By Edward B. Schwartz, a partner in the Washington DC office of Reed Smith LLP, and Gregory Vose, an associate in the firm’s Pittsburgh, PA office.
Riding a wave of populist support for tougher enforcement of the antitrust laws, the Federal Trade Commission (FTC) has announced a number of changes over the last several months making clear that it intends to significantly expand its antitrust enforcement role, particularly with respect to mergers and acquisitions. But in its zeal to usher in a new era of more robust enforcement and to reframe antitrust doctrine, these changes leave businesses with fewer enforcement signposts to guide them in strategic planning, and are likely to deter procompetitive transactions that would be good for competition and consumers alike.
Recently installed FTC Chair Lina Khan is a progressive reformer who, before being tapped by President Biden, was an academic fellow at Columbia Law School and had never worked in the private sector. Her brief and remarkable career trajectory was launched by an article she wrote in 2017 while in law school at Yale—Amazon’s Antitrust Paradox. The article forcefully challenged the consumer welfare test orthodoxy, arguing that platform-based business models such as Amazon’s can harm competition even while they offer increased output and lower prices.1 The Senate confirmed Khan as a Commissioner on June 15, 2021 with bipartisan support. To the chagrin of some Senators who voted for her confirmation as a Commissioner, President Biden appointed her to be FTC Chair later that same day.
The changes have been swift and dramatic. At Khan’s first FTC meeting on July 1, 2021, the FTC voted along party lines to rescind an Obama-era Bureau of Competition policy statement setting out the Commission’s analytical framework for enforcing the FTC Act’s Section 5 proscription against “unfair methods of competition.”2 While that 2015 policy statement broke from the policies of the prior administration by stating the scope of Section 5 was broader than the Sherman and Clayton Acts, the Commission also committed to be “guided by” the consumer welfare standard, and to exercising restraint in bringing enforcement actions targeting conduct that, standing alone, would not violate the Sherman or the Clayton Act.
By scuttling the 2015 policy statement, the Commission under Chair Khan has signaled its intent to recast enforcement policy and to expand the scope of the conduct and transactions it will investigate and challenge. As Khan observed in her statement at the time “the time is right for the Commission to rethink its approach and to recommit to its mandate to police unfair methods of competition even if they are outside the ambit of the Sherman or Clayton Acts.”3
Left unaddressed by the Commission in withdrawing the 2015 policy is the question posed by Commissioners Wilson and Phillips in their dissenting statements:4 if the consumer welfare standard and over 100 years of Sherman and Clayton Act jurisprudence will not supply the analytical framework for the Commission’s analysis under Section 5, what will? Until now, antitrust counsel could turn to a wealth of authorities grounded in the consumer welfare standard and Sherman and Clayton Act enforcement, including case law, joint DOJ-FTC guidelines (including the horizontal merger guidelines), and agency precedent to help advise clients as to what conduct and transactions are likely to raise significant concerns by the FTC. Even with that wealth of guidance, assessing merger-clearance risk can be challenging. What do companies and their counsel look to today? How do companies know what conduct and transactions will be condemned?
“We know it when we see it” may be a suitable standard for obscenity, but not for anticompetitive conduct and competition-reducing mergers. It is difficult for businesses to make informed decisions regarding their critical growth strategies when it is virtually impossible to gauge what level of cost and delay an unfocused and wide-ranging antitrust investigation can take. To those businesses brave enough to be willing to weather the storm, negotiating such contingencies in the transactional documents has also become increasingly difficult. This guilty-until-proven-innocent approach to antitrust enforcement amounts to an added “deal tax” by significantly increasing legal costs and uncertainty.
At the same July 1 meeting, the FTC also approved rulemaking changes that make it much easier for Staff to launch merger investigations and force merging parties to respond to compulsory process (subpoenas or civil investigative demands), prioritizing mergers involving technology companies and healthcare businesses.5 In addition, to combat the increase in merger filings, the FTC announced on August 3, 2021 that some companies awaiting merger approval may face further investigation and that some deals may be challenged even after an initial review period expires.6
And the beat goes on. On August 26, 2021, the FTC reversed prior FTC guidance by announcing that debt must now be included when calculating the size of a transaction for purposes of the HSR filing threshold,7 making more transactions reportable. Two months later, the FTC announced that second requests—already overbroad and unduly burdensome—are going to become even more so as the FTC will now seek “additional facets of market competition that may be impacted,” including “how a proposed merger will affect labor markets, the cross-market effects of a transaction, and how the involvement of investment firms may affect market incentives to compete.” The scope of these investigations appears now to be virtually unbounded; and worse, there is little to nothing the parties can practically do to reign them in. And most recently, the Commission reinstated a “prior-approval” policy not in force since the mid-1990s, that requires companies operating under a merger consent decree to notify the Commission of all proposed transactions in “each relevant market for which a violation was alleged,” whether the transaction is reportable or not.
Not every proposed transaction benefits competition and consumers. But the vast majority of mergers and acquisitions spur innovation and efficiency by providing smaller companies with the capital they need to grow. Mergers of more established companies often result in synergies that promote innovation and manufacturing efficiencies, and allow the merged company to get its products and services into the hands of more consumers.
Vague enforcement standards, ever-expanding investigations, and the consideration of factors like the impact of proposed transactions on labor and the environment will all undoubtedly have a chilling effect on deal making. Even the threat of an investigation lasting one to two years can be enough to kill a deal that would have been a win for competition and consumers, or if the parties endure, impose enormous uncertainty and costs, and erode the value of the target company as it twists in the enforcement winds.
Much of the impetus for more muscular and malleable antitrust enforcement comes from concerns on both sides of the aisle about the perceived market power and conduct of the large digital platforms. The competitive dynamics of the markets in which those companies operate, and some of the business strategies they have adopted, raise difficult and novel issues for antitrust enforcement that may warrant new approaches to thinking about competition and consumer harm in those markets. And, reasonable antitrust minds can and do differ over how to approach merger enforcement: we see that dynamic with every change in Administration, sometimes even if the same party remains in power. But the FTC’s recent policy and process changes leave businesses handicapped in their strategic planning and their attempts to assess the antitrust risk arising from those strategies and contemplated transactions. Hopefully, the Commission will move expeditiously to take steps to fill the current policy void, and to establish policies and procedures to reduce the (perhaps) unintended consequences of the recent changes to merger policy and process. But for now, and as a young philosopher once quipped as he careened, uncontrolled, down a steep hill to an uncertain end, we “don’t know where we’re going, but we’re on our way!”8
- See Amazon’s Antitrust Paradox, 126 Yale L.J. 710 (2017).
- See Fed. Trade Comm’n Press Release, FTC Rescinds 2015 Policy that Limited Its Enforcement Ability Under the FTC Act (Jul. 1, 2021).
- See Statement of Chair Lina M. Khan (Jul. 1, 2021).
- See Dissenting Statement of Commissioner Christine S. Wilson (Jul. 1, 2021); Remarks of Commissioner Noah Joshua Phillips (Jul. 1, 2021).
- See Fed. Trade Comm’n Press Release, FTC Votes to Update Rulemaking Procedures, Sets Stage for Stronger Deterrence of Corporate Misconduct (Jul. 1, 2021).
- See Fed. Trade Comm’n Press Release, Adjusting merger review to deal with the surge in merger filings (Aug. 3, 2021).
- See Fed. Trade Comm’n Press Release, Reforming the Pre-Filing Process for Companies Considering Consolidation and a Change in the Treatment of Debt (Aug. 26, 2021).
- The Little Rascals, Hi’-Neighbor!, Episode 126 (Metro-Goldwyn-Mayer 1934).