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Antitrust Magazine

Volume 35, Issue 3 | Summer 2021

What Happens Next to Antitrust—in 6 Questions

Joshua H. Soven

Summary

  • The rapid growth and size of some companies, new business models, and increased focus on the labor markets have generated a volatile discussion about the future of antitrust policy and enforcement.
  • The intensity of the debate can cloud the practical implications of the policy choices for businesses. This article unpacks some of those implications by analyzing six questions, providing thoughts as to how businesses should prepare for what happens next.
  • There has been consensus that the antitrust agencies should focus on challenges to conduct that increases prices and/or reduces levels of quality and innovation.
What Happens Next to Antitrust—in 6 Questions
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We are in a bull market for debate about antitrust policy. The rapid growth and size of some companies, new business models, and increased focus on the labor markets have generated a volatile discussion about the future of antitrust policy and enforcement.

For many, the back and forth involves heroes and villains, new friends and old foes, and antitrust “school” rivalries. This dynamic is healthy—it promotes candid discussion and new thinking. But the intensity of the debate can cloud the practical implications of the policy choices for businesses. This article unpacks some of those implications by analyzing six questions. And while everyone has an agenda (and I have mine), I do not focus on what I think should happen, but on what I think will happen, and how businesses should prepare for what happens next.

1. What is antitrust trying to accomplish?

The next phase of antitrust will depend a lot on what the Biden administration decides is the purpose of the antitrust laws. Complete consensus on the objectives of antitrust has never existed. Until the 1970s, prosecutors and the courts often applied the antitrust laws to protect small businesses and to try to preserve and restore unconcentrated market structures. The impact of conduct on consumers and economic efficiency mattered, but not as much as it does today.

Next came about two decades of accepting, rejecting, and modifying the Chicago School’s position that antitrust should focus on price and economic efficiency, after which antitrust policy had a pretty soft landing on the consumer welfare standard. In 2005, Professor Herbert Hovenkamp, the author of the leading antitrust treatise, described the state of play: “[T] oday we enjoy more consensus about the goals of the antitrust laws than at any time in the last half century. . . . Few people dispute that antitrust’s core mission is protecting consumers’ right to the low prices, innovation, and diverse production that competition promises.”

Professor Hovenkamp probably overstated the level of agreement about whether the consumer welfare standard protects “diverse production.” But he was right that there has been consensus that the antitrust agencies should focus on challenges to conduct that increases prices and/or reduces levels of quality and innovation. The number of competitors in a market matters when it informs the analysis of conduct’s effects on customers, but preserving a particular market structure has not been an end in itself.

Reflecting this consensus, in June 2021, the Supreme Court, in essence, described the consumer welfare standard in its unanimous decision that held that certain restrictions on compensation for student-athletes imposed by the National Collegiate Athletic Association violated Section 1 of the Sherman Act: “[It is] a fact-specific assessment of market power and market structure aimed at assessing the challenged restraint’s actual effect on competition—especially its capacity to reduce output and increase price.”

Members of the Biden administration (in their writings) have argued that “excessive market power is a serious problem” in the United States and raised two concerns about the consumer welfare standard. First, some assert that the standard does not reliably cover conduct that generates short-term benefits for consumers, but potentially could produce harms to competition in the long run. For example, they think that the consumer welfare standard does a poor job of stopping large companies from reducing prices below costs, which they believe can over time reduce the number of competitors and innovation. Professor Timothy Wu (the Special Assistant to President Biden for Technology and Competition Policy) put it this way:

[E]mphasis on measurable harms to consumers still tends to bias the law toward a focus on static harms and, especially, on prices. Such “price fixation” inevitably tends to marginalize parts of the antitrust law concerned with dynamic harms—harms like the blocking of potential competition, slowing of innovation, loss of quality competition, and overall industry stagnation.

The second concern among Biden administration officials is that the consumer welfare standard does not achieve what they believe was Congress’ central goal for the antitrust laws—to prevent the “excessive concentrations of economic power,” by protecting smaller businesses, suppliers, and labor. FTC Chair Lina Khan has written:

Focusing antitrust exclusively on consumer welfare is a mistake. For one, it betrays legislative intent, which makes clear that Congress passed antitrust laws to safeguard against excessive concentrations of economic power. This vision promotes a variety of aims, including the preservation of open markets, the protection of producers and consumers from monopoly abuse, and the dispersion of political and economic control. Secondly, focusing on consumer welfare disregards the host of other ways that excessive concentration can harm us—enabling firms to squeeze suppliers and producers, endangering system stability (for instance, by allowing companies to become too big to fail), or undermining media diversity, to name a few.

