Bilal Sayyed provides his round-one comments on the draft Merger Guidelines.
To read more from the ProMarket Merger Guidelines Symposium, please see here.
For revised Merger Guidelines to retain their predecessors’ persuasive value with the courts, counsel, and businesses, I offered five “key principles” in response to the agencies’ request for information on potential revisions to the 2010 Horizontal Merger Guidelines and 2020 Vertical Merger Guidelines (Merger Guidelines). In this short comment I review whether the proposed Merger Guidelines are consistent with four of the principles I advocated for, and conclude that that the revisions to the Merger Guidelines are inconsistent with each of the four principles. I believe this undercuts the institutional value of the Guidelines in shaping and explaining the law to the courts.
The Proposed Merger Guidelines Do Not Respect the Principal of Incremental Change
The proposed Merger Guidelines adopt significant changes to agency merger doctrine. They eliminate without explanation the unifying principle of all post-1968 Merger Guidelines that “mergers should not be permitted to create, enhance or entrench market power or to facilitate its exercise.” In doing so, they move to an analytic framework that relies heavily on presumptions based on market structure characteristics rather than an inquiry into market power.
I read each of the proposed “Guidelines” one through eight as creating, in some fashion, an unjustified presumption of harm. (The drafting staff agrees these are presumptions. See, for example, Susan Athey’s comments on American Antitrust Institute’s Ruled by Reason Podcast, Unpacking the 2023 Revised Merger Guidelines: A Conversation with the U.S. Department of Justice, where she identifies each of the guidelines as presumptions.)
The draft Guidelines attempt to dress up these presumptions as consistent with the law, but they are not. A few examples are all that fit in this short comment. Footnote 29 of the draft Guidelines attempts to justify the move back to the 1982 Merger Guidelines’ position (maintained through the 1992 Horizontal Merger Guidelines) of characterizing markets with an HHI of 1800 as “highly concentrated” and mergers that reach or exceed such concentration levels as presumptively illegal. But it does this by citing to case law that merely repeats the language of the 1992 Horizontal Merger Guidelines, not to any independent legal (or economic) justification for it. The draft further attempts to justify, perhaps to the courts, the shifting nature of what the Agencies believe is a highly concentrated market by indicating that the move to the higher HHI levels in the 2010 Horizontal Merger Guidelines was based merely on agency resource constraints, not analytical rigor. In fact, former Chairman Joe Simons offered a different explanation – one based on experience and not resource constraints.
Also consider the draft’s adoption of a presumption based on the merged firm’s market share: a structural presumption attaches at a market share greater than 30% and a change in the HHI greater than 100. It resembles former Assistant Attorney General Bill Baxter’s leading firm provision in the 1982 Merger Guidelines. But it is not a leading firm provision. Derived from Philadelphia National Bank’s pronouncement sixty years ago, the draft Guidelines’ presumption ignores that the firm in Philadelphia National Bank was the largest (leading) firm in the market, post-merger. The Agencies establish for themselves (and likely hope to influence the courts to adopt) a presumption against a firm that could be number three in the market acquiring a firm with a market share less than 2%. What case law, statutory authority, or economics supports that?
I recognize in the scenario I discuss – a newly combined firm with a market share of 30% being number three in the market – the HHI is going to be near or above 2700, and thus would fall under the structural presumption adopted for HHI levels in the draft. However, readers of the guidelines should recognize this is not the adoption of a leading firm provision – which some commentators called for – but something that may limit pro-competitive growth through acquisition. In a market where the top three firms have a market share approaching greater than 90%, should the agencies look to preserve the independence of a firm with a 2% (or slightly larger) market share? Isn’t it more likely that the assets of that small firm can be better utilized by an existing, larger firm that is not the leading firm? Is such a firm a maverick? I doubt it, but perhaps that is worth analyzing, not presuming. Is such a firm a likely behemoth in the future? Maybe, but that’s a potential or future competition case, not something that should fall into a presumption of harm.
