Thus, while protecting nascent competition remains a worthy enforcement goal, Section 2 is the wrong tool for the task. The Agencies no doubt believe that “the threshold requirement of a high probability of entry in future competition cases”—as in Marine Bancorporation, Falstaff Brewing, and Steris—is “too stringent,” and academics like Hemphill and Wu agree. However, the solution is not to shift merger analysis to a Section 2 standard that both Congress and the Supreme Court deemed even more stringent. If the Agencies believe that existing law leads to underenforcement, then they should seek to convince the courts that Section 7 reaches further than courts have applied it to date. Indeed, the FTC accomplished similar feats with both hospital mergers and pharmaceutical patent settlements, and the DOJ used the early Merger Guidelines to spark judicial refinements in horizontal merger analysis.
Are Any Mergers Lawful Under Section 7 but Unlawful Under Section 2?
Traditionally enforcers have brought what we might now call nascent acquisition cases under the Section 7 potential competition doctrine, which imposes a heavy burden on plaintiffs. As Steris demonstrates, courts view potential competition claims very skeptically. There Steris, a large incumbent provider of sterilization services, sought to purchase Synergy, which used a different sterilization technique and operated only outside the United States. The FTC alleged that Synergy was an actual potential competitor that, but for the transaction, would have entered the U.S. market and competed vigorously against Steris. The district court found Synergy was unlikely to enter the market, and therefore denied the FTC’s request for a preliminary injunction. To date, Steris remains the last word on the potential competition doctrine under Section 7.
Soon after Steris, the Agencies argued that Section 2 may present fewer obstacles to challenging the acquisition of a potential competitor. In addition to the statements described above, Bruce Hoffman, then the Director of the FTC Bureau of Competition, said “Section 2 imposes a somewhat relaxed test for the causal relationship between the exclusionary conduct and the acquisition or maintenance of monopoly power,” and former FTC Assistant Director Michael Moiseyev sketched out how Section 2 may apply to health care mergers. The Agencies also asserted in a joint submission to the OECD that the relevant Section 2 analysis since Microsoft asks solely “whether as a general matter the exclusion of nascent threats is the type of conduct that is reasonably capable of contributing significantly to the defendant’s continued market power.”
This new theory increasingly crops up in recent merger litigation. In its 2019 challenge of Sabre/Farelogix, the DOJ reportedly considered a Section 2 claim but instead opted for a traditional Section 7 claim, which was rejected on the merits by the district court but later vacated as moot. Presumably convinced that Section 7 could not reach certain transactions, the Agencies then turned to Section 2 theories. Since 2017, the FTC has alleged Section 2 claims in FTC v. Mallinckrodt, Illumina, and FTC v. Facebook, while the DOJ did so in United States v. Visa Inc. In each case save Facebook, the parties abandoned the transaction or settled the claim, leaving the underlying legal theory untested.
Brown Shoe Decided This Question Long Ago
Had the parties litigated those cases to judgment, the courts probably would have rejected the Agencies’ argument that some transactions lawful under Section 7 might nonetheless be unlawful under Section 2. Indeed, the reverse is true—mergers that might be lawful under Section 2 have generally been addressed under the less stringent incipiency standard applied under Section 7. This interpretation is also consistent with the texts and legislative histories of the two statutes.
Following the promulgation of the Celler-Kefauver Act in 1950, the Supreme Court first interpreted the scope of the revised Clayton Act in Brown Shoe. There the DOJ challenged a merger of two shoe manufacturers and retailers as violative of Section 7 of the Clayton Act. The case thus required the Court to interpret the modern (post-amendment) Section 7.
The Court concluded that the Celler-Kefauver Act distinguished Section 7 analysis from the Sherman Act, and therefore the plaintiff faced a lighter burden under Section 7 than it did under Section 2. As a statute concerned with “probabilities, not certainties,” Section 7 requires only a reasonable probability of harm, not—as the Sherman Act requires—a showing of actual injury to competition. Thus, the Court found Congress “wish[ed] to make it clear that the bill is not intended to revert to the Sherman Act test”; rather, Congress sought “to cope with monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding,” and therefore amended the Clayton Act so it “reaches far beyond the Sherman Act.” For these reasons, “the tests for measuring the legality of any particular economic arrangement under the Clayton Act are to be less stringent than those used in applying the Sherman Act.”
Brown Shoe remains the authoritative interpretation of Section 7 today. In 1964, the Court reaffirmed Brown Shoe and explained “[t]he grand design of the original § 7 . . . as well as the Celler-Kefauver Amendment . . . was to arrest incipient threats to competition which the Sherman Act did not ordinarily reach.” Similarly, in 1990, the Court again noted that “Section 7 of the Clayton Act made stock acquisitions of competing companies more vulnerable.”
