In an Agencies Roundup post several weeks ago, I revisited the Federal Trade Commission’s (FTC) newly adopted—and not-yet-effective—rule barring the use of noncompete agreements across much of the U.S. economy. It was not my first such post (my ninth, if I’ve counted correctly, and if readers will forgo armchair diagnoses of monomania). The last time around, I noted consolidated challenges to the rule being heard in the U.S. District Court for the Northern District of Texas, where Judge Ada Brown has said that he will issue a decision on the motion for a stay of the rule’s effective date by July 3.

Read the full piece here.

ICLE Chief Economist Brian Albrecht’s debate with Evan Starr on the Federal Trade Commission’s ban of noncompete agreements was featured in an episode of the American Bar Association Antitrust Law Section’s Our Curious Amalgam podcast. Audio of the full episode is embedded below.

 

As former antitrust enforcers and alumni of the Federal Trade Commission (“FTC”), we are pleased to submit these comments to the FTC and Department of Justice’s Antitrust Division (“DOJ”) (collectively, “Agencies”) in response to your Request for Information on Corporate Consolidation Through Serial Acquisitions and Roll-Up Strategies (“RFI”).  We have devoted significant portions of our careers to protecting consumers and competition and we continue to care deeply about the Agencies and their mission.  Moreover, we agree that mergers and acquisitions merit further study and applaud the Agencies for tackling these issues.

We write to suggest several ways in which the Agencies might adjust and supplement the RFI to build confidence in its objectivity and comprehensiveness.  As written, the RFI creates an appearance that the Agencies are mainly seeking negative information about acquisitions, rather than seeking to learn about their benefits to competition as well as their potential harms, and that the Agencies are seeking information about ideological topics untethered from their mission.  Such an approach could distort the Agencies’ perspective, degrade public confidence, and ultimately lead the Agencies to challenge pro-competitive or competitively neutral acquisitions.

I. The Agencies Should Issue a Supplemental RFI to Inquire into the Pro-Competitive Aspects of Serial Acquisitions

As they have in the past, the Agencies should examine mergers and acquisitions in an objective fashion.  In recent years, for example, the Agencies themselves have recognized that mergers “are one means by which firms can improve their ability to compete.”[1]  In one paper, from 2020, the FTC’s staff examined a large potash merger and concluded that the “evidence does not indicate that the firms were able to impose an anticompetitive price increase in the wake of the merger.”[2]  Another retrospective from 2009, into hospital mergers, found mixed results; one merger resulted in higher prices, the other did not.[3]  Finally, a retrospective into grocery mergers found that “mergers in highly concentrated markets are most frequently associated with price increases, while mergers in less concentrated markets are most often associated with price decreases.”[4]  In each instance, the Agencies examined the markets and acquisitions objectively.

The current RFI, however, suggests that the Agencies have already concluded that “serial acquisitions” harm competition.  Although several questions take a neutral approach, many of them solicit negative information about acquisitions, and not one asks about any benefits. For example, Question 2(c) asks whether serial acquisitions encourage “actual or attempted coordination or collusion between competitors” and Question 3 posits nine subparts about ways in which an acquirer might harm competition, including tying and refusals to deal.  By contrast, the RFI includes no questions that solicit information about possible pro-competitive benefits from acquisitions; at most, Question 4 asks the public to identify “claimed” business objectives and whether they came to pass.

Accordingly, we suggest that the Agencies supplement the RFI with additional questions that solicit information about the benefits of serial acquisitions.  Below is proposed Question 6, mirroring existing Question 3:

Proposed Question 6

Serial Acquisition Business Practices (Part 2): If you identified serial acquisitions in the preceding questions, please share whether the acquisitions affected the relevant market in in any of the following ways:

1. A reduction in price for consumers, either by the acquirer, its competitors, or both;

2. An increase in output, either by the acquirer, its competitors, or both;

3. An increase in product offerings, including new varieties of products or products offered at different price points, either from the acquirer, its competitors, or both;

4. An increase in product quality, either from the acquirer, its competitors, or both;

5. An increase in investment, financing, or innovation, as measured by patent filings or any other metric, either by the acquirer, its competitors, or both;

6. An increase in efficiency (e.g., lower unit costs), either by the acquirer, its competitors, or both;

7. Any other market effects that show the benefits of the acquisitions; and

8. Any other market effects that show that the acquisitions were competitively neutral in terms of their effect on price, quality, variety, investment, or any other metric.

