Laying a New Foundation � New FTC and DOJ Merger Guidelines Seek to Advance Biden Administration�s Aggressive Enforcement Vision

In the nearly three years since President Biden took office, it has become clear that his Administration has sought to develop an “inflection point”[1] for antitrust enforcement.

Speeches by new leadership at both the U.S. Department of Justice and the Federal Trade Commission (collectively, the “Agencies”) have claimed that years of “underenforcement” of the antitrust laws, particularly in the context of merger enforcement, have led to consolidated industries, higher prices, lower wages and many other economic ailments.[2] The new Merger Guidelines (the “Guidelines”),[3] released by the agencies on December 18, solidify a significantly more aggressive merger enforcement agenda and seek to build a new foundation for future enforcement efforts.

The Guidelines describe the practices used by the Agencies in assessing whether a merger “presents sufficient risk to warrant an enforcement action.”[4] The Guidelines come roughly five months after the Agencies released a draft of proposed new Merger Guidelines (the “Proposed Guidelines”)[5] and now formally replace the Agencies’ 2010 Horizontal Merger Guidelines and the previously withdrawn 2020 Vertical Merger Guidelines, the prior key cornerstones of merger enforcement.

As previewed in our July Alert on the Proposed Guidelines, the Guidelines seek to institutionally entrench the Biden Administration’s new enforcement philosophy within the Agencies. However, their utility remains uncertain. While the Agencies say that the Guidelines “reflect the new realities of how firms do business in the modern economy,”[6] whether the Guidelines will be adopted by courts or survive a change in administration remains unknown.[7] Parties engaging in mergers or acquisitions, in particular those that are not prepared to litigate against the Agencies, will need to be mindful of the new approach and expanded factors under the Guidelines that the Agencies will use in analyzing transactions to determine if they purport to violate the federal antitrust laws.

Below we update and revise our list of the ten most significant aspects of the Guidelines as originally described in our July Alert.

1. Guidelines Maintain Lower Threshold for Presuming Harm from Horizontal Mergers

As described in our July Alert, a critical change in the Proposed Guidelines was the reduced threshold for a finding by the Agencies that a merger is likely to substantially lessen competition. Unsurprisingly, the proposed lower Herfindahl-Hirschman Index (HHI)[8] thresholds at which the Agencies will presume a merger is likely to substantially lessen competition were unchanged in the Guidelines.

Going forward, the Agencies will presume that a merger is likely to substantially lessen competition if, in essence, it (1) creates a firm with greater than 30% market share or (2) increases market concentration to the equivalent of between five or six equally-sized competitors. These new HHI thresholds (see table below) are a substantial reduction from the 2010 Guidelines and are far below those where the Agencies have successfully challenged previous mergers. Still, parties need to be mindful that, if followed to the letter, these more easily triggered presumptions will significantly increase the number of mergers where the Agencies will find competitive harm.


2. Unlike Earlier Proposal, No New Presumption for Coordinated Effects

The Guidelines walk back slightly the previously proposed introduction of a new presumption for when a merger results in market conditions that are susceptible to coordinated action. Under the Guidelines, the Agencies may conclude (instead of the prior language: “will presume”) that a merger increases the likelihood of coordination and materially increases the risk of coordination if any of the following three market conditions are present: (1) a highly concentrated market (i.e., a market with post-merger HHI greater than 1,800), (2) there has been prior actual or attempted coordination among market participants, or (3) the merger would eliminate a “maverick” (i.e., a firm with a “disruptive” presence in the market).

This remains a significant departure from the 2010 Guidelines, under which the Agencies were only “likely” to challenge a transaction if all three of those market conditions were present. It is likely that the Agencies will seek to challenge more transactions using a coordinated effects theory.

3. Prior Presumption of Harm for Vertical Mergers Involving Firms with Shares Greater than 50% Removed

In another departure from the Proposed Guidelines released in July, the Agencies removed a contemplated presumption of harm from any transaction where the “foreclosure share” (i.e., the combined firm’s market share for the product for which it could foreclose competitor access) is above 50%. Instead, the Agencies fall back on more traditional vertical theories of harm including whether the merged firm has the incentive and ability to foreclose its competitors from a vital product, service or route to market. This concession may have been the result of a string of losses in recent vertical merger cases including Microsoft/Activision[9] and UnitedHealth/Change Healthcare.[10] However, the Agencies have added a reference to the FTC’s recent victory in Illumina/GRAIL, where the appellate court found the FTC’s vertical theory of harm was supported by substantial evidence.[11]

4. Include More Potential Rebuttal Evidence that May Be Considered than Prior Proposal

In our July Alert, we noted that the Proposed Guidelines did not specifically articulate the procompetitive benefits often associated with vertical mergers. This has been rectified in the Guidelines, which include additional detail around rebuttal evidence for various theories of harm, including evidence of potential procompetitive benefits of vertical mergers.[12] However, the Agencies’ references to rebuttal evidence are often accompanied by specific burdens of proof by the merging parties (e.g., that any claimed efficiencies, such as the elimination of double-marginalization described in our July Alert, would prevent “the full range of probable strategies” to harm competition).[13] Although the Guidelines seek to address the criticisms of commentators noting the lack of detail regarding potential rebuttal arguments to the Agencies’ more novel theories, it is clear from the various caveating that the Agencies remain highly skeptical of any such arguments and appear unlikely to give rebuttal evidence much weight.

