US Antitrust Agencies Release Revised Draft Merger Guidelines

Key Takeaways

After announcing an effort to revise existing merger enforcement guidance in January 2022, the US Antitrust Agencies released a draft version of revised Merger Guidelines yesterday, which “describe and guide” the Agencies’ evaluation of mergers, but do not themselves create binding law.
The Draft Guidelines reflect current Agency enforcement priorities, with big tech and private equity transactions clearly in mind.
The Draft Guidelines significantly lower the thresholds for determining market concentration levels sufficient to create a presumption of anticompetitive effects. While the Draft Guidelines list the forms of competitive harms that the Agencies consider may arise from various M&A activity, the Draft Guidelines often do not provide the analytical framework the Agencies will use in evaluating such transactions. Notably absent is any discussion of the analytical framework for evaluating transactions in innovation markets.
In a departure from past iterations, the Draft Guidelines extensively cite case law in an obvious attempt to tie the Agencies’ more aggressive enforcement priorities to binding legal precedent. However, the majority of cases cited are significantly dated and their use in the Draft Guidelines stands in tension with the Agencies’ stated objective of “reflect[ing] the realities of our modern economy and the best of modern economics . . . .”
Highlighting the attention that merger enforcement is receiving under the Biden administration, the Draft Guidelines were specifically mentioned by President Biden in public remarks yesterday.

Background

On July 19, 2023, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) (each an Agency, and collectively, the Agencies) released a long-awaited draft version of revised Merger Guidelines (the Draft Guidelines), a set of public principles designed to provide information about how the Agencies may review mergers.¹ Merger Guidelines for horizontal transactions were first released in 1968 and periodically reviewed and revised as antitrust law evolved over the decades, with the last major update in 2010. The Agencies also historically issued separate guidance with respect to vertical mergers, which were last updated at the end of the Trump administration in 2020,²but subsequently withdrawn very early on in the Biden administration.³The 2023 Draft Guidelines consolidate discussion of the Agencies’ approach to all mergers—whether horizontal, vertical, or involving “related” markets.

The Agencies originally announced their intention to revise the 2010 Horizontal Merger Guidelines in January 2022,⁴following the mandate in President Biden’s July 2021 executive order on competition.⁵The Draft Guidelines will go through a statutorily required 60-day public comment period before a final version is released, likely later in the year. In related press releases, the Agencies stated that the goal of the update is to “better reflect how the [A]gencies determine a merger’s effect on competition in the modern economy and evaluate proposed mergers under the law.”⁶FTC Chair Lina Khan stated the Agencies are “updating their enforcement manual to reflect the realities of how firms do business in the modern economy,” while Assistant Attorney General Jonathan Kanter said “[a]s markets and commercial realities change, it is vital that we adapt our law enforcement tools to keep pace so that we can protect competition in a manner that reflects the intricacies in our modern economy.”⁷

When crafting the Draft Guidelines, the Agencies focused on “three core goals.”⁸First, the Draft Guidelines are intended to “reflect the laws as written by Congress and interpreted by the highest courts.”⁹ Second, the Draft Guidelines are designed to be “accessible, increasing transparency and awareness.”¹⁰Third, the Draft Guidelines should “provide frameworks that reflect the realities of our modern economy and the best of modern economics and other analytical tools.”¹¹

The draft release contains 13 specific guidelines that the Agencies may use when evaluating mergers:¹²

Mergers should not significantly increase concentration in highly concentrated markets.
Mergers should not eliminate substantial competition between firms.
Mergers should not increase the risk of coordination.
Mergers should not eliminate a potential entrant in a concentrated market.
Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.
Vertical mergers should not create market structures that foreclose competition.
Mergers should not entrench or extend a dominant position.
Mergers should not further a trend toward concentration.
When a merger is part of a series of multiple acquisitions, the Agencies may examine the whole series.
When a merger involves a multi-sided platform, the Agencies examine competition between platforms, on a platform, or to displace a platform.
When a merger involves competing buyers, the Agencies examine whether it may substantially lessen competition for workers or other sellers.
When an acquisition involves partial ownership or minority interests, the Agencies examine its impact on competition.
Mergers should not otherwise substantially lessen competition or tend to create a monopoly.

According to the Agencies, Draft Guidelines 1-8 are “frameworks that the Agencies use to assess the risk that a merger’s effect may be substantially to lessen competition or to tend to create a monopoly.” Draft Guidelines 9-12 “explain issues that often arise when the Agencies apply [Draft Guidelines 1-8] on several common settings.” And Draft Guideline 13 “explains how the Agencies consider mergers [] that raise competitive concerns not addressed by the other [Draft] Guidelines.”¹³

Significant Changes from Prior Guidelines

Revisions to Horizontal Concentration Thresholds Shifts Merger Illegality Presumption Lower.

