Archives For mergers

On October 7, 2015, the Senate Judiciary Committee held a hearing on the “Standard Merger and Acquisition Reviews Through Equal Rules” (SMARTER) Act of 2015.  As former Antitrust Modernization Commission Chair (and former Acting Assistant Attorney General for Antitrust) Deborah Garza explained in her testimony, “t]he premise of the SMARTER Act is simple:  A merger should not be treated differently depending on which antitrust enforcement agency – DOJ or the FTC – happens to review it.  Regulatory outcomes should not be determined by a flip of the merger agency coin.”

Ms. Garza is clearly correct.  Both the U.S. Justice Department (DOJ) and the U.S. Federal Trade Commission (FTC) enforce the federal antitrust merger review provision, Section 7 of the Clayton Act, and employ a common set of substantive guidelines (last revised in 2010) to evaluate merger proposals.  Neutral “rule of law” principles indicate that private parties should expect to have their proposed mergers subject to the same methods of assessment and an identical standard of judicial review, regardless of which agency reviews a particular transaction.  (The two agencies decide by mutual agreement which agency will review any given merger proposal.)

Unfortunately, however, that is not the case today.  The FTC’s independent ability to challenge mergers administratively, combined with the difference in statutory injunctive standards that apply to FTC and DOJ merger reviews, mean that a particular merger application may face more formidable hurdles if reviewed by the FTC, rather than DOJ.  These two differences commendably would be eliminated by the SMARTER Act, which would subject the FTC to current DOJ standards.  The SMARTER Act would not deal with a third difference – the fact that DOJ merger consent decrees, but not FTC merger consent decrees, must be filed with a federal court for “public interest” review.  This commentary briefly addresses those three issues.  The first and second ones present significant “rule of law” problems, in that they involve differences in statutory language applied to the same conduct.  The third issue, the question of judicial review of settlements, is of a different nature, but nevertheless raises substantial policy concerns.

  1. FTC Administrative Authority

The first rule of law problem stems from the broader statutory authority the FTC possesses to challenge mergers.  In merger cases, while DOJ typically consolidates actions for a preliminary and permanent injunction in district court, the FTC merely seeks a preliminary injunction (which is easier to obtain than a permanent injunction) and “holds in its back pocket” the ability to challenge a merger in an FTC administrative proceeding – a power DOJ does not possess.  In short, the FTC subjects proposed mergers to a different and more onerous method of assessment than DOJ.  In Ms. Garza’s words (footnotes deleted):

“Despite the FTC’s legal ability to seek permanent relief from the district court, it prefers to seek a preliminary injunction only, to preserve the status quo while it proceeds with its administrative litigation.

This approach has great strategic significance. First, the standard for obtaining a preliminary injunction in government merger challenges is lower than the standard for obtaining a permanent injunction. That is, it is easier to get a preliminary injunction.

Second, as a practical matter, the grant of a preliminary injunction is typically sufficient to end the matter. In nearly every case, the parties will abandon their transaction rather than incur the heavy cost and uncertainty of trying to hold the merger together through further proceedings—which is why merging parties typically seek to consolidate proceedings for preliminary and permanent relief under Rule 65(a)(2). Time is of the essence. As one witness testified before the [Antitrust Modernization Commission], “it is a rare seller whose business can withstand the destabilizing effect of a year or more of uncertainty” after the issuance of a preliminary injunction.

Third, even if the court denies the FTC its preliminary injunction and the parties close their merger, the FTC can still continue to pursue an administrative challenge with an eye to undoing or restructuring the transaction. This is the “heads I win, tails you lose” aspect of the situation today. It is very difficult for the parties to get to the point of a full hearing in court given the effect of time on transactions, even with the FTC’s expedited administrative procedures adopted in about 2008. . . . 

[Moreover,] [while] [u]nder its new procedures, parties can move to dismiss an administrative proceeding if the FTC has lost a motion for preliminary injunction and the FTC will consider whether to proceed on a case-by-case basis[,] . . . th[is] [FTC] policy could just as easily change again, unless Congress speaks.”

Typically time is of the essence in proposed mergers, so substantial delays occasioned by extended reviews of those transactions may prevent many transactions from being consummated, even if they eventually would have passed antitrust muster.  Ms. Garza’s testimony, plus testimony by former Assistant Deputy Assistant Attorney General for Antitrust Abbott (Tad) Lipsky, document cases of substantial delay in FTC administrative reviews of merger proposals.  (As Mr. Lipsky explained, “[a]ntitrust practitioners have long perceived that the possibility of continued administrative litigation by the FTC following a court decision constitutes a significant disincentive for parties to invest resources in transaction planning and execution.”)  Congress should weigh these delay-specific costs, as well as the direct costs of any additional burdens occasioned by FTC administrative procedures, in deciding whether to require the FTC (like DOJ) to rely solely on federal court proceedings.

  1. Differences Between FTC and DOJ Injunctive Standards

The second rule of law problem arises from the lighter burden the FTC must satisfy to obtain injunctive relief in federal court.  Under Section 13(b) of the FTC Act, an injunction shall be granted the FTC “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of success, such action would be in the public interest.”  The D.C. Circuit (in FTC v. H.J. Heinz Co. and in FTC v. Whole Foods Market, Inc.) has stated that, to meet this burden, the FTC need merely have raised questions “so serious, substantial, difficult and doubtful as to make them fair ground for further investigation.”  By contrast, as Ms. Garza’s testimony points out, “under Section 15 of the Clayton Act, courts generally apply a traditional equities test requiring DOJ to show a reasonable likelihood of success on the merits—not merely that there is ‘fair ground for further investigation.’”  In a similar vein, Mr. Lipsky’s testimony stated that “[t]he cumulative effect of several recent contested merger decisions has been to allow the FTC to argue that it needn’t show likelihood of success in order to win a preliminary injunction; specifically these decisions suggest that the Commission need only show ‘serious, substantial, difficult and doubtful’ questions regarding the merits.”  Although some commentators have contended that, in reality, the two standards generally will be interpreted in a similar fashion (“whatever theoretical difference might exist between the FTC and DOJ standards has no practical significance”), there is no doubt that the language of the two standards is different – and basic principles of statutory construction indicate that differences in statutory language should be given meaning and not ignored.  Accordingly, merging parties face the real prospect that they might fare worse under federal court review of an FTC challenge to their merger proposal than they would have fared had DOJ challenged the same transaction.  Such an outcome, even if it is rare, would be at odds with neutral application of the rule of law.

