The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced apartly open oral argument in the Illumina-Grail matter. That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.
Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.
Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave tofile an amicus brief in the matter. They question the merits of the case on a number of grounds.
Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence fromFrancine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.
There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce.Thom Lambert andJonathan Barnett both have interesting posts on the matter.
This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.
What else is going on at the FTC? Law360 reportson a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.
And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.
What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.
There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see.
Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:
The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft
My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.
Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have anoverview here.
This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”
Moreover, asBrian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.
England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for good reason, but for political expediency—AICOA is riddled with intentional uncertainty. In theory, the law’s glaring definitional deficiencies are meant to be rectified by “expert” agencies (i.e., the DOJ and FTC) after passage. But in actuality, no such certainty would ever emerge, and the law would stand as a testament to the crass political machinations and absence of rigor that undergird it. Among many other troubling outcomes, this is what the future under AICOA would hold.
Guidelines Cannot Substitute for the Law’s Lack of Legal Certainty
Two months ago, the American Bar Association’s (ABA) Antitrust Section published a searing critique of AICOA in which it denounced the bill for being poorly written, vague, and departing from established antitrust-law principles. As Lazar Radic and I discussed in a previous post, what made the ABA’s letter to Congress so eye-opening was that it was penned by a typically staid group with a reputation for independence, professionalism, and ideational heterogeneity.
One of the main issues the ABA flagged in its letter is that the introduction of vague new concepts—like “materially harm competition,” which does not exist anywhere in current antitrust law—into the antitrust mainstream will risk substantial legal uncertainty and produce swathes of unintended consequences.
According to some, however, the bill’s inherent uncertainty is a feature, not a bug. It leaves enough space for specialist agencies to define the precise meaning of key terms without unduly narrowing the scope of the bill ex ante.
In particular, supporters of the bill have pointed to the prospect of agency guidelines under the law to rescue it from the starkest of the fundamental issues identified by the ABA. Section 4 of AICOA requires the DOJ and FTC to issue “agency enforcement guidelines” no later than 270 days after the date of enactment:
outlining policies and practices relating to conduct that may materially harm competition under section 3(a), agency interpretations of the affirmative defenses under section 3(b), and policies for determining the appropriate amount of a civil penalty to be sought under section 3(c).
In pointing to the prospect of guidelines, however, supporters are inadvertently admitting defeat—and proving the ABA’s point: AICOA is not ready for prime time.
This thinking is misguided for at least three reasons:
Guidelines are not rules
As section 4(d) of AICOA recognizes, guidelines are emphatically nonbinding:
The joint guidelines issued under this section do not … operate to bind the Commission, Department of Justice, or any person, State, or locality to the approach recommended in the guidelines.
As such, the value of guidelines in dispelling legal uncertainty is modest, at best.
This is even more so in today’s highly politicized atmosphere, where guidelines can be withdrawn at the tip of the ballot (we’ve just seen the FTC rescind the Vertical Merger Guidelines it put in place less than a year ago). Given how politicized the issuing agencies themselves have become, it’s a virtual certainty that the guidelines produced in response to AICOA would be steeped in partisan politics and immediately changed with a change in administration, thus providing no more lasting legal certainty than speculation by a member of Congress.
Guidelines are not the appropriate tool to define novel concepts
Regardless of this political reality, however, the mixture of vagueness and novelty inherent in the key concepts that underpin the infringements and affirmative defenses under AICOA—such as “fairness,” “preferencing,” “materiality”, or the “intrinsic” value of a product—undermine the usefulness (and legitimacy) of guidelines.
Indeed, while laws are sometimes purposefully vague—operating as standards rather than prescriptive rules—to allow for more flexibility, the concepts introduced by AICOA don’t even offer any cognizable standards suitable for fine-tuning.
The operative terms of AICOA don’t have definitive meanings under antitrust law, either because they are wholly foreign to accepted antitrust law (as in the case of “self-preferencing”) or because the courts have never agreed on an accepted definition (as in the case of “fairness”). Nor are they technical standards, which are better left to specialized agencies rather than to legislators to define, such as in the case of, e.g., pollution (by contrast: what is the technical standard for “fairness”?).
Indeed, as Elyse Dorsey has noted, the only certainty that would emerge from this state of affairs is the certainty of pervasive rent-seeking by non-altruistic players seeking to define the rules in their favor.
As we’ve pointed out elsewhere, the purpose of guidelines is to reflect the state of the art in a certain area of antitrust law and not to push the accepted scope of knowledge and practice in a new direction. This not only overreaches the FTC’s and DOJ’s powers, but also risks galvanizing opposition from the courts, thereby undermining the utility of adopting guidelines in the first place.
Guidelines can’t fix a fundamentally flawed law
Expecting guidelines to provide sensible, administrable content for the bill sets the bar overly high for guidelines, and unduly low for AICOA.
The alleged harms at the heart of AICOA are foreign to antitrust law, and even to the economic underpinnings of competition policy more broadly. Indeed, as Sean Sullivan has pointed out, the law doesn’t even purport to define “harms,” but only serves to make specific conduct illegal:
Even if the conduct has no effect, it’s made illegal, unless an affirmative defense is raised. And the affirmative defense requires that it doesn’t ‘harm competition.’ But ‘harm competition’ is undefined…. You have to prove that harm doesn’t result, but it’s not really ever made clear what the harm is in the first place.”
“Self-preferencing” is not a competitive defect, and simply declaring it to be so does not make it one. As I’ve noted elsewhere:
The notion that platform entry into competition with edge providers is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true…. The theory of vertical discrimination harm is at odds not only with this platform-specific empirical evidence, it is also contrary to the long-standing evidence on the welfare effects of vertical restraints more broadly …
… [M]andating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.
Asking agencies with an expertise in competition policy to enact economically sensible guidelines to direct enforcement against such conduct is a fool’s errand. It is a recipe for purely political legislation adopted by competition agencies that does nothing to further their competition missions.
AICOA’s Catch-22 Is Its Own Doing, and Will Be Its Downfall
AICOA’s Catch-22 is that, by making the law so vague that it needs enforcement guidelines to flesh it out, AICOA renders both itself and those same guidelines irrelevant and misses the point of both legal instruments.
Ultimately, guidelines cannot resolve the fundamental rule-of-law issues raised by the bill and highlighted by the ABA in its letter. To the contrary, they confirm the ABA’s concerns that AICOA is a poorly written and indeterminate bill. Further, the contentious elements of the bill that need clarification are inherently legislative ones that—paradoxically—shouldn’t be left to competition-agency guidelines to elucidate.
The upshot is that any future under AICOA will be one marked by endless uncertainty and the extreme politicization of both competition policy and the agencies that enforce it.
Slow wage growth and rising inequality over the past few decades have pushed economists more and more toward the study of monopsony power—particularly firms’ monopsony power over workers. Antitrust policy has taken notice. For example, when the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) initiated the process of updating their merger guidelines, their request for information included questions about how they should respond to monopsony concerns, as distinct from monopoly concerns.
From a pure economic-theory perspective, there is no important distinction between monopsony power and monopoly power. If Armen is trading his apples in exchange for Ben’s bananas, we can call Armen the seller of apples or the buyer of bananas. The labels (buyer and seller) are kind of arbitrary. It doesn’t matter as a pure theory matter. Monopsony and monopoly are just mirrored images.
Some infer from this monopoly-monopsony symmetry, however, that extending antitrust to monopsony power will be straightforward. As a practical matter for antitrust enforcement, it becomes less clear. The moment we go slightly less abstract and use the basic models that economists use, monopsony is not simply the mirror image of monopoly. The tools that antitrust economists use to identify market power differ in the two cases.
Monopsony Requires Studying Output
Suppose that the FTC and DOJ are considering a proposed merger. For simplicity, they know that the merger will generate efficiency gains (and they want to allow it) or market power (and they want to stop it) but not both. The challenge is to look at readily available data like prices and quantities to decide which it is. (Let’s ignore the ideal case that involves being able to estimate elasticities of demand and supply.)
In a monopoly case, if there are efficiency gains from a merger, the standard model has a clear prediction: the quantity sold in the output market will increase. An economist at the FTC or DOJ with sufficient data will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost or else product-quality improvements that increase consumer demand. Since the merger lowers prices for consumers, the agencies (assume they care about the consumer welfare standard) will let the merger go through, since consumers are better off.
In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or because quality declines. Again, the empirical implication of the merger is seen directly in the market in question. Since the merger raises prices for consumers, the agencies (assume they care about the consumer welfare standard) will let not the merger go through, since consumers are worse off. In both cases, you judge monopoly power by looking directly at the market that may or may not have monopoly power.
Unfortunately, the monopsony case is more complicated. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed.
To see why, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. An overly eager FTC may see a lower quantity of input purchased and jump to the conclusion that the merger increased monopsony power. After all, monopsonies purchase fewer inputs than competitive firms.
Not so fast. Fewer input purchases may be because of efficiency gains. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals are not exercising any market power to suppress wages.
The key point is that monopsony needs to be treated differently than monopoly. The antitrust agencies cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased.
How can the agencies differentiate efficiency-enhancing mergers from monopsony mergers? The easiest way may be for the agencies to look at the output market: an entirely different market than the one with the possibility of market power. Once we look at the output market, as we would do in a monopoly case, we have clear predictions. If the merger is efficiency-enhancing, there will be an increase in the output-market quantity. If the merger increases monopsony power, the firm perceives its marginal cost as higher than before the merger and will reduce output.
In short, as we look for how to apply antitrust to monopsony-power cases, the agencies and courts cannot look to the input market to differentiate them from efficiency-enhancing mergers; they must look at the output market. It is impossible to discuss monopsony power coherently without considering the output market.
In real-world cases, mergers will not necessarily be either strictly efficiency-enhancing or strictly monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. The question of how guidelines should address monopsony power is inextricably tied to the consideration of merger efficiencies, particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.
This is just one complication that arises when we move from the purest of pure theory to slightly more applied models of monopoly and monopsony power. Geoffrey Manne, Dirk Auer, Eric Fruits, Lazar Radic and I go through more of the complications in our comments summited to the FTC and DOJ on updating the merger guidelines.
What Assumptions Make the Difference Between Monopoly and Monopsony?
Now that we have shown that monopsony and monopoly are different, how do we square this with the initial observation that it was arbitrary whether we say Armen has monopsony power over apples or monopoly power over bananas?
There are two differences between the standard monopoly and monopsony models. First, in a vast majority of models of monopsony power, the agent with the monopsony power is buying goods only to use them in production. They have a “derived demand” for some factors of production. That demand ties their buying decision to an output market. For monopoly power, the firm sells the goods, makes some money, and that’s the end of the story.
The second difference is that the standard monopoly model looks at one output good at a time. The standard factor-demand model uses two inputs, which introduces a tradeoff between, say, capital and labor. We could force monopoly to look like monopsony by assuming the merging parties each produce two different outputs, apples and bananas. An efficiency gain could favor apple production and hurt banana consumers. While this sort of substitution among outputs is often realistic, it is not the standard economic way of modeling an output market.
The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming under Section 2 of the Sherman Antitrust Act, but refuses to provide any guidance regarding enforcement criteria.
Earlier this month, Deputy Assistant Attorney General Richard Powers stated that “there’s ample case law out there to help inform those who have concerns or questions” regarding Section 2 criminal enforcement, conveniently ignoring the fact that criminal Section 2 cases have not been brought in almost half a century. Needless to say, those ancient Section 2 cases (which are relatively few in number) antedate the modern era of economic reasoning in antitrust analysis. What’s more, unlike Section 1 price-fixing and market-division precedents, they yield no clear rule as to what constitutes criminal unilateral behavior. Thus, DOJ’s suggestion that old cases be consulted for guidance is disingenuous at best.
It follows that DOJ criminal-monopolization prosecutions would be sheer folly. They would spawn substantial confusion and uncertainty and disincentivize dynamic economic growth.
