jonathan Gleklen, Matthew Tabas, Summer Quintana and Patrick Shaw

On July 19, 2023, the Department of Justice (the DOJ) and the Federal Trade Commission (the FTC, and collectively with the DOJ, the Agencies) released their long-awaited revised Draft Merger Guidelines (Draft Guidelines).¹ Once finalized, the Draft Guidelines will replace the Agencies' 2010 Horizontal Merger Guidelines and their 2020 Vertical Merger Guidelines, which the FTC (but not the DOJ) has already repealed. The Draft Guidelines highlight the Agencies' concerns over a trend in concentration and set forth a variety of presumptions for when a merger will lessen competition. This includes transactions where the combined share is 30% and for vertical transactions where just one of the parties has a 50% share ' even in industries less concentrated than those subject to a presumption of harm in prior versions of the merger guidelines. The Draft Guidelines also expand upon theories of actual and perceived potential competition and note the impact mergers may have on labor markets. The Draft Guidelines describe the process that the Agencies are already using in the Biden administration, and the document reinforces the Agencies' intent to aggressively attack transactions that they believe may substantially lessen competition.

Background Into the Merger Guidelines

Since 1968,² the DOJ and FTC have published merger guidelines to provide the public with guidance on their analytical approach to examining transactions under the antitrust laws.³ Merger guidelines have explained the Agencies' views on market definition, market concentration, types of competitive harm, likelihood of entry, buyer power, efficiencies, and more.⁴

These Draft Guidelines outline the Agencies' more recent approaches to evaluating (and challenging) transactions. However, the Draft Guidelines are not law and are not binding on the courts. While courts have historically looked to them for guidance,⁵ only time will tell if courts will continue to give weight to the guidelines given the significant departure from the last 40 years of law and economics ' even if the Draft Guidelines cite older cases from the Supreme Court and lower courts consistent with many of the approaches to merger analysis described in the Draft Guidelines. Courts may well be hesitant to accept the more aggressive approaches described in the Draft Guidelines issued without bipartisan support at the FTC.

Biden Administration's New Approach to Antitrust Enforcement

As noted in prior advisories,⁶ the current leadership of the FTC and DOJ have staked out a more aggressive approach to antitrust enforcement, particularly with respect to mergers and acquisitions. According to FTC Chair Lina Khan, the relaxed approach to antitrust merger enforcement has led to highly concentrated markets, higher prices on goods, lower wages for workers, and a lack of innovation.⁷ AAG Jonathan Kanter has echoed similar sentiments.⁸

On January 18, 2022, the DOJ and FTC announced their intent to launch a joint effort to "modernize" the Agencies' merger guidelines.⁹ Eighteen months later, after a "Request for Information" process and "listening forums," the DOJ and FTC finally released their revised Draft Guidelines for public comment.

Overview of Changes in the Draft Guidelines

The Draft Guidelines make clear the Agencies' intent to increase scrutiny of both horizontal and non-horizontal mergers. In a departure from past merger guidelines, the Draft Guidelines provide no "safe harbors" and identify no category of transaction that they expressly identify as unlikely to raise competitive concerns, even in unconcentrated markets.¹⁰ Rather, the Draft Guidelines ensure that the Agencies have maximum flexibility to challenge transactions that they view as anticompetitive without a risk of the Draft Guidelines being cited back to them (or to a court in a litigated challenge) by merging firms. By adding extensive citations to case law, the Agencies hope that courts will adopt the approach of the Draft Guidelines to assist the Agencies in their more aggressive approach to merger enforcement ' an approach that has led to repeated losses in court.

The Draft Guidelines set forth 13 core principles:

1. Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets

The Draft Guidelines propose to lower the threshold for what constitutes a "highly-concentrated" market. The 2010 Horizontal Merger Guidelines state that a market is highly-concentrated if the Herfindahl-Hirschman Index (HHI) exceeds 2,500 and that a transaction that results in a "highly concentrated" market will be presumed anticompetitive where the transaction involves an HHI increase of more than 200.¹¹ The new Draft Guidelines change these thresholds, returning to the thresholds used in the 1982 Merger Guidelines.¹² A "highly concentrated market" is redefined as a market with an HHI exceeding 1,800 and presume that any transaction increasing the HHI by more than 100 is anticompetitive.

Critically, the Agencies will ignore industry concentration and consider transactions to be presumptively unlawful where the merged firm will have a share of 30% and the HHI change is more than 100 (essentially amounting to a transaction of seven significant competitors with roughly equal share going to six significant competitors being presumptively illegal). That means that a transaction between a competitor with 28% and a competitor with 2% would be presumed anticompetitive, even if no other competitors in the market had shares of more than 1%. This presumption based on share alone has not been found in any previous merger guidelines but is based on the Supreme Court's 1963 decision in Philadelphia National Bank.¹³ However, the Draft Guidelines ignore more recent precedent that illustrates how market share, and market concentration more generally, can be an inaccurate way of determining whether a merger is likely to harm competition. As the Second Circuit recognized recently in In re AMR Corp., "in the 1970s, the Supreme Court began to apply a more nuanced and text-based interpretation of Section 7 [of the Clayton Act], refusing to blindly equate a substantial increase in market share with a likely substantial decrease in competition[.]"¹⁴ For example, in United States v. General Dynamics Corp.,¹⁵ the Supreme Court analyzed the merger of two coal companies and found that the existence of long-term sales contracts and the importance of a company's coal reserves in securing those contracts meant that market shares were not the most relevant metric for determining the merger's effects. As the Court put it, "[e]vidence of past production does not, as a matter of logic, necessarily give a proper picture of a company's future ability to compete."¹⁶ In other words, current market shares alone may not be representative of the competitive landscape going forward. More recently, courts have found that factors such as lack of resources to compete in the future,¹⁷ financial difficulties,¹⁸ and poor brand image¹⁹ make market shares misleading metrics of the competitive impact of a merger.

2. Mergers Should Not Eliminate Substantial Competition Between Firms

The current 2010 Horizontal Merger Guidelines consider whether merging firms are "substantial head-to-head competitors," a key consideration when evaluating whether a merger will lead to unilateral, anticompetitive effects through the loss of such competition.²⁰ Consistent with this approach, the Draft Guidelines note that the "Agencies examine whether competition between the merging parties is substantial," noting that a merger of such firms "may substantially lessen competition even where market shares are difficult to measure or where market shares understate the significance of the merging parties to one another." The Draft Guidelines point to a variety of indicators of substantial competition, including close monitoring of the other merger party when making pre-merger strategic decisions, evidence of customer substitution between the merging firms, and evidence from natural experiments.

3. Mergers Should Not Increase the Risk of Coordination

While most merger challenges are based on a unilateral effects theory, the Agencies have occasionally challenged mergers on the grounds that the transaction will facilitate collusion among the firms that remain in the market or make...