Zephyr Teachout provides her round-one comments on the draft Merger Guidelines.
To read more from the ProMarket Merger Guidelines Symposium, please see here.
Merger Guidelines provide the public with insight into how the federal antitrust enforcement agencies (The Federal Trade Commission and Department of Justice Antitrust Division) evaluate potential mergers under the Clayton Act. Guidelines were first promulgated by the DOJ in 1968, and then again 14 years later. The 1982 guidelines represented a radical departure from law, a significant break with the text and history of the Clayton Act. Bill Baxter, the head of the Antitrust Division in Ronald Reagan’s Department of Justice, embraced an extreme pro-merger policy. In defiance of the legal framework, Baxter used the Guidelines to signal the DOJ would effectively require expert proof that prices would increase in order to block a merger. The 1982 Guidelines replaced the statutory text (risk of lessened competition) with consumer welfare (e.g. lower prices, innovation, higher quality) as the north star of analyzing mergers. Those Guidelines indicated that the prophylactic approach of the statute would not be followed, and that mergers would be presumptively waived through unless a steep evidentiary burden was met. The 1982 Reagan administration move was openly ideological, unapologetically grounded in Chicago School economic theory, instead of legal logic.
Since 1982, the Agencies under different administrations have promulgated intermediate changes to the Guidelines, but not to the consumer welfare framework, or the overall framework of the Guidelines. Therefore, the business community has been operating in the ideologically grounded regime established by the 1982 guidelines for over 40 years.
The new draft Guidelines, issued last month, represent a return to common sense and the rule of law, while recognizing the unique threats to competition posed by new developments, including big data, tech platforms, and serial acquisitions. My comment here will focus on seven ways that the new Guidelines put law, instead of ideology, at the center of merger review.
First, these Guidelines represent a return to the text of the Clayton Act. Section 7 of the Clayton Act prohibits mergers and acquisitions where “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create monopoly.” As the new Guidelines point out, the language is explicitly prophylactic, and preventative. Section 7 is a malum prohibitum instead of a malum in se law. The Clayton Act instructs the Agencies to stop that which might substantially lessen competition, not merely that which definitively will substantially lessen competition (let alone that which definitely will increase prices). There are several good policy reasons for this choice on the part of Congress, but for our purposes what matters is that Congress made that choice in the Clayton Act, not whether or not it should have, and that the Agencies as of 2023 are committed to faithfulness to publicly passed laws. The 1982 Guidelines only once use the phrase “lessen competition,” in a direct quote to the statute in a footnote. The 2023 draft Guidelines refer to “lessen competition” 84 times. The statute—a publicly passed law—is returned to its primacy of place in these new Guidelines.
Second, the Agencies understand that there must be basic, comprehensible, logic undergirding their policy. In the context of the administrative state, that logic must be tethered to the logic of the laws that undergird the administrative power. Unlike the 1982 Guidelines, which subordinated the Clayton Act’s goals and case law to the ideology of efficiency and consumer welfare, the draft Guidelines are tethered to case law. These are the first Guidelines to include citations to law in the guidelines, and the citations are extensive. The use of law in the Guidelines helps give businesses clarity about the legal regime under which they operate. The use of law is, for opponents of the Guidelines, something of a shock: the American Action Forum, a right-of-center think tank, criticized the Guidelines for relying on “archaic and often ignored case law” instead of “modern practices based on consumer welfare.” Other defense-side summaries made similar claims, effectively admitting that the existing Guidelines are not based in law but ideology. As all law students learn in their first year, a holding does not stop representing the law simply by the passage of time; it must be explicitly overturned or overridden to move from law to non-law, yet the American Action Forum and similar critics argue against the foundational idea of law itself. The Guidelines are offensive to these critics because they are faithful to existing case law.
