1 year ago
If you’re a casual follower of legal news who perhaps spent the summer focused on the polarizing end to the Supreme Court’s term or Donald Trump’s growing indictments, you could easily be forgiven for missing a major dispute — one that will soon reach a significant inflection point and could have dramatic implications for the American economy.
It’s a real controversy in the world of antitrust law, once a relatively staid arena that has lately produced fierce debate in Washington, on Wall Street and beyond.
At issue is an obscure but highly important piece of legal interpretation issued by the Justice Department and the Federal Trade Commission that describes how the agencies review proposed mergers and acquisitions under federal antitrust laws. These so-called “merger guidelines” have existed in varying forms for more than 50 years, but DOJ antitrust head Jonathan Kanter and FTC Chair Lina Khan released a much-anticipated proposal in July to overhaul these guidelines as part of the Biden administration’s broader effort to crack down on monopolies.
The proposal has been praised by progressive activists but faced significant blowback elsewhere. Two prominent Obama administration officials took to op-ed pages to sharply criticize the draft; antitrust scholars have been hotly debating the merits of the proposal; and lawyers in the private sector have issued pointed critiques. For their parts, Kanter and Khan have publicly tried to tamp down what one of them described as “hysteria” generated by the proposal, which is open for public comment through today.
Before we get into the details, it is critical for understanding the intensity of this debate to know that the Justice Department’s antitrust division under Kanter, and the FTC under Khan have not been faring particularly well in the courts since they were confirmed in 2021. Khan recently came under fire from House Republicans after two high-profile court losses involving failed efforts to block acquisitions by Meta and Microsoft. The Justice Department’s track record in the courts under Kanter has attracted less public blowback, but it is at least as mixed — if not demonstrably worse — than the FTC’s performance under Khan.
There have been some victories on the part of the Justice Department, including successful challenges to a proposed merger in the book publishing industry and an airline industry alliance, but those efforts have been offset by a series of losses that have resulted in pointed words from the presiding judges.
A judge rejected the DOJ’s challenge to a merger in the health care technology industry after concluding, among other things, that the case “rest[ed] on speculation rather than real-world evidence.” A merger challenge in the agriculture industry fell apart because the department “ignore[d] the commercial realities” of the sector. Another judge dismissed a case brought to block a merger in the defense industry, arguing that the government had attempted to “gerrymander its way to victory” by proposing a narrow analytic framework that did not reflect “market realities.” After these losses, the department either did not appeal, eventually dropped its appeal, or lost its appeal.
Against this backdrop, the newly proposed merger guidelines read a lot like a strategic public lobbying effort — a bid to will into existence an expansive and enforcement-friendly legal framework that modern courts have not endorsed either in the particulars or in broad strokes, and whose wisdom as a matter of domestic economic policy is open to serious question. There are some laudable elements to the proposal — including its detail and clarity about its purported legal underpinnings — but it is silent or vague on critical points throughout.
Indeed, the document on the whole — which includes 13 guidelines and appendices spread over roughly 50 pages — resembles a large and self-serving grab bag for antitrust enforcers to search through in order to pick and choose ways to prevent mergers from going through. And it provides further evidence to support the position that many skeptics of the progressive antitrust reform movement have long held — that Kanter, Khan and their cohort are so opposed to business combinations on grounds of political ideology that they are almost totally indifferent to the ways in which ordinary Americans might benefit from transformation in the modern economy.
Perhaps the most notable and far-reaching change in the draft guidelines is that they appear to silently abandon the modern lodestar of antitrust analysis — the so-called consumer welfare standard — which has guided merger enforcement policy for decades and has served as a central governing principle for regulators and courts.
Under that standard, regulators and the courts have generally recognized that there are often (if not always) economic benefits to business combinations resulting from greater operational efficiencies, and they have focused on preventing mergers that might harm consumers — in the form of higher prices, reduced output or diminished quality.
Kanter, Khan and their ideological allies within the progressive antitrust community, however, claim that focus has been far too narrow. They argue that lax and myopic antitrust enforcement is responsible for a broad array of problems in our economy — including economic inequality and a decline in the rate of small business formation — and maintain that we would be better served by following an approach to antitrust enforcement that supposedly prevailed in the first half of the 20th century, when there was relatively less emphasis on economic analysis in antitrust law.
The first proposed guideline, for instance, proposes a small number of presumptions that would allow regulators and the courts to block a broad array of proposed mergers regardless of their effects on consumers — even if consumers stood to gain from lower prices. One of them is that a merger that creates a firm with a market share of over 30 percent presents too great a threat of undue concentration regardless of the overall state of the market.
This seems absurd on its face. It would appear to mean that a company with a 29 percent share of some market could be blocked from making an acquisition that would increase its market share by as little as two percent, even if the rest of the market is highly decentralized among a significant number of competitors and even if consumers would benefit from the merger in the form of lower prices or more products.
How did Kanter and Khan come up with this particular bright-line rule? The answer is revealing, if not exactly reassuring.
The supposed basis for their position is a Supreme Court decision from 1963 that arguably suggests that a merger resulting in a 30 percent market concentration is necessarily unlawful under antitrust law regardless of any benefits that might accrue to consumers. That figure, however, did not come from any statutory text. It was apparently drawn from case law at the time concerning so-called “exclusive dealing” arrangements, which tend to implicate different concerns than mergers.