Aggressive unilateral business conduct is a key driver of the competitive process. It brings about “creative destruction” that transforms markets, generates innovation, and thereby drives economic growth. As such, one wants to be particularly careful before condemning such conduct on grounds that it is anticompetitive. Accordingly, error costs here are particularly high and damaging to economic prosperity.
Moreover, error costs in assessing unilateral conduct are more likely than in assessing joint conduct, because it is very hard to distinguish between procompetitive and anticompetitive single-firm conduct, as DOJ’s 2008 Report on Single Firm Conduct Under Section 2 explains (citations omitted):
Courts and commentators have long recognized the difficulty of determining what means of acquiring and maintaining monopoly power should be prohibited as improper. Although many different kinds of conduct have been found to violate section 2, “[d]efining the contours of this element … has been one of the most vexing questions in antitrust law.” As Judge Easterbrook observes, “Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.”
The problem is not simply one that demands drawing fine lines separating different categories of conduct; often the same conduct can both generate efficiencies and exclude competitors. Judicial experience and advances in economic thinking have demonstrated the potential procompetitive benefits of a wide variety of practices that were once viewed with suspicion when engaged in by firms with substantial market power. Exclusive dealing, for example, may be used to encourage beneficial investment by the parties while also making it more difficult for competitors to distribute their products.
If DOJ does choose to bring a Section 2 criminal case soon, would it target one of the major digital platforms? Notably, a U.S. House Judiciary Committee letter recently called on DOJ to launch a criminal investigation of Amazon (see here). Also, current Federal Trade Commission (FTC) Chair Lina Khan launched her academic career with an article focusing on Amazon’s “predatory pricing” and attacking the consumer welfare standard (see here).
[DOJ’s criminal Section 2 prosecution of A&P, begun in 1944,] bear[s] an eerie resemblance to attacks today on leading online innovators. Increasingly integrated and efficient retailers—first A&P, then “big box” brick-and-mortar stores, and now online retailers—have challenged traditional retail models by offering consumers lower prices and greater convenience. For decades, critics across the political spectrum have reacted to such disruption by urging Congress, the courts, and the enforcement agencies to stop these American success stories by revising antitrust doctrine to protect small businesses rather than the interests of consumers. Using antitrust law to punish pro-competitive behavior makes no more sense today than it did when the government attacked A&P for cutting consumers too good a deal on groceries.
Before bringing criminal Section 2 charges against Amazon, or any other “dominant” firm, DOJ leaders should read and absorb the sobering Muris and Nuechterlein assessment.
Finally, not only would DOJ Section 2 criminal prosecutions represent bad public policy—they would also undermine the rule of law. In a very thoughtful 2017 speech, then-Acting Assistant Attorney General for Antitrust Andrew Finch succinctly summarized the importance of the rule of law in antitrust enforcement:
[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.
Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.
The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.
Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.
Bringing criminal monopolization cases now, after a half-century of inaction, would be antithetical to the stability and continuity that underlie the rule of law. What’s worse, the failure to provide prosecutorial guidance would be squarely at odds with concerns of notice and reliance that inform the rule of law. As such, a DOJ decision to target firms for Section 2 criminal charges would offend the rule of law (and, sadly, follow the FTC ‘s recent example of flouting the rule of law, see here and here).
In sum, the case against criminal Section 2 prosecutions is overwhelming. At a time when DOJ is facing difficulties winning “slam dunk” criminal Section 1 prosecutions targeting facially anticompetitive joint conduct (see here, here, and here), the notion that it would criminally pursue unilateral conduct that may generate substantial efficiencies is ludicrous. Hopefully, DOJ leadership will come to its senses and drop any and all plans to bring criminal Section 2 cases.
If you wander into an undergraduate economics class on the right day at the right time, you might catch the lecturer talking about Giffen goods: the rare case where demand curves can slope upward. The Irish potato famine is often used as an example. As the story goes, potatoes were a huge part of the Irish diet and consumed a large part of Irish family budgets. A failure of the potato crop reduced the supply of potatoes and potato prices soared. Because families had to spend so much on potatoes, they couldn’t afford much else, so spending on potatoes increased despite rising prices.
It’s a great story of injustice with a nugget of economics: Demand curves can slope upward!
Follow the students around for a few days, and they’ll be looking for Giffen goods everywhere. Surely, packaged ramen and boxed macaroni and cheese are Giffen goods. So are white bread and rice. Maybe even low-end apartments.
While it’s a fun concept to consider, the potato famine story is likely apocryphal. In truth, it’s nearly impossible to find a Giffen good in the real world. My version of Greg Mankiw’s massive “Principles of Economics” textbook devotes five paragraphs to Giffen goods, but it’s not especially relevant, which is perhaps why it’s only five paragraphs.
Wander into another economics class, and you might catch the lecturer talking about monopsony—that is, a market in which a small number of buyers control the price of inputs such as labor. I say “might” because—like Giffen goods—monopsony is an interesting concept to consider, but very hard to find a clear example of in the real world. Mankiw’s textbook devotes only four paragraphs to monopsony, explaining that the book “does not present a formal model of monopsony because, in the world, monopsonies are rare.”
Even so, monopsony is a hot topic these days. It seems that monopsonies are everywhere. Walmart and Amazon are monopsonist employers. So are poultry, pork, and beef companies. Local hospitals monopsonize the market for nurses and physicians. The National Collegiate Athletic Association is a monopsony employer of college athletes. Ultimate Fighting Championship has a monopsony over mixed-martial-arts fighters.
In 1994, David Card and Alan Krueger’s earthshaking study found a minimum wage increase had no measurable effect on fast-food employment and retail prices. They investigated monopsony power as one explanation but concluded that a monopsony model was not supported by their findings. They note:
[W]e find that prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. Within New Jersey, however, we find no evidence that prices increased more in stores that were most affected by the minimum-wage rise. Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models). [Emphasis added]
Even so, the monopsony hunt was on and it intensified during President Barack Obama’s administration. During his term, the U.S. Justice Department (DOJ) brought suit against several major Silicon Valley employers for anticompetitively entering into agreements not to “poach” programmers and engineers from each other. The administration also brought suit against a hospital association for an agreement to set uniform billing rates for certain nurses. Both cases settled but the Silicon Valley allegations led to a private class-action lawsuit.
In 2016, Obama’s Council of Economic Advisers published an issue brief on labor-market monopsony. The brief concluded that “evidence suggest[s] that firms may have wage-setting power in a broad range of settings.”
Around the same time, the Obama administration announced that it intended to “criminally investigate naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers.” The DOJ argued that no-poach agreements that allocate employees between companies are per se unlawful restraints of trade that violate Section 1 of the Sherman Act.
If one believes that monopsony power is stifling workers’ wages and benefits, then this would be a good first step to build up a body of evidence and precedence. Go after the low-hanging fruit of a conspiracy that is a per se violation of the Sherman Act, secure some wins, and then start probing the more challenging cases.
After several matters that resulted in settlements, the DOJ brought its first criminal wage-fixing case in late 2020. In United States v. Jindal, the government charged two employees of a Texas health-care staffing company of colluding with another staffing company to decrease pay rates for physical therapists and physical-therapist assistants.
The defense in Jindal conceded that that price-fixing was per se illegal under the Sherman Act but argued that prices and wages are two different concepts. Therefore, the defense claimed that, even if it was engaged in wage-fixing, the conduct would not be per se illegal. That was a stretch, and the district court judge was having none of that in ruling that: “The antitrust laws fully apply to the labor markets, and price-fixing agreements among buyers … are prohibited by the Sherman Act.”
Nevertheless, the jury in Jindal found the defendants not guilty of wage-fixing in violation of the Sherman Act, and also not guilty of a related conspiracy charge.
Before trial, the defense in DaVita filed a motion to dismiss, arguing that no-poach agreements did not amount to illegal market-allocation agreements. Instead, the defense claimed that no-poach agreements were something less restrictive. Rather than a flat-out refusal to hire competitors’ employees, they were more akin to agreeing not to seek out competitors’ employees. As with Jindal, this was too much of a stretch for the judge who ruled that no-poach agreements could be an illegal market-allocation agreement.
A day after the Jindal verdict, the jury in DaVita acquitted the kidney-dialysis provider and its former CEO of charges that they conspired with competitors to suppress competition for employees through no-poach agreements.
The DaVita jurors appeared to be hung up on the definition of “meaningful competition” in the relevant market. The defense presented information showing that, despite any agreements, employees frequently changed jobs among the companies. Thus, it was argued that any agreement did not amount to an allocation of the market for employees.
The prosecution called several corporate executives who testified that the non-solicitation agreements merely required DaVita employees to tell their bosses they were looking for another job before they could be considered for positions at the three alleged co-conspirator companies. Some witnesses indicated that, by informing their bosses, they were able to obtain promotions and/or increased compensation. This was supported by expert testimony concluding that DaVita salaries changed during the alleged conspiracy period at a rate higher than the health-care industry as a whole. This finding is at-odds with a theory that the non-solicitation agreement was designed to stabilize or suppress compensation.
The Jindal and DaVita cases highlight some of the enormous challenges in mounting a labor-monopsonization case. Even if agencies can “win” or get concessions on defining the relevant markets, they still face challenges in establishing that no-poach agreements amount to a “meaningful” restraint of trade. DaVita suggests that a showing of job turnover and/or increased compensation during an alleged conspiracy period may be sufficient to convince a jury that a no-poach agreement may not be anticompetitive and—under certain circumstances—may even be pro-competitive.
For now, the hunt for a monopsony labor market continues its quest, along with the hunt for the ever-elusive Giffen good.
U.S. antitrust policy seeks to promote vigorous marketplace competition in order to enhance consumer welfare. For more than four decades, mainstream antitrust enforcers have taken their cue from the U.S. Supreme Court’s statement in Reiter v. Sonotone (1979) that antitrust is “a consumer welfare prescription.” Recent suggestions (see here and here) by new Biden administration Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) leadership that antitrust should promote goals apart from consumer welfare have yet to be embodied in actual agency actions, and they have not been tested by the courts. (Given Supreme Court case law, judicial abandonment of the consumer welfare standard appears unlikely, unless new legislation that displaces it is enacted.)
Assuming that the consumer welfare paradigm retains its primacy in U.S. antitrust, how do the goals of antitrust match up with those of national security? Consistent with federal government pronouncements, the “basic objective of U.S. national security policy is to preserve and enhance the security of the United States and its fundamental values and institutions.” Properly applied, antitrust can retain its consumer welfare focus in a manner consistent with national security interests. Indeed, sound antitrust and national-security policies generally go hand-in-hand. The FTC and the DOJ should keep that in mind in formulating their antitrust policies (spoiler alert: they sometimes have failed to do so).
At first blush, it would seem odd that enlightened consumer-welfare-oriented antitrust enforcement and national-security policy would be in tension. After all, enlightened antitrust enforcement is concerned with targeting transactions that harmfully reduce output and undermine innovation, such as hard-core collusion and courses of conduct that inefficiently exclude competition and weaken marketplace competition. U.S. national security would seem to be promoted (or, at least, not harmed) by antitrust enforcement directed at supporting stronger, more vibrant American markets.
This initial instinct is correct, if antitrust-enforcement policy indeed reflects economically sound, consumer-welfare-centric principles. But are there examples where antitrust enforcement falls short and thereby is at odds with national security? An evaluation of three areas of interaction between the two American policy interests is instructive.
The degree of congruence between national security and appropriate consumer welfare-enhancing antitrust enforcement is illustrated by a brief discussion of:
the intellectual property-antitrust interface, with a focus on patent licensing; and
proposed federal antitrust legislation.
The first topic presents an example of clear consistency between consumer-welfare-centric antitrust and national defense. In contrast, the second topic demonstrates that antitrust prosecutions (and policies) that inappropriately weaken intellectual-property protections are inconsistent with national defense interests. The second topic does not manifest a tension between antitrust and national security; rather, it illustrates a tension between national security and unsound antitrust enforcement. In a related vein, the third topic demonstrates how a change in the antitrust statutes that would undermine the consumer welfare paradigm would also threaten U.S. national security.
