Progression and Retrogression in Antitrust Scrutiny under the Merger Guidelines

The 2023 Merger Guidelines (“2023 Guidelines”) jointly issued by the Antitrust Division of the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) (collectively, the “Agencies”) represent the latest iteration of a fluctuating interpretation over time of section 7 of the Clayton Act of 1914, which prohibits mergers the effect of which “may be substantially to lessen competition” in any section of the country. The Merger Guidelines serve the goals of transparency in merger enforcement by discussing the legal and economic analytical approaches adopted by the Agencies. They do, however, tend to change direction with the political winds (i.e., which administration is in office at the time they are amended). Even taking those huffs and puffs into account, the latest iteration, finalized in December 2023, has significantly raised eyebrows because it constitutes a marked retrenchment to long-discarded approaches and legal positions that have been rejected by the courts over the years.

The Merger Guidelines do not, by themselves, have the force of law. Nevertheless courts have occasionally cited to them as persuasive authority. From a practical transactional standpoint, moreover, the antitrust enforcement policies and proclivities of the Agencies are often essential knowledge for structuring mergers and acquisitions (“M&A”) transactions. While this article cannot delve into the Merger Guidelines in depth, it will summarize their evolution and some significant aspects of the Agencies’ current approach.

A Brief History of the Merger Guidelines

1968 Guidelines

First issued (by DOJ alone) in 1968 during the Johnson administration, the Merger Guidelines’ distinctive characteristic was general hostility toward mergers between substantial companies, largely because such mergers—which, almost by definition, tend to increase concentration—would lessen the possibility of achieving a deconcentrated market in the future. For example, the 1968 Guidelines took a dim view of mergers involving firms with 5 percent or more of the market, even where that market was unconcentrated (i.e., below 1,000 on the Herfindahl-Hirschman Index (“HHI”) scale), and in a market displaying a significant trend toward concentration, the larger competitors would not have been permitted to acquire any firm with a market share of 2 percent or more.

1982 and 1984 Guidelines

Quite a different philosophical approach permeated the first two revisions of the Merger Guidelines, which took place during the deregulatory Reagan era and regarded many mergers as either competitively beneficial or neutral. Conspicuously absent was any discussion of a “trend toward concentration.”

The 1982 Guidelines and the successor 1984 Guidelines also rejected ad hoc market definition and instead defined a market as a group of products and a geographic area where a hypothetical firm that is the only seller of those products in that area would possess monopoly power and could profitably restrict output or raise prices. Such power could not be exercised, however, if it would result in buyers switching to other products sold in the same geographic market or to products sold in other areas or would induce out-of-market firms to enter the market and begin selling competing products. Any firms selling competing products or substitutes to which consumers would switch in response to the hypothetical firm’s attempt to impose, in the 1982 and 1984 Guidelines’ terminology, a “small but significant and nontransitory price increase” (“SSNPI”), would make that price increase unprofitable, would prevent the exercise of market power, and ought therefore to be included in the defined market. The methodology of the 1982 and 1984 Guidelines was then to expand the market definition to include these additional products and areas up to the point at which it would be profitable for a hypothetical firm that was the only seller of a product or group of products in that area to impose an SSNPI. At that point, that group of products and area would be considered to be a market.

Having defined the market, the 1982 and 1984 Guidelines’ next task was an assessment of the likely effects of a proposed merger on competitive behavior in that market. Even if those effects were “significantly adverse,” however, that was not the end of the analysis, for there could well be significant mitigating factors, such as ease of entry or the proximity and similarity of next-best substitutes.

1992 Guidelines

Emphasis under the 1992 Guidelines (which, for the first time, was a joint issuance of DOJ and the FTC) shifted slightly from the purely theoretical to the more practical. For example, in assessing likely conduct by consumers or by other producers, the 1992 Guidelines purported to eschew overreliance on polls of customers or competitors in favor of the more pragmatic inquiry into the parties’ incentives: “whether consumers or producers ‘likely would’ take certain actions, that is, whether the action is in the actor’s economic interest.” Similarly, consumer reaction would now be measured with respect to an SSNPI lasting for the “foreseeable future,” instead of the one-year formulation of the 1984 Guidelines.