  1. The Tunney Act

Finally, helpful as it is, the SMARTER Act does not entirely eliminate the disparate treatment of proposed mergers by DOJ and the FTC.  The Tunney Act, 15 U.S.C. § 16, enacted in 1974, which applies to DOJ but not to the FTC, requires that DOJ submit all proposed consent judgments under the antitrust laws (including Section 7 of the Clayton Act) to a federal district court for 60 days of public comment prior to being entered.

a.  Economic Costs (and Potential Benefits) of the Tunney Act

The Tunney Act potentially interjects uncertainty into the nature of the “deal” struck between merging parties and DOJ in merger cases.  It does this by subjecting proposed DOJ merger settlements (and other DOJ non-merger civil antitrust settlements) to a 60 day public review period, requiring federal judges to determine whether a proposed settlement is “in the public interest” before entering it, and instructing the court to consider the impact of the entry of judgment “upon competition and upon the public generally.”  Leading antitrust practitioners have noted that this uncertainty “could affect shareholders, customers, or even employees. Moreover, the merged company must devote some measure of resources to dealing with the Tunney Act review—resources that instead could be devoted to further integration of the two companies or generation of any planned efficiencies or synergies.”  More specifically:

“[W]hile Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power. Such a distortion in conduct probably was not contemplated by the Tunney Act’s drafters, but merger partners will need to be cognizant of how their post-close actions may be perceived during Tunney Act review. . . .  [And, in addition,] while Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power.”

Although the Tunney Act has been justified on traditional “public interest” grounds, even its scholarly supporters (a DOJ antitrust attorney), in praising its purported benefits, have acknowledged its potential for abuse:

“Properly interpreted and applied, the Tunney Act serves a number of related, useful functions. The disclosure provisions and judicial approval requirement for decrees can help identify, and more importantly deter, “influence peddling” and other abuses. The notice-and-comment procedures force the DOJ to explain its rationale for the settlement and provide its answers to objections, thus providing transparency. They also provide a mechanism for third-party input, and, thus, a way to identify and correct potentially unnoticed problems in a decree. Finally, the court’s public interest review not only helps ensure that the decree benefits the public, it also allows the court to protect itself against ambiguous provisions and enforcement problems and against an objectionable or pointless employment of judicial power. Improperly applied, the Tunney Act does more harm than good. When a district court takes it upon itself to investigate allegations not contained in a complaint, or attempts to “re-settle” a case to provide what it views as stronger, better relief, or permits lengthy, unfocused proceedings, the Act is turned from a useful check to an unpredictable, costly burden.”

The justifications presented by the author are open to serious question.  Whether “influence peddling” can be detected merely from the filing of proposed decree terms is doubtful – corrupt deals to settle a matter presumably would be done “behind the scenes” in a manner not available to public scrutiny.  The economic expertise and detailed factual knowledge that informs a DOJ merger settlement cannot be fully absorbed by a judge (who may fall prey to his or her personal predilections as to what constitutes good policy) during a brief review period.  “Transparency” that facilitates “third-party input” can too easily be manipulated by rent-seeking competitors who will “trump up” justifications for blocking an efficient merger.  Moreover, third parties who are opposed to mergers in general may also be expected to file objections to efficient arrangements.  In short, the “sunshine” justification for Tunney Act filings is more likely to cloud the evaluation of DOJ policy calls than to provide clarity.

b.  Constitutional Issues Raised by the Tunney Act

In addition to potential economic inefficiencies, the judicial review feature of the Tunney Act raises serious separation of powers issues, as emphasized by the DOJ Office of Legal Counsel (OLC, which advises the Attorney General and the President on questions of constitutional interpretation) in a 1989 opinion regarding qui tam provisions of the False Claims Act:

“There are very serious doubts as to the constitutionality . . . of the Tunney Act:  it intrudes into the Executive power and requires the courts to decide upon the public interest – that is, to exercise a policy discretion normally reserved to the political branches.  Three Justices of the Supreme Court questioned the constitutionality of the Tunney Act in Maryland v. United States, 460 U.S. 1001 (1983) (Rehnquist, J., joined by Burger, C.J., and White, J., dissenting).”

Notably, this DOJ critique of the Tunney Act was written before the 2004 amendments to that statute that specifically empower courts to consider the impact of proposed settlements “upon competition and upon the public generally” – language that significantly trenches upon Executive Branch prerogatives.  Admittedly, the Tunney Act has withstood judicial scrutiny – no court has ruled it unconstitutional.   Moreover, a federal judge can only accept or reject a Tunney Act settlement, not rewrite it, somewhat ameliorating its affront to the separation of powers.  In short, even though it may not be subject to serious constitutional challenge in the courts, the Tunney Act is problematic as a matter of sound constitutional policy.

c.  Congressional Reexamination of the Tunney Act

These economic and constitutional policy concerns suggest that Congress may wish to carefully reexamine the merits of the Tunney Act.  Any such reexamination, however, should be independent of, and not delay expedited consideration of, the SMARTER Act.  The Tunney Act, although of undoubted significance, is only a tangential aspect of the divergent legal standards that apply to FTC and DOJ merger reviews.  It is beyond the scope of current legislative proposals but it merits being taken up at an appropriate time – perhaps in the next Congress.  When Congress turns to the Tunney Act, it may wish to consider four options:  (1) repealing the Act in its entirety; (2) retaining the Act as is; (3) partially repealing it only with respect to merger reviews; or, (4) applying it in full force to the FTC.  A detailed evaluation of those options is beyond the scope of this commentary.


