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When teaching antitrust as I am this fall, a time always comes during the semester when I need to give my students an example of a merger whose implications for competition are so obviously adverse that the antitrust authorities would surely seek an injunction against the merger under Section 7 of the Clayton Act. My favorite example of this type of transaction has always been a completely unrealistic and therefore highly instructive hypothetical merger between the two leading U.S. automakers, Ford and GM.

With today’s reports that each of the two firms is discussing a potential collaboration with Nissan and Renault and that a three-way alliance is also being considered, I’ll now have to rethink my hypo.

Analysts have been quick to emphasize that a full-blown merger between GM and Ford is not in the cards and that the only thing being considered is some type of joint venture whose antitrust implications are being analyzed carefully. But why not think about a straightforward merger?

Sure, each firm has a substantial (if declining) share of the U.S. market (GM has about 25% and Ford has about 18%) such that a merger between the two firms would result in a more than sufficiently large increase in the industry HHI to create a presumption of illegality under the U.S. Merger Guidelines. But perhaps the firms could realistically offer a number of arguments to rebut that presumption.

First, GM’s many difficulties in the past year could plausibly justify treating GM as a “failing firm” for purposes of applying the Merger Guidelines, which subject the acquisition of such firms to less scrutiny than the same transaction would receive in better times. If there’s anything to the claim that analysts have been making over past year that GM is facing serious insolvency risks, then the failing firm strategy might really be worth a try.

An additional way to cast the merger in a more favorable light would be to argue that the relevant geographic market for cars in this day and age is not the U.S. or even North America but rather the world. Other products such as computer software are thought of in this way. And while cars (and car parts for local assembly) are more costly than software to transport intercontinentally, the principle is the same: firms in both industries compete with each other all over the world. GM and Ford have much lower shares of the world market than of the U.S. and North American markets. So if the world market were considered the relevant one, the merger would seem less threatening to competition.

A final point perhaps worth emphasizing is industry trends. It matters more for competition where market shares are likely to be in the future than where they are today. And both firms’ market shares have been in steady, long-term decline over the last few decades (albeit with an occasional uptick every now and then). The popular cars of even the near-term future are likely to be those that are hybrid or that do not rely on gasoline at all. And in these markets, Ford and GM are not major players–both take a back seat to Toyota and Honda. That being the case, Ford and GM might argue from a dynamic perspective that a merger between them, while no doubt resulting in some consolidation in old technology markets, would nevertheless enhance rather than harm competition in hybrid and electric cars — the innovation markets of the future. Current market share data thus may not express accurately the true underlying competitive reality.

It should be noted that all of these arguments could also potentially be made in support of a more limited proposed joint venture between the two firms. And of course, depending on how the venture proposal is structured, additional arguments might also be available.

All of this analysis is really beginning to make me worry about the future utility of that old GM/Ford hypo. Who knows? Perhaps I had better switch to Coke and Pepsi!

My friend Anna Ivey (former Dean of Admissions at the University of Chicago Law School and author of The Ivey Guide to Law School Admissions: Straight Advice on Essays, Resumes, Interviews, and More (Harcourt, 2005)) has recently started a new blog devoted to the topic of university admissions with a particular focus on the fields of law and business.

Anna is one of the brightest minds in the admissions game, and this blog will likely be of great value both to students and administrators who are trying to stay ahead of the curve. Anna’s motto? “It’s your life. Choose wisely.”

Stay tuned for what is likely to be some great content from Anna in the weeks ahead.

Law & Liturgy

Keith Sharfman —  14 September 2006

I love Ethan Leib’s interesting idea of reading the legal pronouncements of Jewish liturgy in light of later legal developments–and vice versa.

Ethan suggests creatively that an allusion to the liturgy of Yom Kippur (the Jewish day of atonement) may be found in Cardozo’s famous opinion in Jacob & Youngs v. Kent: “The willful transgressor must accept the penalty of his transgression. . . . The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong.”

Jacob & Youngs is a contracts case and its reference to transgression and atonement reminds Ethan of the familiar vow nullification formula of the Kol Nidre prayer, whose hallowed words (as translated here by Birnbaum) are, at least cantorially speaking, the high water mark of the Yom Kippur synagogue service: “All personal vows we are likely to make, all personal oaths and pledges we are likely to take between this Yom Kippur and the next Yom Kippur, we publicly renounce. Let them all be relinquished and abandoned, null and void, neither firm nor established. Let our personal vows, pledges and oaths be considered neither vows nor pledges nor oaths.”

Casting Cardozo in a liturgical light is certainly a new twist. Ethan wonders “What kind of law can contemplate the routine nullification of promises year after year? Probably not one based on promissory liability at its core.” Ethan defends the nullification doctrine of the Kol Nidre prayer on the ground that it “applies only to promises made with oneself or with god, not standard commercial promises made between people.” But let me suggest an additional, perhaps less apologetic and somewhat broader defense that is consistent with modern contract theory.

