DOJ and FTC Issue Draft Merger Guidelines

On July 19, 2023, the Department of Justice (the DOJ) and the Federal Trade Commission (the FTC, and collectively with the DOJ, the Agencies) released their long-awaited revised Draft Merger Guidelines (Draft Guidelines).¹ Once finalized, the Draft Guidelines will replace the Agencies’ 2010 Horizontal Merger Guidelines and their 2020 Vertical Merger Guidelines, which the FTC (but not the DOJ) has already repealed. The Draft Guidelines highlight the Agencies’ concerns over a trend in concentration and set forth a variety of presumptions for when a merger will lessen competition. This includes transactions where the combined share is 30% and for vertical transactions where just one of the parties has a 50% share — even in industries less concentrated than those subject to a presumption of harm in prior versions of the merger guidelines. The Draft Guidelines also expand upon theories of actual and perceived potential competition and note the impact mergers may have on labor markets. The Draft Guidelines describe the process that the Agencies are already using in the Biden administration, and the document reinforces the Agencies’ intent to aggressively attack transactions that they believe may substantially lessen competition.

Background Into the Merger Guidelines

Since 1968,² the DOJ and FTC have published merger guidelines to provide the public with guidance on their analytical approach to examining transactions under the antitrust laws.³ Merger guidelines have explained the Agencies’ views on market definition, market concentration, types of competitive harm, likelihood of entry, buyer power, efficiencies, and more.⁴

These Draft Guidelines outline the Agencies’ more recent approaches to evaluating (and challenging) transactions. However, the Draft Guidelines are not law and are not binding on the courts. While courts have historically looked to them for guidance,⁵ only time will tell if courts will continue to give weight to the guidelines given the significant departure from the last 40 years of law and economics — even if the Draft Guidelines cite older cases from the Supreme Court and lower courts consistent with many of the approaches to merger analysis described in the Draft Guidelines. Courts may well be hesitant to accept the more aggressive approaches described in the Draft Guidelines issued without bipartisan support at the FTC.

Biden Administration’s New Approach to Antitrust Enforcement

As noted in prior advisories,⁶ the current leadership of the FTC and DOJ have staked out a more aggressive approach to antitrust enforcement, particularly with respect to mergers and acquisitions. According to FTC Chair Lina Khan, the relaxed approach to antitrust merger enforcement has led to highly concentrated markets, higher prices on goods, lower wages for workers, and a lack of innovation.⁷ AAG Jonathan Kanter has echoed similar sentiments.⁸

On January 18, 2022, the DOJ and FTC announced their intent to launch a joint effort to “modernize” the Agencies’ merger guidelines.⁹ Eighteen months later, after a “Request for Information” process and “listening forums,” the DOJ and FTC finally released their revised Draft Guidelines for public comment.

Overview of Changes in the Draft Guidelines

The Draft Guidelines make clear the Agencies’ intent to increase scrutiny of both horizontal and non-horizontal mergers. In a departure from past merger guidelines, the Draft Guidelines provide no “safe harbors” and identify no category of transaction that they expressly identify as unlikely to raise competitive concerns, even in unconcentrated markets.¹⁰ Rather, the Draft Guidelines ensure that the Agencies have maximum flexibility to challenge transactions that they view as anticompetitive without a risk of the Draft Guidelines being cited back to them (or to a court in a litigated challenge) by merging firms. By adding extensive citations to case law, the Agencies hope that courts will adopt the approach of the Draft Guidelines to assist the Agencies in their more aggressive approach to merger enforcement — an approach that has led to repeated losses in court.

The Draft Guidelines set forth 13 core principles:

1. Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets

The Draft Guidelines propose to lower the threshold for what constitutes a “highly-concentrated” market. The 2010 Horizontal Merger Guidelines state that a market is highly-concentrated if the Herfindahl-Hirschman Index (HHI) exceeds 2,500 and that a transaction that results in a “highly concentrated” market will be presumed anticompetitive where the transaction involves an HHI increase of more than 200.¹¹ The new Draft Guidelines change these thresholds, returning to the thresholds used in the 1982 Merger Guidelines.¹² A “highly concentrated market” is redefined as a market with an HHI exceeding 1,800 and presume that any transaction increasing the HHI by more than 100 is anticompetitive.

