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The Obama Administration has been vocal about stepping up antitrust enforcement and, despite the difficult business environment, the new leadership at the Federal Trade Commission and Department of Justice Antitrust Division has clearly signaled an intent to pursue that course.

The impact of the new Administration’s policy may be felt most immediately in the area of mergers and acquisitions, where pressing deal timelines frequently compel the agencies to show their cards early.

Below, we identify some of the ways in which the federal agencies under the new Administration may pursue merger enforcement beyond traditional analytical patterns. Companies considering strategic transactions would be well advised to include competitive effects analysis among the key factors to be evaluated early in the decision-making process.

Most Significant Departure: Pursuing Single Firm Conduct

Perhaps the new Administration’s most significant departure from its predecessor’s antitrust policies concerns the treatment of conduct by single firms with market power. During the Bush Administration, the Antitrust Division issued a report on single firm conduct (known as the Section 2 Report, after the section of the Sherman Act that governs such conduct) that was criticized by some as being too lenient on firms with market power. The Federal Trade Commission openly rejected the Report and, in May of this year, the new Antitrust Division chief, Christine A. Varney, officially withdrew it as US government policy. The withdrawal was accompanied by unequivocal official statements that the Antitrust Division would pursue single firm monopolistic conduct aggressively. Please read our Antitrust Alert on this issue, “Department of Justice Officially Departs from Bush Antitrust Policies.”

Technically, a merger’s impact on competition is analytically distinct from the post-merger firm’s independent conduct as a potential violation of antitrust laws. The legality of a combination of two competing firms is a different question from whether, post-merger, the new single firm abuses its own market power. Nevertheless, the heightened concern with potential harm from single firm conduct may well signal that the new Administration has a lower threshold for the amount of market power it is willing to tolerate in a post-merger entity. As explained below, such a shift in government policy may be particularly visible in the case of mergers with vertical, as opposed to horizontal, implications.

Vertical Mergers

In recent times, merger analysis has focused principally on horizontal effects, or the transaction’s impact on a particular market as a result of concentration in that same market. The paradigmatic example is the merger of two competing widget suppliers leading to higher widget prices either because the post-merger entity controls too big a swath of the widget market (unilateral effects) or because the smaller number of post-merger widget suppliers makes price coordination among them easier (coordinated effects). While horizontal effects are likely to remain front and center in the agencies’ merger analysis, the new Administration—particularly through its representative Ms. Varney—has repeatedly announced an intent to scrutinize the vertical implications of mergers with renewed vigor.

Vertical effects typically occur when a firm (sometimes vertically integrated) merges with another firm that participates in a market in which the first firm’s customers or suppliers are active. Anticompetitive effects may occur when the first firm acquires sufficient market power in the target firm’s market to enable the merged entity to control inputs or outlets necessary to compete effectively in the first firm’s markets, and thereby either raise significant barriers to entry into those markets or prevent other firms from competing efficiently in those markets. The vertically integrated merged firm’s role as a supplier to some of its own competitors may also facilitate collusion among competitors in the post-merger world. In her tenure as a Federal Trade Commissioner during the Clinton Administration, Ms. Varney was a strong supporter of vertical merger analysis, joining a number of FTC decisions challenging mergers on those grounds.

Innovation Markets

During the Clinton Administration, the Antitrust Division and FTC jointly issued the Antitrust Guidelines for the Licensing of Intellectual Property, in which, for the first time, the agencies officially recognized the need to scrutinize a transaction’s effects on competition in “innovation” markets. These, generally, are markets in which the parties may not currently offer products or services, but for which the parties may currently be developing competing technologies for the future. Traditional measures of market concentration are difficult, if not impossible, to apply to innovation markets, although the Guidelines did provide a safe harbor for transactions leaving at least five competing innovators in the market.

Following the issuance of the Guidelines, both agencies during the Clinton Administration sought divestitures or compulsory licensing remedies for transactions deemed to have anticompetitive effects in innovation markets. Current leaders at both the FTC and the Antitrust Division have announced plans to reinvigorate antitrust scrutiny of innovation markets.

High-Tech, the Internet, Products with Network Effects and Pharmaceuticals

While no one can predict with certainty which industries may be most vulnerable to the new Administration’s antitrust enforcement efforts, in a variety of speeches and announcements the agencies’ leaders have identified certain industries or types of markets as deserving close antitrust scrutiny. These include the high-technology industry and the Internet, in which Ms. Varney developed an expertise both in private practice and in her time at the Federal Trade Commission, and which may be particularly susceptible to the vertical-effects and innovation-markets theories outlined above.

