Robert H. Lande and Mark Glick respond to recent articles by Nancy Rose & Jonathan Sallet and Herbert Hovenkamp debating the role of an efficiency defense in merger litigation. The authors argue that the debate misses the point that there is no textualist support for such a defense.
The recent ProMarket article by Nancy Rose and Jonathan Sallet, “Defending the Merger Efficiency Defense: A Response to Herbert Hovenkamp” and the article it responds to, “The U.S. Supreme Court and the Merger Efficiency ‘Defense’,” do an excellent job analyzing a number of important issues relevant to whether efficiency defenses should be allowed in merger cases. Efficiency defenses, which task merging parties with demonstrating to the court that the merger’s benefits to consumer welfare outweigh any drawbacks from lost competition, arose through regulatory changes and lower court rulings beginning in the 1980s. However, both articles ignore the crucial foundational issue of whether the text of the Clayton Act, the principle antitrust act governing mergers and acquisitions, allows an efficiency defense at all. It does not. A textualist analysis of the plain words of the statute demonstrates that an efficiency defense does not exist.
Section 7 of the Clayton Act bars mergers and acquisitions when the effect of which “may be substantially to lessen competition, or to tend to create a monopoly.”Where, in that key clause or the rest of the Act, is the statute’s efficiency defense (or rebuttal or exception)? How, despite their absence from the statute, did they become part of merger enforcement? What justified their inclusion in the Merger Guidelines?
A textualist analysis demonstrates there is no efficiency defense
Following the lead of Justice Elena Kagan’s characterization of the contemporary Supreme Court that “we are all textualists now,” this article will analyze Section 7 of the Clayton Act using textualism, a method of statutory analysis that starts with, and in almost all cases ends with, the precise words of a statute. It gives words and phrases the plain, fair, straightforward, and ordinary meanings they had when the statute was enacted, and almost always ignores everything else, including laws’ legislative history. Using textualism, courts should not create exceptions not in the text of the law, and should not impose their own policy preferences into a statute.
A textualist approach to the efficiency defense issue would plainly and straightforwardly read the Clayton Act and ask whether an efficiency defense appears in the words of the statute. Since the Clayton Act in relevant part only forbids all mergers that “may be substantially to lessen competition or tend to create a monopoly….” it clearly does not contain an efficiency or cost reduction defense of any kind.
It would have been simple for Congress to include an efficiency defense in Section 7 of the Clayton Act. Congress knew how to include one because the 1936 Robinson-Patman Act amendment to the Clayton Act, which focuses on price discrimination as opposed to mergers and acquisitions, does contain an efficiency defense. Although Section 2 of the Robinson-Patman Act forbids price discrimination whose effect “may be substantially to lessen competition or tend to create a monopoly” (the exact language contained in Section 7!), it also provides an explicit efficiency defense. It permits a defendant to charge competing customers different prices if the defendant can show that its pricing was caused by a lower “cost of manufacture, sale or delivery.…”
Because Congress in 1936 included an efficiency defense in Section 2 of the Clayton Act, but did not do so when it enacted Section 7 of the Clayton Act in 1914 or when it passed the Celler-Kefauver Amendment in 1950, Section 7’s lack of an explicit efficiency defense should dispositively decide the efficiency defense question to a textualist. It is simply not in the statute. Therefore, judges should not allow one even if they personally consider it to be sound public policy.
Despite this conclusion, each of the two parts of Section 7’s prohibition against mergers that “may be substantially to lessen competition or tend to create a monopoly” could be analyzed separately on this issue. Even then, neither analysis justifies an efficiency defense.
The “tend to create a monopoly” clause of Section 7
To a textualist the “or to tend to create a monopoly” clause is clear. The plain reading of this text precludes an efficiency defense if the merger may “tend to create a monopoly” with no consideration as to whether that monopoly would be likely to be “efficient.”
