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On Tuesday, April 20th, the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC) released proposed revisions to their Horizontal Merger Guidelines (“Guidelines”). The current Guidelines, which, aside from some modifications in 1997, have remained unchanged since their issuance in 1992, outline the process by which the FTC and the DOJ analyze the antitrust implications of horizontal mergers and acquisitions. (The Guidelines do not address vertical mergers and acquisitions.) These revisions are intended to ensure that the Guidelines “more accurately reflect the way the FTC and DOJ currently conduct [horizontal] merger reviews.”
Though the Guidelines have no force of law, they are highly influential. FTC Chairman Jon Leibowitz described the Guidelines as “one of the most cited documents in modern antitrust.”
In most respects, these revised Guidelines are not “new” but, rather, reflect an effort to articulate the enforcement philosophy that is already ascendant in Washington, D.C. The revisions provide a greater level of detail on some subjects than are contained in the current Guidelines, particularly with respect to the economic models used by the agencies to assess the potential competitive impact of horizontal mergers. The revised Guidelines should assist companies and the antitrust bar in evaluating whether a horizontal merger can be completed without significant agency intervention.
Key Revisions
Below are some key points of the revisions, which reflect this current enforcement philosophy:
- The revised Guidelines downplay the importance of market definition in the horizontal merger analysis, stating that “[m]arket definition is not an end in itself: it is one of the tools that the agencies use to assess whether a merger is likely to lessen competition.” In recent years, the government's biggest court losses in horizontal merger cases (Arch Coal/Triton; Oracle/ People Soft; and—at the district court level—Whole Foods/Wild Oats) have turned on market definition issues.
- The revised Guidelines instead place more emphasis on other ways to measure anticompetitive effects. These include: merger simulation models (which “need not rely on market definition”); economic tests of “upward pricing pressure” (which also “need not rely on market definition”); the use of win/loss data; and “natural experiments.” This approach may open the agencies to criticism in creating the appearance of relying on market definition when it supports a particular enforcement action and disregarding it, in favor of other economic techniques that purport to demonstrate a horizontal merger’s anticompetitive effect, when it frustrates another action.
- The revisions place significant emphasis on price discrimination—a price increase for a small subset of vulnerable customers—which may, in some cases, encourage very narrow market definitions comprised only of those customers.
- The Herfindahl-Hirschman Index (“HHI”) thresholds have been upwardly revised. The revised Guidelines state that the agencies will consider markets “unconcentrated” if, after the merger, they have a HHI below 1,500 (an increase from a threshold of 1,000). A market will be considered “highly concentrated” at a HHI of 2,500 or greater (an increase from 1,800). A merger producing (i) an increase of more than 200 HHI points and (ii) a post-merger HHI exceeding 2,500 will be presumed anticompetitive. The new thresholds, however, do not represent a loosening of horizontal merger review standards but, instead, conform the Guidelines to the thresholds that the agencies have most often used in practice.
- Additionally, the revised Guidelines contain a significantly expanded discussion of unilateral effects of a horizontal merger, consistent with the interests of agency chief economists. Importantly, the revisions note that, like new entrants into the relevant market, non-merging firms’ ability to reposition their products to offer close substitutes for the products offered by the merging firms may deter or counteract what may otherwise be significant anticompetitive unilateral effects.
- Further, the current Guidelines include a presumption that harmful unilateral effects of a horizontal merger would not arise so long as the merged firm had a market share of below 35%. This 35% “safe harbor” has been deleted in the revisions. This deletion makes the higher HHI thresholds described above much less significant.
- A section of the revised Guidelines, not contained in the current Guidelines, includes a discussion of the impact of horizontal mergers on innovation. The current Guidelines focus primarily on short-term prices and output effects. DOJ Antitrust Division head Christine Varney has repeatedly expressed an interest in assessing horizontal mergers’ effects on innovation.
Practical Implications
- Overall, the revised Guidelines reflect a pro-enforcement perspective and an effort to blunt various tools that merging parties have used successfully in the past to defeat horizontal merger challenges. They are consistent with a more activist enforcement policy.
- The agencies will take a particularly hard look at mergers between firms that sell similar products. They are likely to be less receptive to arguments in favor of broader market definitions and broader competitive dynamics. Win/loss data will be key in many deals as a measure of the closeness of competition between the merging parties.
- If the agencies set a high bar for non-merging firms’ ability to reposition their products to offer close substitutes, the economic tests embodied in these revised Guidelines may lead to more horizontal merger challenges.
- The revised Guidelines’ approaches to entry, efficiencies, and failing firms are largely consistent with the current Guidelines. Notably, however, the two-year standard for “timely, likely, and sufficient” entry into the market to prevent the enhancement of market power by a merged firm has been eliminated. Deputy Assistant AG Molly Boast stated in a panel discussion yesterday that the intent in deleting the two-year benchmark was to emphasize that “timely, likely, and sufficient” entry might occur far sooner, or could occur after two years, depending upon the market. Parties will bear a significant burden in trying to rely on any of these factors to defend a horizontal merger that the agencies view as problematic, particularly, in the case of entry, where there is no history of the type of entry upon which the merging firms might rely.
- In technology industries, it will be increasingly important to convince the agencies that mergers will not harm innovation.
- As noted above, the Guidelines are not law and are not binding on the courts. In some respects, their analytical approach is in tension with legal precedent, which places much more emphasis on market definition. However, since most horizontal merger investigations are resolved at the agency level, rather than challenged in court, the revised Guidelines provide important insight into how best to address agency concerns.
Public comments on the revised Guidelines are being accepted until May 20th.
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