Similarly, products with potential to create network effects are likely to attract the agencies’ attention (network effects occur when the value of a product or service to any one of its users increases as the number of total users increases—the telephone being an early example, and a PC operating system, an Internet search engine or a securities trading platform being more recent ones). Because these industries and markets are likely to affect US consumers directly, they are also likely to be the focus of FTC attention. Both the Antitrust Division and, particularly, the FTC have vowed to be vigilant about maintaining vigorous competition in the pharmaceutical industry, where innovation and vertical issues may also become central.

Nonreportable Transactions Not Immunized from Scrutiny

The vast majority of federal agency challenges to mergers and acquisitions on competition grounds occur in the regulatory process governed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The fact that a transaction is not reportable under the HSR Act, however, does not immunize it from antitrust scrutiny. The Act prevents a transaction meeting the relevant thresholds from closing unless certain notice and waiting period requirements have been satisfied, but the transaction’s legality under the antitrust laws is entirely independent from its reportability.

In the past six months or so, the FTC has challenged two transactions that were not reportable under the HSR Act. The challenges came despite the fact that both transactions had already closed. Please see our Antitrust Alert, “FTC Files Complaint Against Ovation.” In a concurring statement to one of the challenges, now-Chairman Jon Leibowitz urged more frequent use of disgorgement of “ill-gotten gains” as an antitrust remedy. This signals not only novel thinking about merger remedies, but also a willingness to pursue consummated transactions, in which the post-merger entity has had an opportunity to derive financial gain from an allegedly unlawful transaction.

As a hedge against such consequences, parties would be well advised to analyze the permissibility of a contemplated transaction under the antitrust laws whether or not the transaction is reportable under the HSR Act. Parties to nonreportable transactions similarly would be well advised to consult antitrust counsel when considering post-closing marketing and pricing strategies, because these may influence an agency’s decision to challenge the transaction retroactively.

Novel Legal Theories

In a concurrence to one of the above-referenced post-closing challenges, FTC Commissioner J. Thomas Rosch stated that, in addition to the acquisition under scrutiny, he would also have challenged the buyer’s earlier acquisition of a competing product. Commissioner Rosch would have done so despite the fact that, admittedly, the earlier acquisition did not raise any horizontal or vertical issues because the buyer was a new entrant into the relevant product market and was not a customer or supplier of any competitor in that market. Commissioner Rosch argued that the earlier acquisition was nevertheless unlawful because, unlike the seller in that transaction, the buyer had an incentive to raise prices after the acquisition. See “FTC Files Complaint Against Ovation.” 

A federal agency’s reliance on the theory that a shift in marketplace incentives is sufficient to invalidate a merger would mark a significant departure from traditional US merger enforcement. Commissioner Rosch’s influential status at the FTC suggests that the agency may now be more willing to explore such novel theories than in the past. Notably, unlike the Antitrust Division, the FTC is not limited to traditional antitrust theories when challenging mergers and acquisitions. The FTC must bring cases under section 5 of the FTC Act, which prohibits “unfair methods of competition” and is recognized as covering a broader range of conduct than traditional antitrust law. Thus, the agency’s statutory mandate may give the FTC more latitude to pursue novel theories than the Antitrust Division.

Economic Woes Will Not Relax Enforcement

In the early months of the Obama Administration, some argued that the exceptionally dire economic climate should motivate the federal agencies to relax merger enforcement in order to spur economic activity. Soon after taking office, however, both Ms. Varney and Chairman Leibowitz emphasized that they do not believe that lax antitrust enforcement would help the economy. To the contrary, each has reiterated the belief that vigorous enforcement would benefit competition and the economy in the long run. Traditional antitrust doctrine includes a narrowly construed “failing firm” defense to a merger challenge, but the current Administration is unlikely to be receptive to pleas to expand that doctrine in these times of economic difficulty.

Increased Agency Cooperation, Domestic and International

As part of the effort to step up antitrust enforcement, both agencies have vowed to increase the extent to which they cooperate with each other and with competition authorities outside the US. On the one hand, this may lead to greater enforcement capabilities as information-sharing among agencies across international borders enhances each agency’s knowledge base and toolkit. Because international cooperation has been steadily on the rise in recent years, however, the new Administration is unlikely to bring significant new developments on that score.

The Antitrust Division and FTC, however, have also vowed to make the domestic merger review process more efficient by improving coordination of that process between them. These efforts could translate into faster processing under the HSR Act, greater transparency and predictability for the procedures by which particular mergers are assigned to one agency or the other and greater uniformity on the procedural and substantive standards applied by each agency to merger reviews.