Chair Khan, Professor Wu, and others in the Biden administration want to replace the consumer welfare standard with a benchmark that focuses on protecting the “competitive process.” Professor Wu has written that to develop this approach “will require much further work and practice to arrive at practicable standards,” but that “the basic question is whether the complained-of conduct is competition on the merits, or, rather, an effort to disable or subvert the competitive process.” “This is a test primarily focused on protection of a process, more specifically, which is different than the maximization of a value.” Professor Wu wrote that the competitive process standard is “not ultimately tied to arguments about whether, in the final analysis, consumer welfare has been served or not.”

The courts will not replace or modify the consumer welfare standard overnight. But the desire to do so by members of the Biden administration will produce immediate consequences for businesses. Many antitrust investigations are resolved at the agencies, without litigation. (Lawyers like trials; most companies do not.) The Biden administration will, in many cases, investigate the wide set of issues raised by those who favor the competitive process standard. This will lengthen some investigations and expand the scope of the information the parties need to produce. For example, the antitrust agencies have already started to ask for more information about how transactions affect labor markets.

To reduce regulatory risk and manage investigation costs, companies will need to broaden the scope of their advocacy to go beyond price effects and incentives to innovate. From the outset, companies should have thorough presentations that address the transaction’s effects on smaller businesses and other competitors, labor rates, unions, and diversity of consumer choice. For high-profile transactions, companies will often need to make presentations to Congress, other federal agencies, labor organizations, political interest groups, and other stakeholders.

In litigation, the push to replace the consumer welfare standard will increase risks for defendants in some circumstances, but it will also present strategic opportunities. The DOJ’s and FTC’s litigators have often benefited from the consumer welfare standard because it requires them to hit only a single evidentiary target—showing that the defendants planned to increase prices, drop levels of output or service, and/or reduce innovation. The standard also has helped the antitrust agencies defeat efficiencies defenses in merger cases because, as applied by the courts, companies must show that they will pass most or all of the efficiencies on to customers.

In contrast, the “competitive process” standard is broader and less precise, which will leave room for businesses to urge the courts to adopt favorable interpretations. And if a variety of welfare concerns become relevant in antitrust litigation—concentration of power, labor, suppliers, etc.—businesses can advocate that the courts should incorporate these factors into the analysis. For example, companies can sometimes make credible arguments that a merger will help them avoid layoffs, increase wages, and support unions.

In addition, a renewed emphasis on “market structure” and protection of smaller businesses will present strategic opportunities for businesses in litigation if it causes the courts to place greater emphasis on old-style market definition. For several decades, the primary litigation obstacle that the antitrust agencies faced was not the Chicago School’s de-emphasis of market structure, but the inability to prove a traditional market structure in the first place. To deal with this problem, the antitrust agencies successfully advocated for a more flexible view of market definition that used econometric tools to measure the relative intensity of price and quality competition between companies. This has produced big benefits for the antitrust agencies in litigation. For example, the FTC’s flagship hospital merger enforcement program often sidesteps traditional market definition and policy objectives favored by some critics of the consumer welfare standard (e.g., wages and impacts on suppliers). Instead, the program hinges on an FTC economic model that has a singular focus on whether a merger is likely to increase prices to the hospitals’ customers.

2. Does antitrust policy play dice
with competition?

On the surface, the antitrust debate is about legal doctrine. But the substance of the disagreements largely boils down to how much risk to take that conduct will reduce competition.

In an enforcement framework, the risk issue reduces to two questions. First, what “probability of harm” test should the agencies and the courts use to determine antitrust liability? For example, does conduct violate the antitrust laws if there is a 51 percent chance that it will reduce competition? Second, what is the plaintiff’s burden of proof in court (e.g., a preponderance of the evidence) to show that the probability test is satisfied?

In the 131 years since Congress passed the Sherman Act, neither the antitrust agencies nor the courts have answered these two questions with precision. Instead, the agencies and courts have adopted a variety of presumptions and burden-shifting mechanisms to resolve antitrust cases. Nevertheless, I think that the DOJ’s and FTC’s litigators believe that to win a case, they need to prove that it is more likely than not that conduct will cause a material and foreseeable reduction in competition. And this belief affects case selection. For example, the antitrust agencies generally do not challenge acquisitions of a “nascent” competitor when there is only a very low chance of a loss of competition (e.g., below 5 percent).