Critically, the Agencies will ignore industry concentration and consider transactions to be presumptively unlawful where the merged firm will have a share of 30% and the HHI change is more than 100 (essentially amounting to a transaction of seven significant competitors with roughly equal share going to six significant competitors being presumptively illegal). That means that a transaction between a competitor with 28% and a competitor with 2% would be presumed anticompetitive, even if no other competitors in the market had shares of more than 1%. This presumption based on share alone has not been found in any previous merger guidelines but is based on the Supreme Court’s 1963 decision in Philadelphia National Bank.¹³ However, the Draft Guidelines ignore more recent precedent that illustrates how market share, and market concentration more generally, can be an inaccurate way of determining whether a merger is likely to harm competition. As the Second Circuit recognized recently in In re AMR Corp., “in the 1970s, the Supreme Court began to apply a more nuanced and text-based interpretation of Section 7 [of the Clayton Act], refusing to blindly equate a substantial increase in market share with a likely substantial decrease in competition[.]”¹⁴ For example, in United States v. General Dynamics Corp.,¹⁵ the Supreme Court analyzed the merger of two coal companies and found that the existence of long-term sales contracts and the importance of a company’s coal reserves in securing those contracts meant that market shares were not the most relevant metric for determining the merger’s effects. As the Court put it, “[e]vidence of past production does not, as a matter of logic, necessarily give a proper picture of a company’s future ability to compete.”¹⁶ In other words, current market shares alone may not be representative of the competitive landscape going forward. More recently, courts have found that factors such as lack of resources to compete in the future,¹⁷ financial difficulties,¹⁸ and poor brand image¹⁹ make market shares misleading metrics of the competitive impact of a merger.

2. Mergers Should Not Eliminate Substantial Competition Between Firms

The current 2010 Horizontal Merger Guidelines consider whether merging firms are “substantial head-to-head competitors,” a key consideration when evaluating whether a merger will lead to unilateral, anticompetitive effects through the loss of such competition.²⁰ Consistent with this approach, the Draft Guidelines note that the “Agencies examine whether competition between the merging parties is substantial,” noting that a merger of such firms “may substantially lessen competition even where market shares are difficult to measure or where market shares understate the significance of the merging parties to one another.” The Draft Guidelines point to a variety of indicators of substantial competition, including close monitoring of the other merger party when making pre-merger strategic decisions, evidence of customer substitution between the merging firms, and evidence from natural experiments.

3. Mergers Should Not Increase the Risk of Coordination

While most merger challenges are based on a unilateral effects theory, the Agencies have occasionally challenged mergers on the grounds that the transaction will facilitate collusion among the firms that remain in the market or make existing coordination more stable or effective. The Draft Guidelines note three “primary factors” indicating that a transaction is more likely to facilitate coordination of price, quality of products and services, or allocation of labor: a highly concentrated market, prior coordination or attempted coordination, or where the transaction eliminates a “maverick” with a “disruptive presence on the market.” The Draft Guidelines also point to “secondary factors” that may meaningfully increase the risk of coordination even in the absence of the “primary factors,” noting that not all factors need be present. These include a concentrated market with an HHI above 1,000, “market transparency” (where a firm’s competitive behavior relating to pricing, terms, etc. are readily observable), whether there are similar incentives for market participants, and whether coordination would be profitable for remaining competitors. Similar to prior guidelines, the Draft Guidelines set forth a checklist of factors, but do not provide any detail regarding how to use all of these factors in assessing the likelihood of coordination.

4. Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market

The Draft Guidelines expand upon the analysis of potential competition in prior merger guidelines, noting that the Agencies will examine whether a transaction has the potential to prevent another entity from entering the market, regardless of whether entry is actually likely or not.