The consistency between antitrust goals and national security is relatively strong and straightforward in the field of defense-industry-related mergers and joint ventures. The FTC and DOJ traditionally have worked closely with the U.S. Defense Department (DOD) to promote competition and consumer welfare in evaluating business transactions that affect national defense needs.
The DOD has long supported policies to prevent overreliance on a single supplier for critical industrial-defense needs. Such a posture is consistent with the antitrust goal of preventing mergers to monopoly that reduce competition, raise prices, and diminish quality by creating or entrenching a dominant firm. As then-FTC Commissioner William Kovacic commented about an FTC settlement that permitted the United Launch Alliance (an American spacecraft launch service provider established in 2006 as a joint venture between Lockheed Martin and Boeing), “[i]n reviewing defense industry mergers, competition authorities and the DOD generally should apply a presumption that favors the maintenance of at least two suppliers for every weapon system or subsystem.”
Antitrust enforcers have, however, worked with DOD to allow the only two remaining suppliers of a defense-related product or service to combine their operations, subject to appropriate safeguards, when presented with scale economy and quality rationales that advanced national-security interests (see here).
Antitrust enforcers have also consulted and found common cause with DOD in opposing anticompetitive mergers that have national-security overtones. For example, antitrust enforcement actions targeting vertical defense-sector mergers that threaten anticompetitive input foreclosure or facilitate anticompetitive information exchanges are in line with the national-security goal of preserving vibrant markets that offer the federal government competitive, high-quality, innovative, and reasonably priced purchase options for its defense needs.
The FTC’s recent success in convincing Lockheed Martin to drop its proposed acquisition of Aerojet Rocketdyne holdings fits into this category. (I express no view on the merits of this matter; I merely cite it as an example of FTC-DOD cooperation in considering a merger challenge.) In its February 2022 press release announcing the abandonment of this merger, the FTC stated that “[t]he acquisition would have eliminated the country’s last independent supplier of key missile propulsion inputs and given Lockheed the ability to cut off its competitors’ access to these critical components.” The FTC also emphasized the full consistency between its enforcement action and national-security interests:
Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security. The FTC’s enforcement action in this matter dovetails with the DoD report released this week recommending stronger merger oversight of the highly concentrated defense industrial base.
Shifts in government IP-antitrust patent-licensing policy perspectives
Standard setting through standard setting organizations (SSOs) has been a particularly important means of spawning valuable benchmarks (standards) that have enabled new patent-backed technologies to drive innovation and enable mass distribution of new high-tech products, such as smartphones. The licensing of patents that cover and make possible valuable standards—“standard-essential patents” or SEPs—has played a crucial role in bringing to market these products and encouraging follow-on innovations that have driven fast-paced welfare-enhancing product and process quality improvements.
Licensing, cross-licensing, or otherwise transferring intellectual property (hereinafter “licensing”) can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and owners. Licensing can allow an innovator to capture returns from its investment in making and developing an invention through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts. …
[L]imitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible. These various forms of exclusivity can be used to give a licensee an incentive to invest in the commercialization and distribution of products embodying the licensed intellectual property and to develop additional applications for the licensed property. The restrictions may do so, for example, by protecting the licensee against free riding on the licensee’s investments by other licensees or by the licensor. They may also increase the licensor’s incentive to license, for example, by protecting the licensor from competition in the licensor’s own technology in a market niche that it prefers to keep to itself.
Unfortunately, however, FTC and DOJ antitrust policies over the last 15 years have too often belied this generally favorable view of licensing practices with respect to SEPs. (See generally here, here, and here). Notably, the antitrust agencies have at various times taken policy postures and enforcement actions indicating that SEP holders may face antitrust challenges if:
they fail to license all comers, including competitors, on fair, reasonable, and nondiscriminatory (FRAND) terms; and
seek to obtain injunctions against infringers.
In addition, antitrust policy officials (see 2011 FTC Report) have described FRAND price terms as cabined by the difference between the licensing rates for the first (included in the standard) and second (not included in the standard) best competing patented technologies available prior to the adoption of a standard. This pricing measure—based on the “incremental difference” between first and second-best technologies—has been described as necessary to prevent SEP holders from deriving artificial “monopoly rents” that reflect the market power conferred by a standard. (But see then FTC-Commissioner Joshua Wright’s 2013 essay to the contrary, based on the economics of incomplete contracts.)
This approach to SEPs undervalues them, harming the economy. Limitations on seeking injunctions (which are a classic property-right remedy) encourages opportunistic patent infringements and artificially disfavors SEP holders in bargaining over licensing terms with technology implementers, thereby reducing the value of SEPs. SEP holders are further disadvantaged by the presumption that they must license all comers. They also are harmed by the implication that they must be limited to a relatively low hypothetical “ex ante” licensing rate—a rate that totally fails to take into account the substantial economic welfare value that will accrue to the economy due to their contribution to the standard. Considered individually and as a whole, these negative factors discourage innovators from participating in standardization, to the detriment of standards quality. Lower-quality standards translate into inferior standardized produces and processes and reduced innovation.
Recognizing this problem, in 2018 DOJ, Assistant Attorney General for Antitrust Makan Delrahim announced a “New Madison Approach” (NMA) to SEP licensing, which recognized:
antitrust remedies are inappropriate for patent-licensing disputes between SEP-holders and implementers of a standard;
SSOs should not allow collective actions by standard-implementers to disfavor patent holders;
SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents by seeking injunctions; and
unilateral and unconditional decisions not to license a patent should be per se legal. (See, for example, here and here.)
Acceptance of the NMA would have counter-acted the economically harmful degradation of SEPs stemming from prior government policies.
Regrettably, antitrust-enforcement-agency statements during the last year effectively have rejected the NMA. Most recently, in December 2021, the DOJ issued for public comment a Draft Policy Statement on Licensing Negotiations and Remedies, SEPs, which displaces a 2019 statement that had been in line with the NMA. Unless the FTC and Biden DOJ rethink their new position and decide instead to support the NMA, the anti-innovation approach to SEPs will once again prevail, with unfortunate consequences for American innovation.
The “weaker patents” implications of the draft policy statement would also prove detrimental to national security, as explained in a comment on the statement by a group of leading law, economics, and business scholars (including Nobel Laureate Vernon Smith) convened by the International Center for Law & Economics:
China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights. …
Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.
A Center for Security and International Studies submission on the draft policy statement (signed by a former deputy secretary of the DOD, as well as former directors of the U.S. Patent and Trademark Office and the National Institute of Standards and Technology) also raised China-related national-security concerns:
[T]he largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.
Furthermore, in a more general vein, leading innovation economist David Teece also noted the negative national-security implications in his submission on the draft policy statement:
The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation. … Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.
That’s not all. In its public comment warning against precipitous finalization of the draft policy statement, the Innovation Alliance noted that, in recent years, major foreign jurisdictions have rejected the notion that SEP holders should be deprived the opportunity to seek injunctions. The Innovation Alliance opined in detail on the China national-security issues (footnotes omitted):
[T]he proposed shift in policy will undermine the confidence and clarity necessary to incentivize investments in important and risky research and development while simultaneously giving foreign competitors who do not rely on patents to drive investment in key technologies, like China, a distinct advantage. …
The draft policy statement … would devalue SEPs, and undermine the ability of U.S. firms to invest in the research and development needed to maintain global leadership in 5G and other critical technologies.
Without robust American investments, China—which has clear aspirations to control and lead in critical standards and technologies that are essential to our national security—will be left without any competition. Since 2015, President Xi has declared “whoever controls the standards controls the world.” China has rolled out the “China Standards 2035” plan and has outspent the United States by approximately $24 billion in wireless communications infrastructure, while China’s five-year economic plan calls for $400 billion in 5G-related investment.
Simply put, the draft policy statement will give an edge to China in the standards race because, without injunctions, American companies will lose the incentive to invest in the research and development needed to lead in standards setting. Chinese companies, on the other hand, will continue to race forward, funded primarily not by license fees, but by the focused investment of the Chinese government. …
Public hearings are necessary to take into full account the uncertainty of issuing yet another policy on this subject in such a short time period.
A key part of those hearings and further discussions must be the national security implications of a further shift in patent enforceability policy. Our future safety depends on continued U.S. leadership in areas like 5G and artificial intelligence. Policies that undermine the enforceability of patent rights disincentivize the substantial private sector investment necessary for research and development in these areas. Without that investment, development of these key technologies will begin elsewhere—likely China. Before any policy is accepted, key national-security stakeholders in the U.S. government should be asked for their official input.
These are not the only comments that raised the negative national-security ramifications of the draft policy statement (see here and here). For example, current Republican and Democratic senators, prior International Trade Commissioners, and former top DOJ and FTC officials also noted concerns. What’s more, the Patent Protection Society of China, which represents leading Chinese corporate implementers, filed a rather nonanalytic submission in favor of the draft statement. As one leading patent-licensing lawyer explains: “UC Berkley Law Professor Mark Cohen, whose distinguished government service includes serving as the USPTO representative in China, submitted a thoughtful comment explaining how the draft Policy Statement plays into China’s industrial and strategic interests.”
Finally, by weakening patent protection, the draft policy statement is at odds with the 2021 National Security Commission on Artificial Intelligence Report, which called for the United States to “[d]evelop and implement national IP policies to incentivize, expand, and protect emerging technologies[,]” in response to Chinese “leveraging and exploiting intellectual property (IP) policies as a critical tool within its national strategies for emerging technologies.”
In sum, adoption of the draft policy statement would raise antitrust risks, weaken key property rights protections for SEPs, and undercut U.S. technological innovation efforts vis-à-vis China, thereby undermining U.S. national security.
FTC v. Qualcomm: Misguided enforcement and national security
U.S. national-security interests have been threatened by more than just the recent SEP policy pronouncements. In filing a January 2017 antitrust suit (at the very end of the Obama administration) against Qualcomm’s patent-licensing practices, the FTC (by a partisan 2-1 vote) ignored the economic efficiencies that underpinned this highly successful American technology company’s practices. Had the suit succeeded, U.S. innovation in a critically important technology area would have needlessly suffered, with China as a major beneficiary. A recent Federalist Society Regulatory Transparency Project report on the New Madison Approach underscored the broad policy implications of FTC V. Qualcomm (citations deleted):
The FTC’s Qualcomm complaint reflected the anti-SEP bias present during the Obama administration. If it had been successful, the FTC’s prosecution would have seriously undermined the freedom of the company to engage in efficient licensing of its SEPs.
Qualcomm is perhaps the world’s leading wireless technology innovator. It has developed, patented, and licensed key technologies that power smartphones and other wireless devices, and continues to do so. Many of Qualcomm’s key patents are SEPs subject to FRAND, directed to communications standards adopted by wireless devices makers. Qualcomm also makes computer processors and chips embodied in cutting edge wireless devices. Thanks in large part to Qualcomm technology, those devices have improved dramatically over the last decade, offering consumers a vast array of new services at a lower and lower price, when quality is factored in. Qualcomm thus is the epitome of a high tech American success story that has greatly benefited consumers.
Qualcomm: (1) sells its chips to “downstream” original equipment manufacturers (OEMs, such as Samsung and Apple), on the condition that the OEMs obtain licenses to Qualcomm SEPs; and (2) refuses to license its FRAND-encumbered SEPs to rival chip makers, while allowing those rivals to create and sell chips embodying Qualcomm SEP technologies to those OEMS that have entered a licensing agreement with Qualcomm.
The FTC’s 2017 antitrust complaint, filed in federal district court in San Francisco, charged that Qualcomm’s “no license, no chips” policy allegedly “forced” OEM cell phone manufacturers to pay elevated royalties on products that use a competitor’s baseband processors. The FTC deemed this an illegal “anticompetitive tax” on the use of rivals’ processors, since phone manufacturers “could not run the risk” of declining licenses and thus losing all access to Qualcomm’s processors (which would be needed to sell phones on important cellular networks). The FTC also argued that Qualcomm’s refusal to license its rivals despite its SEP FRAND commitment violated the antitrust laws. Finally, the FTC asserted that a 2011-2016 Qualcomm exclusive dealing contract with Apple (in exchange for reduced patent royalties) had excluded business opportunities for Qualcomm competitors.