Lower courts likewise continue to recognize that Section 7 presents a lower bar to plaintiffs than does the Sherman Act. For example, in Fraser v. Major League Soccer, LLC, the First Circuit noted that a “merger to monopoly . . . is a feasible section 2 claim, even if it is more often challenged under Clayton Act section 7, which requires much less.” The D.C. Circuit made a similar point in the Section 1 case Rothery Storage & Van Co. v. Atlas Van Lines, Inc., noting that Section 7 “applies a much more stringent [i.e., plaintiff-friendly] test than does rule-of-reason analysis under section 1 of the Sherman Act.” The D.C. Circuit recently reaffirmed this interpretation in United States v. AT&T, Inc., and it is widely followed in other circuits.
The Supreme Court’s interpretation of the statutes in Brown Shoe is consistent with their plain meaning. As a statute “for dealing with clear-cut menaces to competition,” Section 2 of the Sherman Act is addressed to those persons “who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize.” In contrast, and consistent with the incipiency standard and its focus upon “probabilities, not certainties,” Section 7 of the Clayton Act proscribes the acquisition of stock or assets when “the effect may be substantially to lessen competition, or to tend to create a monopoly.” Because “may be” is broader than “shall,” the Clayton Act captures a broader range of activities and demands a lower burden of proof.
The legislative history, which the Court reviewed at length in Brown Shoe, also supports the conclusion that Section 7 reaches far beyond the Sherman Act. Indeed, the Celler-Kefauver Act grew out of Congressional frustration with the deficiencies in the original Section 7. When first enacted, Section 7 did not apply to asset acquisitions or statutory mergers, so enforcers attempted to reach these transactions under the Sherman Act. However, in the 1948 Columbia Steel case, the Court ruled that an asset acquisition by the nation’s largest steel producer did not violate either Section 1 or Section 2. There, the Court went so far as to say that the transaction—which was primarily vertical in nature—did not violate Section 2 because it “seems to reflect a normal business purpose, rather than a scheme to circumvent the law.” Congress reacted by promulgating the Celler-Kefauver Act of 1950, which expanded the scope of the Clayton Act and reduced the burden it places on plaintiffs.
Through the Celler-Kefauver Act, Congress sought to “reject, as inappropriate to the problem it sought to remedy, the application to § 7 cases of the standards for judging the legality of business combinations adopted by the courts in dealing with cases arising under the Sherman Act, and which may have been applied to some early cases arising under original § 7.” As the Senate Report explained, amended Section 7 seeks “to cope with monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding.” The DOJ continues to emphasize the importance of this legislative history today, as it did in the AT&T case.
Evidence from Cases Presenting Overlapping Clayton Act and Sherman Act Claims
Because “the tests for measuring the legality of any particular economic arrangement under the Clayton Act are to be less stringent than those used in applying the Sherman Act,” courts presented with overlapping Clayton and Sherman Act claims have begun their analysis with the Clayton Act claim. This approach is consistent with the Court’s treatment of other claims that can be brought under both statutes, like tying and exclusive dealing.
For example, in the 1963 case United States v. Crocker-Anglo National Bank, the district court ruled that a transaction lawful under the Clayton Act must also be lawful under the Sherman Act. Like the recent nascent competition cases, the DOJ challenged an unconsummated horizontal merger as a violation of both Section 7 of the Clayton Act and the Sherman Act, in this case Section 1. The district court began and ended its analysis with the Clayton Act claim, finding no evidence “that there is a reasonable probability” of potential competition between the banks. And “[s]ince the merger does not violate the Clayton Act, the possibility that it might be held to violate the more stringent standards of the Sherman Act seems most unlikely.”
Because the Sherman Act standard is more stringent than that prescribed by the Clayton Act, the reverse is not necessarily true; courts have concluded a transaction that does not violate the Sherman Act could still violate the Clayton Act. Thus, for example, in part of the famous Brunswick bowling merger litigation, a jury returned a defense verdict on a Section 2 claim but a plaintiff verdict on a Section 7 claim. The district court concluded “the jury’s Sherman Act determination does not preclude this Court” from upholding the jury’s findings with respect to the Clayton Act claim because—quoting Brown Shoe—“the tests for measuring the legality of any particular economic arrangement under the Clayton Act are to be less stringent than those used in applying the Sherman Act.” The verdict was later vacated on antitrust standing grounds and judgment entered for the defendant.
In short, when in the past courts have faced overlapping Clayton and Sherman Act merger claims, they have begun—and often also ended—their analysis with the more plaintiff-friendly Clayton Act analysis because a transaction lawful under the Clayton Act must also be lawful under the Sherman Act.