The Biden administration, its advisors, and some members of Congress believe that antitrust enforcers have wrongly erred on the side of under-enforcement. To address this, they want to (1) lower the risk thresholds that the agencies use when they decide whether to bring an enforcement action, and (2) reduce the agencies’ burden of proof to demonstrate that conduct violates the antitrust laws. For example, Professor Wu has written that the antitrust agencies have applied too high a standard when they decide whether to challenge acquisitions of nascent competitors by large technology companies.

Relatedly, six prominent antitrust practitioners and scholars, including Professor Wu, published a report that advocates for legislation that “under some circumstances [makes] conduct that creates a risk of substantial harm [] unlawful even if the harm cannot be shown to be more likely than not. The views of these practitioners and scholars are reflected in bills pending in Congress. These bills would: (1) prohibit certain acquisitions by large companies; (2) expand the types of conduct for which there is a presumption of illegality; (3) shift burdens of proof to the defendants for certain cases; (4) lower the government’s burden of proof in merger cases; (5) require that large technology platforms avoid preferencing their own products and services and make data available to competitors; and (6) most dramatically, could require the breakup of some large technology platforms.

Similar to the Biden administration’s doubts about the consumer welfare standard, this risk-averse dynamic will affect antitrust enforcement policy, particularly if the antitrust agencies receive more funding. For example, the administration’s antitrust team will scrutinize a number of acquisitions by large companies that, until recently, the agencies would have cleared quickly because they do not create a material risk of foreseeable harm to consumers. The implications for businesses are substantial.

First, in this environment, some companies facing an antitrust investigation should accelerate the production of ordinary course of business documents that can demonstrate that there is no significant risk of a loss of competition or harm to the competitive process. This approach can avoid the delays that can occur when the agency intends to conduct an extensive investigation. An incrementalist approach by companies under investigation, which was always an overrated strategy, will become more likely to prolong investigations, raise costs, and increase business risks.

Second, “hot” documents will present even greater risks to businesses than they do today. While often packaged as if it is a hard science, antitrust remains an imprecise discipline. Bad “intent” documents will both put pressure on and make it easier for the Biden administration to challenge conduct that has a relatively low probability of causing competitive harm. Professor Wu has explained: “[E]vidence of an anticompetitive plan is a particularly important guide in this area. Such intent might be subjectively expressed through testimony or internal writings. The enforcer or factfinder essentially borrows a party’s expertise to help form a judgment about competitive effects.”

In this environment, hot documents will also make it much easier for courts to resolve ambiguities against companies. It will become exceptionally important that company officials describe their conduct and competitors accurately, and with precision. Hyperbole that may look harmless at the time could generate a government lawsuit.

Third, if pending antitrust bills become law, it will likely require businesses to change litigation strategies. Some of the proposed legislation effectively puts the burden of proof on the defendants for certain conduct. This may cause courts to give the defendants greater latitude to obtain substantial discovery from the government’s witnesses and other third parties.

Putting the burden on the defendants might also cause some courts to allow the defendants to go first at trial, which will enable the parties to cross-examine the government’s witnesses in the defendants’ case in chief. Relatedly, if litigation becomes more about the competitive process and less about consumer welfare, it could put more pressure on the antitrust agencies to sponsor credible testimony from third-party competitors who allegedly will be harmed by the defendants’ conduct. To prepare a witness properly for trial requires a substantial investment of time and resources. Even officials from third parties who agree to testify at trial for the DOJ or the FTC often are reluctant to make this commitment.

3. Who really is at the top of the antitrust pyramid?

The Biden administration may or may not dent the U.S. antitrust law universe, but, either way, European competition agencies probably will present the biggest regulatory risk to many U.S. companies over the next five years. The political and economic forces that will produce more aggressive enforcement in the United States are just as strong in Europe. And European competition agencies generally do not need to go to court to stop mergers and other conduct, which gives them more latitude to bring enforcement actions that could present substantial litigation risks in the United States. Moreover, the U.S. antitrust agencies may urge European authorities to stop conduct that they doubt they can challenge under U.S. law.

