Happy Holidays! The Flawed 2023 Merger Guidelines and More: Competition Corner by Alden Abbott

Issue #23

The New Merger Guidelines (“The Pig Still Oinks”)

Well, they have done it. On December 18, the FTC and DOJ issued final 2023 Merger Guidelines, as an early New Year’s gift (nicely sandwiched between Hanukkah (which ended December 15) and Christmas) of the porcine sort. The two agencies’ try to put lipstick on this pig, by claiming that the Guidelines “emphasize the dynamic and complex nature of competition”, an approach that supposedly “enables the agencies to assess the commercial realities of the United States’ modern economy when making enforcement decisions”. But no amount of verbal makeup prevents this porker from oinking, despite the valiant best effort of the antitrust agencies’ talented and highly respected chief economists (Susan Athey and Aviv Nevo) to argue otherwise.

The cosmetic touches to the previous draft Merger Guidelines consist primarily in softening the language regarding the impact of structural presumptions. The reality, however, is that the draft’s structural presumptions remain, as does the draft’s reduction in concentration numbers, lower Herfindahls and all. In response to some public comments, economic and evidentiary analysis previously relegated to appendices were inserted into the main guidelines, but that once again is merely a cosmetic fix (akin to “freshening up” the pig’s rouge), not a substantive change.

Also, the thirteen special guidelines (really theories of alleged competitive harm) in the previous draft were trimmed to eleven. This was done by removing an economically illiterate analysis of vertical mergers (former guideline 6), and deleting special language indicating that the guidelines’ theories were “not exhaustive of the ways that a merger may substantially lessen competition” (former guideline 13). Old guideline 6 is not specifically disavowed, however, and the guideline 13 limitation is retained, showing up in revised words that carry the same message at page 4 of the final Guidelines (“factors contemplated in these Merger Guidelines neither dictate nor exhaust the range of theories or evidence that the Agencies may introduce in merger litigation”).  The retained “non-exhaustive” language implicitly rules out any safe harbor for non-problematic mergers, thereby injecting costly uncertainty into merger planning.

Finally, and most regrettably, the final Guidelines, like the draft version, fail to recognize the substantial economic benefits that countless mergers generate. Such benefits include efficiency-induced cost reductions, innovation-induced quality improvements and new product generation, and reallocation of resources to higher valued-uses. Prior merger guidelines recognized the real possibility of efficiencies, and vowed to provide guidance to let non-problematic mergers proceed. Not so in the final 2023 Guidelines.

Furthermore, the final Guidelines also adopt a very stringent view of cognizable efficiencies, imposing conditions that will almost never be met in the real world. They also blithely assert that alternatives to mergers, such as contracts, may be employed to achieve claimed efficiencies, without considering that such alternatives may not be achievable in the real world.

Finally, in selectively citing cases, the Guidelines ignore the immense changes in US antitrust case law over the last four decades, which reflect an economics-based appreciation for the role of business arrangements in advancing efficiency and consumer welfare. The specter of the discredited primary focus on “increasing concentration” and harm to competitors, which animated old and dated antitrust case law, still haunts these Guidelines.

In short, the pig is still a pig. Sophisticated courts will hopefully hear the oinks, and agree with Geoffrey Manne that “[t]he primary effect of these updated guidelines is to reduce their utility to courts as a reflection of current legal and economic understanding.”

FTC v. Illumina/Grail – A Rare FTC Merger Victory?

Talking about merger policy, one should note the end of the FTC v. Illumina/Grail saga, with the FTC’s December 18 press release announcing that Illumina decided on December 17 to divest itself of its recently reacquired Grail cancer blood testing subsidiary.

The press release crowed that the Fifth Circuit “issued an opinion in the case finding that there was substantial evidence supporting the Commission’s ruling that the deal was anticompetitive.” True enough. (Although the Fifth Circuit’s assessment of the FTC’s competitive harm arguments certainly is open to criticism, that is not the purpose of this commentary.)

The FTC also, however, was constrained to note that “[t]he Fifth Circuit vacated the Commission’s order and remanded it for further proceedings based on the standard the Commission applied when reviewing one aspect of Illumina’s rebuttal evidence.” In so noting, the Commission failed to explain that the reason for the remand went to the heart of Illumina’s argument that its acquisition of Grail was not anticompetitive.

The Fifth Circuit’s opinion based its remand on Illumina’s “Open Offer,” the long-term supply agreement by which Illumina offered to make its platform available to all cancer blood-test developers. The Fifth Circuit agreed with Commissioner Wilson that the Commission should have enabled Illumina to show the Open Offer’s competitive effects on it, as part of its rebuttal to the prima facie case. The FTC had failed to do so, instead claiming that the Open Offer could only be considered at the remedy stage following a finding of liability. The court instead viewed the Open Offer as “a post-signing, pre-closing adjustment to the status quo implemented by the merging parties to stave off concerns about potential anticompetitive conduct.” The Fifth Circuit agreed with “those courts [in other cases involving AT&T and Microsoft]  that such agreements should be addressed at the liability—not remedy—stage of the Section 7 proceedings.”