The federal district court held for the FTC. It ordered that Qualcomm end these supposedly anticompetitive practices and renegotiate its many contracts. [Among the beneficiaries of new pro-implementer contract terms would have been a leading Chinese licensee of Qualcomm’s, Huawei, the huge Chinese telecommunications company that has been accused by the U.S. government of using technological “back doors” to spy on the United States.]
Qualcomm appealed, and in August 2020 a panel of the Ninth Circuit Court of Appeals reversed the district court, holding for Qualcomm. Some of the key points underlying this holding were: (1) Qualcomm had no antitrust duty to deal with competitors, consistent with established Supreme Court precedent (a very narrow exception to this precedent did not apply); (2) Qualcomm’s rates were chip supplier neutral because all OEMs paid royalties, not just rivals’ customers; (3) the lower court failed to show how the “no license, no chips” policy harmed Qualcomm’s competitors; and (4) Qualcomm’s agreements with Apple did not have the effect of substantially foreclosing the market to competitors. The Ninth Circuit as a whole rejected the FTC’s “en banc” appeal for review of the panel decision.
The appellate decision in Qualcomm largely supports pillar four of the NMA, that unilateral and unconditional decisions not to license a patent should be deemed legal under the antitrust laws. More generally, the decision evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support. The FTC and the lower court’s findings of “harm” had been essentially speculative and anecdotal at best. They had ignored the “big picture” that the markets in which Qualcomm operates had seen vigorous competition and the conferral of enormous and growing welfare benefits on consumers, year-by-year. The lower court and the FTC had also turned a deaf ear to a legitimate efficiency-related business rationale that explained Qualcomm’s “no license, no chips” policy – a fully justifiable desire to obtain a fair return on Qualcomm’s patented technology.
Qualcomm is well reasoned, and in line with sound modern antitrust precedent, but it is only one holding. The extent to which this case’s reasoning proves influential in other courts may in part depend on the policies advanced by DOJ and the FTC going forward. Thus, a preliminary examination of the Biden administration’s emerging patent-antitrust policy is warranted. [Subsequent discussion shows that the Biden administration apparently has rejected pro-consumer policies embodied in the 9th U.S. Circuit’s Qualcomm decision and in the NMA.]
Although the 9th Circuit did not comment on them, national-security-policy concerns weighed powerfully against the FTC v. Qualcomm suit. In a July 2019 Statement of Interest (SOI) filed with the circuit court, DOJ cogently set forth the antitrust flaws in the district court’s decision favoring the FTC. Furthermore, the SOI also explained that “the public interest” favored a stay of the district court holding, due to national-security concerns (described in some detail in statements by the departments of Defense and Energy, appended to the SOI):
[T]he public interest also takes account of national security concerns. Winter v. NRDC, 555 U.S. 7, 23-24 (2008). This case presents such concerns. In the view of the Executive Branch, diminishment of Qualcomm’s competitiveness in 5G innovation and standard-setting would significantly impact U.S. national security. A251-54 (CFIUS); LD ¶¶10-16 (Department of Defense); ED ¶¶9-10 (Department of Energy). Qualcomm is a trusted supplier of mission-critical products and services to the Department of Defense and the Department of Energy. LD ¶¶5-8; ED ¶¶8-9. Accordingly, the Department of Defense “is seriously concerned that any detrimental impact on Qualcomm’s position as global leader would adversely affect its ability to support national security.” LD ¶16.
The [district] court’s remedy [requiring the renegotiation of Qualcomm’s licensing contracts] is intended to deprive, and risks depriving, Qualcomm of substantial licensing revenue that could otherwise fund time-sensitive R&D and that Qualcomm cannot recover later if it prevails. See, e.g., Op. 227-28. To be sure, if Qualcomm ultimately prevails, vacatur of the injunction will limit the severity of Qualcomm’s revenue loss and the consequent impairment of its ability to perform functions critical to national security. The Department of Defense “firmly believes,” however, “that any measure that inappropriately limits Qualcomm’s technological leadership, ability to invest in [R&D], and market competitiveness, even in the short term, could harm national security. The risks to national security include the disruption of [the Department’s] supply chain and unsure U.S. leadership in 5G.” LD ¶3. Consequently, the public interest necessitates a stay pending this Court’s resolution of the merits. In these rare circumstances, the interest in preventing even a risk to national security—“an urgent objective of the highest order”—presents reason enough not to enforce the remedy immediately. Int’l Refugee Assistance Project, 137 S. Ct. at 2088 (internal quotations omitted).
Not all national-security arguments against antitrust enforcement may be well-grounded, of course. The key point is that the interests of national security and consumer-welfare-centric antitrust are fully aligned when antitrust suits would inefficiently undermine the competitive vigor of a firm or firms that play a major role in supporting U.S. national-security interests. Such was the case in FTC v. Qualcomm. More generally, heightened antitrust scrutiny of efficient patent-licensing practices (as threatened by the Biden administration) would tend to diminish innovation by U.S. patentees, particularly in areas covered by standards that are key to leading global technologies. Such a diminution in innovation will tend to weaken American advantages in important industry sectors that are vital to U.S. national-security interests.
Proposed Federal Antitrust Legislation
Proposed federal antitrust legislation being considered by Congress (see here, here, and here for informed critiques) would prescriptively restrict certain large technology companies’ business transactions. If enacted, such legislation would thereby preclude case-specific analysis of potential transaction-specific efficiencies, thereby undermining the consumer welfare standard at the heart of current sound and principled antitrust enforcement. The legislation would also be at odds with our national-security interests, as a recent U.S. Chamber of Commerce paper explains:
Congress is considering new antitrust legislation which, perversely, would weaken leading U.S. technology companies by crafting special purpose regulations under the guise of antitrust to prohibit those firms from engaging in business conduct that is widely acceptable when engaged in by rival competitors.
A series of legislative proposals – some of which already have been approved by relevant Congressional committees – would, among other things: dismantle these companies; prohibit them from engaging in significant new acquisitions or investments; require them to disclose sensitive user data and sensitive IP and trade secrets to competitors, including those that are foreign-owned and controlled; facilitate foreign influence in the United States; and compromise cybersecurity. These bills would fundamentally undermine American security interests while exempting from scrutiny Chinese and other foreign firms that do not meet arbitrary user and market capitalization thresholds specified in the legislation. …
The United States has never used legislation to punish success. In many industries, scale is important and has resulted in significant gains for the American economy, including small businesses. U.S. competition law promotes the interests of consumers, not competitors. It should not be used to pick winners and losers in the market or to manage competitive outcomes to benefit select competitors. Aggressive competition benefits consumers and society, for example by pushing down prices, disrupting existing business models, and introducing innovative products and services.
If enacted, the legislative proposals would drag the United States down in an unfolding global technological competition. Companies captured by the legislation would be required to compete against integrated foreign rivals with one hand tied behind their backs. Those firms that are the strongest drivers of U.S. innovation in AI, quantum computing, and other strategic technologies would be hamstrung or even broken apart, while foreign and state-backed producers of these same technologies would remain unscathed and seize the opportunity to increase market share, both in the U.S. and globally. …
Instead of warping antitrust law to punish a discrete group of American companies, the U.S. government should focus instead on vigorous enforcement of current law and on vocally opposing and effectively countering foreign regimes that deploy competition law and other legal and regulatory methods as industrial policy tools to unfairly target U.S. companies. The U.S. should avoid self-inflicted wounds to our competitiveness and national security that would result from turning antitrust into a weapon against dynamic and successful U.S. firms.
Consistent with this analysis, former Obama administration Defense Secretary Leon Panetta and former Trump administration Director of National Intelligence Dan Coats argued in a letter to U.S. House leadership (see here) that “imposing severe restrictions solely on U.S. giants will pave the way for a tech landscape dominated by China — echoing a position voiced by the Big Tech companies themselves.”
The national-security arguments against current antitrust legislative proposals, like the critiques of the unfounded FTC v. Qualcomm case, represent an alignment between sound antitrust policy and national-security analysis. Unfounded antitrust attacks on efficient business practices by large firms that help maintain U.S. technological leadership in key areas undermine both principled antitrust and national security.
Enlightened antitrust enforcement, centered on consumer welfare, can and should be read in a manner that is harmonious with national-security interests.
The cooperation between U.S. federal antitrust enforcers and the DOD in assessing defense-industry mergers and joint ventures is, generally speaking, an example of successful harmonization. This success reflects the fact that antitrust enforcers carry out their reviews of those transactions with an eye toward accommodating efficiencies that advance defense goals without sacrificing consumer welfare. Close antitrust-agency consultation with DOD is key to that approach.
Unfortunately, federal enforcement directed toward efficient intellectual-property licensing, as manifested in the Qualcomm case, reflects a disharmony between antitrust and national security. This disharmony could be eliminated if DOJ and the FTC adopted a dynamic view of intellectual property and the substantial economic-welfare benefits that flow from restrictive patent-licensing transactions.
In sum, a dynamic analysis reveals that consumer welfare is enhanced, not harmed, by not subjecting such licensing arrangements to antitrust threat. A more permissive approach to licensing is thus consistent with principled antitrust and with the national security interest of protecting and promoting strong American intellectual property (and, in particular, patent) protection. The DOJ and the FTC should keep this in mind and make appropriate changes to their IP-antitrust policies forthwith.
Finally, proposed federal antitrust legislation would bring about statutory changes that would simultaneously displace consumer welfare considerations and undercut national security interests. As such, national security is supported by rejecting unsound legislation, in order to keep in place consumer-welfare-based antitrust enforcement.
President Joe Biden’s July 2021 executive order set forth a commitment to reinvigorate U.S. innovation and competitiveness. The administration’s efforts to pass the America COMPETES Act would appear to further demonstrate a serious intent to pursue these objectives.
Yet several actions taken by federal agencies threaten to undermine the intellectual-property rights and transactional structures that have driven the exceptional performance of U.S. firms in key areas of the global innovation economy. These regulatory missteps together represent a policy “lose-lose” that lacks any sound basis in innovation economics and threatens U.S. leadership in mission-critical technology sectors.
Life Sciences: USTR Campaigns Against Intellectual-Property Rights
In the pharmaceutical sector, the administration’s signature action has been an unprecedented campaign by the Office of the U.S. Trade Representative (USTR) to block enforcement of patents and other intellectual-property rights held by companies that have broken records in the speed with which they developed and manufactured COVID-19 vaccines on a mass scale.
Patents were not an impediment in this process. To the contrary: they were necessary predicates to induce venture-capital investment in a small firm like BioNTech, which undertook drug development and then partnered with the much larger Pfizer to execute testing, production, and distribution. If success in vaccine development is rewarded with expropriation, this vital public-health sector is unlikely to attract investors in the future.
Contrary to increasingly common assertions that the Bayh-Dole Act (which enables universities to seek patents arising from research funded by the federal government) “robs” taxpayers of intellectual property they funded, the development of Covid-19 vaccines by scientist-founded firms illustrates how the combination of patents and private capital is essential to convert academic research into life-saving medical solutions. The biotech ecosystem has long relied on patents to structure partnerships among universities, startups, and large firms. The costly path from lab to market relies on a secure property-rights infrastructure to ensure exclusivity, without which no investor would put capital at stake in what is already a high-risk, high-cost enterprise.
This is not mere speculation. During the decades prior to the Bayh-Dole Act, the federal government placed strict limitations on the ability to patent or exclusively license innovations arising from federally funded research projects. The result: the market showed little interest in making the investment needed to convert those innovations into commercially viable products that might benefit consumers. This history casts great doubt on the wisdom of the USTR’s campaign to limit the ability of biopharmaceutical firms to maintain legal exclusivity over certain life sciences innovations.