In sum, in order to eliminate inconsistencies between FTC and DOJ standards for reviewing proposed mergers, Congress should give serious consideration to enacting the SMARTER Act, which would both eliminate FTC administrative review of merger proposals and subject the FTC to the same injunctive standard as the DOJ in judicial review of those proposals.  Moreover, if the SMARTER Act is enacted, Congress should also consider going further and amending the Tunney Act to make it apply to FTC as well as to DOJ merger settlements – or, alternatively, to have it not apply at all to any merger settlements (a result which would better respect the constitutional separation of powers and reduce a potential source of economic inefficiency).

Last week concluded round 3 of Congressional hearings on mergers in the healthcare provider and health insurance markets. Much like the previous rounds, the hearing saw predictable representatives, of predictable constituencies, saying predictable things.

The pattern is pretty clear: The American Hospital Association (AHA) makes the case that mergers in the provider market are good for consumers, while mergers in the health insurance market are bad. A scholar or two decries all consolidation in both markets. Another interested group, like maybe the American Medical Association (AMA), also criticizes the mergers. And it’s usually left to a representative of the insurance industry, typically one or more of the merging parties themselves, or perhaps a scholar from a free market think tank, to defend the merger.

Lurking behind the public and politicized airings of these mergers, and especially the pending Anthem/Cigna and Aetna/Humana health insurance mergers, is the Affordable Care Act (ACA). Unfortunately, the partisan politics surrounding the ACA, particularly during this election season, may be trumping the sensible economic analysis of the competitive effects of these mergers.

In particular, the partisan assessments of the ACA’s effect on the marketplace have greatly colored the Congressional (mis-)understandings of the competitive consequences of the mergers.  

Witness testimony and questions from members of Congress at the hearings suggest that there is widespread agreement that the ACA is encouraging increased consolidation in healthcare provider markets, for example, but there is nothing approaching unanimity of opinion in Congress or among interested parties regarding what, if anything, to do about it. Congressional Democrats, for their part, have insisted that stepped up vigilance, particularly of health insurance mergers, is required to ensure that continued competition in health insurance markets isn’t undermined, and that the realization of the ACA’s objectives in the provider market aren’t undermined by insurance companies engaging in anticompetitive conduct. Meanwhile, Congressional Republicans have generally been inclined to imply (or outright state) that increased concentration is bad, so that they can blame increasing concentration and any lack of competition on the increased regulatory costs or other effects of the ACA. Both sides appear to be missing the greater complexities of the story, however.

While the ACA may be creating certain impediments in the health insurance market, it’s also creating some opportunities for increased health insurance competition, and implementing provisions that should serve to hold down prices. Furthermore, even if the ACA is encouraging more concentration, those increases in concentration can’t be assumed to be anticompetitive. Mergers may very well be the best way for insurers to provide benefits to consumers in a post-ACA world — that is, the world we live in. The ACA may have plenty of negative outcomes, and there may be reasons to attack the ACA itself, but there is no reason to assume that any increased concentration it may bring about is a bad thing.

Asking the right questions about the ACA

We don’t need more self-serving and/or politicized testimony We need instead to apply an economic framework to the competition issues arising from these mergers in order to understand their actual, likely effects on the health insurance marketplace we have. This framework has to answer questions like:

  • How do we understand the effects of the ACA on the marketplace?
    • In what ways does the ACA require us to alter our understanding of the competitive environment in which health insurance and healthcare are offered?
    • Does the ACA promote concentration in health insurance markets?
    • If so, is that a bad thing?
  • Do efficiencies arise from increased integration in the healthcare provider market?
  • Do efficiencies arise from increased integration in the health insurance market?
  • How do state regulatory regimes affect the understanding of what markets are at issue, and what competitive effects are likely, for antitrust analysis?
  • What are the potential competitive effects of increased concentration in the health care markets?
  • Does increased health insurance market concentration exacerbate or counteract those effects?

Beginning with this post, at least a few of us here at TOTM will take on some of these issues, as part of a blog series aimed at better understanding the antitrust law and economics of the pending health insurance mergers.

Today, we will focus on the ambiguous competitive implications of the ACA. Although not a comprehensive analysis, in this post we will discuss some key insights into how the ACA’s regulations and subsidies should inform our assessment of the competitiveness of the healthcare industry as a whole, and the antitrust review of health insurance mergers in particular.

The ambiguous effects of the ACA

It’s an understatement to say that the ACA is an issue of great political controversy. While many Democrats argue that it has been nothing but a boon to consumers, Republicans usually have nothing good to say about the law’s effects. But both sides miss important but ambiguous effects of the law on the healthcare industry. And because they miss (or disregard) this ambiguity for political reasons, they risk seriously misunderstanding the legal and economic implications of the ACA for healthcare industry mergers.

To begin with, there are substantial negative effects, of course. Requiring insurance companies to accept patients with pre-existing conditions reduces the ability of insurance companies to manage risk. This has led to upward pricing pressure for premiums. While the mandate to buy insurance was supposed to help bring more young, healthy people into the risk pool, so far the projected signups haven’t been realized.