At a minimum, the addition of these questions, or something similar, would build public confidence that the Agencies are approaching the topic in an objective manner.

Moreover, the answers also could yield valuable, current information about the benefits of acquisitions — and thereby improve the Agencies’ ability to develop better enforcement actions.  In the past, of course, the Agencies have stated that “the vast majority of mergers are either procompetitive and enhance consumer welfare or are competitively benign”[5] and that “[m]ergers are one means by which firms can improve their ability to compete.”[6]  In a policy statement from just a few years ago, the FTC agreed that mergers can promote innovation:

[I]n dynamic sectors characterized by high R&D costs, firms with broad scale and scope may have unique incentives and capabilities to invest in innovation.  For example, where a firm can exploit synergies across product lines or earn returns on research and development projects across multiple geographies, it may have greater incentives to make investments in such projects than firms with more limited operations.[7]

Many other studies agree that mergers can promote competition and innovation.  The Antitrust Modernization Commission,[8] antitrust treatises,[9] and a recent, comprehensive literature survey[10] all have found that mergers can and do advance procompetitive business objectives.  Another recent study found that mergers resulted in more patent applications and investment in research and development. [11]  In the biopharmaceutical industry, for instance, the Congressional Budget Office agreed that “The acquisition of a small company by a larger one can create efficiencies that might increase the combined value of the firms by allowing drug companies of different sizes … to specialize in activities in which they have a comparative advantage.”[12]  Numerous recent court decisions also find that mergers can create integration efficiencies that ultimately promote competition and benefit consumers.[13]

II. The Agencies Should Explain or Withdraw Certain Questions that Create an Appearance of Focusing on Ideological Issues Unrelated to Their Statutory Mission

Within the RFI, certain questions may create an appearance that the Agencies are interested in ideological issues unrelated to their statutory mission.  For example, Question 2(d) and its subparts inquire into labor topics unrelated to the rare phenomenon of a labor monopsony, such as “Have workers been reclassified (i.e., from employees to independent contractors) or outsourced to/from third-party providers?” and questions about “work conditions” and “employment stability.”  It is not obvious how any of these questions relate to the Agencies’ statutory mission or historical practice. The RFI cites no statutory provisions or cases, and we are unaware of any, in which a court has found that issues of worker classification, work conditions, or employment stability had any relevance to a merger analysis.

Similarly, Question 5 asks a series of questions about private equity and the role that investors play in managing an acquired company.  Again, the RFI cites no statutory provisions or cases, and we are unaware of any, in which a court has found that the identity of a purchaser as a private equity firm has any relevance to a merger analysis, except to the extent that the firm may own other companies in the same market.

For these reasons, we recommend that the Agencies withdraw these questions or explain their relevance to the antitrust laws and this inquiry.  By narrowing the RFI to topics that relate directly to the antitrust laws and merger analysis, and that have grounding in the statutory language and historical precedent, the Agencies would gather more useful information and would increase public confidence in the necessity and utility of this inquiry.

***

As former enforcers, we strongly support the Agencies’ mission and the importance of vigorous enforcement.  We hope that our suggestions will help the Agencies to improve the quality and utility of the information that they receive in response to this RFI.

Thank you for your attention to these comments.

[1] OECD, Conglomerate Effects of Mergers – Note by the United States to the Organisation for Economic Co-operation and Development (June 4, 2020) at 5, https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf.