Lower Threshold for Highly Concentrated Markets. The Draft Guidelines revise the threshold for what the Agencies define as “highly concentrated” markets. Previously, the 2010 Horizontal Merger Guidelines considered markets with Herfindahl-Hirschman Index (HHI) scores exceeding 2,500 to be “highly concentrated.” A market with four firms holding equal 25% market shares would have an HHI of 2,500. However, the Draft Guidelines lower the threshold for “highly concentrated” markets to 1,800. Consequently, a market with five equally sized firms (or anything more concentrated) would now be classified as “highly concentrated” by the Draft Guidelines. This change expands the scope of industries deemed “highly concentrated,” within which any transactions resulting in a significant increase in concentration—which is generally a low standard—would be presumed illegal.
Horizontal Merger Market Share Threshold. In addition to lower thresholds for a concentrated market, the Draft Guidelines also incorporate a single-firm market share threshold that presumes as illegal nearly all horizontal transactions that result in a combined market share of 30% or higher. According to the Draft Guidelines, “a merger that significantly increases concentration and creates a firm with a share over 30% presents an impermissible threat of undue concentration regardless of the overall level of market concentration.” Considering the Draft Guidelines’ low threshold for a “significant increase in concentration” based on HHI, almost all transactions resulting in a 30% or more combined market share would be presumed illegal, including any horizontal acquisitions by companies with an existing market share at or above 30%. This is a stark departure from the 2010 Horizontal Merger Guidelines, which considered market shares in a more holistic manner, even stating “[t]he purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones . . . they provide one way to identify some mergers unlikely to raise competitive concerns and some others for which it is particularly important to examine whether other competitive factors confirm, reinforce, or counteract the potentially harmful effects of increased concentration.”¹⁴

Vertical Merger Market Share Thresholds. Unlike the 2020 version of the Vertical Merger Guidelines, the Draft Guidelines also include two market share thresholds for vertical mergers. First, if a merger leads to the foreclosure of access to 50% or more of a vertically related product (such as an input, service, or distribution channel), it is presumptively illegal. Secondly, the Draft Guidelines state that even if the foreclosure is less than 50% of a related product, a vertical merger is likely to harm competition if one of the parties involved holds a “dominant position.” As noted above, the Draft Guidelines define a dominant position as having a market share of 30% or greater.

Broad Review of Roll-up Acquisitions. The Draft Guidelines introduce a broader scope of review for “roll-up” or “serial” acquisitions. Draft Guideline 9 states that when a merger is part of a series of multiple acquisitions in the same sector, the Agencies may examine the entire series itself, or as part of an industry trend (under Draft Guideline 8). Draft Guideline 9 primarily targets roll-up strategies, where a company makes numerous small acquisitions and consolidates them into one large entity. The Agencies note they will review empirical trends, such as a rise in market concentration over time or the exit of major market players, as part of this analysis. This memorializes an area of public focus by the Agencies, which have expressed strong criticism of this strategy, often pursued by private equity firms. The Agencies have argued that individual roll-up acquisitions often go unchecked by antitrust regulators because they don’t meet HSR thresholds due to their small size, but when considered collectively, these many small acquisitions can have a detrimental effect on competition.

Labor Issues / Lessening of Competition for Workers or Other Sellers. The Draft Guidelines now reflect in writing the publicly stated concerns of the Agencies with respect to labor monopsony issues. Draft Guideline 11 states that the Agencies will now assess whether a merger between buyers, including employers, may substantially lessen competition through a reduction in wages, slowing wage growth, reduced benefits, or a reduction of working conditions or workplace quality. This focuses on the features of labor markets which may put firms in dominant positions, and the resulting examination of whether a firm is a “dominant” buyer in terms of labor will include assessing whether the merging firms have “power to cut or freeze wages, exercise increased leverage in negotiations with workers, or generally degrade benefits and working conditions without prompting workers to quit.”¹⁵ This Draft Guideline makes clear that the Agencies will also analyze labor market competition and its impact on competition on a case-by-case basis, just as they do in markets for products and services. This emphasis on labor markets is a distinct change to the prior analytical framework under the 2010 Horizontal Merger Guidelines (where labor was not even mentioned) and will add complexity to merger analyses conducted by the Agencies going forward.