Genomics: FTC Attempts to Block the Illumina/GRAIL Acquisition
In the genomics industry, the Federal Trade Commission (FTC) has devoted extensive resources to oppose the acquisition by Illumina—the market leader in next-generation DNA-sequencing equipment—of a medical-diagnostics startup, GRAIL (an Illumina spinoff), that has developed an early-stage cancer screening test.
It is hard to see the competitive threat. GRAIL is a pre-revenue company that operates in a novel market segment and its diagnostic test has not yet received approval from the Food and Drug Administration (FDA). To address concerns over barriers to potential competitors in this nascent market, Illumina has committed to 12-year supply contracts that would bar price increases or differential treatment for firms that develop oncology-detection tests requiring use of the Illumina platform.
The FTC’s case against Illumina’s re-acquisition of GRAIL relies on theoretical predictions of consumer harm in a market that is not yet operational. Hypothetical market failure scenarios may suit an academic seminar but fall well below the probative threshold for antitrust intervention.
Most critically, the Illumina enforcement action places at-risk a key element of well-functioning innovation ecosystems. Economies of scale and network effects lead technology markets to converge on a handful of leading platforms, which then often outsource research and development by funding and sometimes acquiring smaller firms that develop complementary technologies. This symbiotic relationship encourages entry and benefits consumers by bringing new products to market as efficiently as possible.
If antitrust interventions based on regulatory fiat, rather than empirical analysis, disrupt settled expectations in the M&A market that innovations can be monetized through acquisition transactions by larger firms, venture capital may be unwilling to fund such startups in the first place. Independent development or an initial public offering are often not feasible exit options. It is likely that innovation will then retreat to the confines of large incumbents that can fund research internally but often execute it less effectively.
Wireless Communications: DOJ Takes Aim at Standard-Essential Patents
Wireless communications stand at the heart of the global transition to a 5G-enabled “Internet of Things” that will transform business models and unlock efficiencies in myriad industries. It is therefore of paramount importance that policy actions in this sector rest on a rigorous economic basis. Unfortunately, a recent policy shift proposed by the U.S. Department of Justice’s (DOJ) Antitrust Division does not meet this standard.
In December 2021, the Antitrust Division released a draft policy statement that would largely bar owners of standard-essential patents from seeking injunctions against infringers, which are usually large device manufacturers. These patents cover wireless functionalities that enable transformative solutions in myriad industries, ranging from communications to transportation to health care. A handful of U.S. and European firms lead in wireless chip design and rely on patent licensing to disseminate technology to device manufacturers and to fund billions of dollars in research and development. The result is a technology ecosystem that has enjoyed continuous innovation, widespread user adoption, and declining quality-adjusted prices.
Rather than promoting competition or innovation, the proposed policy would simply transfer wealth from firms that develop new technologies at great cost and risk to firms that prefer to use those technologies at no cost at all. This does not benefit anyone other than device manufacturers that already capture the largest portion of economic value in the smartphone supply chain.
From international trade to antitrust to patent policy, the administration’s actions imply little appreciation for the property rights and contractual infrastructure that support real-world innovation markets. In particular, the administration’s policies endanger the intellectual-property rights and monetization pathways that support market incentives to invest in the development and commercialization of transformative technologies.
This creates an inviting vacuum for strategic rivals that are vigorously pursuing leadership positions in global technology markets. In industries that stand at the heart of the knowledge economy—life sciences, genomics, and wireless communications—the administration is on a counterproductive trajectory that overlooks the business realities of technology markets and threatens to push capital away from the entrepreneurs that drive a robust innovation ecosystem. It is time to reverse course.
The Jan. 18 Request for Information on Merger Enforcement (RFI)—issued jointly by the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ)—sets forth 91 sets of questions (subsumed under 15 headings) that provide ample opportunity for public comment on a large range of topics.
Before chasing down individual analytic rabbit holes related to specific questions, it would be useful to reflect on the “big picture” policy concerns raised by this exercise (but not hinted at in the questions). Viewed from a broad policy perspective, the RFI initiative risks undermining the general respect that courts have accorded merger guidelines over the years, as well as disincentivizing economically beneficial business consolidations.
Policy concerns that flow from various features of the RFI, which could undermine effective merger enforcement, are highlighted below. These concerns counsel against producing overly detailed guidelines that adopt a merger-skeptical orientation.
The RFI Reflects the False Premise that Competition is Declining in the United States
The FTC press release that accompanied the RFI’s release made clear that a supposed weakening of competition under the current merger-guidelines regime is a key driver of the FTC and DOJ interest in new guidelines:
Today, the Federal Trade Commission (FTC) and the Justice Department’s Antitrust Division launched a joint public inquiry aimed at strengthening enforcement against illegal mergers. Recent evidence indicates that many industries across the economy are becoming more concentrated and less competitive – imperiling choice and economic gains for consumers, workers, entrepreneurs, and small businesses.
This premise is not supported by the facts. Based on a detailed literature review, Chapter 6 of the 2020 Economic Report of the President concluded that “the argument that the U.S. economy is suffering from insufficient competition is built on a weak empirical foundation and questionable assumptions.” More specifically, the 2020 Economic Report explained:
Research purporting to document a pattern of increasing concentration and increasing markups uses data on segments of the economy that are far too broad to offer any insights about competition, either in specific markets or in the economy at large. Where data do accurately identify issues of concentration or supercompetitive profits, additional analysis is needed to distinguish between alternative explanations, rather than equating these market indicators with harmful market power.
Soon to-be-published quantitative research by Robert Kulick of NERA Economic Consulting and the American Enterprise Institute, presented at the Jan. 26 Mercatus Antitrust Forum, is consistent with the 2020 Economic Report’s findings. Kulick stressed that there was no general trend toward increasing industrial concentration in the U.S. economy from 2002 to 2017. In particular, industrial concentration has been declining since 2007; the Herfindahl–Hirschman index (HHI) for manufacturing has declined significantly since 2002; and the economywide four-firm concentration ratio (CR4) in 2017 was approximately the same as in 2002.
Even in industries where concentration may have risen, “the evidence does not support claims that concentration is persistent or harmful.” In that regard, Kulick’s research finds that higher-concentration industries tend to become less concentrated, while lower-concentration industries tend to become more concentrated over time; increases in industrial concentration are associated with economic growth and job creation, particularly for high-growth industries; and rising industrial concentration may be driven by increasing market competition.
In short, the strongest justification for issuing new merger guidelines is based on false premises: an alleged decline in competition within the Unites States. Given this reality, the adoption of revised guidelines designed to “ratchet up” merger enforcement would appear highly questionable.
The RFI Strikes a Merger-Skeptical Tone Out of Touch with Modern Mainstream Antitrust Scholarship
The overall tone of the RFI reflects a skeptical view of the potential benefits of mergers. It ignores overarching beneficial aspects of mergers, which include reallocating scarce resources to higher-valued uses (through the market for corporate control) and realizing standard efficiencies of various sorts (including cost-based efficiencies and incentive effects, such as the elimination of double marginalization through vertical integration). Mergers also generate benefits by bringing together complementary assets and by generating synergies of various sorts, including the promotion of innovation and scaling up the fruits of research and development. (See here, for example.)
What’s more, as the Organisation for Economic Co-operation and Development (OECD) has explained, “[e]vidence suggests that vertical mergers are generally pro-competitive, as they are driven by efficiency-enhancing motives such as improving vertical co-ordination and realizing economies of scope.”
Given the manifold benefits of mergers in general, the negative and merger-skeptical tone of the RFI is regrettable. It not only ignores sound economics, but it is at odds with recent pronouncements by the FTC and DOJ. Notably, the 2010 DOJ-FTC Horizontal Merger Guidelines (issued by Obama administration enforcers) struck a neutral tone. Those guidelines recognized the duty to challenge anticompetitive mergers while noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (“[t]he Agencies seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral”). The same neutral approach is found in the 2020 DOJ-FTC Vertical Merger Guidelines (“the Agencies use a consistent set of facts and assumptions to evaluate both the potential competitive harm from a vertical merger and the potential benefits to competition”).
The RFI, however, expresses no concern about unnecessary government interference, and strongly emphasizes the potential shortcomings of the existing guidelines in questioning whether they “adequately equip enforcers to identify and proscribe unlawful, anticompetitive mergers.” Merger-skepticism is also reflected throughout the RFI’s 91 sets of questions. A close reading reveals that they are generally phrased in ways that implicitly assume competitive problems or reject potential merger justifications.
For example, the questions addressing efficiencies, under RFI heading 14, casts efficiencies in a generally negative light. Thus, the RFI asks whether “the [existing] guidelines’ approach to efficiencies [is] consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts,” citing the statement in FTC v. Procter & Gamble (1967) that “[p]ossible economies cannot be used as a defense to illegality.”
The view that antitrust disfavors mergers that enhance efficiencies (the “efficiencies offense”) has been roundly rejected by mainstream antitrust scholarship (see, for example, here, here, and here). It may be assumed that today’s Supreme Court (which has deemed consumer welfare to be the lodestone of antitrust enforcement since Reiter v. Sonotone (1979)) would give short shrift to an “efficiencies offense” justification for a merger challenge.
Another efficiencies-related question, under RFI heading 14.d, may in application fly in the face of sound market-oriented economics: “Where a merger is expected to generate cost savings via the elimination of ‘excess’ or ‘redundant’ capacity or workers, should the guidelines treat these savings as cognizable ‘efficiencies’?”
Consider a merger that generates synergies and thereby expands and/or raises the quality of goods and services produced with reduced capacity and fewer workers. This merger would allow these resources to be allocated to higher-valued uses elsewhere in the economy, yielding greater economic surplus for consumers and producers. But there is the risk that such a merger could be viewed unfavorably under new merger guidelines that were revised in light of this question. (Although heading 14.d includes a separate question regarding capacity reductions that have the potential to reduce supply resilience or product or service quality, it is not stated that this provision should be viewed as a limitation on the first sentence.)
The RFI’s discussion of topics other than efficiencies similarly sends the message that existing guidelines are too “pro-merger.” Thus, for example, under RFI heading 5 (“presumptions”), one finds the rhetorical question: “[d]o the [existing] guidelines adequately identify mergers that are presumptively unlawful under controlling case law?”
This question answers itself, by citing to the Philadelphia National Bank (1963) statement that “[w]ithout attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat.” This statement predates all of the merger guidelines and is out of step with the modern economic analysis of mergers, which the existing guidelines embody. It would, if taken seriously, threaten a huge number of proposed mergers that, until now, have not been subject to second-request review by the DOJ and FTC. As Judge Douglas Ginsburg and former Commissioner Joshua Wright have explained:
The practical effect of the PNB presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, without requiring evidence – other than market shares – that the proposed merger is likely to harm competition. . . . The presumption ought to go the way of the agencies’ policy decision to drop reliance upon the discredited antitrust theories approved by the courts in such cases as Brown Shoe, Von’s Grocery, and Utah Pie. Otherwise, the agencies will ultimately have to deal with the tension between taking advantage of a favorable presumption in litigation and exerting a reformative influence on the direction of merger law.
By inviting support for PNB-style thinking, RFI heading 5’s lead question effectively rejects the economic effects-based analysis that has been central to agency merger analysis for decades. Guideline revisions that downplay effects in favor of mere concentration would likely be viewed askance by reviewing courts (and almost certainly would be rejected by the Supreme Court, as currently constituted, if the occasion arose).
These particularly striking examples are illustrative of the questioning tone regarding existing merger analysis that permeates the RFI.
New Merger Guidelines, if Issued, Should Not Incorporate the Multiplicity of Issues Embodied in the RFI
The 91 sets of questions in the RFI read, in large part, like a compendium of theoretical harms to the working of markets that might be associated with mergers. While these questions may be of general academic interest, and may shed some light on particular merger investigations, most of them should not be incorporated into guidelines.