Other new presumptions include presumptions associated with prior coordination (actual or attempted), acquisition of a maverick, analysis of potential competition, foreclosure market share tests, and “trends.” Some of these build on factors relevant to competitive effects analysis identified in earlier Guidelines, but without identifying any additional experience, case law or economics as justification for a movement from relevant factor to presumption.
In merger cases, the courts, following Baker Hughes’s articulation of the framework in Brown Shoe, Philadelphia National Bank, and General Dynamics, put the Agencies to an initial test: do they have sufficient evidence to make out their prima facie case—that is, market facts sufficient to establish a presumption of harm. The DOJ and FTC seek to lessen that burden by incorporating into the Guidelines Supreme Court case law that adopted legal presumptions based on then-current mainstream economics, but that have not yet been revisited by the Supreme Court in merger cases likely to rely on current economic understandings of competition. Reliance on Supreme Court case law that did not, in most instances, have the benefit of appellate court review is folly. It is very unlikely that the Supreme Court will reject the principles developed by the appellate courts in merger cases decided subsequent to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the repeal of the Expediting Act, and Marine Bancorp and General Dynamics. It is not an incremental change (nor good lawyering) to advance more reliance on presumptions and market structure when the Supreme Court has been clear that presumptions are disfavored and has moved away from presumptions and structure arguments since BMI and General Dynamics.
The Proposed Merger Guidelines Do Not Respect the Burden Shifting Framework of Baker Hughes
The proposed Merger Guidelines adopt the structure of Baker Hughes’s burden-shifting approach: presumption of harm followed by consideration of evidence that has the effect of rebutting (or undermining) the government’s prima facie case. However, to my reading, the proposed Merger Guidelines shift the burden of persuasion to the parties. (This was the key issue in Baker Hughes.) A few additional things stand-out with respect to rebuttal arguments.
First, the draft largely or entirely reads out of the competitive effects analysis a number of rebuttal arguments. It ignores entirely the potential influence of what the 2010 Horizontal Merger Guidelines identified as “powerful buyers” who “may constrain the ability of the merging parties to raise prices.” Additionally, the draft, both in its significant emphasis on presumptions to establish a prima facie case and its narrow view of rebuttals, appears to exclude an argument that the market is operating competitively pre-merger and will do so post-merger—this is, in fact, the result and perhaps purpose of the shift from a market power focus to an emphasis on the simpler burden of focusing on preserving market structure. It is simply harder to show market power than to count number of firms. Additionally, Guideline Eight supports a challenge to mergers merely where the HHI concentration is 1,000 or greater and “recently” increasing (neglecting to analyze or consider exogenous reasons for the trend). This suggests that any rebuttal argument is likely to fail. What rebuts a trend? None of the rebuttal factors discussed in the draft Guidelines seems relevant to an analysis of harm based solely on “trend.” Similarly, to the extent a challenge to a vertical merger is based on a trend towards vertical integration (see Guideline 6), rebuttal arguments seem likely not only to be ineffective and unlikely to be entertained but may be considered the basis for an entrenchment claim.
Second, the high hurdle for successful rebuttal arguments is not symmetrical with similar corresponding factors that underscore theories of competitive harm. The draft Guidelines adopts these inconsistencies on the basis of specious assumptions. For example, the draft restates the high hurdles associated with meeting the failing firm defense. However, the draft Guidelines do not appear to place high hurdles (any hurdles) on a theory of harm associated with a firm holding certain (high) levels of debt. At footnote 25, the draft states that competitive harm can be associated with a leveraged buyout that puts the target firm at significant risk of failure (no showing of market overlap or vertical relationship between the parties to an LBO transaction is required). In short, according to footnote 25, too much debt can weaken the competitive viability of an acquired (or to-be-acquired) firm; this appears to be sufficient to raise a Section 7 concern. (This sounds more like a Section 5 theory of harm and illustrates the possible breadth of use of Section 5.)