The Draft Guidelines state that the Agencies will consider two different potential competition theories: actual potential competition (in which one or both of the merging firms would enter a market and the new entry is likely to deconcentrate the market or bring other procompetitive effects) and perceived potential competition (in which current market participants change their competitive behavior because of their perception that one of the merging firms will enter the market). In both cases, the Draft Guidelines put an emphasis on “objective” evidence of whether a company has the capabilities to enter without regard to whether it actually has plans to enter or whether another market participant actually perceives them to be an entrant. Further, the Draft Guidelines note that if the merging firm had a reasonable probability of entering a concentrated relevant market, the Agencies will presume that the positive benefits of that entry would be competitively significant unless there is direct evidence that the effect would be de minimis. The Draft Guidelines note, however, that perceived potential entrants will not be considered to rebut a presumption of harm, and that only actual potential competitors count when the Agencies consider “whether firms are likely to enter the market to replace the lost competition.”

While judicial decisions on potential competition theories are mixed and the Agencies have frequently lost cases that relied upon a potential competition theory, the Draft Guidelines adopt the most Agency-friendly approaches found in the courts. For example, the Draft Guidelines provide that the Agencies need only show a “reasonable probability” of entry to show a loss of actual potential competition rather than the “clear proof” required by some judicial decisions (and previously by the FTC itself).²¹ In addition, although recent case law has indicated that an entity must have greater than a 50% chance of entry to satisfy the “feasible means of entry” requirement,²² the Draft Guidelines state that the Agencies will view entry as feasible if the company has sufficient resources, the entity already successfully entered other markets, or even if the firm just has an incentive to enter the market.²³ As for the likelihood of deconcentration, the Draft Guidelines state that if a firm has a reasonable probability of entering the relevant market, the Agencies will presume that such entry would result in deconcentration of the market “unless there is substantial direct evidence that the competitive effect would be de minimis.”²⁴

To find a loss of “perceived potential competition,” the Draft Guidelines ask whether a market participant “could reasonably consider one of the merging companies to be a potential entrant” and whether that perception has a “likely influence” on current competition, not whether that perception has actually influenced competition in the market.

5. Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use To Compete

The Draft Guidelines replace the Vertical Merger Guidelines adopted in 2020 but were abandoned by the FTC at the beginning of the Biden administration. Consistent with the past approach to analyzing vertical mergers, the Agencies will determine whether a transaction would result in the combined entity having both the ability and the incentive to harm its rivals. Such foreclosure can occur either by denying competitors of the merged firm access to inputs or customers that they need to compete (or by raising the prices or decreasing the quality of those inputs) or by giving the merged firm access to competitively sensitive information of its rivals.

When determining whether a firm has an incentive to foreclose rivals, the Draft Guidelines note that the agencies will look at the prior conduct of the merged firms as well as at the internal planning documents of the merging firms. The Draft Guidelines note that, while the existence of documents suggesting an intent to foreclose or raise rivals’ costs is “highly probative,” the absence of such documents is “less informative.”

With respect to access to rivals’ competitively sensitive information, the Draft Guidelines note a concern that the merged firm’s access to such information might discourage rivals from competing aggressively or that market participants might refuse to do business with the merged firm rather than risk the misuse of their information, making them less effective competitors. This “self-foreclosure” theory was also rejected in the FTC’s challenge to Microsoft’s acquisition of Activision.²⁵

6. Vertical Mergers Should Not Create Market Structures That Foreclose Competition

The Draft Guidelines look beyond ability and incentive to foreclose by presuming that a transaction involving a firm that controls 50% of the market for an input used by competitors of its merger partner or accounts for 50% of purchases in its merger partner’s market will substantially lessen competition. While the Agencies claim that the Draft Guidelines reflect current law, they provide no basis for the conclusion that such a market share is likely to result in a transaction that substantially lessens competition without considering actual ability and incentive to foreclose.

Even where the share falls below 50%, the Draft Guidelines indicate that the Agencies will look to “plus factors” in addition to foreclosure share, including a trend toward vertical integration, a concentrated relevant market where the merger increases barriers to entry, or where the “nature and purpose of the merger is to foreclose rivals.”