The 1992 Guidelines were concerned with two broad categories of competitive effects: “coordinated effects” and “unilateral effects.” Coordinated effects had been a traditional target of antitrust enforcement and were characterized as being “profitable for each of the [colluding firms] only as a result of the accommodating reactions of the others.” For coordinated action to be successful, the firms must be able (A) to arrive at “terms of agreement that are profitable to the firms involved” and (B) “to detect and punish deviations that would undermine the coordinated interaction.” Unilateral effects were deemed to be of concern where the survivor of a merger “may find it profitable to alter [its] behavior unilaterally following the acquisition by elevating price and suppressing output.”

As compared with the 1984 version, the 1992 Guidelines substantially expanded entry analysis. In light of some unfavorable litigation results during the 1980s, DOJ began to repudiate reliance on structural conditions of entry in favor of a more fluid approach that took into account the likelihood of entry (not whether entry “could” occur but whether it “would”) and its timeliness and likely sufficiency. Judicial reliance on the entry language of the 1984 Guidelines had undercut the effectiveness of this position and suggested that those provisions would have to be substantially revised, rather than merely fine-tuned.

One of the most significant changes in the 1992 Guidelines was the introduction into both market definition and entry analysis of the concept of “sunk costs.” This concept relates to the question of whether another producer will enter the market and is used to distinguish between two categories of potential competitors: “uncommitted entrants” and “committed entrants.” The “uncommitted entrants” category constitutes firms not currently producing the product (or not currently competing in the relevant geographic market) that, in response to an SSNPI, “likely would” commence production of the relevant product within one year; “committed entrants,” by contrast, must incur significant sunk costs of entry and exit in order to commence timely production of the relevant product. Such firms were not treated as market participants but were instead analyzed in a separate step to determine whether they would meet the entry tests of (A) timeliness (within two years), (B) likelihood (based on profitability—at premerger prices), and (C) sufficiency (in terms of whether the magnitude, character, and scope of the entry would be adequate to return prices to premerger levels) and thus would likely deter anticompetitive mergers or deter or counteract the competitive effects of concern. The 1992 Guidelines treated uncommitted entrants as incumbent, in-market producers of the relevant product—even though they were not currently producing that product or were not doing so in that geographic market—because of their putative flexible and timely competitive response without significant commitment to the relevant market.

1997 and 2010 Guidelines

The Agencies made some minor tweaks to the Merger Guidelines in 1997 and again in 2010. Both versions focused on horizontal mergers. The 2010 Guidelines, however, de-emphasized market shares and market concentration vis-à-vis earlier versions. For example, the 2010 Guidelines rejected the mechanical, somewhat lockstep approach of the 1992 Guidelines—that is, (1) market definition and concentration, (2) competitive effects, (3) entry, (4) efficiencies, and (5) failing firm defense.

2020 Guidelines

The 2020 Guidelines focused on vertical mergers. In 2021, however, the FTC backed away from its endorsement of the 2020 Guidelines, based on the assertion that the guidance documents included “unsound economic theories that are unsupported by the law or market realities.” The FTC reaffirmed its commitment to continue to work with DOJ on the Merger Guidelines but, by a vote of 3–2, withdrew its approval of the 2020 Guidelines as representing a flawed approach.

Lead-Up to the 2023 Guidelines

Under the Biden administration, there has been a marked policy shift in favor of more vigorous antitrust enforcement in the M&A sphere. In July 2021, President Biden issued an executive order that “encouraged” the attorney general and the chair of the FTC “to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.” Contemporaneously, the Agencies issued a joint statement that they would take a “hard look” at both sets of guidelines.