Third, the Guidelines indicate that the Agencies will not arbitrarily limit the kind of evidence that they can use to examine risks to competition. One of the features of the 1982 Guidelines and the culture that developed in their wake was an unusual narrowing of evidentiary bases for exploring competition harms. In practice, this meant that in order to block a merger, enforcers generally felt like they had to prove market definitions in order to prove Herfindahl–Hirschman Index (HHI) concentrations. In effect, the “indirect” method of proof of inordinate power (HHI concentrations) wholly supplanted direct methods of proof of dominance. These Guidelines make clear that direct methods of proof are wholly acceptable—as they would be in the normal course of business of any other kind of law. In a functioning legal regime, both direct and indirect evidence are acceptable paths to proof.
Fourth, and in a similar vein, the Guidelines remove confusion about other arbitrary limits that the ideological dominance of the last 40 years have imposed. For instance, competition may be lessened without a merger being either vertical or horizontal—and in today’s economy, with the rise of big data and artificial intelligence, vertical and horizontal may not be useful frameworks for many threatening combinations. Likewise, competition for labor may be lessened by a merger, and the agencies’ draft Guidelines indicate explicitly that they will consider such risks, especially given the new evidence that labor markets have been significantly impacted by concentration. These Guidelines should perhaps not be needed—both of these expressions are mere common sense—but the articulation of these principles in the Guidelines is very helpful for business owners and labor market participants who may have gone to law school in the 1990s and have come to accept that such limitations are embedded in the legal culture.
Fifth, the Guidelines give permission to use common sense and not require every bit of logic in a merger decision be derived from high-priced economic experts. For instance, serial acquisitions can be a threat to competition, and mergers between competitors can be a threat to competition. Again, these common sense assertions should not need expression, but the legal part of the antitrust legal community has become so intimidated by the control economists have exercised over the last 40 years—an intimidation that started with Baxter’s aggressive use of economic experts to supersede lawyers’ decisions in the 1980s. Therefore, the permission to be lawyers, use logic, and treat antitrust law like other laws, where the project is primarily legal, is important. The Guidelines reject the extra-legal policy of giving legal decisions to another field of experts.
Sixth, and in a move that strikes me as especially important, the Guidelines make clear that although the merger rules are malum prohibitum, not malum in se, that does not mean that mergers that violate the law can go forward just because the parties present some generic evidence of other salutary impacts. Instead, if the government is going to allow a merger that may substantially lessen competition, the “cognizable efficiencies must be of sufficient magnitude and likelihood that no substantial lessening of competition is threatened by the merger in any relevant market.” The draft insists that efficiencies must be significant and factually specific, not routine or speculative. This principle, elaborated in section 4.3 of the Guidelines, affirms existing law that possible economies are not a defense to an illegal merger, law that has been weakened as agencies have treated procompetitive efficiencies as justifications. This draft makes merger law more like most other areas of law, where speculative or external salutary effects cannot typically justify law breaking. The agencies are signaling that illegal mergers will be blocked, not rationalized.
Finally, the draft Guidelines indicate the Agencies will use lower market concentration thresholds to trigger review. This change is long overdue, based on the evidence; see the great work by economist John Kwoka. The existing Guidelines have been failing on their own terms to stop mergers that led to higher consumer prices. This change also represents a reassertion of law over ideology, as the Agencies are reflecting back evidence and experience to change numerical guidelines, as agencies throughout the administration routinely do.
All of these changes should make merger review less expensive. The cost of litigation has become a rule of law problem in antitrust, because cost, instead of merit, routinely drives Agency decisions. As law was turned over to economic experts in the 1980s, the merger process also became swamped and suffocated with expert costs, and projected costs made it easier to wave through problematic mergers instead of investigating them. The draft Guidelines appropriately relegate economic experts to a less dominant role; this should give the public more confidence that enforcers will follow the law, because they are less likely to be dissuaded from investigation by the fear of out of control expert costs.
In sum, the draft Guidelines represent an important democratic achievement. They show that President Joe Biden’s Agencies are committed to following law, both statutory law and case law. The agencies will use economists but not grant them inappropriate power to veto decisions and not keep logic and common sense in exile. They will be transparent and democratically accountable. They will follow the evidence, and they will restore the Clayton Act’s fundamental prophylactic approach.
Author Disclosure: I have no financial involvements, nor am I consulting or accepting remuneration, from any party that may have an interest in the draft Merger Guidelines.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
