Turning Back The Clock? Agencies Seek to Remake and Expand Merger Prohibitions

This week, after months of anticipation, the Antitrust Division of the Department of Justice and the Federal Trade Commission issued draft revised Merger Guidelines containing 13 principles that the Agencies use as a framework for evaluating all forms of transactions. As widely expected, the Draft Guidelines harken back to 1960s-era legal precedents and seek to roll back the modern structural presumptions adopted in the 2010 Horizontal Merger Guidelines. They also express a far more skeptical view of the benefits of mergers in ways that would subject more mergers to challenge. At the same time and in line with current DOJ and FTC practices, the Draft Guidelines expressly expand the reach of merger reviews into labor markets, take a skeptical view of serial acquisitions, add new provisions for multi-sided platforms, and espouse broader theories of harm.

First issued in 1968, the DOJ/FTC Merger Guidelines (“Guidelines”) articulate how the Agencies identify potentially illegal mergers and provide guidance to industry and the courts as to the factors and framework the Agencies use when evaluating mergers. Although the Guidelines are not law, courts have relied heavily on the Guidelines when ruling on litigated challenges to mergers. Previous revisions to the Guidelines, including the most recent revision in 2010, have largely reflected contemporary economic and legal developments as they evolved, and were considered to represent the consensus perspective of various enforcers. In contrast, the Draft 2023 Guidelines reflect the current Administration’s view that the old Guidelines and prior merger enforcement, generally, have drifted away from original Congressional intent, which leads them to revert to standards and presumptions of 1960s-era Supreme Court cases reflecting more expansive merger enforcement. At the same time, revisions and wholly new provisions in the 2023 Draft Guidelines purport to better address competitive issues raised by new technology.

The 2023 Draft Guidelines reflect a significant change to the Agencies’ merger enforcement approach in previous Administrations. If they become effective as currently proposed, some mergers that would have previously been viewed as unproblematic will be viewed by the Agencies as presumptively illegal. The longer-term impact of the new Draft Guidelines will depend on their impact on the judiciary. Courts typically consider the prior Guidelines as “instructive” and many opinions effectively have adopted the principles of the prior Guidelines as legal standards. For courts to follow the new 2023 Draft Guidelines, the Agencies will have to persuade them to ignore broader trends in antitrust law and more modern merger precedent, including binding circuit precedent, and look to broader language in historic Supreme Court case law for guidance. While these older decisions have not been explicitly overturned, modern decisions have not relied on many of their more sweeping holdings.

 The 2023 Draft Guidelines are currently subject to a 60-day comment period and could be revised.    

Strengthened Structural Presumption for Horizontal Mergers

Relying on the Supreme Court’s decision in Philadelphia National Bank, 374 U.S. 321 (1963), prior Guidelines have long included a presumption that in highly concentrated markets, a merger that eliminates even a relatively small competitor can create undue risk that the merger may substantially lessen competition. However, the new Draft Guidelines lower the level of concentration at which the Agencies will presume a merger substantially lessens competition to the levels that formally prevailed from 1982 to 2010. In effect, the revisions to the agencies’ HHI thresholds shift the focus back to place greater scrutiny on “6-5” mergers, which have more recently been viewed as less likely to raise competitive concerns. Additionally, the 2023 Draft Guidelines introduce a new combined firm market share threshold of 30% as the basis for a presumption of illegality, regardless of overall market concentration.  If adopted, these new thresholds would reflect a departure from recent agency practice. It remains to be seen, however, whether the agencies will seek to challenge transactions based on these lower levels of concentration.

Revival of the Incipiency Standard; Serial Acquisitions

Relying on the text of the Clayton Act and 1960s Supreme Court precedent, the 2023 Draft Guidelines emphasize that the role of the Agencies is to assess the risk that the merger may substantially lessen competition. In an effort to revive an interpretation of “incipiency” that was commonly cited by the Supreme Court in the 1960s, but which has been absent from the Guidelines since 1982, the Draft Guidelines provide that the Agencies will evaluate whether a proposed merger is in a market or industry where there is a “trend toward concentration” based on both market share levels and other market characteristics. The Draft Guidelines also explain that when a merger is part of a series of acquisitions, the Agencies may examine the series of acquisitions holistically, even if no single acquisition on its own would risk substantially lessening competition—underscoring the Agencies heightened focus on Private Equity M&A activity. This standard could significantly increase the focus on numerous industries, including ones that are considered “unconcentrated” today, but where M&A activity is seen to be increasing either horizontal consolidation or vertical integration. These revisions are likely to lead to greater uncertainty for parties considering multiple transactions, or within industries undergoing increasing concentration among multiple firms.

