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.
- 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.
- 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.
- 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.
Conclusion
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).