As Justice Stephen Breyer has pointed out, antitrust is a legal regime that must account for administrative practicalities. Then-Judge Breyer described the nature of the problem in his 1983 Barry Wright opinion (affirming the dismissal of a Sherman Act Section 2 complaint based on “unreasonably low” prices):
[W]hile technical economic discussion helps to inform the antitrust laws, those laws cannot precisely replicate the economists’ (sometimes conflicting) views. For, unlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve.
It follows that any effort to include every theoretical merger-related concern in new merger guidelines would undercut their (presumed) overarching purpose, which is providing useful guidance to the private sector. All-inclusive “guidelines” in reality provide no guidance at all. Faced with a laundry list of possible problems that might prompt the FTC or DOJ to oppose a merger, private parties would face enormous uncertainty, which could deter them from proposing a large number of procompetitive, welfare-enhancing or welfare-neutral consolidations. This would “undercut the very economic ends” of promoting competition that is served by Section 7 enforcement.
Furthermore, all-inclusive merger guidelines could be seen by judges as undermining the rule of law (see here, for example). If DOJ and FTC were able to “pick and choose” at will from an enormously wide array of considerations to justify opposing a proposed merger, they could be seen as engaged in arbitrary enforcement, rather than in a careful weighing of evidence aimed at condemning only anticompetitive transactions. This would be at odds with the promise of fair and dispassionate enforcement found in the 2010 Horizontal Merger Guidelines, namely, to “seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.”
Up until now, federal courts have virtually always implicitly deferred to (and not questioned) the application of merger-guideline principles by the DOJ and FTC. The agencies have won or lost cases based on courts’ weighing of particular factual and economic evidence, not on whether guideline principles should have been applied by the enforcers.
One would expect courts to react very differently, however, to cases brought in light of ridiculously detailed “guidelines” that did not provide true guidance (particularly if they were heavy on competitive harm possibilities and discounted efficiencies). The agencies’ selective reliance on particular anticompetitive theories could be seen as exercises in arbitrary “pre-cooked” condemnations, not dispassionate enforcement. As such, the courts would tend to be far more inclined to reject (or accord far less deference to) the new guidelines in evaluating agency merger challenges. Even transactions that would have been particularly compelling candidates for condemnation under prior guidelines could be harder to challenge successfully, due to the taint of the new guidelines.
In short, the adoption of highly detailed guidelines that emphasize numerous theories of harm would likely undermine the effectiveness of DOJ and FTC merger enforcement, the precise opposite of what the agencies would have intended.
New Merger Guidelines, if Issued, Should Avoid Relying on Outdated Case Law and Novel Section 7 Theories, and Should Give Due Credit to Economic Efficiencies
The DOJ and FTC could, of course, acknowledge the problem of administrability and issue more straightforward guideline revisions, of comparable length and detail to prior guidelines. If they choose to do so, they would be well-advised to eschew relying on dated precedents and novel Section 7 theories. They should also give due credit to efficiencies. Seemingly biased guidelines would undermine merger enforcement, not strengthen it.
As discussed above, the RFI’s implicitly favorable references to Philadelphia National Bank and Procter & Gamble are at odds with contemporary economics-based antitrust thinking, which has been accepted by the federal courts. The favorable treatment of those antediluvian holdings, and Brown Shoe Co. v. United States (1962) (another horribly dated case cited multiple times in the RFI), would do much to discredit new guidelines.
In that regard, the suggestion in RFI heading 1 that existing merger guidelines may not “faithfully track the statutory text, legislative history, and established case law around merger enforcement” touts the Brown Shoe and PNB concerns with a “trend toward concentration” and “the danger of subverting congressional intent by permitting a too-broad economic investigation.”
New guidelines that focus on (or even give lip service to) a “trend” toward concentration and eschew overly detailed economic analyses (as opposed, perhaps, to purely concentration-based negative rules of thumb?) would predictably come in for judicial scorn as economically unfounded. Such references would do as much (if not more) to ensure judicial rejection of enforcement-agency guidelines as endless lists of theoretically possible sources of competitive harm, discussed previously.
Of particular concern are those references that implicitly reject the need to consider efficiencies, which is key to modern enlightened merger evaluations. It is ludicrous to believe that a majority of the current Supreme Court would have a merger-analysis epiphany and decide that the RFI’s preferred interventionist reading of Section 7 statutory language and legislative history trumps decades of economically centered consumer-welfare scholarship and agency guidelines.
Herbert Hovenkamp, author of the leading American antitrust treatise and a scholar who has been cited countless times by the Supreme Court, recently put it well (in an article coauthored with Carl Shapiro):
When the FTC investigates vertical and horizontal mergers will it now take the position that efficiencies are irrelevant, even if they are proven? If so, the FTC will face embarrassing losses in court.
Reviewing courts wound no doubt take heed of this statement in assessing any future merger guidelines that rely on dated and discredited cases or that minimize efficiencies.
New Guidelines, if Issued, Should Give Due Credit to Efficiencies
Heading 14 of the RFI—listing seven sets of questions that deal with efficiencies—is in line with the document’s implicitly negative portrayal of mergers. The heading begins inauspiciously, with a question that cites Procter & Gamble in suggesting that the current guidelines’ approach to efficiencies is “[in]consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts.” As explained above, such an anti-efficiencies reference would be viewed askance by most, if not all, reviewing judges.
Other queries in heading 14 also view efficiencies as problematic. They suggest that efficiency claims should be treated negatively because efficiency claims are not always realized after the fact. But merger activity is a private-sector search process, and the ability to predict ex post effects with perfect accuracy is an inevitable part of market activity. Using such a natural aspect of markets as an excuse to ignore efficiencies would prevent many economically desirable consolidations from being achieved.
Furthermore, the suggestion under heading 14 that parties should have to show with certainty that cognizable efficiencies could not have been achieved through alternative means asks the impossible. Theoreticians may be able to dream up alternative means by which efficiencies might have been achieved (say, through convoluted contracts), but such constructs may not be practical in real-world settings. Requiring businesses to follow dubious theoretical approaches to achieve legitimate business ends, rather than allowing them to enter into arrangements they favor that appear efficient, would manifest inappropriate government interference in markets. (It would be just another example of the “pretense of knowledge” that Friedrich Hayek brilliantly described in his 1974 Nobel Prize lecture.)
Other questions under heading 14 raise concerns about the lack of discussion of possible “inefficiencies” in current guidelines, and speculate about possible losses of “product or service quality” due to otherwise efficient reductions in physical capacity and employment. Such theoretical musings offer little guidance to the private sector, and further cast in a negative light potential real resource savings.
Rather than incorporate the unhelpful theoretical efficiencies critiques under heading 14, the agencies should consider a more helpful approach to clarifying the evaluation of efficiencies in new guidelines. Such a clarification could be based on Commissioner Christine Wilson’s helpful discussion of merger efficiencies in recent writings (see, for example, here and here). Wilson has appropriately called for the symmetric treatment of both the potential harms and benefits arising from mergers, explaining that “the agencies readily credit harms but consistently approach potential benefits with extreme skepticism.”
She and Joshua Wright have also explained (see here, here, and here) that overly narrow product-market definitions may sometimes preclude consideration of substantial “out-of-market” efficiencies that arise from certain mergers. The consideration of offsetting “out-of-market” efficiencies that greatly outweigh competitive harms might warrant inclusion in new guidelines.
The FTC and DOJ could be heading for a merger-enforcement train wreck if they adopt new guidelines that incorporate the merger-skeptical tone and excruciating level of detail found in the RFI. This approach would yield a lengthy and uninformative laundry list of potential competitive problems that would allow the agencies to selectively pick competitive harm “stories” best adapted to oppose particular mergers, in tension with the rule of law.
Far from “strengthening” merger enforcement, such new guidelines would lead to economically harmful business uncertainty and would severely undermine judicial respect for the federal merger-enforcement process. The end result would be a “lose-lose” for businesses, for enforcers, and for the American economy.
If the agencies enact new guidelines, they should be relatively short and straightforward, designed to give private parties the clearest possible picture of general agency enforcement intentions. In particular, new guidelines should:
Eschew references to dated and discredited case law;
Adopt a neutral tone that acknowledges the beneficial aspects of mergers;
Recognize the duty to challenge anticompetitive mergers, while at the same time noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (consistent with the 2010 Horizontal Merger Guidelines); and
Acknowledge the importance of efficiencies, treating them symmetrically with competitive harm and according appropriate weight to countervailing out-of-market efficiencies (a distinct improvement over existing enforcement policy).
Merger enforcement should continue to be based on fact-based case-specific evaluations, informed by sound economics. Populist nostrums that treat mergers with suspicion and that ignore their beneficial aspects should be rejected. Such ideas are at odds with current scholarly thinking and judicial analysis, and should be relegated to the scrap heap of outmoded and bad public policies.
As a new year dawns, the Biden administration remains fixated on illogical, counterproductive “big is bad” nostrums.
Noted economist and former Clinton Treasury Secretary Larry Summers correctly stressed recently that using antitrust to fight inflation represents “science denial,” tweeting that:
In his extended Twitter thread, Summers notes that labor shortages are the primary cause of inflation over time and that lowering tariffs, paring back import restrictions (such as the Buy America Act), and reducing regulatory delays are vital to combat inflation.
Summers’ points, of course, are right on the mark. Indeed, labor shortages, supply-chain issues, and a dramatic increase in regulatory burdens have been key to the dramatic run-up of prices during the Biden administration’s first year. Reducing the weight of government on the private sector and thereby enhancing incentives for increased investment, labor participation, and supply are the appropriate weapons to slow price rises and incentivize economic growth.
More specifically, administration policies can be pinpointed as the cause, not the potential solution to, rapid price increases in specific sectors, particularly the oil and gas industry. As I recently commented, policies that disincentivize new energy production, and fail to lift excessive regulatory burdens, have been a key factor in sparking rises in gasoline prices. Administration claims that anticompetitive activity is behind these prices increases should be discounted. New Federal Trade Commission (FTC) investigations of oil and gas companies would waste resources and increase already large governmental burdens on those firms.
The administration, nevertheless, appears committed to using antitrust as an anti-inflationary “tool” against “big business” (or perhaps, really, as a symbolic hammer to shift blame to the private sector for rising prices). Recent pronouncements about combatting “big meat” are a case in point.
The New ‘Big Meat’ Crusade
Part of the administration’s crusade against “big meat” involves providing direct government financial support for favored firms. A U.S. Department of Agriculture (USDA) plan to spend up to $1 billion to assist smaller meat processors is a subsidy that artificially favors one group of competitors. This misguided policy, which bears the scent of special-interest favoritism, wastes taxpayer dollars and distorts free-market outcomes. It will do nothing to cure supply and regulatory problems that affect rising meat prices. It will, however, misallocate resources.
The other key aspect of the big meat initiative smacks more of problematic, old-style, economics-free antitrust. It centers on: (1) threatening possible antitrust actions against four large meat processors based principally on their size and market share; and (2) initiating a planned rulemaking under the Packers and Stockyards Act. (That rulemaking was foreshadowed by language in the July 2021 Biden Administration Executive Order on Competition.)
The administration’s apparent focus on the “dominance” of four large meatpacking firms (which have the temerity to collectively hold greater than 50% market shares in the hog, cattle, and chicken sectors) and the 120% jump in their gross profits since the pandemic began is troubling. It echoes the structuralist “big is bad” philosophy of the 1950s and 1960s. In and of itself, large market share is not, of course, an antitrust problem, nor are large gross profits. Rather, those metrics typically signal a particular firm’s superior efficiency relative to the competition. (Gross profit “reflects the efficiency of a business in terms of making use of its labor, raw material and other supplies.”) Antitrust investigations of firms merely because they are large would inefficiently bloat those companies’ costs and discourage them from engaging in cost-reducing new capacity and production improvements. This would tend to raise, not lower, prices by major firms. It thus would lower consumer welfare, a result at odds with the guiding policy goal of antitrust, which is to promote consumer welfare.