The ACA’s redefinition of what is an acceptable insurance policy has also caused many consumers to lose the policy of their choice. And the ACA’s many regulations, such as the Minimum Loss Ratio requiring insurance companies to spend 80% of premiums on healthcare, have squeezed the profit margins of many insurance companies, leading, in some cases, to exit from the marketplace altogether and, in others, to a reduction of new marketplace entry or competition in other submarkets.

On the other hand, there may be benefits from the ACA. While many insurers participated in private exchanges even before the ACA-mandated health insurance exchanges, the increased consumer education from the government’s efforts may have helped enrollment even in private exchanges, and may also have helped to keep premiums from increasing as much as they would have otherwise. At the same time, the increased subsidies for individuals have helped lower-income people afford those premiums. Some have even argued that increased participation in the on-demand economy can be linked to the ability of individuals to buy health insurance directly. On top of that, there has been some entry into certain health insurance submarkets due to lower barriers to entry (because there is less need for agents to sell in a new market with the online exchanges). And the changes in how Medicare pays, with a greater focus on outcomes rather than services provided, has led to the adoption of value-based pricing from both health care providers and health insurance companies.

Further, some of the ACA’s effects have  decidedly ambiguous consequences for healthcare and health insurance markets. On the one hand, for example, the ACA’s compensation rules have encouraged consolidation among healthcare providers, as noted. One reason for this is that the government gives higher payments for Medicare services delivered by a hospital versus an independent doctor. Similarly, increased regulatory burdens have led to higher compliance costs and more consolidation as providers attempt to economize on those costs. All of this has happened perhaps to the detriment of doctors (and/or patients) who wanted to remain independent from hospitals and larger health network systems, and, as a result, has generally raised costs for payors like insurers and governments.

But much of this consolidation has also arguably led to increased efficiency and greater benefits for consumers. For instance, the integration of healthcare networks leads to increased sharing of health information and better analytics, better care for patients, reduced overhead costs, and other efficiencies. Ultimately these should translate into higher quality care for patients. And to the extent that they do, they should also translate into lower costs for insurers and lower premiums — provided health insurers are not prevented from obtaining sufficient bargaining power to impose pricing discipline on healthcare providers.

In other words, both the AHA and AMA could be right as to different aspects of the ACA’s effects.

Understanding mergers within the regulatory environment

But what they can’t say is that increased consolidation per se is clearly problematic, nor that, even if it is correlated with sub-optimal outcomes, it is consolidation causing those outcomes, rather than something else (like the ACA) that is causing both the sub-optimal outcomes as well as consolidation.

In fact, it may well be the case that increased consolidation improves overall outcomes in healthcare provider and health insurance markets relative to what would happen under the ACA absent consolidation. For Congressional Democrats and others interested in bolstering the ACA and offering the best possible outcomes for consumers, reflexively challenging health insurance mergers because consolidation is “bad,” may be undermining both of these objectives.

Meanwhile, and for the same reasons, Congressional Republicans who decry Obamacare should be careful that they do not likewise condemn mergers under what amounts to a “big is bad” theory that is inconsistent with the rigorous law and economics approach that they otherwise generally support. To the extent that the true target is not health insurance industry consolidation, but rather underlying regulatory changes that have encouraged that consolidation, scoring political points by impugning mergers threatens both health insurance consumers in the short run, as well as consumers throughout the economy in the long run (by undermining the well-established economic critiques of a reflexive “big is bad” response).

It is simply not clear that ACA-induced health insurance mergers are likely to be anticompetitive. In fact, because the ACA builds on state regulation of insurance providers, requiring greater transparency and regulatory review of pricing and coverage terms, it seems unlikely that health insurers would be free to engage in anticompetitive price increases or reduced coverage that could harm consumers.

On the contrary, the managerial and transactional efficiencies from the proposed mergers, combined with greater bargaining power against now-larger providers are likely to lead to both better quality care and cost savings passed-on to consumers. Increased entry, at least in part due to the ACA in most of the markets in which the merging companies will compete, along with integrated health networks themselves entering and threatening entry into insurance markets, will almost certainly lead to more consumer cost savings. In the current regulatory environment created by the ACA, in other words, insurance mergers have considerable upside potential, with little downside risk.


In sum, regardless of what one thinks about the ACA and its likely effects on consumers, it is not clear that health insurance mergers, especially in a post-ACA world, will be harmful.

Rather, assessing the likely competitive effects of health insurance mergers entails consideration of many complicated (and, unfortunately, politicized) issues. In future blog posts we will discuss (among other things): the proper treatment of efficiencies arising from health insurance mergers, the appropriate geographic and product markets for health insurance merger reviews, the role of state regulations in assessing likely competitive effects, and the strengths and weaknesses of arguments for potential competitive harms arising from the mergers.

The FTC recently required divestitures in two merger investigations (here and here), based largely on the majority’s conclusion that

[when] a proposed merger significantly increases concentration in an already highly concentrated market, a presumption of competitive harm is justified under both the Guidelines and well-established case law.” (Emphasis added).

Commissioner Wright dissented in both matters (here and here), contending that

[the majority’s] reliance upon such shorthand structural presumptions untethered from empirical evidence subsidize a shift away from the more rigorous and reliable economic tools embraced by the Merger Guidelines in favor of convenient but obsolete and less reliable economic analysis.

Josh has the better argument, of course. In both cases the majority relied upon its structural presumption rather than actual economic evidence to make out its case. But as Josh notes in his dissent in In the Matter of ZF Friedrichshafen and TRW Automotive (quoting his 2013 dissent in In the Matter of Fidelity National Financial, Inc. and Lender Processing Services):

there is no basis in modern economics to conclude with any modicum of reliability that increased concentration—without more—will increase post-merger incentives to coordinate. Thus, the Merger Guidelines require the federal antitrust agencies to develop additional evidence that supports the theory of coordination and, in particular, an inference that the merger increases incentives to coordinate.