The Fifth Circuit’s broader message is that antitrust enforcers should fully consider proposed safeguards designed by merging parties to ensure that possible future competitive harms are avoided. This is important. To the extent that other courts agree with this common-sense message (as they should), antitrust enforcers will no longer be able to ignore actual fixes by merging parties in rendering Section 7 liability assessments.

Given the court’s remand order, why did Illumina immediately acquiesce and state it would divest itself of Grail? One can only speculate, but it is quite possible that Illumina believed the Commission inevitably would ignore the Open Offer as inadequate (despite the fact that it facially appears to be more than adequate), and once again find liability. Illumina would then have to decide whether to spin off Grail or appeal, and wait for yet again another court decision. Such a decision might well prove unfavorable to Illumina, to the extent the court deferred to an FTC “reasoned fact finding” purporting to show the Open Order’s inadequacies. Illumina may simply have decided that direct litigation costs, plus legal uncertainty and diversion of corporate resources, militated in favor of cutting its losses and letting Grail go.

In sum, the FTC’s “success” in the Illumina/Grail matter amounts to far less than a full legal victory for the Commission. Far more significant is the negative signal that this case sends to sophisticated tech-savvy firms that want to acquire (or reacquire) complementary assets to enhance their offerings and speed up the adoption of welfare-enhancing innovations.

As law and economics experts have pointed out (see, for example, here and  here), the FTC’s Illumina/Grail case has been a travesty from start to finish, focusing on possible theoretical harms in future markets while ignoring real benefits in existing markets. It may even cost future lives (see here). Let us hope that this supposed FTC “win” is not misinterpreted as a victory for sound merger enforcement policy – it should properly be viewed as a misguided welfare-inimical antitrust crusade of the sort that should be avoided.

An FTC Reform Agenda

Although the new Merger Guidelines are garnering the antitrust community’s primary attention, as they should, I released for public consumption my own gift (a true public good), in the form of an FTC reform package (described in  my December 12 Mercatus policy brief  and my December 14 Truth on the Market commentary). My 12 reform recommendations (one for each of the 12 Days of Christmas) assert that the FTC should:

1.      Withdraw the November 2022 Unfair Methods of Competition Policy Statement and all FTC resolutions invoking that statement, and prepare a new unfair methods of competition policy statement.

2.      Withdraw the draft 2023 Merger Guidelines (or the finalized version of those guidelines, if it has been issued) and issue new merger guidelines, in conjunction with the U.S. Justice Department (DOJ).

3.      End inquiries into ESG (environmental, social, and corporate governance) issues in Hart-Scott-Rodino (HSR) pre-merger information requests.

4.      With the concurrence of the new assistant attorney general for antitrust, rescind the finalized version of the major amendment to HSR rules proposed by the FTC in 2023 (and expected to be finalized soon), and review preexisting HSR rules, in order to reduce regulatory burdens.

5.      Terminate the Biden-era policy of routinely requiring FTC review of future proposed mergers in all settlements of merger matters.

6.      Rescind all proposed or final rules on unfair methods of competition enacted pursuant to Section 6(g) of the FTC Act, and withdraw from any litigation related to such rules. Relatedly, the FTC should disavow any substantive rulemaking authority under Section 6(g).

7.      Rescind the FTC’s July 2021 “streamlining” of Magnuson-Moss Act (Section 18 of the FTC Act) consumer-protection rulemaking procedures.

8.      Perform a study of all proposed unfairness-based consumer-protection rules under Section 18 of the FTC Act.

9.      Announce publicly that the FTC will not enforce the Robinson-Patman Act (RPA).

10.                 Identify all consultants, special assistants, and other personnel who worked at the FTC at the direction of Chair Lina Khan.

11.                 Identify all FTC staff detailed to other agencies.

12.                 Lay the groundwork for possibly obtaining limited statutory disgorgement authority (that is, a monetary remedy) to address consumer fraud.

I hope that my recommendations may help spark an antitrust community debate on a possible FTC reform agenda.

Where are the FTC Rules?

On December 4 I published a Truth on the Market commentary on the Khan FTC’s failure to enact (or even come close to enacting) new substantive rules, despite having announced a dramatic rulemaking agenda in 2021. I explain why the FTC should not waste further resources on advancing possible substantive rules that have not been mandated by Congress (such resources would be much better allocated to ferreting out clearly welfare-inimical business conduct, such as hardcore fraud).

Pharmaceutical Antitrust

For my readers who are interested in pharmaceutical antitrust, I commend to you a Concurrences book that compares US and EU competition policies toward the pharmaceutical sector. I wrote a foreword to the volume.

IP Developments

IP Watchdog issued its annual IP developments roundup on December 24. My lead entry summarized the four 2023 Supreme Court decisions (one dealing with patents, two with trademarks, and one with copyrights). These decisions have major implications for IP policy. I also highlighted the Biden Administration’s disappointing “anti-IP” policy initiatives, involving price controls (Bayh-Dole Act march-in rights) and WTO patent waivers for COVID-19 medicines. In the new year, we will keep following IP policy developments, which have huge implications for the effectiveness of competition.

Things to Come

The Mercatus competition team (which also includes my outstanding colleagues Satya Marar, Giorgio Castiglia, and Cody Taylor) remains hard at work assessing the antitrust implications of artificial intelligence, plus a variety of other topics. More publications and tweets will be forthcoming. Until then, Happy New Year!