7. Mergers Should Not Entrench or Extend a Dominant Position

Under the Draft Guidelines, the Agencies have defined a market participant as “dominant” if (1) one of the merging firms has enough market power to influence pricing and the quality of products and services from other competitors or (2) one of the merging parties has a 30% market share. The Draft Guidelines note that the Agencies will evaluate whether a transaction will entrench a dominant position even where there is no horizontal overlap or vertical relationship.

According to the Draft Guidelines, such a transaction can entrench a dominant position by increasing entry barriers, increasing switching costs (such as by enabling bundling or by giving the merged firm control over an asset they use to switch providers, such as a data transfer service), interfering with the use of competitive alternatives (such as by acquiring a firm that facilitates such use), depriving rivals of scale economies and network effects, or acquiring a nascent competitive threat. The Draft Guidelines note that the Agencies will analyze acquisitions by dominant firms under both Section 7 of the Clayton Act and Section 2 of the Sherman Act.

The 2020 Vertical Merger Guidelines abandoned the Agencies’ prior position that merger analysis should not consider whether a merger will allow tying or bundling and that such conduct — which may be procompetitive — should be analyzed post-merger. The Draft Guidelines continue that approach, stating that the Agencies will evaluate whether a merger “could enable a dominant position from one market into a related market” through “tying, bundling, conditioning, or otherwise linking the sales of two products.” The Draft Guidelines note that the Agencies will not assess whether such tying or bundling would itself be unlawful, but only whether it may tend to extend the firm’s dominant position.

8. Mergers Should Not Further a Trend Toward Concentration

This principle focuses on markets that have not yet reached an HHI of greater than 1,800, but where recent transactions have brought that HHI figure closer to the 1,800 threshold. The Draft Guidelines here reflect the Agencies’ aim to prevent markets from ever reaching the point of high concentration. Transactions in industries with an HHI above 1,000 where concentration is increasing and the transaction will lead to an HHI increase of more than 200 are highlighted as “furthering a trend toward concentration,” but the Draft Guidelines do not otherwise explain why a particular transaction may lead to further concentration or at what level of concentration this may occur.

9. When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series

Prior merger guidelines focused on analysis of a particular transaction before the Agencies and evaluated a merger’s potential competitive impact without examining prior transactions. Consistent with recent Agency scrutiny of serial acquisitions (particularly in the tech sector and likely applied to a common strategy employed by private equity), the Draft Guidelines state that the Agencies “may examine a pattern or strategy of growth through acquisition by examining both the firm’s history and current or future strategic incentives” and that “[w]here one or both of the merging parties has engaged in a pattern or strategy of pursuing consolidation through acquisition, the Agencies will examine the impact of the cumulative acquisition strategy to determine if it may substantially lessen competition or tend to create a monopoly.”²⁶

While the Draft Guidelines note a concern where a business engages in many small acquisitions “in the same or related business lines” that result in a loss of competition, the Draft Guidelines do not provide clarity regarding what is considered a “related business line” or how a “business” line relates to a relevant market. The Draft Guidelines do not discuss the analysis of potential procompetitive effects of multiple acquisitions in the same industry.

10. When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or To Displace a Platform

The Draft Guidelines lay out a framework for addressing mergers with multi-sided platforms, meaning businesses that provide different products or services to two or more different groups. The Draft Guidelines state that the Agencies will assess transactions involving platforms by looking at competition between platforms, competition on platforms, and preventing transactions that would likely result in a platform’s displacement or eradication. Consistent with past Agency practice, the Draft Guidelines indicate that the Agencies will consider effects on one side of a market without considering effects on the other side (e.g., looking at a merger’s effect on newspaper advertising competition without considering how changes in advertising prices may effect subscriptions). In a footnote, the Agencies acknowledge that the Supreme Court rejected this approach in Ohio v. American Express,²⁷ but state that they will apply Amex’s requirement to consider both sides of a two-sided market as a single market in which effects should be analyzed only in cases involving “transaction platforms” that “cannot make a sale to one side of the platform without simultaneously making a sale to the other.”²⁸

The Draft Guidelines note that the Agencies will evaluate mergers involving platforms to identify the loss of horizontal competition between platforms and vertical foreclosure when a platform acquires a platform participant (which may deny participants to competing platforms or lead to degraded access to the platform to competitors of the acquired company), when a platform acquires a service that facilitates participation in multiple platforms, or when a platform acquires a provider of inputs to platform services (such as data).