The administration’s announcement that the USDA “will also propose rules this year to strengthen enforcement of the Packers and Stockyards Act” is troublesome. That act, dating back to 1921, uses broad terms that extend beyond antitrust law (such as a prohibition on “giv[ing] any undue or unreasonable preference or advantage to any particular person”) and threatens to penalize efficient conduct by individual competitors. “Ratcheting up” enforcement under this act also could undermine business efficiency and paradoxically raise, not lower, prices.
Obviously, the specifics of the forthcoming proposed rules have not yet been revealed. Nevertheless, the administration’s “big is bad” approach to “big meat” strongly signals that one may expect rules to generate new costly and inefficient restrictions on meat-packer conduct. Such restrictions, of course, would be at odds with vibrant competition and consumer-welfare enhancement.
This is not to say, of course, that meat packing should be immune from antitrust attention. Such scrutiny, however, should not be transfixed by “big is bad” concerns. Rather, it should center on the core antitrust goal of combatting harmful business conduct that unreasonably restrains competition and reduces consumer welfare. A focus on ferreting out collusive agreements among meat processors, such as price-fixing schemes, should have pride of place. The U.S. Justice Department’s already successful ongoing investigation into price fixing in the broiler-chicken industry is precisely the sort of antitrust initiative on which the administration should expend its scarce enforcement resources.
In sum, the Biden administration could do a lot of good in antitrust land if it would only set aside its nostalgic “big is bad” philosophy. It should return to the bipartisan enlightened understanding that antitrust is a consumer-welfare prescription that is based on sound and empirically based economics and is concerned with economically inefficient conduct that softens or destroys competition.
If it wants to stray beyond mere enforcement, the administration could turn its focus toward dismantling welfare-reducing anticompetitive federal regulatory schemes, rather than adding to private-sector regulatory burdens. For more about how to do this, we recommend that the administration consult a just-released Mercatus Center policy brief that Andrew Mercado and I co-authored.
Even as delivery services work to ship all of those last-minute Christmas presents that consumers bought this season from digital platforms and other e-commerce sites, the U.S. House and Senate are contemplating Grinch-like legislation that looks to stop or limit how Big Tech companies can “self-preference” or “discriminate” on their platforms.
A platform “self-preferences” when it blends various services into the delivery of a given product in ways that third parties couldn’t do themselves. For example, Google self-preferences when it puts a Google Shopping box at the top of a Search page for Adidas sneakers. Amazon self-preferences when it offers its own AmazonBasics USB cables alongside those offered by Apple or Anker. Costco’s placement of its own Kirkland brand of paper towels on store shelves can also be a form of self-preferencing.
Such purportedly “discriminatory” behavior constitutes much of what platforms are designed to do. Virtually every platform that offers a suite of products and services will combine them in ways that users find helpful, even if competitors find it infuriating. It surely doesn’t help Yelp if Google Search users can see a Maps results box next to a search for showtimes at a local cinema. It doesn’t help other manufacturers of charging cables if Amazon sells a cheaper version under a brand that consumers trust. But do consumers really care about Yelp or Apple’s revenues, when all they want are relevant search results and less expensive products?
Until now, competition authorities have judged this type of conduct under the consumer welfare standard: does it hurt consumers in the long run, or does it help them? This test does seek to evaluate whether the conduct deprives consumers of choice by foreclosing rivals, which could ultimately allow the platform to exploit its customers. But it doesn’t treat harm to competitors—in the form of reduced traffic and profits for Yelp, for example—as a problem in and of itself.
“Non-discrimination” bills introduced this year in both the House and Senate aim to change that, but they would do so in ways that differ in important respects.
The House bill would impose a blanket ban on virtually all “discrimination” by platforms. This means that even such benign behavior as Facebook linking to Facebook Marketplace on its homepage would become presumptively unlawful. The measure would, as I’ve written before, break a lot of the Internet as we know it, but it has the virtue of being explicit and clear about its effects.
The Senate bill is, in this sense, a lot more circumspect. Instead of a blanket ban, it would prohibit what the bill refers to as “unfair” discrimination that “materially harm[s] competition on the covered platform,” with a carve-out exception for discrimination that was “necessary” to maintain or enhance the “core functionality” of the platform. In theory, this would avoid a lot of the really crazy effects of the House bill. Apple likely still could, for example, pre-install a Camera app on the iPhone.
But this greater degree of reasonableness comes at the price of ambiguity. The bill does not define “unfair discrimination,” nor what it would mean for something to be “necessary” to improve the core functionality of a platform. Faced with this ambiguity, companies would be wise to be overly cautious, given the steep penalties they would face for conduct found to be “unfair”: 15% of total U.S. revenues earned during the period when the conduct was ongoing. That’s a lot of money to risk over a single feature!
Also unlike the House legislation, the Senate bill would not create a private right of action, thereby limiting litigation to enforce the bill’s terms to actions brought by the Federal Trade Commission (FTC), U.S. Justice Department (DOJ), or state attorneys general.
Put together, these features create the perfect recipe for extensive discretionary power held by a handful of agencies. With such vague criteria and such massive penalties for lawbreaking, the mere threat of a lawsuit could force a company to change its behavior. The rules are so murky that companies might even be threatened with a lawsuit over conduct in one area in order to make them change their behavior in another.
The FTC itself has a history of abusing its authority. As Commissioners Noah Phillips and Christine Wilson remind us, the commission was nearly shut down in the 1970s after trying to use its powers to “protect” children from seeing ads for sugary foods, interpreting its consumer-protection mandate so broadly that it considered tooth decay as falling within its scope.
Khan in particular does not appear especially bound by the usual norms that might constrain this sort of regulatory overreach. In recent weeks, she has pushed through contentious decisions by relying on more than 20 “zombie votes” cast by former Commissioner Rohit Chopra on the final day before he left the agency. While it has been FTC policy since 1984 to count votes cast by departed commissioners unless they are superseded by their successors, Khan’s FTC has invoked this relatively obscure rule to swing more decisions than every single predecessor combined.
Thus, while the Senate bill may avoid immediately breaking large portions of the Internet in ways the House bill would, it would instead place massive discretionary powers into the hands of authorities who have expansive views about the goals those powers ought to be used to pursue.
This ought to be concerning to anyone who disapproves of public policy being made by unelected bureaucrats, rather than the people’s chosen representatives. If Republicans find an empowered Khan-led FTC worrying today, surely Democrats ought to feel the same about an FTC run by Trump-style appointees in a few years. Both sides may come to regret creating an agency with so much unchecked power.
Recent antitrust forays on both sides of the Atlantic have unfortunate echoes of the oldie-but-baddie “efficiencies offense” that once plagued American and European merger analysis (and, more broadly, reflected a “big is bad” theory of antitrust). After a very short overview of the history of merger efficiencies analysis under American and European competition law, we briefly examine two current enforcement matters “on both sides of the pond” that impliedly give rise to such a concern. Those cases may regrettably foreshadow a move by enforcers to downplay the importance of efficiencies, if not openly reject them.
Background: The Grudging Acceptance of Merger Efficiencies
Starting in the 1980s, the promulgation of increasingly economically sophisticated merger guidelines in the United States led to the acceptance of efficiencies (albeit less then perfectly) as an important aspect of integrated merger analysis. Several practitioners have claimed, nevertheless, that “efficiencies are seldom credited and almost never influence the outcome of mergers that are otherwise deemed anticompetitive.” Commissioner Christine Wilson has argued that the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) still have work to do in “establish[ing] clear and reasonable expectations for what types of efficiency analysis will and will not pass muster.”
In short, although the actual weight enforcers accord to efficiency claims is a matter of debate, efficiency justifications are cognizable, subject to constraints, as a matter of U.S. and European Union merger-enforcement policy. Whether that will remain the case is, unfortunately, uncertain, given DOJ and FTC plans to revise merger guidelines, as well as EU talk of convergence with U.S. competition law.
Two Enforcement Matters with ‘Efficiencies Offense’ Overtones
Two Facebook-related matters currently before competition enforcers—one in the United States and one in the United Kingdom—have implications for the possible revival of an antitrust “efficiencies offense” as a “respectable” element of antitrust policy. (I use the term Facebook to reference both the platform company and its corporate parent, Meta.)
FTC v. Facebook
The FTC’s 2020 federal district court monopolization complaint against Facebook, still in the motion to dismiss the amended complaint phase (see here for an overview of the initial complaint and the judge’s dismissal of it), rests substantially on claims that Facebook’s acquisitions of Instagram and WhatsApp harmed competition. As Facebook points out in its recent reply brief supporting its motion to dismiss the FTC’s amended complaint, Facebook appears to be touting merger-related efficiencies in critiquing those acquisitions. Specifically:
[The amended complaint] depends on the allegation that Facebook’s expansion of both Instagram and WhatsApp created a “protective ‘moat’” that made it harder for rivals to compete because Facebook operated these services at “scale” and made them attractive to consumers post-acquisition. . . . The FTC does not allege facts that, left on their own, Instagram and WhatsApp would be less expensive (both are free; Facebook made WhatsApp free); or that output would have been greater (their dramatic expansion at “scale” is the linchpin of the FTC’s “moat” theory); or that the products would be better in any specific way.
The FTC’s concerns about a scale-based merger-related output expansion that benefited consumers and thereby allegedly enhanced Facebook’s market position eerily echoes the commission’s concerns in Procter & Gamble that merger-related cost-reducing joint efficiencies in advertising had an anticompetitive “entrenchment” effect. Both positions, in essence, characterize output-increasing efficiencies as harmful to competition: in other words, as “efficiencies offenses.”
UK Competition and Markets Authority (CMA) v. Facebook
The CMA announced Dec. 1 that it had decided to block retrospectively Facebook’s 2020 acquisition of Giphy, which is “a company that provides social media and messaging platforms with animated GIF images that users can embed in posts and messages. . . . These platforms license the use of Giphy for its users.”
The CMA theorized that Facebook could harm competition by (1) restricting access to Giphy’s digital libraries to Facebook’s competitors; and (2) prevent Giphy from developing into a potential competitor to Facebook’s display advertising business.
As a CapX analysis explains, the CMA’s theory of harm to competition, based on theoretical speculation, is problematic. First, a behavioral remedy short of divestiture, such as requiring Facebook to maintain open access to its gif libraries, would deal with the threat of restricted access. Indeed, Facebook promised at the time of the acquisition that Giphy would maintain its library and make it widely available. Second, “loss of a single, relatively small, potential competitor out of many cannot be counted as a significant loss for competition, since so many other potential and actual competitors remain.” Third, given the purely theoretical and questionable danger to future competition, the CMA “has blocked this deal on relatively speculative potential competition grounds.”
Apart from the weakness of the CMA’s case for harm to competition, the CMA appears to ignore a substantial potential dynamic integrative efficiency flowing from Facebook’s acquisition of Giphy. As David Teece explains:
Facebook’s acquisition of Giphy maintained Giphy’s assets and furthered its innovation in Facebook’s ecosystem, strengthening that ecosystem in competition with others; and via Giphy’s APIs, strengthening the ecosystems of other service providers as well.
There is no evidence that CMA seriously took account of this integrative efficiency, which benefits consumers by offering them a richer experience from Facebook and its subsidiary Instagram, and which spurs competing ecosystems to enhance their offerings to consumers as well. This is a failure to properly account for an efficiency. Moreover, to the extent that the CMA viewed these integrative benefits as somehow anticompetitive (to the extent that it enhanced Facebook’s competitive position) the improvement of Facebook’s ecosystem could have been deemed a type of “efficiencies offense.”
Are the Facebook Cases Merely Random Straws in the Wind?
It might appear at first blush to be reading too much into the apparent slighting of efficiencies in the two current Facebook cases. Nevertheless, recent policy rhetoric suggests that economic efficiencies arguments (whose status was tenuous at enforcement agencies to begin with) may actually be viewed as “offensive” by the new breed of enforcers.