Or as he points out in his dissent in In the Matter of Holcim Ltd. and Lafarge S.A.

The unifying theme of the unilateral effects analysis contemplated by the Merger Guidelines is that a particularized showing that post-merger competitive constraints are weakened or eliminated by the merger is superior to relying solely upon inferences of competitive effects drawn from changes in market structure.

It is unobjectionable (and uninteresting) that increased concentration may, all else equal, make coordination easier, or enhance unilateral effects in the case of merger to monopoly. There are even cases (as in generic pharmaceutical markets) where rigorous, targeted research exists, sufficient to support a presumption that a reduction in the number of firms would likely lessen competition. But generally (as in these cases), absent actual evidence, market shares might be helpful as an initial screen (and may suggest greater need for a thorough investigation), but they are not analytically probative in themselves. As Josh notes in his TRW dissent:

The relevant question is not whether the number of firms matters but how much it matters.

The majority in these cases asserts that it did find evidence sufficient to support its conclusions, but — and this is where the rubber meets the road — the question remains whether its limited evidentiary claims are sufficient, particularly given analyses that repeatedly come back to the structural presumption. As Josh says in his Holcim dissent:

it is my view that the investigation failed to adduce particularized evidence to elevate the anticipated likelihood of competitive effects from “possible” to “likely” under any of these theories. Without this necessary evidence, the only remaining factual basis upon which the Commission rests its decision is the fact that the merger will reduce the number of competitors from four to three or three to two. This is simply not enough evidence to support a reason to believe the proposed transaction will violate the Clayton Act in these Relevant Markets.

Looking at the majority’s statements, I see a few references to the kinds of market characteristics that could indicate competitive concerns — but very little actual analysis of whether these characteristics are sufficient to meet the Clayton Act standard in these particular markets. The question is — how much analysis is enough? I agree with Josh that the answer must be “more than is offered here,” but it’s an important question to explore more deeply.

Presumably that’s exactly what the ABA’s upcoming program will do, and I highly recommend interested readers attend or listen in. The program details are below.

The Use of Structural Presumptions in Merger Analysis

June 26, 2015, 12:00 PM – 1:15 PM ET


  • Brendan Coffman, Wilson Sonsini Goodrich & Rosati LLP


  • Angela Diveley, Office of Commissioner Joshua D. Wright, Federal Trade Commission
  • Abbott (Tad) Lipsky, Latham & Watkins LLP
  • Janusz Ordover, Compass Lexecon
  • Henry Su, Office of Chairwoman Edith Ramirez, Federal Trade Commission

In-person location:

Latham & Watkins
555 11th Street,NW
Ste 1000
Washington, DC 20004

Register here.

There is always a temptation for antitrust agencies and plaintiffs to center a case around so-called “hot” documents — typically company documents with a snippet or sound-bites extracted, some times out of context. Some practitioners argue that “[h]ot document can be crucial to the outcome of any antitrust matter.” Although “hot” documents can help catch the interest of the public, a busy judge or an unsophisticated jury, they often can lead to misleading results. But more times than not, antitrust cases are resolved on economics and what John Adams called “hard facts,” not snippets from emails or other corporate documents. Antitrust case books are littered with cases that initially looked promising based on some supposed hot documents, but ultimately failed because the foundations of a sound antitrust case were missing.

As discussed below this is especially true for a recent case brought by the FTC, FTC v. St. Luke’s, currently pending before the Ninth Circuit Court of Appeals, in which the FTC at each pleading stage has consistently relied on “hot” documents to make its case.

The crafting and prosecution of civil antitrust cases by federal regulators is a delicate balancing act. Regulators must adhere to well-defined principles of antitrust enforcement, and on the other hand appeal to the interests of a busy judge. The simple way of doing this is using snippets of documents to attempt to show the defendants knew they were violating the law.

After all, if federal regulators merely had to properly define geographic and relevant product markets, show a coherent model of anticompetitive harm, and demonstrate that any anticipated harm would outweigh any procompetitive benefits, where is the fun in that? The reality is that antitrust cases typically rely on economic analysis, not snippets of hot documents. Antitrust regulators routinely include internal company documents in their cases to supplement the dry mechanical nature of antitrust analysis. However, in isolation, these documents can create competitive concerns when they simply do not exist.

With this in mind, it is vital that antitrust regulators do not build an entire case around what seem to be inflammatory documents. Quotes from executives, internal memoranda about competitors, and customer presentations are the icing on the cake after a proper antitrust analysis. As the International Center for Law and Economics’ Geoff Manne once explained,

[t]he problem is that these documents are easily misunderstood, and thus, while the economic significance of such documents is often quite limited, their persuasive value is quite substantial.

Herein lies the problem illustrated by the Federal Trade Commission’s use of provocative documents in its suit against the vertical acquisition of Saltzer Medical Group, an independent physician group comprised of 41 doctors, by St. Luke’s Health System. The FTC seeks to stop the acquisition involving these two Idaho based health care providers, a $16 million transaction, and a number comparatively small to other health care mergers investigated by the antitrust agencies. The transaction would give St. Luke’s a total of 24 primary care physicians operating in and around Nampa, Idaho.

In St. Luke’s the FTC used “hot” documents in each stage of its pleadings, from its complaint through its merits brief on appeal. Some of the statements pulled from executives’ emails, notes and memoranda seem inflammatory suggesting St. Luke’s intended to increase prices and to control market share all in order to further its strength relative to payer contracting. These statements however have little grounding in the reality of health care competition.