11. When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers

The Agencies note that they will evaluate mergers that may harm sellers just as they evaluate mergers that may harm consumers. The Agencies have long considered the competitive effects of mergers on both buyers and sellers, but the Draft Guidelines (and an accompanying statement from FTC Commissioner Alvaro Bedoya) place a particular emphasis on the competitive impact of a merger on both wages and working conditions. This focus is consistent both with Agency statements focusing on labor market competition that predate the Biden administration and with this administration’s focus on labor markets.

The Draft Guidelines note that “[i]f the merger may substantially lessen competition or tend to create a monopoly in upstream markets, that loss of competition is not offset by purported benefits in a separate downstream product market.” Thus, if a merger allows firms to reduce labor costs through a loss of competition, it will be irrelevant that the downstream markets are competitive and that those lower costs will be passed on to consumers in the form of lower prices. While prior guidelines have not been explicit that the Agencies take this approach, this clarification is consistent with past antitrust enforcement (e.g., considering whether a merger of meatpackers will reduce prices paid to ranchers).

12. When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition

The current 2010 Horizontal Merger Guidelines note that partial acquisitions may lessen competition by giving the partial owner the ability to influence the competitive conduct of the target firm by lessening incentives to compete or by affording access to competitively sensitive information.²⁹ The Draft Guidelines echo these potential concerns, but also note that the Agencies have concerns with common ownership (e.g., a parent holding minority stakes in firms that compete with each other, rather than with the parent), which is not addressed in the 2010 Horizontal Merger Guidelines.

13. Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly

The 2010 Horizontal Merger Guidelines’ caution that the modes of analysis described are not meant to be exhaustive and that the guidelines “neither dictate nor exhaust the range of evidence the Agencies may introduce in litigation.”³⁰ The final section of the Draft Guidelines is consistent with this idea, and likewise notes that the concerns identified elsewhere in the guidelines are not exhaustive. The Agencies note that “a wide range of evidence can show that a merger may lessen competition or tend to create a monopoly” and that the Agencies will “look to the facts and the law in each case.”

The Draft Guidelines’ Approach to Market Definition

Section 7 of the Clayton Act outlaws transactions that may substantially lessen competition or create a monopoly in “any line of commerce,” and the Supreme Court has made clear that a plaintiff in a Section 7 case must prove the contours of a relevant product and geographic market and effects within that market to prevail.³¹

The Draft Guidelines deemphasize the “hypothetical monopolist test” used in the current and prior merger guidelines as the basis for market definition, pointing to the “reasonable interchangeability” test adopted by the Supreme Court in Brown Shoe as the touchstone of market definition.³² The Agencies note that they use several tools to demonstrate that a market is a relevant antitrust market, including “direct evidence of substantial competition between the merging parties” that can demonstrate that a market may exist even if the “precise metes and bounds of the market are not specified,” “direct evidence of market power,” “practical indicia” of a relevant market such as “industry or public recognition,” and finally the “hypothetical monopolist test” and “hypothetical monopsonist test.”

Appendix 3 to the Draft Guidelines provides details of the Agencies’ approach to market definition, including application of the “hypothetical monopolist test.” While the 2010 Horizontal Merger Guidelines describe a “SSNIP” test focused on whether a hypothetical monopolist can increase prices,³³ the Draft Guidelines look to a SSNIPT test that considers whether a hypothetical monopolist could impose worse terms “along any dimension of competition, including price (SSNIP), but also other terms (broadly defined) such as quality, service, capacity investment, choice of product variety or features, or innovative effort.” The Draft Guidelines note that the Agencies will often use a 5% price increase, but may use lower or higher prices as the benchmark for “significant.” The Draft Guidelines do not describe what counts as a “significant” worsening of non-price terms.