Indeed, the plain language of Section 7 forbids all mergers that “may” even “tend” to create a monopoly, regardless whether the resulting monopoly might have lower costs, higher quality, or more innovation, and without even examining whether prices would be likely to rise, fall, or remain stable. Perhaps the simple, plain language of this clause of Section 7 is what caused the writers of the 2023 Merger Guidelines to conclude that the enforcers would not recognize an efficiency defense for mergers that “may…tend to create a monopoly.…”
The “may be substantially to lessen competition” clause of Section 7
Could an efficiency defense arise under the “may be substantially to lessen competition” clause? A textualism analysis of this issue should center around what the word “competition” meant in the dictionaries from the 1900–1950 period that Justice Antonin Scalia, the arch proponent of textualism, considered “useful and authoritative.” These definitions, which have not changed in more than a century, are:
The Oxford English Dictionary: “The action of endeavoring to gain what another endeavors to gain at the same time’; the striving of two or more for the same object; rivalry”
The Century Dictionary and Cyclopedia: “The act of seeking or endeavoring to gain what another is endeavoring to gain at the same time; common contest or striving for the same object; strife for superiority; rivalry”
Webster’s Second New International Dictionary: “Act of competing, esp. of seeking, or endeavoring to gain, what another is endeavoring to gain at the same time; common strife for the same object; strife for superiority; emulous contest; rivalry”
Funk & Wagnalls New Standard Dictionary of the English Language: “The act or proceeding of striving for something that is sought by another at the same time; a contention of two or more for the same object or for superiority; rivalry…”
Every one of these dictionaries defines competition in terms of rivalry: of acts of rivalry. None used an economic definition of competition (let alone an economic definition of “perfect competition,” which is complete lack of rivalry, since all firms take prices as given). None defined “rivalry” in terms of being more efficient or having lower costs.
Could these meanings of “competition” allow an efficiency defense? Suppose a merger would reduce the number of rivals in a market from four down to three. Under a straightforward definition of “rivalry,” a textualist should conclude that the amount of rivalry (i.e., competition) in the market would be likely to decrease, even if the merged firm would experience lower costs, because three firms compete less—engage in less rivalry—than four firms.
But suppose that a market had four firms in it, with market shares of 40%, 30%, 15% and 15%. Suppose the two 15% firms wanted to merge, and claimed the merger would lead to tremendous cost savings, enabling the resulting firm to better compete with the two larger firms in the market. Because of this possible “enhanced rivalry” scenario, it can be argued that an efficiency defense should be allowed in “may be substantially to lessen competition” merger cases. Indeed, this could be the rationale behind the inclusion of an efficiency defense in “may be substantially to lessen competition” cases under the 2023 Merger Guidelines.
For a textualist, however, this possibility of “enhanced rivalry” should not be enough to offset the fundamental point that Congress included an explicit efficiency defense in the Robinson-Patman Amendment to the Clayton Act, but chose not to include one in Section 7 of the Clayton Act. For this reason, the courts should not invent or allow an implicit efficiencies workaround defense. If a court allowed an efficiency defense in Section 7 cases, this would mean that it was in effect amending the text of the statute by inserting its own policy preferences into the law—the opposite of textualism.
The legislative history
Moreover, to the extent there is any doubt, non-textualists would remind us that interpreting Congress’s decision not to include an explicit efficiency defense in the text of the Clayton Act as dispositive, would be much more consistent with the Clayton Act’s legislative history. This is because when Congress debated the antimerger laws, it showed almost no concern with missed or foregone efficiencies from mergers.
Our search of the legislative history of the Clayton Act and its major amendment, the Celler-Kefauver Act, revealed no explicit or implicit evidence of a congressional concern with the allocative inefficiency arising from monopoly pricing. There was, however, a small amount of congressional attention to the possible effects of the legislation on the productive efficiency of firms. Opponents of the Celler-Kefauver Amendment claimed that it might hurt corporate efficiency. However, the view of the Amendment’s proponents, and thus of the majority in Congress, was that the Amendment probably would help, not hurt, corporate efficiency by increasing competitive pressures.