Two recent developments illustrate the increased antitrust risks to U.S. companies from competition authorities in Europe. First, in March 2021, the European Commission (EC) implemented a rule that expands the number of smaller transactions that the Commission can review in order to give the EC greater ability to review transactions that involve nascent competitors, even when the nascent firm has little or no revenue. The rule enables EC member countries to request that the EC review any merger that does not meet the EU merger thresholds, but “affects trade between Member States” and “threatens to significantly affect competition” within the territory of that member country, regardless of whether it meets the thresholds in that Member State. The Guidance also provides for post-closing referrals regardless of whether the referral complies with current statutory requirements.

Businesses should expect that the EC will use this expanded authority frequently. In May 2021, the European Commission used the authority to open an investigation of Illumina’s proposed acquisition of GRAIL. Because the EC investigation barred the parties from closing, the FTC moved to dismiss its federal litigation complaint that sought to enjoin the deal pending a lengthier administrative trial at the FTC. Companies need to plan for member countries to make such referrals to the EC on their own initiative. They also need to account for (offensively and defensively) the ability of private parties with strategic interests in a deal to urge member states to make such referrals to the EC.

Second, since Brexit, the United Kingdom’s Competition and Markets Authority (CMA) has stepped up its level of scrutiny of transactions, particularly those in the technology and medical technology sectors that involve nascent or adjacent competitors. For example, in 2020, just two days after the U.S. District Court for the District of Delaware denied the DOJ’s attempt to block Sabre’s acquisition of Farelogix, the CMA stopped the transaction. Notably, the Antitrust Division’s Assistant Attorney General at that time praised the CMA’s decision in a DOJ press release.

Handling a regulatory review in Europe was already analogous to three-dimensional chess. The latest developments add even more dimensions. The issues that will become more complex include: drafting risk allocation covenants for merger agreements; decisions about which European authorities to notify about a transaction; assessments about whether third parties will push for investigations to advance their strategic interests; and whether and how to discuss competition reviews in Europe with the U.S. antitrust agencies.

4. Does anyone “feel the need for speed”
in merger reviews?

Commentators have written millions of words about potential changes to the antitrust law that governs mergers, but remarkably few about how to make antitrust merger reviews go faster. The antitrust agencies have rolled out initiatives intended to streamline merger investigations. However, these initiatives have had only modest effect. Instead, as the DOJ recently wrote in a submission to the Surface Transportation Board, “Mergers subject to the HSR Act can occasionally take a year or more to reach final decision.”

Merger process reforms do not stick in part because many at the DOJ and the FTC doubt that they serve the agencies’ interests when they review large strategic transactions. Rather, they think that the agencies benefit from a lot of time to investigate such transactions and to prepare for litigation. Parties (and their lawyers) are also responsible for the modest success of merger process reforms. Many parties decide not to respond rapidly to a Second Request because they think that it will make the agencies hostile to their deal and that with more time the agencies “will come around.”

Although there are credible arguments why a faster merger review process would produce substantial benefits for the antitrust agencies and the parties in many matters, there are no signs of change to the status quo. If the Biden administration does speed up merger investigations, the following factors will probably drive reform:

First, the antitrust agencies and the parties realize that technology now enables the merging parties to produce in three months the information that the agencies use to make most enforcement decisions: documents from the files of 10–15 senior officials; financial databases; and win-loss data. It might take a month or two longer for the agencies to obtain the information they need from third parties, but no more than that.

Second, the parties involved in a Second Request investigation decide that it is in their interest to push for an agreement with the antitrust agencies that enables them to complete the investigation in seven months and complete any litigation in four months. This schedule would enable a district court to issue a ruling within one year after the HSR filing, a rarity today.

Third, the antitrust agencies really commit to relying on structural presumptions, and conclude that they do not benefit from long discovery schedules and multi-week trials where the bulk of the time is spent litigating why a presumption is not informative about the transaction’s likely competitive effects. Relatedly, merger reviews will accelerate if the agencies decide that it is not in their interests to give the parties many months to unilaterally construct their own remedies that put the agencies in the defensive position of “litigating the fix.”

5. Will antitrust enforcers stop worrying and learn to love regulation?

If you tell a lawyer or economist who works at the Antitrust Division or the FTC that they are a regulator, they usually respond with a cross look. They view their work as law enforcement, not regulation. And they have a point; much of the justification for robust antitrust enforcement is to avoid regulation.

