A close review of the court ruling that approved the $26 billion mega-merger reveals a number of mistakes in Judge Victor Marrero’s reasoning, which means there are several excellent legal arguments on which states could appeal the ruling.
Last week, Judge Victor Marrero of the District Court for the Southern District of New York resoundingly approved a proposed $26 billion mega-merger between Sprint and T-Mobile, further consolidating one of the most critical sectors in the economy from four firms to three.
Nine states and the District of Columbia were seeking to prohibit the merger between Sprint and T-Mobile on the grounds that the merger substantially decreases competition in the retail mobile wireless industry, would likely increase prices for consumers, and increases the likelihood of collusion among the remaining behemoths. The states pursued the case despite the merger’s approval by the Department of Justice (DOJ) and the Federal Communications Commission (FCC). On Sunday, New York State Attorney General Letitia James announced that her office planned to withdraw from the case and not appeal the decision, in part because T-Mobile has promised to create jobs in Rochester, New York.
It’s tempting to view the decision as just another sign of the general collapse of the enforcement of US antimonopoly law in recent decades. A generation ago, such a four-to-three merger probably would not have even been proposed, as the 1968 Merger Guidelines declared such deals to be presumptively illegal. As recently as 2011, even after the radical weakening of antimonopoly policy in the 1980s and 1990s, federal enforcers prohibited a similar acquisition of T-Mobile by AT&T because of the obvious anti-competitive effects. But a close review of the ruling reveals a number of mistakes in the judge’s reasoning, which means there are several excellent legal arguments on which the remaining states will be able to appeal the ruling.
First, the states will be able to challenge Judge Marrero’s claim that theoretical efficiencies from the merger are grounds for approving the deal. The court’s decision stated that lower courts have “recognize[d] or at least assume[d] that evidence of efficiencies may rebut the presumption that a merger’s effects will be anti-competitive[.]” In fact, even under the highly lenient interpretations of recent antitrust law, efficiencies cannot be used to approve an otherwise illegal merger.
In three separate instances, the Supreme Court has dismissed efficiencies as defenses to presumptively illegal mergers. In Brown Shoe, the Supreme Court recognized that, despite potential economic efficiencies gained through consolidation, Congress chose to protect competition even if “occasional higher costs and prices might result from the maintenance of fragmented industries and markets.”
In Philadelphia National Bank, the Supreme Court stated that illegal mergers should not be saved “on some ultimate reckoning of social or economic debits and credits” even if the merger is “benign.” Later, the Supreme Court stated that “possible economies cannot be used as a defense to illegality.” Judge Marrero attempts to justify his decision stating that subsequent lower court decisions and agency guidance have recognized efficiencies as a defense. However, such as position does not grant the lower courts permission to ignore the precedent set by the Supreme Court.
Second, the states will be able to challenge Judge Marrero’s use of the “weakened competitor” argument to approve the Sprint/T-Mobile merger. The decision repeatedly cites Sprint’s purportedly poor fiscal and operational condition, but the weakened competitor defense is even narrower than the already strict “failing firm” defense, and US antitrust law makes very clear that neither can be used in this instance. To use such a defense, the corporations asking to merge must demonstrate that one of parties is in imminent danger of financial failure and that the failing firm has no possibility of reorganizing.
|“The merger of Sprint and T-Mobile overwhelmingly meets the criteria set by Supreme Court precedent as a presumptively illegal merger.”|
In recent years, numerous appellate courts have rejected the weakened competitor defense. The 6th Circuit, for instance, has deemed the defense “the Hail–Mary pass of presumptively doomed mergers[.]” The 7th Circuit went even farther and stated that the defense is “probably the weakest ground of all for justifying a merger.” The 9th Circuit has explicitly denounced the defense. And despite Judge Marrero’s assertion that the Supreme Court has given the green light to use this argument, the court has never explicitly done so.
To make matters worse, Judge Marrero entirely failed to consider whether there was any alternative to consolidation to strengthen Sprint’s financial position. For example, investors such as Berkshire Hathaway could easily inject capital into Sprint and make the company an effective competitor. Similarly, there were other potential corporate suitors for Sprint, such as Dish Network, that would not have resulted in a four-to-three merger. It is not clear whether Sprint even tried to make a deal with another suitor.
Third, Judge Marrero cites throughout his decision the supposed benefits of the conditions placed on the merger by the DOJ and FCC. The two agencies have ordered Sprint to divest certain portions of its business to Dish Network, in theory to create a new fourth mobile carrier for the US market.
Unfortunately for the court, the law makes clear that the theoretical benefits of conditions placed on a merger cannot be used to approve a deal that is otherwise presumptively illegal. For instance, the Supreme Court stated, “[w]here a merger is of such a size as to be inherently suspect, elaborate proof of market structure, market behavior and probable anti-competitive effects may be dispensed with … to prevent undue concentration.”
Most revealing for the question of the Sprint/T-Mobile case, the Supreme Court blocked a merger that would have resulted in a 25 percent market share in a highly concentrated industry. The merger of Sprint and T-Mobile overwhelmingly meets the criteria set by Supreme Court precedent as a presumptively illegal merger and perfectly exemplifies the type of mergers that Congress sought to prohibit with the Clayton Act.
Daniel A. Hanley is a policy analyst at the Open Markets Institute.
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