Joshua Wright provides his round-one comments on the draft Merger Guidelines.

To read more from the ProMarket Merger Guidelines Symposium, please see here.

The Biden Administration has made no secret of its intention to “reboot” antitrust law in the United States. Putting aside whether that is a good idea—and I think it is not—I focus here upon whether and how these draft Merger Guidelines might aid or hinder in that task. In particular, I focus upon how the federal courts might react to the new draft Guidelines. Some merging parties are not going to lay down and call off their deal in the face of a merger challenge. In such a circumstance, the Agencies (the Federal Trade Commission and Department of Justice Antitrust Division) will need to win in court to block the merger, which in turn will affect how subsequent merging parties interact with the Agencies. My view is that this reboot cannot and will not succeed unless the courts are convinced. So, how do I think the courts will view this document?

Courts, as they always do, start with the text of the statute. Section 7 of the Clayton Act says an acquisition is unlawful when “The effect of such acquisition may be substantially to lessen competition or tend to create a monopoly” (emphasis mine). The text of the statute requires the plaintiff to show that a particular acquisition has the requisite effect on competition. It is textually insufficient to say “some other merger in some other industry had an anticompetitive effect. Therefore, this merger also has an anticompetitive effect.” Based upon the text of the statute, the plaintiff must put forward transaction-specific evidence that the merger substantially lessens competition or tends to create a monopoly.

But, in 2023 the body of U.S. merger law is much more than just the text of Section 7; the text of the statute cannot answer every question that is relevant to whether a specific merger substantially lessens competition. Accordingly, much merger law is judge-made. The federal courts have developed a common law of merger analysis in scores of decisions. And, famously, the courts (notice how I write “the courts” and not ”the Agencies”) have adopted legal presumptions to govern litigation in all sorts of antitrust cases generally, as well as Section 7 merger cases specifically. The structural presumption in cases involving mergers between direct competitors, despite my best efforts, has been especially durable. 

The thrust of the new draft Guidelines is to state various presumptions that various mergers will be presumed unlawful under various circumstances. There is (at least) one problem here: the Agencies’ Merger Guidelines, as others point out, do not have the force of law. The Agencies can presume whatever they want, but stating their presumption does not make it so. I presume UCLA will defeat USC when they play a football game on November 18; we will have to wait several months to evaluate my presumption, and I doubt the game’s contestants or referees will care much about the presumption I just invented. So, too, will we have to wait for courts to evaluate the presumptions invented in the draft Guidelines. My view is that the courts will give certain of the Agencies’ invented presumptions a similar amount of attention.

Many have pointed out correctly that the Supreme Court has not issued a merits decision in a Section 7 case in decades. Perhaps this is a reason the case law cited in the draft Guidelines is so old. But the Supreme Court has decided many other antitrust cases on many other occasions, including very recently. And the Court has even addressed the concept of “presumptions,” and whether and how they ought to apply in antitrust cases. How do the draft Guidelines—with their renewed focus on case law and their focus on establishing presumptions—address this precedent? The answer: not at all. 

The Supreme Court stated explicitly in Eastman Kodak v. Image Technical Services that antitrust presumptions “are generally disfavored” when they “rest on formalistic distinctions rather than market realities.” Instead, the Court “prefer[s] to resolve antitrust claims on a case-by-case basis, focusing on the particular facts disclosed by the record.” In Polygram v. FTC, the D.C. Circuit held that a “restraint is presumed unlawful” only “[i]f based upon economic learning and the experience of the market, it is obvious that the restraint of trade likely impairs competition.” 

So that is the general approach to presumptions in antitrust cases. What about specific presumptions in specific contexts? Other than the structural presumption in horizontal merger cases set forth in Philadelphia National Bank, the modern Court routinely declines to apply a presumption of illegality, instead requiring case-specific evidence. (See Illinois Tool Works v. Independent Ink for a thorough and recent example of the Supreme Court declining to adopt a presumption that a firm’s patent necessarily confers antitrust-relevant market power.) The FTC, on multiple occasions, has deemed conduct to be presumptively unlawful only for the Supreme Court to reject the existence of such a presumption. This happened in California Dental (with respect to restrictions on advertising among competitors) and Actavis (with respect to pay-for-delay agreements). We have precedent from the Supreme Court stating explicitly that legal presumptions are disfavored in antitrust cases, combined with specific examples of the Court rejecting agency requests for favorable legal presumptions. And yet, the Agencies are now trying to state legal presumptions that all sorts of different mergers are unlawful without a fulsome analysis of market realities. 