In evaluating this theory of competitive harm, will the Agencies apply the same strict standard of reliance on the failing firm defense— “grave probability of a business failure” or “imminently cease playing a competitive role in the market?” I doubt it; footnote 25 allows the Agencies to argue for non-symmetrical treatment of “failure.”
The Agencies apply inconsistent treatment to the analysis of potential new entrants. The proposed (and current) Guidelines treat entry claims with skepticism; in my experience, if a firm cannot be characterized as a committed entrant, it is unlikely that future entry will be deemed likely to prevent or ameliorate competitive concerns. In practice, de novo entry arguments seem to fail on one of the three requirements of timely, likely, and sufficient.
But the significant hurdles to an entry defense are not applied to identifying so-called potential entrants—i.e., perceived potential entrants or actual potential entrants. There, the government’s proposed Guidelines will accept “a reasonable probability of entry” based on “objective evidence regarding [a] firm’s available feasible means of entry” including evidence that the firm has sufficient size and resources to enter, advantages that would make the firm well-situated to enter, successful expansion into other markets, or current participation in adjacent or related markets, evidence that the firm has incentives to enter, and evidence that other industry participants recognize the company as a potential entrant. In large part the analysis of potential entrants repeats the mistake of the 1982 Merger Guidelines and 1984 Merger Guidelines (and the appellate opinions in Baker Hughes, Syufy, and Waste Management) entry analysis: entry based solely on capabilities (“could enter”) without strong consideration of incentives (and ability) to enter (“would enter”). The 1992 Horizontal Merger Guidelines corrected this error (and this approach is continued in this draft’s discussion of entry requirements). (The distinction between the entry analysis of the 1982/1984 Merger Guidelines and the 1992 Horizontal Merger Guidelines is discussed by Robert (Bobby) Willig and Jon Baker in separate and important papers that also help illustrate why the concepts of committed and uncommitted entry are a better way to think about the elimination of non-incumbent competition.)
The proposed Guidelines tilt the field against the merging parties in other ways. For example, while “subjective evidence that [a] company considered entering” may be sufficient to identify an actual potential competitor, it seems unlikely to be sufficient in defending a merger of two competing firms to point to firms that have “considered entering.” (It also seems somewhat inconsistent with the position the Commission took in Meta/Within, where it seems to have argued that objective evidence was of greater utility than subjective evidence, when Meta argued that it had decided not to enter the market for Virtual Reality Fitness Apps.)
The draft also adopts a new principle or reading of Section 7. Case law analyzes whether a merger will violate Section 7 as a question of probability—not certainties but a reasonable probability of harm. The draft rephrases this, suggesting that Section 7 requires the Agencies to assess the risk to competition, without putting any bounds on this risk analysis. Earlier iterations of the Guidelines used “risk” more narrowly; the potentially broader application of a risk standard here seems intended to create a more favorable interpretation in the Agencies’ favor than the existing reasonable probability standard and to raise the bar on the evidence required to make a successful rebuttal argument.
Asymmetry in the treatment of rebuttal evidence is a subtle but disingenuous departure from the presumption-burden shift-rebuttal framework articulated in Baker Hughes and followed by the appellate courts.
Efficiency claims are no longer an integral part of a competitive effects analysis.
The 1997 revisions to the efficiency analysis of the 1992 Horizontal Merger Guidelines were a significant step towards the rationalization of merger law; notwithstanding claims that mergers never or rarely ever obtain their projected efficiencies, efficiencies or synergies have been and remain a common reason firms merge. It is now widely accepted by the courts that an analysis of efficiencies associated with a merger is a standard part of competitive effects analysis; it is also recognized that efficiencies (if they can be shown) are a merger benefit and not a merger harm. The proposed Guidelines treat efficiency claims even more skeptically than past versions of Merger Guidelines, adding an unwarranted (and likely difficult to show) pass-through requirement. Here, it is clear here that proposed Guidelines attempt to shift to the respondent or future defendant the burden of persuasion – that the merger is not anticompetitive – rather than merely the burden of production of evidence in efficiency claims: “the merging parties must show that … the benefits will improve competition in the relevant market or prevent the threat that it may be lessened.” Note also the non-symmetrical treatment of harm to future competition—or harm to innovation—and the need to show pass-through “within a short period of time.” Efficiencies related to R&D appear to be out as the benefits or R&D appear unlikely to be passed through that quickly. (Or maybe this is just a drafting error—a failure to realize that the ever-higher hurdles placed on merging firms must be (should be?) related to the actual theory of harm.)