Potential Competition Remains a Focus, Despite Recent Court Losses. The Draft Guidelines also devote considerable time to potential competition theories, which is not surprising given recent enforcement activity. Most notable is the Agencies’ characterization of the evidence in such transactions and the relative weight given to the different categories, which echo arguments that the FTC presented to the court in Meta/Within. In the bucket of “objective evidence” in potential competition cases, the Draft Guidelines include a firm’s “size and resources to enter,” “advantages that would make the firm well-suited to enter,” previous successful entry into other markets, and incentives to enter.¹⁶On the other hand, whether the company actually “considered entering” and whether current market participants “perceive the merging firm to be a potential entrant” are deemed to be “subjective evidence.”¹⁷The division between objective and subjective evidence was a key piece of the FTC’s litigation strategy in Meta/Within, in which the FTC emphasized Meta’s capabilities as a potential entrant in the abstract, despite the absence of concrete plans to enter.

Continued Emphasis on Tech via Platform Competition. The Draft Guidelines emphasize the Agencies’ heightened focus on the technology space and highlight the “growing importance of platform competition,”¹⁸ asserting that “[p]latform markets present distinct competitive considerations from the traditional market structures of the 20^th century economy, as they often present high barriers to entry and are likely to tip in ways that entrench dominant firms.”¹⁹Draft Guideline 10 specifically addresses the characteristics and considerations that arise when platforms are a part of an acquisition, and asserts that mergers involving platforms can present competitive problems even when a firm merging with the platform has a relationship to the platform that is not strictly horizontal or vertical.²⁰ This Draft Guideline notes that the Agencies consider three types of platform competition: “competition between platforms, competition on a platform, and competition to displace the platform.”²¹Draft Guideline 10 also identifies conflicts of interest that arise when a platform operator competes on the platform it operates.²² Finally, this Draft Guideline underscores the Agencies’ efforts to “protect competition to displace the platform or any of its services,” alleging that when platforms are dominant the Agencies will seek to prevent “even relatively small accretions of power” from inhibiting the prospects for displacing the platform or decreasing dependency on that platform.²³Given these considerations, Draft Guideline 10 will be particularly impactful for transactions in the technology space.

Acquisition Involving Partial Ownership or Minority Interests. The Draft Guidelines emphasize that partial ownership or minority interests are subject to the same laws as full ownership and can raise similar competitive concerns at the Agencies. In making this assertion, Draft Guideline 12 notes three areas that will be the Agencies’ focus with respect to minority interests. First, this Draft Guideline alleges that a partial owner may be able to “influence the competitive conduct of the target firm” through appointing board members or influencing budgets and leadership positions.²⁴ Second, this Draft Guideline notes an examination of the reduction in the incentives of the partial owner to compete with the broader entity. Third, this Draft Guideline notes that the wholly owned company may decline to innovate if doing so would have a negative impact on a partially owned rival. The Draft Guidelines also stress an overall concern about access to competitively sensitive information in this analysis, and this reflects a trend of greater Agency scrutiny of mechanisms than in the past, including board observer seats.

High Bar for Rebuttal Evidence. The last section of the Draft Guidelines includes several categories of “rebuttal evidence” that merging parties can submit to the Agencies in defense of a transaction. Specifically, the Agencies will consider (1) the failing firm defense, (2) new entry and repositioning into a relevant market after a merger, (3) procompetitive efficiencies from the transaction, and (4) structural barriers to coordination unique to an industry. Predictably, however, the Agencies take a narrow view of each of these defenses. For the first three defenses, the Agencies lay out separate, multipronged subjective tests that merging parties must prove to rebut an Agencies’ allegations about a potential merger. And for the fourth defense, the Agencies state that they view structural barriers to coordination as “exceedingly rare in the modern economy.”²⁵ As a result, merging parties should continue to expect a skeptical audience when presenting such rebuttal evidence.

Heads I Win – Tails You Lose. An appendix to the Draft Guidelines describes the “sources of evidence” that the Agencies commonly consider in merger reviews.²⁶While this largely tracks the 2010 Horizontal Merger Guidelines, the Agencies here go out of their way to note instances where they will not credit certain evidence if favorable to the parties, including ordinary-course documents (historically viewed as probative), customer feedback, and merger retrospectives. Specifically, “Agencies give less weight to predictions by the parties or their employees, whether in the ordinary course of business or in anticipation of litigation, offered to allay competition concerns.”²⁷ Further, in discussing customer evidence, the Draft Guidelines state that “the ongoing business relationship between a customer and a merging party may discourage the customer from providing evidence inconsistent with the interests of the merging parties.”²⁸Under this approach, the Agencies will clearly discount evidence that is helpful to the parties. Finally, in discussing effects from past mergers, the Draft Guidelines state that, while the Agencies will give “substantial weight” to post-merger price increases or worsened terms, they may not credit contrary evidence because “the merged firm may be aware of the possibility of post-merger antitrust review and is therefore moderating its conduct.”²⁹