The reliance by the FTC on these so-called hot documents is problematic for several reasons. First, the selective quoting of internal documents paints the intention of the merger solely to increase profit for St. Luke’s at the expense of payers, when the reality is that the merger is premised on the integration of health care services and the move from the traditional fee-for-service model to a patient-centric model. St Luke’s intention of incorporating primary care into its system is in-line with the goals of the Affordable Care Act to promote over all well-being through integration. The District Court in this case recognized that the purpose of the merger was “primarily to improve patient outcomes.” And, in fact, underserved and uninsured patients are already benefitting from the transaction.

Second, the selective quoting suggested a narrow geographic market, and therefore an artificially high level of concentration in Nampa, Idaho. The suggestion contradicts reality, that nearly one-third of Nampa residents seek primary care physician services outside of Nampa. The geographic market advanced by the FTC is not a proper market, regardless of whether selected documents appear to support it. Without a properly defined geographic market, it is impossible to determine market share and therefore prove a violation of the Clayton Antitrust Act.

The DOJ Antitrust Division and the FTC have acknowledged that markets can not properly be defined solely on spicy documents. Writing in their 2006 commentary on the Horizontal Merger Guidelines, the agencies noted that

[t]he Agencies are careful, however, not to assume that a ‘market’ identified for business purposes is the same as a relevant market defined in the context of a merger analysis. … It is unremarkable that ‘markets’ in common business usage do not always coincide with ‘markets’ in an antitrust context, inasmuch as the terms are used for different purposes.

Third, even if St. Luke’s had the intention of increasing prices, just because one wants to do something such as raise prices above a competitive level or scale back research and development expenses — even if it genuinely believes it is able — does not mean that it can. Merger analysis is not a question of mens rea (or subjective intent). Rather, the analysis must show that such behavior will be likely as a result of diminished competition. Regulators must not look at evidence of this subjective intent and then conclude that the behavior must be possible and that a merger is therefore likely to substantially lessen competition. This would be the tail wagging the dog. Instead, regulators must first determine whether, as a matter of economic principle, a merger is likely to have a particular effect. Then, once the analytical tests have been run, documents can support these theories. But without sound support for the underlying theories, documents (however condemning) cannot bring the case across the goal line.

Certainly, documents suggesting intent to raise prices should bring an antitrust plaintiff across the goal line? Not so, as Seventh Circuit Judge Frank Easterbrook has explained:

Almost all evidence bearing on “intent” tends to show both greed and desire to succeed and glee at a rival’s predicament. … [B]ut drive to succeed lies at the core of a rivalrous economy. Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind competition.

As Harvard Law Professor Phil Areeda observed, relying on documents describing intent is inherently risky because

(1) the businessperson often uses a colorful and combative vocabulary far removed from the lawyer’s linguistic niceties, and (2) juries and judges may fail to distinguish a lawful competitive intent from a predatory state of mind. (7 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law § 1506 (2d ed. 2003).)

So-called “hot” documents may help guide merger analysis, but served up as a main course make a paltry meal. Merger cases rise or fall on hard facts and economics, and next week we will see if the Ninth Circuit recognizes this as both St. Luke’s and the FTC argue their cases.

The press release is here. Notably, the settlement obligates Google to continue product development and to license ITA software on commercially-reasonable terms, seemingly for 5 years.  Frankly, I can’t imagine Google wouldn’t have done this anyway, so the settlement is not likely much of a binding constraint.

Also notable is what the settlement doesn’t seem to do: Impose any remedies intended to “correct” (or even acknowledge) so-called search neutrality issues.  This has to be considered a huge victory for Google and for common sense.  I’m sure Josh and I will have more to say once the pleadings and settlement are available.  Later today or tomorrow we will post a paper we have just completed on the issue of search neutrality.

Unfortunately, this settlement doesn’t put the matter to rest, and we still have to see what the FTC has in store now.  But for now, this is, as I said, a huge victory for Google . . . and for all of us who travel!

Steven Pearlstein at the Washington Post asks if it’s “Time to loosen Google’s grip.”  The article is an analytical mess.  Pearlstein is often a decent business reporter–I’m not sure what went wrong here, but this is a pretty shoddy piece of antitrust journalism.

For the most part, the article is a series of tired claims about Google leveraging its monopoly . . . blah, blah, blah.  See my posts here, here, and here for some detailed responses to those claims.

Pearlstein is at least a decent writer, so the prose is nice and flowery.  I don’t think he even uses the word “leverage.”  Instead we get this:

The question now is how much bigger and more dominant we want this innovative and ambitious company to become. Google has already achieved a near-monopoly in Web search and search advertising, and has cleverly used that monopoly and the profits it generates to achieve dominant positions in adjacent or complementary markets. Success in those other markets, in turn, further strengthens Google’s Web search dominance and reduces the chance that any other competitor will be able to successfully challenge it.

It’s the same old line:  “Google is dominant (in a market we wave our hands and say is antitrust-relevant).*  It uses its profits to ‘leverage’ its power to control other ‘adjacent’ markets.  Said leveraging reinforces Google’s monopoly, making it nearly impossible for anyone to compete.  Wash. Rinse. Repeat.”

Pearlstein claims not to be bothered by Google’s legitimate monopoly–it’s the crass buying of other companies that worries him ($6 billion for Groupon?!?! Talk about stimulus!  Why isn’t the fed subsidizing this?–Oh, wait.  I guess they are . . . ).  And here’s where Pearlstein really flubs it.

Check out this paragraph:

In theory, antitrust laws were meant to restrict such acquisitions by a monopolist. In practice, however, it hasn’t worked out that way. Decades of cramped judicial opinions have so limited application of antitrust laws that each transaction can be considered only in terms of how it affects the narrowly defined niche market that an acquiring company hopes to enter.