The Proposed Merger Guidelines Do Not Explain the Commission’s Principal Analytical Techniques, Practices and Enforcement Policies With Respect to Mergers & Provide No Clarity on Likely Enforcement Decisions by the Agencies
The proposed Merger Guidelines fail to provide clarity and guidance in two significant, over-arching ways: (i) it neglects to address and is inconsistent with the Commission’s stated application of its authority to prohibit Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act (UMC Statement); and (ii) it provides no guidance on what the Agencies are (or will) actually do when attempting to implement these Guidelines.
The first sentence of the proposed merger guidelines repeats what seems like boilerplate but here is incorrect and reflects a failure of the Commission (and the Commissioners) to provide clear guidance to the business community: absent a walk-back of the Commission’s UMC Statement (which seems unlikely), these draft Merger Guidelines do not “explain how … the Federal Trade Commission … identif[ies] potentially illegal mergers.”
The UMC statement “describes the key principles of general applicability concerning whether conduct [including mergers] is an unfair method of competition.” According to the Commission’s UMC Statement, Section 5 of the Federal Trade Commission Act “extends beyond the Sherman and Clayton Acts” and thus reaches conduct not violative of Section 7 of the Clayton Act, nor subject to the requirements of a Section 7 case. In short, more mergers (defined to include acquisitions of stock or assets, including partial acquisitions) can be challenged under Section 5.
Just last week the Commission confirmed it would allege that acquisitions violated the law under theories broader than those reachable under Section 7. In EQT Corporation, the Commission, proceeding under Section 8 of the Clayton Act and Section 5 of the FTC Act (but not Section 7), declared that the complaint in this matter “should remind market participants that transactions that might not strictly violate Section 7 can still pose a risk to competition that the FTC has a statutory obligation to address.”
Whatever the binding constraints of the proposed Merger Guidelines (and there are very few), they are largely irrelevant to the ultimate determination of whether the Commission finds a proposed or consummated merger illegal.
The (dis)utility of the proposed Guidelines is compounded by their failure to align with the Agencies’ ability to enforce these guidelines. The Agencies do not and will not have the resources to enforce to the analytic framework of the proposed Merger Guidelines. Thus, if they mean to adhere to this analytic framework, they will have to pick and choose between those mergers they challenge and those they do not. How will they do that? The Guidelines provide no clue.
Conclusion
Previous Guidelines were neither perfect nor complete. But, in their effort to reinvent the wheel, the Agencies have muddled the good and introduced error and bias. While they may explain what the Agencies wish to do, the adoption of these Guidelines will end the era of Guidelines as effective tools to shape the law, because they are neither persuasive nor a correct statement of existing law, but an advocacy document. Adoption of the proposed Guidelines likely kills the Guidelines as an institutional anchor of merger enforcement across administrations, and we will have entered the era of guidelines as a largely political document, anchored to nothing but the current administration’s political preferences.
Author Disclosure: Bilal Sayyed is senior competition counsel at TechFreedom, a legal policy think tank. Prior to joining TechFreedom, Bilal was Director of the Office of Policy Planning at the Federal Trade Commission (2018-2020). TechFreedom does not represent parties before the antitrust Agencies but does receive financial contributions from parties who may have a financial interest in matters at the Federal Trade Commission and Antitrust Division, including in the content of any final Merger Guidelines. Funders of TechFreedom include Alphabet, Amazon, AT&T, Meta, Verizon. The author thanks Paul Denis, Jay Ezrielev, Bill MacLeod and Steve Salop for comments and suggestions on earlier drafts.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