Reacting to perceived increases in concentration across many industries, along with more than a doubling of merger filings in 2020 and 2021, DOJ and the FTC then launched a joint public inquiry aimed at strengthening enforcement against “illegal” mergers and sought public comment on how they could “modernize” antitrust enforcement with respect to mergers, acquisitions, joint ventures, and “other structural realignments of firms.” Posing 165 specific questions grouped into fifteen areas of inquiry, the Agencies sought comment on (i) how advances in firm and market behavior in the modern economy should inform any revisions to the 2020 Guidelines; and (ii) areas underemphasized or neglected in the 2020 Guidelines, such as labor market effects and nonprice elements of competition like innovation, quality, potential competition, and trends toward concentration. That the winds of change were particularly blustery was made clear by questions such as, “Does the guidelines’ framework suggest limiting enforcement to a subset of the mergers that are illegal under controlling case law?”

The 2023 Proposal to Revise the Merger Guidelines

On July 19, 2023, DOJ and the FTC proposed a significant revision of the Merger Guidelines (the “Proposal”). The Proposal represented a considerable degree of retrogression over the 2010 Guidelines and portended much more intense antitrust scrutiny of merger transactions (both horizontal and vertical).

Diverging from earlier incarnations of the Merger Guidelines in a number of significant ways, the Proposal, rather than setting forth separate guidelines for horizontal and vertical mergers, sought to instantiate their enforcement “wish list” in one far-reaching set of thirteen guidelines. This set was consolidated into eleven guidelines in the final version of the 2023 Guidelines, as summarized below.

There were a number of very noticeable departures from prior Merger Guidelines. The apparent goal of these alterations was to provide the Agencies with maximum flexibility to challenge transactions that they view as anticompetitive without running the risk of being hoist with their own petard by having their own Merger Guidelines cited against them. Significant departures from prior Merger Guidelines included:

• the absence of any “safe harbors” or identification of any category of transaction characterized as unlikely to raise competitive concerns, even in unconcentrated markets;
• extensive citations to case law, including case law that is anachronistic and no longer representative of judicial thinking about the Clayton Act and its standards;
• reduced thresholds for when the Agencies will presume that a horizontal merger is anticompetitive;
• creating a novel presumption of illegality for certain vertical mergers;
• resurrecting long-discarded theories (e.g., potential competition);
• adding provisions relating to serial acquisitions and acquisitions of potential competitors;
• discounting certain defenses to antitrust liability; and
• explicitly addressing, for the very first time, the effects of transactions on labor markets—a factor not traditionally a focus of U.S. merger review but one commonly encountered in European Union merger analysis.

Final Version of the 2023 Guidelines

The Proposal met with some harsh criticism from practitioners and industry commenters. Some of the more prominent critiques included the following:

• The outdated precedent critique. Many commented that the Proposal did not constitute a practical and easily applied analytical framework but set forth, instead, a set of formulaic rules based on outdated antitrust precedent, without acknowledgment of the role of economic analysis in modern merger analysis.
• The structural presumptions critique. Commenters questioned the validity of the notion that a threshold of 30 percent should serve as a basis for concluding that a transaction could extend or entrench dominance, as well as the rigidity of the presumption that a vertical merger involving 50 percent market foreclosure would be incompatible with the antitrust laws.

As finally promulgated, the 2023 Guidelines are structured around principles animating “frameworks” the Agencies will use to assess whether a merger may violate section 7 of the Clayton Act. The Agencies explicated their augmented theories of merger enforcement and their highly skeptical attitude about mitigating circumstances such as efficiencies and failing firm defenses. The analysis was consolidated into eleven guidelines, summarized as follows:

1. Market concentration is often a useful indicator of a merger’s likely effects on competition. A presumption of illegality arises when a merger significantly increases concentration in an already highly concentrated market. This presumption may be rebutted by adequate evidence to the contrary.
2. The Agencies examine whether competition between the merging parties is substantial, because it is axiomatic that any merger or similar business combination will eliminate existing competition between them.
3. The Agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable, and the Agencies likely will presume—subject to the opportunity to present evidence in rebuttal—that the merger may substantially lessen competition. If a market is not highly concentrated, the Agencies investigate whether the facts surrounding the transaction suggest a greater risk of coordination than does market structure alone.
4. Mergers can violate the Clayton Act when they eliminate a potential entrant in a concentrated market. The Agencies therefore assess whether, in a concentrated market, a merger would (a) eliminate a potential entrant or (b) eliminate current competitive pressure from a perceived potential entrant.
5. Mergers are problematic when they create a firm that may limit access to products or services that its rivals use to compete. The Agencies examine the extent to which the merger creates a risk that the merged firm would limit rivals’ access, gain or increase access to competitively sensitive information, or deter rivals from investing in the market.
6. Mergers that entrench or extend a dominant position can violate the Clayton Act. The Agencies analyze whether one of the merging firms already has a dominant position that the merger may reinforce, thereby tending to create a monopoly. They also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.
7. Industries experiencing a trend toward consolidation may heighten the risk a merger may substantially lessen competition or tend to create a monopoly. The Agencies consider such evidence carefully when applying the frameworks in guidelines 1–6.
8. When a merger is part of a series of acquisitions, the Agencies may examine the whole series. Where a merger is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy when applying the frameworks in guidelines 1–6.
9. When applying the frameworks in guidelines 1–6 with respect to a merger that involves a multisided platform, the Agencies consider the distinctive characteristics of multisided platforms that can exacerbate or accelerate competition problems, including competition between platforms, on a platform, or to displace a platform.
10. When a merger involves competing buyers, the Agencies examine whether it may substantially lessen competition for workers, creators, suppliers, or other providers. The Agencies assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
11. Even when an acquisition is less than the entirety (i.e., involves partial ownership or control or minority interests), the Agencies examine its impact on competition under the frameworks in guidelines 1–6.

The Agencies eliminated from the final document a catchall provision (former guideline 13 in the Proposal) in favor of an assertion that the 2023 Guidelines are “not exhaustive” and that “a wide range of evidence can show that a merger may lessen competition or tend to create a monopoly. Whatever the sources of evidence, the Agencies look to the facts and the law in each case.” In this regard, the document identified three categories of situations the Agencies have previously encountered that could substantially lessen competition via mechanisms other than those addressed specifically in the 2023 Guidelines:

(A) a merger that would enable firms to avoid a regulatory constraint because that constraint was applicable to only one of the merging firms;

(B) a merger that would enable firms to exploit a unique procurement process that favors the bids of a particular competitor who would be acquired in the merger; or

(C) in a concentrated market, a merger that would dampen the acquired firm’s incentive or ability to compete due to the structure of the acquisition or the acquirer.

Other Noteworthy Items

Here are some other noteworthy items that the Agencies reworked from the Proposal in the final version:

Rebuttal Evidence

Section IV of the Proposal contained an extensive discussion of rebuttal evidence that would demonstrate that a merger did not result in a substantial lessening of competition. Several categories of such rebuttal evidence were identified: (1) “Failing Firms,” (2) “Entry and Repositioning,” (3) “Procompetitive Efficiencies,” and (4) “Structural Barriers to Coordination Unique to the Industry.” This separate section on rebuttal evidence and its categories has been recast in the final version of the 2023 Guidelines as Section III, though this time the fourth category (“Structural Barriers to Coordination Unique to the Industry”) has been omitted from that discussion and rearranged as part of the discussion under guideline 3.

Interspersed throughout the 2023 Guidelines, there is language acknowledging that parties to a transaction may offer evidence to rebut the presumption that a deal is anticompetitive. Nevertheless, the Agencies will have the benefit of a presumption that a transaction that lessens competition violates the antitrust laws, and therefore the rebuttal evidence must be very convincing. Furthermore, the Agencies have specified the most common sources of evidence that the Agencies draw on in a merger investigation.

Trends Toward Concentration

Portions of what appeared in the Proposal as guideline 6 and guideline 8 have been combined to form what is now guideline 7 in the final version. The draft version of guideline 8 had established structural thresholds for challenging a merger that advances a trend toward concentration. Now, guideline 7 focuses on industries trending toward consolidation, including multiple mergers in succession by various players in the industry. The Agencies’ chief economists, in an article describing the 2023 Guidelines for the Stigler Center at the University of Chicago’s Booth School of Business, quote the rationale for guideline 7 and characterize it as an “intuitive idea”: “The recent history and likely trajectory of an industry can be an important consideration when assessing whether a merger presents a threat to competition.” According to that article, guideline 7 clarifies that the Agencies will “closely examine industry consolidation trends in applying the frameworks” in guidelines 1–6. The Agencies’ chief economists do, however, clarify that guideline 7 is a “plus factor” when analytically appropriate and does not constitute a basis for a challenge on its own or a separate structural presumption.