By “such acquisitions,” Pearlstein means the ones he knows to be anticompetitive.  OK, that’s not fair.  They are the ones where a monopolist “buys its way into new markets and new technologies.”  I must be reading different antitrust laws.  I can’t recall the part where the Sherman Act makes it illegal for a monopolist to improve its product or its business processes, even if it does so by buying another company in a different (though “adjacent”) market in order to run it better.  And could it really be ok for a monopolist to develop its own new technology to accomplish the same ends, but not ok for the company to just take the more efficient route and buy the technology from another company?  I mean, it has to come from somewhere.  Google is either paying its own employees to develop technology or it’s paying another company’s employees to do it.  What’s the difference? Continue Reading…

Today comes news that Senator Kohl has sent a letter to the DOJ urging “careful review” of the proposed Google/ITA merger.  Underlying his concerns (or rather the “concerns raised by a number of industry participants and consumer advocates that I believe warrant careful review”) is this:

Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online air travel search because it cannot be matched by other players in the travel search industry.  They claim that ITA’s superior access to information and superior technology enables it to provide faster and better results to consumers.  As a result, some of these industry participants and independent experts fear that the current high level of competition among online travel agents and metasearch providers could be undermined if Google were to acquire ITA and start its own OTA or metasearch service.  If this were to happen, they argue, consumers would lose the benefits of a robustly competitive online air travel market.

For several reasons, these complaints are without merit and a challenge to the Google/ITA merger would be premature at best—and a costly mistake at worst.

The high-tech market is innovative and dynamic. Goods and services that were once inconceivable are now indispensable, and competition has improved the quality of technology while driving down its costs. But as the market continues to change, antitrust interventions are stuck using a static regulatory framework. As the government develops a strategy for regulating competition in the digital marketplace, it must tread carefully—excessive intervention will stifle innovation, harm consumers, and prevent growth.  And given the link between innovation and economic growth, the stakes of “getting it right” are high. The individual nature of every decision, however, makes errors in antitrust enforcement inevitable. Some conduct that is bad for competition will be allowed to go on while some conduct that is good for competition will be blocked by intervention.

But prosecuting pro-competitive conduct is almost certainly more costly than mistakenly allowing anticompetitive conduct because mechanisms are in place to mitigate the latter but not the former. The cost of erroneous intervention is the loss to consumers directly and a deterrent effect on innovation—for fear of intervention, companies may not take large risks. Meanwhile, allowing conduct to persist amidst uncertainty allows the potential benefits of conduct to materialize while maintaining checks against practices that are bad for consumers: both the competitive marketplace and future enforcers have the power to mitigate specific anticompetitive outcomes that may arise. Unfortunately, current antitrust enforcement—abetted by influential congressmen like Senator Kohl—is more, rather than less, aggressive against innovative companies in high-tech industries. This aggression threatens to stifle growth and deter future innovation in a market with incredible potential.

Google has become a primary target of this scrutiny, and the company’s proposed acquisition of ITA, a software company that compiles and processes travel data, is a good example of aggressive scrutiny threatening to stifle growth.

Google’s acquisition of ITA is a straightforward merger where one company has decided to purchase another outright (instead of merely purchasing its services through contract). There are good reasons for integration. Most notably, Google gets to exercise direct control over ITA’s talented engineers if it owns ITA—influence that it would not have if the company simply signed a contract with ITA. If Google is correct that it can manage ITA’s resources better than ITA’s current management, then integration makes sense and is valuable for consumers.

The primary concern raised over Google’s proposed acquisition of ITA is that acquisition would “leverage” Google’s alleged dominance into another market—the online travel search market—and permit Google to prevent its competitors from accessing ITA’s high-quality analysis of flights and fares.

There are a few problems with this.

  • First, ITA does not provide or own the underlying data (this comes from the airlines themselves); rather it works only to analyze and process it—processing that other companies can and do undertake.  It may have developed superior technology to engage in this processing, but that is precisely why it (and consumers) should not be penalized by its competitors’ efforts to hamstring it.  Remember—although most of the hand-wringing surrounding this deal concerns Google, it is first and foremost the innovative entrepreneurs at ITA who would be prevented from capitalizing on their success if the deal is stopped.
  • Second, it is hard to see why, under the facts as alleged by the deal’s naysayers, consumers would be worse off if Google owns ITA than if ITA stands on its own.  The claims seem to turn on ITA’s indispensability to the online travel industry.  But if ITA is so indispensable—if it possesses such market power, in other words—it’s hard to see how its incentives to capitalize on that market power would change simply by virtue of a change in its management.  Either ITA possesses market power and is already taking advantage of it (or else its managers are leaving money on the table and it most certainly should be taken over by another set of managers) or else it does not actually possess this market power and its combination with Google, even if Google were to keep all of ITA’s technology for itself, will do little to harm the rest of the industry as its competitors step up and step in to take its place.
  • Third and related to these is the simple repugnance of hamstringing successful entrepreneurs because of the exhortations of their competitors, and the implication that a successful company’s work product (like ITA’s “superior technology”) must be rendered widely-available, by government force if necessary.
  • Meanwhile, Google does not seem to have any interest in selling airline tickets or making airline reservations (just as it doesn’t sell the retail goods one can search for using its site). Instead, its interest is in providing its users easy access to airline flight and pricing data and giving online travel agencies the ability to bid on the sale of tickets to Google users looking to buy. The availability of this information via Google search will lower search costs for consumers and the expected bidding should increase competition and drive down travel costs for consumers.  It is easy to see why companies like Kayak and Bing Travel and Expedia and Travelocity might be unhappy about this, but far more difficult to see how their woes should be a problem for the antitrust enforcers (or Congress, for that matter).

The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression. As the technology, usage and market structure change, so do the strategies of the various businesses that build up around them. These new strategies present unknown and unprecedented challenges to regulators, and these new challenges call for a deferential approach. New conduct is not necessarily anticompetitive conduct, and if our antitrust regulation does not accept this, we all lose.