United States v. Microsoft Did Not Alter the Analysis
As described above, and contrary to long-settled law, the Agencies now argue that the D.C. Circuit’s interpretation of Section 2 in Microsoft suggests that Section 2 presents a lower burden, impliedly abrogating Brown Shoe. Hemphill and Wu embrace a similar argument.
This theory is incorrect for four reasons.
First and most obviously, Microsoft is factually inapposite. As then-Chairman Simons recognized, “there were no mergers at issue in Microsoft,” let alone of nascent competitors. This difference matters; indeed, academics who believe Microsoft lowered the Section 2 burden are eager to distinguish cases presenting other fact patterns—such as Rambus v. FTC—from Microsoft.
Second, Microsoft did not address whether or how the relevant legal standards under Section 2 and Section 7 compare; it assessed only the standard under Section 2. In contrast, in Brown Shoe the Court expressly addressed the comparative question because it was part of the legislative history and therefore part of the Court’s interpretation of the amended statute. And as the Court made clear, the plaintiff’s burden under Section 2 is higher, not lower, than its burden under Section 7.
Third, setting aside the factual distinction, Microsoft says nothing about how a plaintiff can establish that a rival—whether acquired or otherwise excluded—is a nascent competitor. Rather, Microsoft’s counsel admitted that Netscape and Java were nascent competitors, arguing “a company like Netscape founded in 1994 can be by the middle of 1995 clearly a potentially lethal competitor to Windows because it can supplant its position in the market because of the characteristics of these markets.” Thus, even if a court extended the causation analysis from Microsoft, it presumably would use existing precedents—including the potential competition cases—to assess whether a merging party qualifies as a nascent competitor.
Fourth, even if Microsoft had squarely addressed the question of how the relevant legal standards under Section 2 and Section 7 compare, Brown Shoe remains the authoritative interpretation. No court of appeals—not even when sitting en banc—has the authority to abrogate law established by the Supreme Court. Therefore, if there is any conflict between the Court’s interpretation in Brown Shoe (and Penn Olin and American Stores) and the interpretation of the D.C. Circuit in Microsoft, the Supreme Court’s interpretation governs.
A Better Path Forward
Given the state of the law, the present debate about how Section 2 may apply to acquisitions of nascent competitors can be seen as a somewhat abstract and unnecessary thought exercise. The Supreme Court long ago set a high bar for Section 2 merger challenges, and Congress long ago addressed this perceived defect by substantially lowering the plaintiff’s burden under Section 7.
If the Agencies believe the potential competition doctrine is too stringent, then they should meet the problem head-on by developing and asserting a viable alternative standard. This has been the Agencies’ standard approach for many decades. The DOJ issued the 1968 and 1982 Merger Guidelines to clarify and advance the state of Section 7 law, particularly after cases like Von’s Grocery and General Dynamics. Those Guidelines introduced new concepts like market share thresholds, the Herfindahl-Hirschman Index, and the Hypothetical Monopolist Test, which over time the federal judiciary adopted. Likewise, in the past 20 years the FTC has successfully reversed serious setbacks in its hospital merger and pharmaceutical patent settlement enforcement programs. Both Agencies used the same playbook: (1) use the Agencies’ research-and-development capabilities to develop compelling “real-world empirical evidence, instead of hunches, guesswork, and theoretical predictions,” and (2) find the right case in which to seek judicial adoption.
The Agencies have at least two options. First, like the hospital merger retrospective program, the Agencies could seek to develop empirical evidence that fits within the existing doctrine. For example, the Agencies could use merger retrospectives to assess whether their existing approach accurately predicts which nascent competitors will grow into strong rivals. Second, like the early Merger Guidelines, they could articulate a new legal or economic framework within which to organize the existing facts. Some of the most significant developments in antitrust law and theory derive from these empirical and theoretical exercises.
Of course, the Agencies will still face both practical and prudential limits. For example, even Wall Street traders and venture capital partners find it difficult to predict which start-ups will succeed, let alone the extent to which a particular acquisition would affect a start-up’s prospects. The Agencies may also have to grapple with how a different approach to potential competition could affect investing incentives pre- and post-acquisition. And once those (and other) questions are answered, the Agencies still will need to convince a judiciary that has already expressed significant reservations about the potential competition doctrine.
Acquisitions of nascent competitors should be evaluated under Section 7, not Section 2. Congress decided in 1950, and the Supreme Court in 1962, that “the tests for measuring the legality of any particular economic arrangement under the Clayton Act are to be less stringent than those used in applying the Sherman Act.” Microsoft did not, and cannot, disturb this holding. Thus, the Agencies’ longstanding preference for Section 7 is legally correct, and their present resort to Section 2 a curious and likely unsuccessful detour. Rather than seeking to “circumvent” and “sidestep” the potential competition doctrine, the Agencies should develop a compelling and empirical case for revising it.