5. Harm from Acquisitions of Potential Entrants or Nascent Competition May Arise at Even Lower Concentration Levels

In the Guidelines, the Agencies continue to emphasize that mergers that eliminate a potential entrant in a concentrated market can substantially lessen competition.[14] The Guidelines further emphasize, through the addition of new footnote language not present in the Proposed Guidelines, that harm may exist under this theory at lower concentration levels than with other mergers. Specifically, if the transaction eliminates a potential entrant in a market with a concentration level equivalent to ten equal-sized firms (i.e., a market with an HHI of 1,000), the Agencies claim that the transaction can substantially lessen competition.[15] This is especially noteworthy because the 2010 Horizontal Merger Guidelines described markets with an HHI below 1,500 as unconcentrated.[16] These changes suggest the Agencies will continue aggressive enforcement against transactions that eliminate potential entrants or nascent competitors.

6. Focus on Transactions within Industries Trending Toward Consolidation Remains, But Standalone Theory of Harm Removed

The Proposed Guidelines included a standalone theory of harm that posited that, if (1) a transaction occurred in an industry where there had been steadily increasing concentration and (2) the transaction would increase the existing level of concentration or pace of the existing trend, the transaction may substantially lessen competition.

The Guidelines include a revised section that removes that standalone theory but continues to focus on industry trends toward consolidation by suggesting that such a trend increases the risk of finding harm under the more traditional horizontal or vertical theories. The Guidelines outline that “the recent history and likely trajectory of an industry can be an important consideration when assessing whether a merger presents a threat to competition.”[17] If a transaction takes place in an industry with a trend toward consolidation, the merging parties should expect heightened scrutiny and investigation into any potential evidence of (1) a trend toward vertical integration thereby making it more difficult for entry at any single level of competition or (2) an “arms race” for bargaining leverage that would cause other firms to consolidate further to gain countervailing bargaining leverage. The Guidelines also note that if there are multiple mergers at once or in succession by different players in the same industry, the Agencies may examine multiple deals in light of the combined trend toward consolidation.

7. Continued Focus on Labor Market Competition

As identified in our July Alert, harm to competition in labor markets is an area of increasing focus for the Agencies and, unsurprisingly, the Guidelines continue to include provisions for mergers involving competing buyers of labor. These are almost identical to the provisions in the Proposed Guidelines, but with the added clarification that the Agencies are protecting not only competition for workers, but also competition for creators, suppliers, and service providers.

8. Insight into Assessment of Mergers Involving ‘Platforms’

The Guidelines continue to pay special attention to transactions involving platforms.[18] As described in our July Alert, the Guidelines seek to clarify the Agencies’ approach to platform transactions and build on an area of particular concern to the Agencies: the conflict of interest and effects on competition that arise when a platform operator is also a platform participant. Expanding on this specific theory of harm is the primary substantive addition compared to the Proposed Guidelines. As the Guidelines explain, when a platform operator is also a platform participant, platform operators are often incentivized to steer users to their products instead of a product the user may prefer. In such instances, the Agencies will closely scrutinize the acquisition of a firm that offers products on the platform.

9. Mergers Involving Firms with a ‘Dominant’ Position Will Face Intense Scrutiny

Consistent with the Proposed Guidelines, the Guidelines confirm that when a transaction involves a firm with a dominant position, the Agencies will analyze whether the transaction is likely to entrench the dominant position or extend it to related markets. Unlike in the Proposed Guidelines, the Guidelines do not provide a specific market share threshold for the Agencies’ assessment of whether a firm has a dominant position. Instead, the Agencies will base their assessment on direct evidence or market shares showing durable market power. Moreover, the Guidelines note that “[t]he degree of scrutiny and concern will increase in proportion to the strength and durability of the dominant firm’s market power,”[19] indicating that the bigger the player the more scrutiny should be expected.

10. Increased Skepticism Towards Efficiencies

The Guidelines take a highly skeptical approach to claims of efficiencies.[20] The Agencies made minimal changes to the discussion of claimed efficiencies in the Guidelines as compared to the Proposed Guidelines, which are a departure from the 2010 Horizontal Merger Guidelines. For example, the Guidelines make clear that the Agencies will not credit efficiencies outside the relevant market that would not prevent a lessening of competition in the relevant market, whereas the 2010 Horizontal Merger Guidelines included a specific reference to instances where the Agencies might use their prosecutorial discretion to do so.[21]

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This content was originally published by Shearman & Sterling before the A&O Shearman merger