As the federal antitrust agencies consider revising the merger guidelines, they should add consideration of the merging parties’ previous bad acts, write Michael A. Carrier and Gwendolyn J. Lindsay Cooley in new research published in the Georgetown Law Journal Online.
Consider a merger of two firms in the pharmaceutical industry, where examples of anticompetitive behavior are rife. Each firm has previously engaged in antitrust violations. When considering whether to allow the merger, how much weight should the antitrust agencies—the U.S. Department of Justice Antitrust Division and Federal Trade Commission—give to these prior bad acts? How important should this evidence be to courts?
A comprehensive study by the American Antitrust Institute found that in the past three decades, the agency responsible for merger enforcement in the industry, the FTC, “challenged 67 pharmaceutical mergers worth over $900 billion, moved to block only one, and settled virtually all of the remainder subject to divestitures.” Many commentators, including current and former FTC Commissioners, have criticized this approach as “too narrow.” Now that the federal antitrust agencies are considering revising the merger guidelines, they should include consideration of the merging parties’ previous bad acts.
Collusive Conduct
Prior bad acts can include either collusive or unilateral conduct. In the 2010 Horizontal Merger Guidelines (the Guidelines), the Antitrust Division and FTC recognize that the merging parties’ previous collusion is a strong indicator that they may engage in similar behavior in the future. Evidence of prior collusion shows that the firms have been able to solve their “cartel problems,” like reaching consensus, deterring cheating, and preventing new competition. Prior collusion also increases the likelihood of recidivism because the company will have learned from past mistakes or lawsuits how to avoid future investigation or litigation.
Although our belief that prior collusion makes it more likely that the merged company will engage in similar conduct seems straightforward, the agencies’ treatment of such conduct has not been consistent. For example, the FTC did not address it in its complaints challenging the Pfizer/Mylan and Teva/Allergan mergers. Relatedly, conversations with antitrust enforcers have revealed that the merging parties are often surprised when confronted with their prior collusion.
Collusion Case Study: Pfizer/Mylan
In 2020, the FTC did not challenge the Pfizer/Mylan merger. Instead, the FTC only required a divestiture of seven of the merging companies’ combined 3,000 drugs. This was despite a 600-page complaint by state attorneys general detailing alleged market allocation and price increases to maximize profits and minimize competition, and corresponding Antitrust Division investigations.
Pfizer and Mylan operated in similar markets. They were both small-molecule pharmaceutical manufacturers of branded and generic drugs. As a result, if prior collusion were proven in court and the companies possessed a substantial market share, then (as we explain more fully elsewhere) we would suggest a presumption that the merger is unlawful.
Unilateral Conduct
Beyond confirming the importance of prior bad acts in coordinated effects cases, we believe the agencies should also examine prior unilateral anticompetitive conduct because of a firm’s ability and incentive to engage in this behavior.
First, there is a heightened ability to engage in anticompetitive conduct:
- As companies get larger, they have more assets and are more able to engage in leveraging or bundling of drugs.
- The larger a firm is, the easier it is to finance a takeover of an incipient challenger.
- The combined firm may be more willing and able to engage in long-running patent litigation or create a patent thicket to exclude potential rivals.
- Large firms have advantages in “pay-for-delay” settlements, with the Supreme Court explaining how market power can be inferred from a brand firm paying a generic company to delay entering the market.
In addition to a heightened ability to engage in anticompetitive conduct, there is an increased incentive to do so to protect higher monopoly profits. With more product line vulnerabilities, large companies may feel more compelled to engage in anticompetitive conduct. Given the significant reduction in monopoly profits after generics enter the market, many brand firms have engaged in an array of anticompetitive conduct to delay generic entry.
We suggest that the agencies should consider unilateral prior bad acts when (1) the markets are similar, (2) there is a connection between the prior bad acts and the markets covered by the merger, and (3) there is sufficient proof of the prior bad acts.
The first factor considers the similarity of the markets. This factor is supported by the Guidelines, which provide that the agencies presume that markets “are conducive to coordinated interaction” if firms “previously engaged in express collusion affecting the relevant market . . . .”