If you look at the Kol Nidre text closely you’ll see that it’s not a renunciation of past promises but is rather written prospectively and concerns next year’s promises rather than this year’s. Judaism’s vow nullification service is in essence a public warning not to rely too heavily on any future promises that the penitent might make but fail to fulfill in the coming year. If you think about it, it’s a pretty clever device to defeat future reliance claims on future commitments that might be breached. Why did you rely on me?, the penitent can argue. Didn’t you hear my anticipatory renunciation of this promise last Yom Kippur? And if you didn’t actually hear it, why shouldn’t the public character of the Kol Nidre service operate as constructive notice?

Kol Nidre has a powerful psychological effect on the faith community that utters it, which perhaps accounts for an exagerated theological significance that is otherwise difficult to explain. By offering and accepting a prayer of mutual prospective renunciation, members of the faith community in effect become morally bound to waive all future promissory claims against other members and maintain a prospective posture of mutual reciprocal forgiveness. Perhaps someone should offer such a prayer at the start of faculty meetings!

Interest Rates and Antitrust

Keith Sharfman —  14 September 2006

Today’s Israeli newspapers have an interesting story about a multibillion dollar antitrust suit that an Israeli manufacturing firm has brought against Israel’s three major banks. The complaint alleges that the banks price colluded on rates, charging identically in five distinct rate categories: a uniform prime rate always 1.5% above the central bank’s; a uniform risk premium of 3%; a uniform 3.5% extension premium; a uniform credit allocation fee of 1.5% per quarter; and uniform quarterly management fees of NIS 150.

Not being an expert in Israeli antitrust law, I cannot confidently predict an outcome in the case. I can say, however, that such allegations would have a tough time succeeding here in the U.S. An individual bank’s position in world capital markets is very similar to the position of a single gas station in the world market for oil. Both are classic “price takers” in the sense that neither can affect the world price by its own behavior. It is not surprising that banks who pay the same price for capital would charge the same fee for it, just as it is not surprising for adjacent gas stations to charge the same price per gallon. Such pricing behavior may well be the product of competition and is hardly evidence of collusion. Firms operating in competitive markets can ill afford to charge more than their competitors.

To be sure, the banking industry is heavily regulated both here and in Israel, and thus banks in both countries may well be earning supracompetitive profits. But the abnormally high profits engendered by regulation are not forbidden by antitrust, which condemns only the anticompetive behavior of private actors and not the actions government.

A hopeful sign in the case is that Israel’s antitrust authority has not signed on. The sophisticated lawyers who work there, many of whom have studied at American law schools, are well aware of the difference between price collusion and price leadership. Hopefully the Israeli courts that are hearing this case will understand this too.

Chief Judge Easterbrook

Keith Sharfman —  30 August 2006

Deven Desai at Concurring Opinions discusses an interesting article on law.com reporting that my old boss, Judge Frank Easterbrook, will soon become Chief Judge of the Seventh Circuit. Interestingly, the article suggests, and the judge in an interview confirms, that not very much about the Seventh Circuit is likely to change. The court is already performing at an exceptionally high level, and a sensible goal for any incoming chief judge would be in the main to stay the course. That said, the article does suggest that there may be a few incremental changes in the years ahead, including the possibility of having some district judges serve on appellate panels.

I have closely watched the work of the Seventh Circuit for a decade and am confident in predicting that whatever administrative innovations end up being adopted in the next seven years, the main thing for those outside the circuit to watch for will remain the outstanding and influential opinions that the fine judges on the court continue to produce in case after case.

I’m confused about something.

What are the capabilities of the Lebanese army? Is it capable of dealing with Hezbollah or not?

Till now, the Lebanese position has been: we have not been able to comply with our obligation under UN Security Council Resolution 1559 to disarm Hezbollah because our army is too weak to do the job. So don’t blame us for Hezbollah’s actions.

Now, however, the Lebanse government is suddenly offering to use 15,000 Lebanese troops to keep Hezbollah at bay if only Israel would withdraw.

If it’s true that the Lebanese army is able to handle Hezbollah, then why didn’t it disarm Hezbollah before the current conflict began? And if the Lebanese army really can’t handle Hezbollah, then isn’t the current offer to use the army basically worthless?

Whatever the Lebanese army’s capabilities really are, it seems hard to fault Israel for its skepticism about the Lebanese offer and for insisting on dealing with Hezbollah itself and not withdrawing until a multinational force is in place.

Law’s Primacy in L&E

Keith Sharfman —  4 August 2006

Kudos to Josh for pointing us to Judge Posner’s fascinating and on the whole quite favorable review of Steven Shavell’s Foundations of Economic Analysis of Law.

