SEPTEMBER 2018 Current Themes in U.S. Merger Control I. Introduction The past year has seen a wholesale turnover in Two related themes that have emerged over leadership at the two federal antitrust enforcement the past year are an increased hostility toward agencies, the Antitrust Division of the Department remedies that result in ongoing supervision or of Justice (DOJ) and the Federal Trade Commission monitoring by the agencies (known as “behavioral” (FTC). Makan Delrahim was confirmed as the remedies) and a sharper focus on vertical merger new assistant attorney general for the DOJ in enforcement. The two are closely related in that the September 2017; Joe Simons was sworn in as the typical “fix” for competition concerns in vertical new FTC chairman in May of this year; two new FTC transactions is often a behavioral remedy—the commissioners have been appointed and a third is imposition of requirements that the merged firm on the way; and the new leaders of both agencies act in a certain way after consummation of the have made new senior staff appointments. With transaction, such as an obligation to continue to these changes in leadership have come a shift give access to competitors. In the absence of such in emphasis and a renewed focus on the role of a resolution, the agencies are faced with a decision the antitrust agencies in merger enforcement, to permit the transaction to proceed, look for a which is being reflected in the agencies’ approach structural solution or challenge the transaction in to transactions under review as well as existing its entirety. consent decrees. II. Developments in Merger Remedies Since his confirmation, AAG Delrahim has The FTC appears to share these views. The new repeatedly emphasized that the DOJ is a law director of the FTC’s Bureau of Competition, enforcement agency, not a regulatory agency.1 As Bruce Hoffman, similarly describes the FTC’s role he has explained: “In Section 7, Congress did not as “antitrust enforcers … not price police.”5 This call for illegal mergers to be regulated, it called enforcement-focused approach is exemplified by for them to be prohibited.”2 Delrahim criticized the DOJ’s approach to existing consent decrees, the previous administration, under which the as well as the agencies’ stated preference DOJ “entered into several behavioral consent for anticompetitive mergers being remedied decrees to resolve vertical mergers it determined structurally rather than behaviorally.6 3 to be illegal ….” Instead, the AAG has agreed A. DOJ consent decree activities with commentators who wrote that “allowing [a] merger and then requiring the merged firm[s] to The DOJ has taken steps to manage the extensive ignore the incentives inherent in its integrated collection of consent decrees on its books, as well structure is both paradoxical and likely difficult to as to make future consent decrees easier for the achieve.”4 government to enforce. The DOJ has created an 2 Manatt, Phelps & Phillips, LLP manatt.com Current Themes in U.S. Merger Control Office of Consent Decree Enforcement to assist requiring the divestiture of either Company A’s in ensuring parties’ compliance with, and the or Company B’s Business Line 3 to a third party, DOJ’s enforcement of, current consent decrees; which would restore the competitive balance in initiated an extensive review of so-called legacy the market for Business Line 3. As is clear from or perpetual consent decrees; and added new this example, structural remedies work best in provisions to its recent consent decrees to make transactions with horizontal overlaps. 7 them easier to enforce. By contrast, behavioral remedies are conditions With respect to this latter initiative, the DOJ that impact the company’s future and ongoing announced that it has improved the enforceability business functions. For example, if the competitive of its consent decrees by including provisions that concern with a transaction is that competitors enable the agency to establish a violation of the would be denied access to an essential input or consent decree by a lower standard of proof.8 would be foreclosed from a significant aspect of Instead of requiring “clear and convincing the market, a potential solution could be for the evidence” of a violation, the newly negotiated merging firms to permit competitors to access consent decrees permit the DOJ to establish a that input, or permit access to key elements of violation by a “preponderance of the evidence.” distribution, after the closing of the transaction. The recent provisions also allow the DOJ to Such remedies require ongoing monitoring and apply for an extension if the court finds a supervision by the antitrust agencies, typically violation, seek reimbursement for enforcement achieved through the appointment of monitors, costs and terminate the decree after a certain reporting requirements and other mechanisms. number of years upon notice to the court and the According to AAG Delrahim, behavioral defendant(s). The DOJ views these provisions as remedies require the agencies to regulate the transferring the “risk of failure” to