Congress’ overriding economic concern with mergers (although other concerns were also expressed) was instead that the merging firms “may” gain the power to engage in supracompetitive pricing, thereby unfairly transferring (perhaps “exploiting” or “stealing” would be a better word?) wealth from consumers (purchasers). The majority of Congress was not concerned with preserving or enhancing corporate efficiency. An efficiency defense did not come from Congress.
How did the efficiency defense enter merger enforcement?
Since Section 7 of the Clayton Act contains no efficiency defense, rebuttal, or exception, a natural question arises as to where and how it originated. The answer is not the Supreme Court. It originated in the 1982 federal Merger Guidelines.
These Guidelines cited no statute, no legislative history, and no Supreme Court precedent or careful economic analysis. Perhaps in recognition of its lack of basis in statutory text or Supreme Court precedent, the Guidelines said that the efficiency rebuttal would be limited to “extraordinary circumstances” that involved evidence that was “clear and convincing.” not just “plausible.”
The Guideline’s invention has been surprisingly successful. The acceptance of this view was enabled not only by subsequent versions of the Merger Guidelines, but also because lower courts started to cite the Guidelines, and the drafters of subsequent Merger Guidelines relied on this lower court precedent to justify including an efficiency defense or rebuttal. But the Guidelines invented this idea, so it was circular reasoning when courts used the Guidelines as the only justification for its inclusion, and then to use this precedent to justify lower and lower standards for the acceptance of efficiency arguments. Conspicuously absent was any independent textualist reasoning, legislative history, or economic analysis.
The Supreme Court
We agree with the 2023 Merger Guidelines that the Supreme Court has declined to endorse an efficiency defense. Judge Richard Posner, who acknowledged that when he was a law clerk, he essentially drafted the Philadelphia National Bank opinion which held there was no merger efficiency defense, is a longtime critic of an efficiency defense. As he explained in 2015, “I would not allow a generalized defense of efficiency.” This was in part because merger efficiencies are so rare. As Posner challenged, “I wish someone would give me examples of mergers that have improved efficiencies. There must be some.” Although the relevant decisions on the (non)-applicability of efficiencies are old, they have never been reversed, despite the Supreme Court’s opportunities to do so. Moreover, modern economic and policy analysis demonstrates that these decisions were correctly decided. There is no sound reason to ignore relevant Supreme Court decisions (as well as the plain text of the merger statute and its legislative history).
In sum, the lower courts have allowed themselves to become untethered from a textualist analysis of the plain and straightforward language of the merger statute and relevant Supreme Court precedent. Nor has any court even articulated a serious economic or policy analysis of the issue.There is no credible basis for a merger efficiency defense.
Conclusion
The 2023 Merger Guidelines were supposed to be solidly based upon the statute it seeks to enforce. And for the most part the Guidelines defer to the Clayton Act and to binding Supreme Court precedent. But when it comes to efficiencies, the Guidelines seem to have engaged in a compromise with past Merger Guidelines. The 2023 Merger Guidelines state that there is no efficiency defense for a merger that may tend to create a monopoly. But for other mergers, the Guidelines accept an efficiency defense if it demonstrates that “the merger would not substantially lessen competition in any relevant market in the first place.”
The Guideline’s overview, however, states that the benefits of competition include not only lower prices, but innovation, choice, improved wages, and “preservation of our democratic political and social institutions.” To qualify under the Guidelines, efficiencies should have to reverse whatever anticompetitive effects otherwise would occur along all these dimensions. So, for example, if a merger leaving only two media companies in a particular market “may” threaten democracy, it should not be permitted even if defendants can prove that streaming prices will decrease. Indeed, if the enforcers and the courts were to attempt to trade off “democracy” against “lower prices,” this would lead to an incalculable, intractable, unpredictable, lengthy, and costly morass.
The enforcers and the courts should return to the text of the Clayton Act, and declare that the antitrust field made a mistake when it ignored the language chosen by Congress. There should not be a merger efficiency defense.
Authors’ Disclosures: Robert H. Lande consults on matters related to the contents of this article in a non-paid capacity as a member of the Board of Directors of the American Antitrust Institute. He recently co-submitted comments to the California Law Review Commission on merger enforcement. Mark Glick reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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