Posner’s most interesting statement in the essay may well be:

“It is curious but true that, although economics is intellectually more sophisticated than law and though there is—recognition of this point is close to the heart of economic analysis of law—a considerable isomorphism between law and economics, no one, however bright, who is not a lawyer can get the law quite right. Law is like a language that you have to be a native speaker of to speak correctly.”

This ties in to our discussion a few months ago about whether law has primacy in the “law and economics” discipline. Posner captures here very well what I was then trying to say about economists who lack legal training. You can be the greatest economist in the world, but you won’t be able to describe the law with complete depth and precision if you never went to law school.

For this reason, I remain convinced that the best place to study and do research in law and economics is at a law school and not in an economics department. If Shavell had stayed in an economics department and never come to HLS, I doubt that it would have been possible for him to make the enormous contribution to L&E that he has made.

Cramer on Sirius/XM

Keith Sharfman —  3 August 2006

A few weeks ago I suggested here that a merger between the two satellite radio firms, Sirius and XM, would not necessarily be as much of an antitrust problem as Sirius CEO Mel Karmazin seems to think.

Now market analyst Jim Cramer has weighed in on the issue and encouraged Karmazin to have Sirius do a hostile takeover of XM. While Cramer’s heart is in the right place, his suggestion that the merger would allow Sirius to “raise its prices, dictate its auto prices and get into retail with a vengeanceâ€? is not likely to help the deal succeed.

The extensive antitrust discussion that we had here a few weeks ago was all about why the deal would *not* enable Sirius/XM to raise its prices. As we pointed out then, these firms face extensive competition from other media, especially terrestrial radio, and therefore antitrust regulators need not be concerned about prices increasing in consequence of the merger. The benefits of the deal would rather be to reduce costs and improve product choices, particularly for consumers who would like one-stop access to proprietary content from both firms (e.g., someone who is a fan both of baseball, which XM carries, and football, which Sirius carries).

If Cramer is right that the deal would cause prices to increase, then there is more of an antitrust issue here than we thought.

After scoffing for months at the suggestion that satellite radio firms Sirius and XM should merge, Sirius CEO Mel Karmazin admitted this week that it’s something he’d like to see happen but expressed doubts about the antitrust authorities permitting the deal to go through. See stories here and here.

Karmazin is right that the proposed Sirius/XM merger presents some antitrust issues. But he may be wrong in thinking that the issues are insurmountable.

Take the issue of product market definition. Karmazin appears ready to concede that the relevant product market is satellite radio and that Sirius and XM are duopolists who by merging would become a monopoly. But why concede that? Satellite radio competes with regular radio for listeners. And many cars are now equipped with television and dvd players, which passengers (though not drivers) can watch. iPods can be hooked up to car speakers. And it is only a matter of time before Internet content (including audio streaming) will be widely available via portable wireless devices that are usable in cars. Satellite is just one medium among many through which it is possible to transmit content. And the market for audio content is quite thick, with Sirius and XM holding only a small combined share.

Even assuming that the agencies will define the product market narrowly to include only satellite does not end the inquiry. Neither XM nor Sirius nor a combined Sirius/XM can stop anyone else from supplying content via the satellite medium. There isn’t a discernible barrier to entry here. So if Sirius/XM raises prices unduly, one would have reason to expect entry into the satellite medium by other firms.

Another point to emphasize is the efficiencies associated with the merger, which would create an entirely new product for which there is clearly some demand. There are doubtless many Sirius subscribers who would like to hear some XM content and vice versa. Now the only way to do that is to buy two sets of hardware and subscribe to both. For these consumers at least, things would be better if they could buy all the content they want from a single provider. And in this sense at least, the merger would be unambiguously pro-consumer.

One final point: even short of a merger, it may still be possible for the two firms to facilitate “one stop shopping” for content by means of cross-licensing agreements permitting each firm to sell the other firm’s content to its own subscribers. But if this is permitted, then wouldn’t it be pointless to block a full blown merger?

A few weeks ago, I predicted here that Anna Nicole Smith would win her case in the Supreme Court. That prediction has now come true. Justice Ginsberg’s opinion for a unanimous court holds that state probate law cannot divest federal bankruptcy courts of jurisdiction over the claims of a bankruptcy estate against a probate estate beneficiary.

It will be interesting to see how this result will be spun by the lawyers and legal commentators who earlier suggested that this was a close case (see here).

Josh’s interesting post re the sunsetting of the ABA’s antitrust consent decree, as well as David Zaring’s, are worth some further thought.