Heavy Citation to Case Law Attempts to Build Credibility with the Courts. One striking feature of the revised Draft Guidelines is the extensive citation to case law. Unlike the 2010 Horizontal Merger Guidelines, which had 17 footnotes in total and did not cite to a single case, the Draft Guidelines (not including the appendices) contain 107 footnotes, many of which cite to a wide range of case law. In the fact sheet that accompanied the release of the Draft Guidelines, the Agencies specifically point out that the Draft Guidelines “are built around statutory text and relevant case precedent” and that “[n]otably, these are the first merger guidelines to cite case precedents. The [Draft Guidelines] draw[] extensively on Supreme Court and appellate cases to ensure it is rooted in the law.”³⁰ But as noted, the Agencies acknowledge the Draft Guidelines themselves are not law.

Coming off a string of litigation defeats (some of which found DOJ or FTC arguments to be contrary to established case law), it is not surprising that the Agencies have opted for this approach. The Washington Post even quotes an unnamed senior DOJ official who specifically “noted that the [Draft G]uidelines are heavily annotated with references to case law to show that their approach is grounded in the law and existing legal precedent.”³¹

What is notable about the Draft Guidelines reliance on case law is the heavy citation to cases from the 1960’s and 1970’s, or even earlier, which stands in stark contrast to the Agencies’ stated aim of “reflect[ing] the realities of our modern economy and the best of modern economics . . . .” Moreover, the Draft Guidelines rely in places on non-precedential concurring opinions³² and decades-old circuit court cases. In one glaring instance regarding the Agencies’ approach to potential competition, the Draft Guidelines rely solely on a 1973 concurring opinion by Justice Marshall for the broad proposition that “[t]he antitrust laws reflect a preference for internal growth over acquisition.” ³³That the Agencies were limited to a five-decade old concurring opinion demonstrates the limits of their ability to tie current enforcement priorities to binding case law, but it remains to be seen whether this effort within the Draft Guidelines will be persuasive to the federal courts reviewing Agency merger challenges in the future.

^[1] https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines
^[2]https://www.ftc.gov/system/files/documents/reports/us-department-justice-federal-trade-commission-vertical-merger-guidelines/vertical_merger_guidelines_6-30-20.pdf
^[3] https://www.ftc.gov/news-events/news/press-releases/2021/09/federal-trade-commission-withdraws-vertical-merger-guidelines-commentary
^[4] https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-seek-strengthen-enforcement-against-illegal
^[5] https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/
^[6] https://www.justice.gov/opa/pr/justice-department-and-ftc-seek-comment-draft-merger-guidelines
^[7]Id.
^[8]Id.
^[9]Id.
^[10] Id.
^[11]Id. Notably, however, the Agencies acknowledge that the Draft Guidelines “are not a substitute for the law itself.”
^[12]Draft Guidelines, at 3-4 (available at https://www.ftc.gov/system/files/ftc_gov/pdf/p859910draftmergerguidelines2023.pdf).
^[13] Id. at 2.
^[14]See 2010 Horizontal Merger Guidelines, at 19 (available at https://www.ftc.gov/system/files/documents/public_statements/804291/100819hmg.pdf).
^[15]See Draft Guidelines, at 26.
^[16] Id. at 11-12.
^[17] Id.
^[18]See Fact Sheet – 2023 Draft Merger Guidelines for Public Comment, at 1 (available at https://www.ftc.gov/system/files/ftc_gov/pdf/Merger-Guidelines-Fact-Sheet-07-17-2023.pdf).
^[19]Id.
^[20]See Draft Guidelines, at 23.
^[21] See id. (emphasis in original).
^[22] Id. at 25.
^[23] Id.
^[24]Id. at 27.
^[25] Id. at 34.
^[26]See id. at Appendix 1.
^[27]Id. (emphasis added).
^[28] Id.
^[29] Id.
^[30]See Fact Sheet – 2023 Draft Merger Guidelines for Public Comment, at 1.
^[31]https://www.washingtonpost.com/politics/2023/07/19/antitrust-enforcers-propose-stiffer-rules-vetting-mergers/
^[32]See Draft Guidelines, at 11, FN 34.
^[33] See id. at 11, FN 35 (citing United States v. Falstaff Brewing Corp., 410 U.S. 526, 560–61 (1973) (Marshall, J., concurring))(“surely one premise of an anti-merger statute [] is that corporate growth by internal expansion is socially preferable to growth by acquisition.”)).