In her Sept. 22 policy statement on “Vision and Priorities for the FTC,” Chair Lina Khan advocated focusing on the possible competitive harm flowing from actions of “gatekeepers and dominant middlemen,” and from “one-sided [vertical] contract provisions” that are “imposed by dominant firms.” No suggestion can be found in the statement that such vertical relationships often confer substantial benefits on consumers. This hints at a new campaign by the FTC against vertical restraints (as opposed to an emphasis on clearly welfare-inimical conduct) that could discourage a wide range of efficiency-producing contracts.
Chair Khan also sponsored the FTC’s July 2021 rescission of its Section 5 Policy Statement on Unfair Methods of Competition, which had emphasized the primacy of consumer welfare as the guiding principle underlying FTC antitrust enforcement. A willingness to set aside (or place a lower priority on) consumer welfare considerations suggests a readiness to ignore efficiency justifications that benefit consumers.
The statement by the FTC majority . . . notes that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies, which are not recognized by the statute as a defense to an unlawful merger. The majority statement explains that the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.
Also noteworthy is Khan’s seeming interest (found in her writings here, here, and here) in reviving Robinson-Patman Act enforcement. What’s worse, President Joe Biden’s July 2021 Executive Order on Competition explicitly endorses FTC investigation of “retailers’ practices on the conditions of competition in the food industries, including any practices that may violate [the] Robinson-Patman Act” (emphasis added). Those troubling statements from the administration ignore the widespread scholarly disdain for Robinson-Patman, which is almost unanimously viewed as an attack on efficiencies in distribution. For example, in recommending the act’s repeal in 2007, the congressionally established Antitrust Modernization Commission stressed that the act “protects competitors against competition and punishes the very price discounting and innovation and distribution methods that the antitrust otherwise encourage.”
Recent straws in the wind suggest that an anti-efficiencies hay pile is in the works. Although antitrust agencies have not yet officially rejected the consideration of efficiencies, nor endorsed an “efficiencies offense,” the signs are troubling. Newly minted agency leaders’ skepticism toward antitrust economics, combined with their de-emphasis of the consumer welfare standard and efficiencies (at least in the merger context), suggest that even strongly grounded efficiency explanations may be summarily rejected at the agency level. In foreign jurisdictions, where efficiencies are even less well-established, and enforcement based on mere theory (as opposed to empiricism) is more widely accepted, the outlook for efficiencies stories appears to be no better.
One powerful factor, however, should continue to constrain the anti-efficiencies movement, at least in the United States: the federal courts. As demonstrated most recently in the 9th U.S. Circuit Court of Appeals’ FTC v. Qualcomm decision, American courts remain committed to insisting on empirical support for theories of harm and on seriously considering business justifications for allegedly suspect contractual provisions. (The role of foreign courts in curbing prosecutorial excesses not grounded in economics, and in weighing efficiencies, depends upon the jurisdiction, but in general such courts are far less of a constraint on enforcers than American tribunals.)
While the DOJ and FTC (and, perhaps to a lesser extent, foreign enforcers) will have to keep the judiciary in mind in deciding to bring enforcement actions, the denigration of efficiencies by the agencies still will have an unfortunate demonstration effect on the private sector. Given the cost (both in resources and in reputational capital) associated with antitrust investigations, and the inevitable discounting for the risk of projects caught up in such inquiries, a publicly proclaimed anti-efficiencies enforcement philosophy will do damage. On the margin, it will lead businesses to introduce fewer efficiency-seeking improvements that could be (wrongly) characterized as “strengthening” or “entrenching” market dominance. Such business decisions, in turn, will be welfare-inimical; they will deny consumers the benefit of efficiencies-driven product and service enhancements, and slow the rate of business innovation.
As such, it is to be hoped that, upon further reflection, U.S. and foreign competition enforcers will see the light and publicly proclaim that they will fully weigh efficiencies in analyzing business conduct. The “efficiencies offense” was a lousy tune. That “oldie-but-baddie” should not be replayed.
The Federal Trade Commission (FTC) has taken another step away from case-specific evaluation of proposed mergers and toward an ex ante regulatory approach in its Oct. 25 “Statement of the Commission on Use of Prior Approval Provisions in Merger Orders.” Though not unexpected, this unfortunate initiative once again manifests the current FTC leadership’s disdain for long-accepted economically sound antitrust-enforcement principles.
High levels of merger activity should, generally speaking, be viewed as a symptom of a vibrant economy, not a reason for economic concern. Horizontal mergers typically are driven by the potential to realize real cost savings, unrelated to anticompetitive reductions in output.
Non-horizontal mergers often put into force welfare-enhancing reductions of double marginalization, while uniting complements and achieving synergies in ways that seek efficiencies. More generally, proposed acquisitions frequently reflect an active market for corporate control that seeks to reallocate scarce resources to higher-valued uses (see, for example, Henry Manne’s seminal article on “Mergers and the Market for Corporate Control”). Finally, by facilitating cost reductions, synergies, and improvements in resource allocations within firms, mergers may allow the new consolidated entity to compete more effectively in the marketplace, thereby enhancing competition.
Given the economic benefits frequently generated by mergers, government antitrust enforcers should not discourage them, nor should they intervene to block them, absent a strong showing that a particular transaction would likely reduce competition and harm consumer welfare. In the United States, the Hart-Scott-Rodino Premerger Notification Act of 1976 (HSR) and its implementing regulations generally have reflected this understanding. They have done this by requiring that proposed transactions above a certain size threshold be notified to the FTC and the U.S. Justice Department (DOJ), and by providing a framework for timely review, allowing most notified mergers to close promptly.
In the relatively few cases where agency enforcement staff have identified competitive problems, the HSR framework usually has enabled timely negotiation of possible competitive fixes (divestitures and, less typically, behavioral remedies). Where fixes have not been feasible, filing parties generally have been able to decide whether to drop a transaction or prepare for litigation within a reasonable time period. Under the HSR framework, enforcers generally have respected the time sensitivity of merger proposals and acted expeditiously (with a few exceptions) to review complicated and competitively sensitive transactions. The vast majority of HSR filings that facially raise no plausible competitive issues historically have been dealt with swiftly—often through “early termination” policies that provide the merging parties an antitrust go-ahead well before the end of HSR’s initial 30-day review period.
In short, although far from perfect, HSR processes have sought to minimize regulatory impediments to merger activity, consistent with the statutory mandate to identify and prevent anticompetitive mergers.
Regrettably, under the leadership of Chair Lina M. Khan, the FTC has taken unprecedented steps to undermine the well-understood HSR framework. As I wrote recently:
For decades, parties proposing mergers that are subject to statutory Hart-Scott-Rodino (HSR) Act pre-merger notification requirements have operated under the understanding that:
1. The FTC and U.S. Justice Department (DOJ) will routinely grant “early termination” of review (before the end of the initial 30-day statutory review period) to those transactions posing no plausible competitive threat; and
2. An enforcement agency’s decision not to request more detailed documents (“second requests”) after an initial 30-day pre-merger review effectively serves as an antitrust “green light” for the proposed acquisition to proceed.
Those understandings, though not statutorily mandated, have significantly reduced antitrust uncertainty and related costs in the planning of routine merger transactions. The rule of law has been advanced through an effective assurance that business combinations that appear presumptively lawful will not be the target of future government legal harassment. This has advanced efficiency in government, as well; it is a cost-beneficial optimal use of resources for DOJ and the FTC to focus exclusively on those proposed mergers that present a substantial potential threat to consumer welfare.
Two recent FTC pronouncements (one in tandem with DOJ), however, have generated great uncertainty by disavowing (at least temporarily) those two welfare-promoting review policies. Joined by DOJ, the FTC on Feb. 4 announced that the agencies would temporarily suspend early terminations, citing an “unprecedented volume of filings” and a transition to new leadership. More than six months later, this “temporary” suspension remains in effect.
Citing “capacity constraints” and a “tidal wave of merger filings,” the FTC subsequently published an Aug. 3 blog post that effectively abrogated the 30-day “green lighting” of mergers not subject to a second request. It announced that it was sending “warning letters” to firms reminding them that FTC investigations remain open after the initial 30-day period, and that “[c]ompanies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”
The FTC’s actions interject unwarranted uncertainty into merger planning and undermine the rule of law. Preventing early termination on transactions that have been approved routinely not only imposes additional costs on business; it hints that some transactions might be subject to novel theories of liability that fall outside the antitrust consensus.
The FTC’s merger-review reign of error continues. Most recently, it released a policy guidance statement that effectively transforms the commission into a merger regulator whose assent is required for a specific category of mergers. This policy is at odds with HSR, which is designed to facilitate merger reviews, not to serve as a regulatory-approval mechanism. As the FTC explains in its Oct. 25 statement(citation to 1995 Statement omitted) (approved by a 3-2 vote, with Commissioners Noah Joshua Phillips and Christine S. Wilson dissenting):
On July 21, 2021, the Commission voted to rescind the 1995 Policy Statement on Prior Approval and Prior Notice Provisions (“1995 Statement”). The 1995 Statement ended the Commission’s then-longstanding practice of incorporating prior approval and prior notice provisions in Commission orders addressing mergers. With the rescission of the 1995 statement, the Commission returns now to its prior practice of routinely requiring merging parties subject to a Commission order to obtain prior approval from the FTC before closing any future transaction affecting each relevant market for which a violation was alleged. . . .
In addition, from now on, in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction, the agency will engage in a case-specific determination as to whether to pursue a prior approval order, focusing on the factors identified below with respect to use of broader prior approval provisions. The fact that parties may abandon a merger after litigation commences does not guarantee that the
Commission will not subsequently pursue an order incorporating a prior approval provision. . . . In some situations where stronger relief is needed, the Commission may decide to seek a prior approval provision that covers product and geographic markets beyond just the relevant product and geographic markets affected by the merger. No single factor is dispositive; rather, the Commission will take a holistic view of the circumstances when determining the length and breadth of prior approval provisions. [Six factors listed include the nature of the transaction; the level of market concentration; the degree to which the transaction increases concentration; the degree to which one of the parties pre-merger likely had market power; the parties’ history of acquisitiveness; and evidence of anticompetitive market dynamics.]
The Oct. 25 Statement is highly problematic in several respects. Its oversight requirements may discourage highly effective consent decree “fixes” of potential mergers, leading to wasteful litigation—or, alternatively, the abandonment of efficient transactions. What’s more, the threat of FTC prior approval orders (based on multiple criteria subject to manipulation by the FTC), even when parties abandon a proposed transaction (and thus, effectively have “done nothing”), smacks of unwarranted regulation of future corporate plans of disfavored firms, raising questions of fundamental fairness.
All told, the new requirements, combined with the FTC’s policies to end early terminations and to stop “greenlighting” routine merger transactions after a 30-day review, are yet signs that the well-understood HSR consensus has been unilaterally abandoned by the FTC, based on purely partisan commission votes, despite the lack of any public consultation. The FTC’s abrupt and arbitrary merger-review-related actions will harm the economy by discouraging welfare-promoting consolidations. These actions also fly in the face of sound public administration.
The FTC continues to move from its historic role of antitrust enforcer to that of antitrust regulator at warp speed, based on a series of 3-2 votes. In particular, the commission’s abandonment of a well-established bipartisan approach to HSR policy is particularly troublesome, given the new risks it creates for private parties considering acquisitions. These new risks will likely deter an unknown number of efficiency-enhancing, innovative combinations that could have benefited consumers and substantially strengthened the American economy.
Perhaps the imminent confirmation of Jonathan Kanter—an individual with many years of practical experience as a leading antitrust practitioner—to be assistant attorney general for antitrust will bring a more reasonable perspective to antitrust agency HSR policies. It may even convince a majority of the commission to return to the bipartisan HSR merger-review framework that has served the American economy well.
If not, perhaps congressional overseers might wish to investigate the implications for the American innovation economy and the rule of law stemming from the FTC’s de facto abandonment of HSR principles. Whether to fundamentally alter merger-review procedures should be up to Congress, not to three unelected officials.