The Appendix also contains details of the Agencies’ approach to market definition in specific circumstances. This includes cluster markets,³⁴ bundled product markets,³⁵ and markets for “one stop shops.”³⁶ The Draft Guidelines note that when defining labor markets they may consider willingness to switch job types and geographic regions, they will evaluate effects on targeted workers (just as they will consider effects on targeted buyers), and they may employ a cluster market approach in labor markets.

Rebutting the Presumption of Anticompetitive Effects

The Draft Guidelines take a narrow view of the facts that will be considered to rebut a presumption of anticompetitive effects.

Entry. The Draft Guidelines track the 2010 Horizontal Merger Guidelines’ requirement that entry by new firms or repositioning by firms already in the market will rebut a presumption of anticompetitive effects only when they would be “timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern.” Entry will be timely only if it will “be rapid enough to replace lost competition before any effect from the loss of competition due to the merger may occur,” noting that entry in most industries takes a significant amount of time and is therefore unlikely to satisfy the timeliness requirement. The Agencies note that they will analyze claims that entry is likely by asking why the entry has not already occurred.

Efficiencies. With respect to efficiencies, the Draft Guidelines likewise track the 2010 Horizontal Merger Guidelines’ requirements that efficiencies “must be of sufficient magnitude and likelihood that no substantial lessening of competition is threatened by the merger in any relevant market.” When considering efficiencies, the Agencies will ask whether the claimed efficiencies are merger-specific or verifiable, whether efficiencies will be passed through, and whether the efficiencies are themselves procompetitive or instead result from the loss of competition (such as less favorable terms for the parties’ trading partners.) When considering whether efficiencies are “merger specific,” the Draft Guidelines conclude that efficiencies are not merger specific when they could be achieved through organic growth, by contract, mergers with others, or a partial merger that involves only the assets that give rise to the efficiencies. As a practical matter, no efficiency is likely to satisfy this test.

Failing Firm. The “failing firm” defense has rarely been successful with the agencies or in litigation, and the Draft Guidelines point to court precedent to limit the defense to circumstances in which there is “a grave probability of business failure,” there are “dim or nonexistent” prospects for successful reorganization in bankruptcy, and the company that acquires the failing firm is the “only available purchaser.” The Draft Guidelines note that the Agencies will not credit a “failing division” defense unless the division has persistently negative cashflow and the owner of the failing division has made good faith efforts to keep the assets of the failing division in the market by eliciting alternative offers.

Will Courts Embrace the 2023 Merger Guidelines?

The Draft Guidelines are statements of the FTC and DOJ’s enforcement policies, and, as such, do not bind the courts.³⁷ However, courts often use merger guidelines as persuasive authority. Iterations of the guidelines have been cited in the antitrust analyses of every federal appeals court in the country.³⁸

However, the fact that the Draft Guidelines were drafted without the input of any Republican members of the FTC (because there currently are none) raises questions about the extent to which the courts will rely on them. Unlike the 2010 Horizontal Merger Guidelines, which the FTC Commissioners approved in a unanimous 5-0 vote,³⁹ the Draft Guidelines had no Republican support.⁴⁰

Conclusion and Next Steps

The Draft Guidelines reflect the Agencies’ aggressive approach to enforcement. While the Draft Guidelines are in draft and remain subject to a public comment period, we believe that significant changes are unlikely, as the Draft Guidelines reflect the direction that Agency leaders have already provided to their staff conducting merger reviews.

Importantly, the Draft Guidelines do not foretell more challenges to deals because they only reflect the approach that the Agencies are currently using. Deals are being more closely examined and seemingly novel theories of competitive harm are being evaluated, while more deals are being challenged in court. But deals are still getting cleared by the Agencies and courts have not adopted many of the positions articulated in the Draft Guidelines, making effective advocacy before the agencies and the courts critical in achieving positive results.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.