Second is the connection of the prior bad acts to the markets covered by the merger. We add this factor because there is a more expansive array of potential forms of unilateral behavior than is presented by the narrower conduct of collusion, which could make it harder to extrapolate from prior to future conduct. The predictive effect of prior bad acts is likely to be highest if that conduct is relevant to the markets in which the merged firm will participate.
Third is a high level of proof of the prior bad acts. Relevant here would be whether the allegations of prior wrongdoing have been proven in court, the amount or character of documentary or testimonial evidence of past wrongdoing, the number of previous offenses, the recency of the allegations, and whether the past conduct was civil or criminal. These inquiries are designed to confirm the severity and reliability of the prior bad acts.
Unilateral Case Study: AbbVie/Allergan
In 2020 the FTC approved the merger of AbbVie and Allergan, requiring only that the merged company divest three drugs. However, both companies had previously engaged in a smorgasbord of anticompetitive conduct. For AbbVie, this included pay-for-delay settlements, patent thickets, and sham litigation.
First is settlements. In FTC v. AbbVie, the FTC claimed that AbbVie paid generic firm Teva to delay entering the market with a generic testosterone gel by offering its own generic version of cholesterol drug TriCor at “a price that is well below what is customary in such situations.” The Third Circuit found that “[t]he payment was plausibly ‘large’” and that it “was also plausibly ‘unjustified’” based on the allegations that “the TriCor deal ‘cannot be explained as an independent business deal from Abbott’s perspective.’”
Second is “sham” litigation. Plaintiffs making such a claim must show that the litigation was subjectively and objectively baseless. Courts almost never allow these claims to proceed, but the court did in FTC v. AbbVie. The FTC obtained a near-unprecedented summary judgment on the ground that AbbVie and its partner, Besins, engaged in sham litigation that was objectively baseless and won at trial because the court found that AbbVie’s “very experienced patent attorneys” filed lawsuits “to impose expense and delay” on the generic firms.
Lastly, AbbVie has received significant criticism for its “patent thicket,” a collection of more than 130 patents covering Humira, the best-selling U.S. drug, which treats rheumatoid arthritis, Crohn’s disease, and psoriasis. Although the district court, affirmed by the Seventh Circuit, dismissed a lawsuit challenging AbbVie’s thicket, the reasoning raised significant questions.
In addition to AbbVie’s anticompetitive toolkit, the court in In re Restasis found that Allergan had filed sham citizen petitions, otherwise designed to raise legitimate safety and effectiveness concerns with the FDA, “to frustrate generic competition.”
Allergan also received attention for a brazen attempt to evade administrative review by transferring patents to the Saint Regis Mohawk Tribe to exploit tribal sovereign immunity. Criticizing this move, several U.S. senators wrote that “[i]t is difficult to conceive of Allergan’s transaction as anything other than a sham to subvert the existing intellectual property system.”
Despite this vast array of anticompetitive conduct, the FTC cleared the merger. We believe that the agency should have more directly considered the impact that prior bad acts would have on the likelihood of future antitrust violations. In particular, applying our framework: (1) AbbVie and Allergan operated in markets similar to the one in which the merged company was anticipated to operate; (2) the prior bad acts offer straightforward examples of conduct that would be relevant in the markets covered by the merged entity; and (3) there was a high level of proof of prior bad acts.
Conclusion
In assessing mergers, the antitrust agencies and courts should seriously consider prior bad acts. Such conduct is likely to affect the combined company’s ability and incentive to engage in future anticompetitive conduct and is vital to consider in close cases, such as where the market will be moderately concentrated post-merger.
Even if the antitrust agencies don’t move to block mergers, consideration of prior bad acts can help inform other relief beyond divestitures, including behavioral remedies to regulate “the merged firm’s post-consummation business conduct.” Behavioral remedies have received criticism for “supplant[ing] competition with regulation” and necessitating “close and ongoing oversight.” However, at least in the pharmaceutical industry, behavioral remedies in enforcement litigation are not as fine-grained and intrusive as those that have been criticized and are commonly used, for example in the FTC’s settlements with Cephalon and RB Group.
In short, given the challenges and criticisms of merger analysis today, we believe that the agencies should more closely and consistently examine merging parties’ prior bad acts.
The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