Entrenching or Extending a Dominant Position; “Ecosystems”

In the final version’s guideline 6, the Agencies assert that a merger may substantially lessen competition or tend to create a monopoly if it entrenches or extends the position of an already dominant firm. The Agencies enjoy substantial discretion to deem a firm to be “dominant” and, consequently, to subject any transaction involving that firm to heightened scrutiny.

The Agencies also sandwiched into the discussion under this guideline some brand-new language concerning the elimination of nascent competitive threats, specifically by reference to the concept of “ecosystem competition.” That term refers to an incumbent firm that offers a wide array of products and services finding itself “partially constrained by other combinations of products and services from one or more providers, even if the business model of those competing services is different.” The notion is that a firm operating in several related markets may have the ability to inflict competitive injury upon another firm competing in only one of those markets.

This “ecosystem” concept has acquired some traction with competition authorities in the European Union (“EU”) and the United Kingdom (“U.K.”). Though there is no clear definition of what such an ecosystem is, European authorities seem to have some sensitivity to strong links among different markets with one central hub, even where there are no clear horizontal or vertical business relations.

For example, on September 25, 2023, the European Commission (“Commission”) blocked the proposed merger between Booking Holdings (which operates the hotel reservation platform Booking.com) and Flugo Group Holdings AB (which operates the flight booking platform “eTraveli”). This decision was significant not merely because it was an apparent departure from the Commission’s published merger guidelines but because this was the first time EU merger authorities had prohibited a transaction because of ecosystem concerns. The Commission’s rationale was that Booking’s dominant position in the market for online hotel travel agencies in the European Economic Area would have been strengthened were the deal to go forward. The EU authorities concluded that the transaction would have channeled eTraveli customers to Booking.com, allowing the latter to expand its travel services ecosystem business and strengthen its position in the market for online travel agencies. Although Booking Holdings offered as a remedy to shunt internet customers for air tickets to a screen with multiple hotel offers from competing hotel travel agents online, the Commission deemed the remedy inadequate to address the novel aspects of those online travel businesses. The decision reflects an unprecedented aggressiveness in blocking mergers on nonhorizontal grounds and may have far-reaching implications for transactions involving rapidly evolving high-tech industries (including, of course, financial services).

Interestingly, the U.K. Competition and Markets Authority (“Authority”) had cleared that same transaction a year earlier, having concluded that internet travel customers do not necessarily purchase distinct travel services from the selfsame provider. In another instance, however—Microsoft’s acquisition of Activision—the Authority arrived at a different conclusion based on an assessment of Microsoft’s “ecosystem.” After the transaction was restructured, however, the Authority cleared it.

Reviewing the same transaction in the United States, the FTC brought an antitrust challenge. That effort was ultimately unsuccessful, as the U.S. district court did not share the FTC’s narrow view of the proposed remedy.

Using this “ecosystem competition” approach in the United States would allow antitrust regulators to assess not only the acquisition of a direct competitor but also the addition of a niche or partially overlapping service to a company’s ecosystem of services. This is a novel approach to merger enforcement in the United States—one that may threaten to expand antitrust scrutiny even where competitive overlap between parties to a transaction is limited. Given the congeries of products and services offered by many business organizations and their affiliates, close attention needs to be paid, when planning a transaction, to “ecosystem” hurdles.

Conclusion

Overall, the 2023 Guidelines are a mixed bag of the innovative and the anachronistic—the latter including heavy reliance placed on court decisions fifty to sixty years old and doctrines (such as potential competition) that not only are in desuetude but also have not in recent memory achieved notable success for the Agencies. It remains to be seen how this current iteration of the Merger Guidelines will fare in litigation involving antitrust challenges to M&A transactions.