Josh’s ongoing series on “Nudging Antitrust” and FTC Commissioner Rosch’s recent thoughts on behavioral economics has been excellent and I look forward to the next installment.  Rosch’s speech, not surprisingly, also elicited a strong response from me.  What follows are my thoughts on Rosch’s speech, focusing on some of the same issues Josh addressed in his first post.

Rosch puts forward four reasons, purportedly identified by behavioral economics, that explain why “human beings sometimes act irrationally in making commercial decisions.”  Each of his four reasons and/or his understanding of its implication is problematic.  Finally, Rosch proposes a policy response to his assessment of the behavioral literature—one that, unfortunately, bears almost no relationship to the behavioral findings form which he purports to draw it.

In the interest of space (and assuming readers have seen Josh’s posts on the speech) I will jump right in with my assessment of Rosch’s claims without trying to restate them.  The speech is readily-available here for those interested in checking my characterizations of Rosch’s comments.

Rosch’s four claims about behavioral economics:

1.  Information asymmetry.  It is deeply problematic that Rosch seems to think that this isn’t something that classical economics has discussed for generations.  More importantly, the idea that it presents a special problem is valid (at least as Rosch seems to see it) only if you act like information is or should be free and that there are no (or small) adverse effects to forcing disclosure of information.  In reality, the creation, assessment and disclosure of information are costly, and it makes no sense to act like there should be no return to these activities or to view as illegitimate the protection by commercial actors of the value they create.

2.  Instant gratification may be more important than long-run maximization.  As Josh points out, we have to assume this refers to hyperbolic discounting.  But even so, the implications of this, if true, are unclear, especially if we take into account (as Rosch seems not to) that regulators are also subject to the effect.  Implicit in much of the behavioral literature (derived, as it is, from constrained and manufactured experimental settings) is that institutions little affect the found effects.  It may even be the case that regulators operating within bureaucratic constraints indeed could be less affected by hyperbolic discounting.  But certainly actors in markets are less constrained than the naked assumption implies, and, either way, the policy implications would seem to be significantly affected by the institutional setting, consideration of which is essential to any legitimate assessment of the value of behavioral economics to the antitrust enterprise.  Unfortunately this consideration seems to be completely lacking here.

3.  Status quo bias.  Again, a large conventional literature on this sort of effect (arising from different sources, perhaps) exists, and the extent to which Rosch is talking about something new is unclear to me.  Even to the extent that it is a new idea, its assessment here falls prey to the same problems I mention above.  Moreover Rosch’s comments fail to reflect the difficulty in differentiating a “normal” or “rational” preference for the status quo arising from, for example, risk aversion, avoidance of transaction costs and the obtaining of costly information from their “irrational,” status-quo biased counterparts.

4.  Sellers may not always behave rationally.  As Josh suggests, this is, at least as Rosch seems to think relevant, an absurd claim on his part.  First off, claiming the theory of the firm for the behavioralists, or ignoring the essential ways in which “conventional” economics accounts for the very things Rosch thinks it fails to account for, seriously calls into question the quality and clarity of Rosch’s thinking on this topic.  Second, everyone knows that perfection is an assumption and not a description of reality.  The constant refrain, sometimes implicit and sometimes explicit, that classical economics “presumes that people will always behave rationally to achieve the best outcome” is, I think, willfully misleading.  Especially along the lines Rosch suggests here (agency costs?  Really? This is something behavioralists invented?), economics has never assumed this kind of perfection, and entire fields revolve around its rejection.

Moreover, there is also a sly and perhaps willful disconnect in emphasis.  The critique ends up sounding like a disparagement of classical economics’ (presumed) description of actual, individual psychology and behavior rather than a critique of a methodological assumption used to achieve better analysis (Josh’s reference to Friedman here is apt, of course).  Saying the behavioralists have a good handle on certain aspects of human psychology is not at all the same thing as saying they have a good approach to making those bits of knowledge systematic and useful.

Rosch’s policy recommendation:

Finally, Rosch pulls all of this together to make a recommendation: Merger review should rely more heavily on documentary evidence of merging parties’ “actual intent.”  In Rosch’s words, neoclassical economics has a problem dealing with behavioral economics because it

suggests [that neoclassical] models are imperfect and that better evidence (i.e., the parties’ documents and testimony) may be just as accurate at predicting competitive effects.

Um, no.  Actually there is nothing in behavioral economics, and certainly nothing in Rosch’s speech, that supports the claim that the parties’ documents may be just as accurate as neoclassical models (nor do I think that most neoclassical economists, other than a few misguided post-Chicagoans, think they should base their analysis of cases solely on abstract theories) at predicting competitive effects.

Of course regular readers know that this is a hot button for me.  My paper with Marc Williamson on the serious problems with relying on documents to infer intent, and on relying on expressions of intent as meaningful to relevant antitrust analysis, must have made little impression on Rosch (in case you haven’t looked at it in a while, the paper, Hot Docs vs. Cold Economics, is here).

Not only does Rosch’s assertion overstate the claims that even behavioralists would make for their ability to understand, interpret and systematize human and group psychology and sociology, it completely glosses over the incredibly thorny problem of the disconnect between that which is intended and that which actually is.  Nothing in the behavioral literature says anything at all about this problem, and it is a serious lapse for a Commissioner of the FTC to suggest that better knowledge (assuming it is better knowledge) about intent permits stronger conclusions about competitive effects.  This is just a non sequitur.

Overall I find the Commissioner’s speech to be seriously lacking.  I understand and applaud the effort to find knowledge useful to the antitrust enterprise wherever it may lie.  But one can’t help feeling that Rosch is a bit too enthusiastic, combative, naïve and, thus, careless in his support for the usefulness of this particular bit of knowledge.