And in any event, a lot has happened in the last 60 years — including, most notably, subsequent court decisions that directly contradict Kanter and Khan’s characterization of the law, as well as dramatic changes to how our economy operates and significant improvements in our understanding of economic markets and concentration. Those are advancements that Kanter and Khan publicly tout in support of their agenda, except, as in this case, when recognizing those advancements is apparently at odds with their objectives.
There are variations on these problems throughout the draft. A separate proposed guideline, for example, concerns so-called “vertical” mergers, which involve two companies that operate at different levels of a supply or distribution chain (for example, a cotton manufacturer and a clothing company). The guideline lists a variety of loosely described qualitative factors that would give regulators significant leeway to block a vertical merger from moving forward — including “a trend toward vertical integration” in the relevant markets, whether the “nature and purpose of the merger is to foreclose rivals,” and whether the merger “increases barriers to entry.” At the same time, the guideline never suggests that the effects on consumers (good or bad) should merit any consideration.
Vertical mergers present unique analytic challenges, but the government — both the DOJ and the FTC — has struggled to block these combinations in the courts. Under the circumstances, it is hard to read this section as anything more than an effort to make it easier for the government to win these cases when they want to.
Another proposed guideline indicates that regulators could block a merger if they conclude that it would “contribute… to a trend toward concentration,” but here too, there is little practical guidance about what this means. The cases cited in support of the guideline are roughly half a century old or more, and there is no recognition that a mere “trend toward concentration” in a market could be offset by substantial benefits to consumers from the combination. The underlying presumption seems to be that mergers are inherently bad — as opposed to transactions that could be desirable or not depending on the underlying facts and circumstances.
It might be tempting to write this all off as an esoteric dispute over a government memo, but the importance of the proposed guidelines stems from the dual purposes of the document — one that is descriptive, and another that is normative.
First, the final guidelines are supposed to constitute a guide to how the agencies are actually making enforcement decisions. They are intended to provide a roadmap for private parties throughout the American economy regarding the kinds of transactions that are likely to draw scrutiny from the agencies, which can ultimately decide to take the merging parties to court to prevent the transaction. Even if the government ultimately loses, these challenges can have a serious chilling effect on business combinations throughout the economy — including ones that might otherwise provide substantial value to consumers and other parties — because lengthy government investigations and litigation are costly, time-consuming and ultimately uncertain.
Kanter is well aware of these dynamics and in fact has attributed a widely recognized slowdown in M&A activity to the agencies’ aggressive enforcement posture. The problem with this sentiment is that the government is currently obtaining its leverage by exploiting the costs of investigation and litigation on private parties rather than credibly establishing a deterrent in the courts through targeted and successful litigation that generates support from the judiciary.
Historically, the guidelines have also served as persuasive authority that courts have often relied upon in ruling on merger challenges by the government. The new proposal, however, frequently reads more like aggressive and outdated legal advocacy as opposed to a dispassionate effort to articulate government enforcement policy and to align it with prevailing law and economic analysis. That is the very approach that the DOJ and FTC have been trying and frequently failing at in the courts under the Biden administration.
Unless the guidelines are meaningfully revised following this comment period — among other things, to clarify the relevance and priority of consumer interests in the agencies’ analysis and to loosen or discard some of the stringent rules whose contemporary legal underpinnings are dubious — it is far from clear whether the final product will receive the same level of deference in the courts. Indeed, the result could be to undermine the agencies’ credibility among the judiciary and to exacerbate a losing trend that is already bad enough. That would be bad for the Biden administration and for the very ideological revolution that Khan and Kanter are trying to fuel.
One great irony of all this as it relates to the Justice Department is that Attorney General Merrick Garland likely understands these issues as well as anyone given his own extensive, often under-recognized, background in antitrust law.
Garland’s senior thesis in college was about economic concentration and government policy in mid-20th century Britain. In law school at Harvard, Garland was a research assistant for Philip Areeda, who, a year after Garland’s graduation, published the first edition of a seminal treatise on antitrust law that remains one of the most important texts in the field. Later, Areeda asked Garland to serve as a lecturer during Harvard’s 1986 winter term.
The following year, Garland published a paper in the Yale Law Journal about the scope of the so-called “state action immunity doctrine,” which insulates states from antitrust liability when they regulate through state-supervised professional bodies in a way that reduces competition among businesses. At the time, some antitrust scholars were arguing that it should be easier for courts to strike down these state regulations under federal antitrust law, but Garland criticized this “revisionist proposal” as a legally dubious and unworkable federal power grab — a position that ultimately proved to be in line with the Supreme Court’s interpretation of the law.
Garland went on to practice antitrust law in the private sector before being appointed as a judge, and looking back on his article today — nearly 40 years later, at a time when antitrust law is also in the midst of potential upheaval — it reads like a prescient call for regulatory and jurisprudential stability in an area of the law with significant economic stakes for the country, and as a critique of ambitious and politically-inflected efforts to stretch antitrust law beyond its current reach. (Perhaps not surprisingly, there was reporting before Kanter’s confirmation that suggested that Garland wanted someone else — someone outside of the progressive antitrust and anti-corporate community — to lead the division.)
Like Garland, Kanter was Senate-confirmed, so Garland may not believe that he is entitled to have the last say on the proposed guidelines even if he is the boss at DOJ. Plenty of people — including me — have also taken issue with Garland’s moderate tendencies in various areas during his tenure as attorney general. In this particular instance, however, some serious moderation might be good for the government and for the public.
English (US)