the defendants market “through complex decrees that ignore 9 and away from the American taxpayer. Merging the profit-maximizing incentives of private parties before the DOJ can expect to see the actors.”10 Such remedies are “overly intrusive agency insist on the inclusion of these provisions and unduly burdensome for both businesses in all future decrees. and government.”11 Further, behavioral remedies B. Hostility toward behavioral remedies generate concerns with regard to administrability There are two basic types of merger remedies: and efficiency. While structural remedies such structural and behavioral. Structural remedies as divesting the source of anticompetitive restructure the merger transaction by requiring harm substantially eliminate the risk of harm, asset divestitures or similar relief as a condition behavioral conditions, at best, merely lower the 12 for clearance. For instance, consider a transaction risk. Echoing the DOJ’s concerns, the FTC’s between Company A and Company B in which Hoffman has explained that behavioral remedies Company A has Business Lines 1, 2 and 3, and are problematic because they try to prevent the Company B has Business Lines 3, 4 and 5. If only merged entity from acting anticompetitively, but the acquisition of Business Line 3 renders the they leave the anticompetitive incentive in place, acquisition anticompetitive, the agencies could “and people have a way of acting upon 13 avoid challenging the acquisition in its entirety by incentives.” 3 III. Vertical Mergers Take on a Higher Profile A. The agencies’ approach to vertical mergers Barriers to entry: A vertical merger could create Review of vertical mergers has long been an post-merger market conditions that could deter or aspect of U.S. merger control, but has recently prevent entry from other firms because firms would assumed a much higher profile. Possibly due to need to enter at both levels of the market— 16 the increasingly difficult merger enforcement so-called two-stage entry. Alternatively, the environment in industries that have seen significant merger may reduce the potential for the merging consolidation over the past decade—such as firms to enter each other’s market, eliminating a healthcare and entertainment—parties are looking source of potential competition. further afield for transaction opportunities. The Foreclosure: A vertical merger may result in U.S. agencies have investigated several major “input foreclosure,” where the upstream merger vertical merger transactions over the past year, partner either refuses to supply essential including AT&T-Time Warner, CVS-Aetna, Cigna- inputs to downstream rivals or supplies only ExpressScripts and Amazon-Whole Foods, and on disadvantageous terms that favor its own several other investigated transactions have integrated downstream business unit. Alternatively, included vertical aspects, such as the Bayer- the merger may result in “customer foreclosure,” Monsanto merger. whereby the downstream firm refuses to purchase As explained by the DOJ’s Non-Horizontal Merger products from competitors of the upstream Guidelines, “[b]y definition, non-horizontal mergers supplier, cutting off an important route to market involve firms that do not operate in the same for the upstream company’s competitors. market.”14 As such, they also do not combine Information exchanges: Under this theory of substitutes, and vertical mergers do not alter harm, the merger gives the integrated firm access the concentration in any relevant market and that it did not previously have to competitively are therefore less likely to generate competitive sensitive business information of an upstream or concerns. Instead, vertical mergers often involve downstream rival. The integrated firm might use complements, the combination of which generates that information to make it harder for the rival firm efficiencies, including cost reduction, and “come to compete, which could reduce competition in with a more built-in likelihood of improving the market in which the merged firm competes competition than horizontal mergers.”15 with the rival. Alternatively, the firm could use that Nevertheless, vertical mergers can raise information to facilitate coordination between them competitive concerns in a variety of ways. and competition on pricing and market strategies. Historically, the agencies have relied upon several It has been the long-standing policy of the DOJ and theories of harm, such as that the merger would FTC that behavioral remedies “can be an effective increase barriers to entry, create input or customer method for dealing with competition concerns foreclosure, or lead to anticompetitive information raised by vertical mergers.”17 As described above, exchanges. however, public statements made by AAG Delrahim 4 Manatt, Phelps & Phillips, LLP manatt.com Current Themes in U.S. Merger Control and FTC officials suggest that this is no longer also reported declining advertising revenue for the case. As a consequence, in the absence of television, with Facebook and Google taking the a possible structural fix, the agencies’ decision lead.