Today, politicians, commentators, and antitrust lawyers across the political spectrum are pushing away historic concerns about antitrust getting into the regulation business. They reason that antitrust enforcement tools, by themselves, are not adequate to protect competition. FTC Chair Khan has written that “reliance on case-by-case adjudication yields a system of enforcement that generates ambiguity, unduly drains resources from enforcers, and deprives individuals and firms of any real opportunity to democratically participate in the process.” In her prominent article on Amazon, Chair Khan discusses how, given her view that “Amazon increasingly serves as essential infrastructure across the internet economy, applying elements of public utility regulations to its business is worth considering.”

Political conservatives are also calling for various regulations. Supreme Court Justice Thomas recently wrote in a concurring opinion that “[t]here is a fair argument that some digital platforms are sufficiently akin to common carriers or places of accommodation to be regulated.” And there is a Republican co-sponsor for each of the bills introduced in the House, some of which would effectively regulate large technology companies.

In addition, there is substantial interest in regulation in Europe. In December 2020, the European Commission proposed the Digital Markets Act, which would impose extensive regulations on some digital platforms, including interoperability and data-sharing requirements. Similar to FTC Chair Khan, European Commission Executive Vice President Margrethe Vestager explained that she thought that regulation was necessary because antitrust enforcement was not sufficient.

Whether Congress will legislate, or the administration will adopt, competition-focused regulations is uncertain. But the Biden administration’s interest in regulation will produce effects right away. Many companies will approach the administration to advocate for new rules. Businesses, whether they favor or oppose regulations, will need to prepare to respond offensively or defensively. Ironically, the DOJ and the FTC could serve as the best place for companies to express concerns that proposed new federal regulations could reduce competition and impede enforcement efforts. Over the years, the antitrust agencies have actively engaged in “competition advocacy” that critiqued new regulations that limit competition.

Businesses will also need to plan for the possibility that new competition-oriented regulations will implicate the often messy, and litigation-intensive, preemption and antitrust preclusion doctrines, as happened in the Credit Suisse and Trinko cases. Companies have used these doctrines to block public and private antitrust enforcement on the ground that regulations govern the conduct at issue and “displace” the antitrust laws. In Credit Suisse, the Supreme Court held that the securities regulations implicitly precluded the application of the antitrust laws to investment banks that allegedly formed syndicates to help execute initial public offerings. And most famously, in the Trinko case, a unanimous Supreme Court rejected a Section 2 complaint against Verizon in part because Verizon and the conduct at issue were subject to regulatory oversight by the Federal Communications Commission.

6. What about the people in the arena?

In 1910, President Theodore Roosevelt credited the individual who is “in the arena” over the “critic.” Roughly a century later, ESPN television anchor Kenny Mayne commented on SportsCenter that “we all know that games aren’t played on paper; they are played by little men inside our TV sets.” Roosevelt’s speech had more impact than Mayne’s joke, but they were making the same point: Events are not self-executing and the participants determine the outcome. This is true for antitrust enforcement too.

Where the antitrust agencies (and businesses) have succeeded, it is often due to detailed and innovative fact-­gathering work and implementing creative and aggressive litigation strategies. Antitrust doctrine matters, but it is never sufficient. The paradigm of this reality is, of course, the FTC’s successful hospital merger enforcement program. Much of the innovation of the program was to develop new litigation strategies and then successfully execute those strategies in courtrooms throughout the country.

Important litigation innovations also came from how the attorneys at the Antitrust Division and the FTC prosecuted unilateral effects cases, which substantially increased the agencies’ win rate. For example, Antitrust Division and FTC attorneys deemphasized customer testimony in favor of aggressive cross-examinations of the parties’ witnesses in their affirmative case. The Antitrust Division also used timing agreements to incentivize the parties to produce documents quickly from key executives and then took litigation-style depositions of those executives during the investigation to obtain a transcript suitable to use on cross-examination at trial.

Similarly, companies (and their counsel) that lost government antitrust litigation challenges implemented new strategies that enabled them to win subsequent cases. For example, companies decided not to sponsor economic models that purported to show how a market performed and instead showed that the government’s models did not accurately represent the facts on the ground.

We have not reached the end of history in developing and implementing better tools to investigate, prosecute, and defend antitrust cases. The current enforcement actions against large technology companies, with presumably more to come, will produce new strategies for handling high-profile antitrust enforcement matters. The reality (unsettling for some) is that these strategies, and how well they are executed, could have a greater impact on the outcomes of future antitrust enforcement actions than will changes to the antitrust laws.

Mr. Soven and Wilson Sonsini represent companies with interests in these issues. The views in this article are those of Mr. Soven.

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