Conglomerate Effects

The Draft Guidelines revive the previously dormant entrenchment doctrine more commonly referred to today as “conglomerate effects” which last appeared in the 1968 Guidelines. In the 1960s and 1970s, courts, including the Supreme Court, blocked mergers where a firm with high market share in one market attempted to acquire a company with a high share in another market. Under this theory, the merger threatened to substantially lessen competition by strengthening a dominant firm through greater efficiencies, or access to a broader line of products or services, thus making it more difficult for smaller rivals to compete. In operation, it viewed efficiency as anti, not procompetitive.

The 2023 Draft Guidelines establish a relatively low bar for what constitutes a dominant position in this context: either 30% market share or direct evidence of an ability to raise prices, lower quality or otherwise impose or obtain terms that they could not obtain but for that dominance. Interestingly, the new Draft Guidelines indicate that the Agencies will not attempt to bear the burden of demonstrating that the combined firm would in fact engage in strategic behavior post-merger (e.g., anticompetitive tying, bundling, or conditioning of sales) and instead suggest that it would be the parties’ responsibility to rebut that presumption. This revision may significantly impact companies that have a significant market presence and seek to expand to adjacent businesses through acquisition.

Competition for Inputs Including Labor

The 2023 Draft Guidelines emphasize the Agencies’ focus on whether a merger may substantially lessen competition for labor. According to the new Draft Guidelines, a merger between competing employers may result in lower wages or slower wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality. The Agencies have increasingly focused on labor markets, especially in non-merger contexts, and the inclusion of competitive effects in labor markets in the Draft Guidelines indicates the Agencies efforts to continue this scrutiny.   

Other Significant Proposals

The 2023 Draft Guidelines introduce new merger considerations for multi-sided platform competition, potential competition, and distribution chains. A multi-sided platform is defined as a product or service in which participants provide or use distinct products which contribute to the attractiveness and use of the platform. The Guidelines then identify five attributes of platforms that the Agencies will consider in connection with mergers or acquisitions. The Agencies will consider competition between platforms, competition on the platform, and competition to displace the platform. In another nod to older Supreme Court case law, the Guidelines commit to scrutinizing acquisitions of firms that represent potential competition, actual or perceived, especially the ability of a potential entrant to enter the market and exert competitive pressure on the market. The influence of a potential competitor is more acute in highly concentrated markets, and thus, the harm to competition is magnified by the loss of a potential competitor.

The 2023 Draft Guidelines also devote two sections to vertical mergers with a general guideline that includes “plus factors” the Agencies’ will consider in analyzing a vertical merger with foreclosure shares below 50 percent.  These factors include trends towards vertical integration, the nature and purpose of the merger, whether the relevant market is already concentrated, and whether the merger increases barriers to entry. A separate section signals increased attention to mergers that affect distribution chains.

Overview of the New Guidelines

Overall, the Draft Guidelines include 13 guidelines and provide details about the framework and tools that the Agencies will use with respect to each guideline. The 13 guidelines are provided below which provide at a high-level the enforcement priorities of the Agencies. In contrast to previous Guidelines that integrated law and economic analysis, the Guidelines are largely legal in nature, with the economic analysis moved to a series of Appendices.

• Mergers should not significantly increase concentration in highly concentrated markets. 
• Mergers should not eliminate substantial competition between firms. 
• Mergers should not increase the risk of coordination. 
• Mergers should not eliminate a potential entrant in a concentrated market.
• Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.
• Vertical mergers should not create market structures that foreclose competition. 
• Mergers should not entrench or extend a dominant position.
• Mergers should not further a trend toward concentration.
• When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series.
• When a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform, or to displace a platform.
• When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers.
• When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition.
• Mergers should not otherwise substantially lessen competition or tend to create a monopoly.

Next Steps

Ultimately, the real impact of the 2023 Draft Guidelines will depend upon how they are used by the agencies and treated by the courts. Although the 2010 Guidelines are not law themselves, many courts have relied upon them and, in effect, written them into law. Whether the Agencies will be successful in convincing the courts that the new Draft Guidelines are reasonable and reliable remains to be seen. What is clear is that the Agencies – through both the 2023 Draft Guidelines and the recent proposed changes to the Hart-Scott-Rodino notification process – are aggressively seeking to shift both procedural and substantive standards to slow corporate consolidation.

We anticipate that the Draft Guidelines will generate significant comments by numerous industry participants, practitioners, academics and others. Crowell & Moring is closely following developments on these issues and will provide further updates. Please reach out to your C&M contact for further information.