The (Bad) Law and (Missing) Economics of the Presumption in Guideline 6

The draft Guidelines contain many efforts to articulate presumptions, but here I will address just Guideline 6: “Vertical Mergers Should Not Create Market Structures that Foreclose Competition.” The first problem is that I am unaware of any claim in the economics literature—even the literature that does not include any post-1960s work that certain parts of the draft Guidelines appear to favor—that a “market structure” “foreclose[s] competition.” By contrast, I am aware that certain conduct by a vertically integrated firm can result in anticompetitive foreclosure, but firm conduct and market structure are not the same. As former Deputy Director of the FTC’s Bureau of Economics Dan O’Brien ably explained to the FTC in 2018, we might think harm from input foreclosure is more likely as the upstream firm’s market power increases. And we might also think harm from customer foreclosure is more likely as the downstream firm’s market power increases. (O’Brien correctly focuses upon “market power” and not “market structure,” but we can pretend for the moment that the latter necessarily informs the former even though it is a weak signal much of the time.) The problem with these inferences, as O’Brien explains, is that “in canonical models, the benefits of vertical mergers tend to increase with upstream market power too,” and that “in canonical models with downstream monopoly and nonlinear pricing, the harm [from a vertical merger] is zero unless there is dynamic foreclosure.” As a matter of economic theory, there is just no consistent connection between market structure and harm. This does not mean market structure is irrelevant—of course it makes sense to look more closely at a vertical merger if the upstream and downstream markets are concentrated. But “look more closely” is quite different from “presume unlawful.”    

Nevertheless, draft Guideline 6 states that “[t]he ‘foreclosure share’ is the share of the related market that is controlled by the merged firm, such that it could foreclose rival’s [sic] access to the related product on competitive terms. If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence.” This is a naked presumption of illegality that has no support whatsoever in the economics literature. Where is the “economic learning and the experience of the market” that makes it “obvious” that a merger where the “foreclosure share” exceeds 50 percent always or almost always harms competition? Or, if you think there should be more government-friendly presumptions applicable in more merger cases, where is the evidence that a vertical merger featuring such a “foreclosure share” is even correlated with harm? 

Theoretical economics, as discussed, cannot get you there. Nor can the empirical economic evidence. In reviewing the state of the evidence on vertical mergers, some have said that “the empirical evidence on the change in welfare due to vertical mergers is decidedly mixed, and should certainly not be used as a basis for a presumption that most vertical mergers are procompetitive or harmless.” Others state that the empirical evidence we have “continue[s] to support the conclusions . . . that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets.” Neither literature review can support a presumption of harm under any circumstances, much less at the 50 percent “foreclosure share” that will result in a presumptively unlawful merger under the draft guidelines.

But that is economics. These draft Guidelines are supposedly about case law. The Agencies cite three cases to support their invented presumption: Brown Shoe (1962), Freuhauf (1979), and du Pont (1957). None of these cases articulates a presumption of illegality, as University of Michigan law professor Dan Crane has explained. There is, however, case law that does indeed address the issue of presumptions in vertical merger cases (albeit not from the Supreme Court). In AT&T-Time Warner (2019), the D.C. Circuit said “the government cannot use a short cut to establish a presumption of anticompetitive effect through statistics about the change in market concentration, because vertical mergers produce no immediate change in market share.” The court in Microsoft-Activision reaffirmed the absence of any presumption in vertical merger cases just last month, quoting the D.C. Circuit’s opinion.

Imagine you are a district judge tasked with deciding the government’s request for a preliminary injunction to block a vertical merger and you are presented with Guideline 6. You review it carefully, including the 66-, 61-, and 44-year-old court decisions the agencies cite that say nothing whatsoever about a presumption of illegality in vertical merger cases (and one of which the FTC lost!). When the merging parties inevitably point out a four-year-old decision by the D.C. Circuit and a one-month-old district court decision that (1) squarely address whether such a presumption exists; (2) say precisely the opposite of what the Agencies’ Merger Guidelines say; and (3) are perfectly consistent with binding Supreme Court precedent, what are you going to think about the Guidelines? My guess is, once that happens, the judge will put the Guidelines to the side, never to open them again. 

Certain parts of the draft Guidelines appear to exist in a world where any case law that might be favorable to defendants just does not exist at all. And in a world where no economic scholarship has been published since 1968. Some other parts of the draft Guidelines, for example Guideline 10, which addresses mergers involving multi-sided platforms, are far more reflective of modern economics. However, the draft Guidelines make clear that each individual guideline is a sufficient basis to challenge a merger—see Guideline 5, which states that “Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete.” Guideline 5, like Guideline 6, covers vertical mergers but also states explicitly that “[t]he inquiry in Guideline 6 into vertical market structures is distinct from this ability and incentive analysis.” So, the fact that some of the draft Guidelines are more economically coherent than others is a cold comfort to merging parties facing a potentially 13-headed investigation into their deal.

I cannot be too confident the federal courts will recognize the absence of coherent economic analysis in Guideline 6 (though I can hope). But I am confident the courts will recognize the Agencies’ fumbled sleight of hand with case law citations. Stanford law professor Doug Melamed put it best: “Citing only supportive material is like writing a brief and ignoring the other side’s arguments.” Federal judges are, unfortunately, quite used to that tactic and are not likely to be impressed by it. 

Author Disclosure: Joshua Wright has not consulted for the parties in any of the matters discussed herein, but currently represents or is consulting with other parties that have a financial stake in the Merger Guidelines and their enforcement.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.