One problem with the consent decree is that it is widely misunderstood. All that antitrust law forbids the ABA to do is impose minimum salaries and other conditions of employment. But that is a far cry from a rule against studying compensation levels (as distinct from imposing them) for the purpose of assessing whether a school is using its scarce resources wisely. Nothing in antitrust law forbids that, so long as there’s no agreement to fix compensation at any particular level. When a law school does a self-study in preparation for an ABA site visit, a great deal of data is collected and evaluated to help the site inspection team assess how well the school is doing. Faculty compensation is an important variable in a school’s success, and omitting that variable from study is neither sensible nor required by antitrust. Analysis of faculty compensation levels is no different from analysis of a school’s other strategic expenditures–on plant and equipment, on the library and technology, on student aid, and the like. The consent decree should not be used as a basis for shielding compensation levels from analysis and scrutiny. If, say, spending on academic faculty at a particular school has increased at a lower rate over the the last decade than spending on clinical faculty or on administrative staff, the ABA report ought to be able to note that fact and comment upon it. While antitrust forbids requiring schools to maintain minimum compensation levels, analysis of expenditures in the compensation area without the imposition of any mandates is not forbidden.

Imagine if a large company like GM were to hire a management consulting firm like McKinsey to study its operations and make recommendations. Wouldn’t it be bizarre for McKinsey not to look at GM’s compensation practices? Without looking at that, it would be very hard to get a full picture of GM’s choices and even harder to make any sort of sensible recommendations. Just so with the ABA. It’s hard to write a sensible report evaluating how well a law school is doing relative to its peers without having any sense of how the school is compensating its faculty, which is surely a key variable in the equation. So long as ABA site inspectors aren’t permitted to look at compensation, it will be difficult for them to do ther jobs.

Bankruptcy versus Probate

Keith Sharfman —  28 February 2006

I suppose that I ought to say something about the Anna Nicole Smith case that was argued today in the Supreme Court, given that I participated in the case (together with 14 other bankruptcy scholars) by filing an amicus brief on Anna Nicole’s side. For all the talk about how arcane the case is (see, e.g., Lyle Denniston’s fine account of today’s argument at SCOTUSblog.com), the issue is really quite straightforward: did the bankruptcy court have jurisdiction over a tort claim by Smith’s bankruptcy estate against Pierce Marshall (Smith’s late husband’s son)? The answer is plainly yes, and here’s why.

Title 28 confers federal bankruptcy jurisdiction over any claim that is “related to” a bankruptcy case–that is, any claim that will have an impact on the disposition of the bankruptcy estate. The Smith estate’s claim clearly meets this description, because any assets this claim recovers will directly benefit her bankruptcy estate. The claim is thus “related to” the bankruptcy case. To be sure, a bankruptcy court could always abstain from hearing a claim like this one. But the statute makes clear that abstention in this context is permissive, not mandatory. “Because the statute says so” is thus the short answer to why there’s federal jurisdiction here.

Here’s the complication. Marshall’s lawyers argue that notwithstanding the plain language of Title 28, there is a judicially-crafted “probate exception” to federal jurisdiction that applies not only in diversity cases but also in bankruptcy. But that is not so. The only Supreme Court decision ever holding that there is no bankruptcy jurisdiction over assets in probate is Harris v. Zion Savings Bank, 317 U.S. 447 (1943), a case decided under the old Bankruptcy Act that is readily distinguishable.

The reason for the result in Harris is that there the debtor and the decedent were one and the same person. Once the debtor dies, there is no longer any need for bankruptcy jurisdiction. That is why Congress in 1978 explicitly made decedents ineligible to file for bankruptcy. Here, however, we are dealing with a bankruptcy debtor who is not dead. Anna Nicole Smith is very much alive. And unlike the assets at issue in Harris, the assets comprising Smith’s bankruptcy estate are not coextensive with those of the probate estate. The creditors in Harris had standing to assert claims against the estate in probate. But Smith’s creditors did not have standing to assert claims in the Marshall probate proceeding. All they could do was assert their claims in the bankruptcy forum. The possibility of bankruptcy jurisdiction is therefore necessary to protect creditor interests that are not legally cognizable in probate.

It is nonsense to suppose that bankruptcy jurisdiction over claims like the one asserted by Smith’s estate improperly “interferes” with state probate proceedings. For one thing, the Smith estate’s claim is only against an heir, not against the probate estate. Moreover, the fact is that probate estates are hardly strangers to bankruptcy. No one, not even Marshall, suggests that a probate estate can’t be a creditor in a bankruptcy case, or that a bankruptcy estate couldn’t recover a preferential or fraudulent transfer from a probate estate. Such litigation is not an “interference” with probate; it is simply a way of sorting out some of a probate estate’s assets and liabilities. A probate court’s jurisdiction need not be exclusive. And if any state’s law so provides, federal bankruptcy law trumps it. Granted, a bankruptcy court might be well-advised to abstain with respect to issues concerning which the probate court has relatively greater expertise and competence (e.g., interpreting a will, perhaps). But the statute makes such abstention only permissive, not mandatory.

It will be interesting to see the Court’s opinion in this case. I will be very surprised if Anna Nicole Smith does not win.