[2] See Kreisle, Bureau of Economics, Price Effects from the Merger of Agricultural Fertilizer Manufacturers Agrium and PotashCorp (July 2020), https://www.ftc.gov/system/files/documents/reports/price-effects-merger-agricultural-fertilizer-manufacturers-agrium-potashcorp/working_paper_345.pdf.

[3] See Haas-Wilson and Garmon, Bureau of Economics, Two Hospital Mergers on Chicago’s North Shore: A Retrospective Study (Jan. 2009), at https://www.ftc.gov/sites/default/files/documents/reports/two-hospital-mergers-chicago%E2%80%99s-north-shore-retrospective-study/wp294_0.pdf.

[4] See Hosken et al, Bureau of Economics, Do Retail Mergers Affect Competition? Evidence from Grocery Retailing (Dec. 2012), https://www.ftc.gov/sites/default/files/documents/reports/do-retail-mergers-affect-competition%C2%A0-evidence-grocery-retailing/wp313.pdf.

[5] Statement of Ass’t Att’y Gen. Christine Varney, Merger Guidelines Workshops, Third Annual Georgetown Law Global Antitrust Enforcement Symposium (Sept. 22, 2009).

[6] OECD, Conglomerate Effects of Mergers – Note by the United States to the Organisation for Economic Co-operation and Development (June 4, 2020) at 5, https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-conglomerate_mergers_us_submission.pdf.

[7] Id. at 8.

[8] E.g., Antitrust Modernization Commission Report 57-60, at https://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.

[9] 4A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 10A-1 (5th ed. 2021).

[10] U.S. Chamber, Evidence of Efficiencies in Consummated Mergers (June 1, 2023), at https://www.uschamber.com/assets/documents/20230601-Merger-Efficiencies-White-Paper.pdf.

[11] U.S. Chamber, Mergers, Industries, and Innovation: Evidence from R&D Expenditures and Patent Applications (Feb. 2023), at https://www.uschamber.com/finance/antitrust/mergers-industries-and-innovation-evidence-from-r-d-expenditure-and-patent-applications.

[12]CBO, Research and Development in the Pharmaceutical Industry (Apr. 2021), at https://www.cbo.gov/publication/57126 . .

[13] Microsoft, 2023 WL 4443412, at *11 (citations omitted).  See also U.S. v. Booz Allen Hamilton, Case 1:22-cv-01603-CCB, at 8 n.13 (D. Md. Oct. 17, 2022); Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 840 (D.C. Cir. 2006) (“[V]ertical integration creates efficiencies for consumers”).

In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the widespread contrary arguments against the ban.

On the Yale Journal of Regulation Notice and Comment Blog, Dan Crane recently shared the results of an informal survey of antitrust and administrative law professors. Of his 17 respondents, “Only one person predicted that the rule will be upheld.” Both the Wall Street Journal and Washington Post editorial boards have argued that the FTC lacks congressional authority to issue the rule. While it is risky to draw inference from silence, it seems notable that the New York Times editorial board, a long-time advocate for FTC Chair Lina Khan and early supporter of the noncompete rule, has not opined. A recent Congressional Research Service report characterizes the FTC’s legal authority to issue such rules as “unsettled.”

Read the full piece here.

ICLE Chief Economist Brian Albrecht was a participant in a virtual debate hosted by the American Bar Association’s Antitrust Law Section on the economics of noncompete agreements, and whether the evidence justifies the Federal Trade Commission’s sweeping ban. Video of the full event is embedded below.

ICLE Chief Economist Brian Albrecht was a guest on the Future of Freedom podcast to discuss the Federal Trade Commission’s (FTC) recent decision to ban nearly all noncompete agreements in employment contracts. Audio of the full episode is embedded below.

I’ll start with a bit of half-empty, half-full (and very partial) resolution in Federal Trade Commission (FTC) publicity.

Losing by Winning or Just Losing or . . . ?

A couple of weeks ago, the Wall Street Journal editorial board announced that:

“Another Lina Khan Theory Loses in Court”

And that was right, up to a point (leaving aside the question of theory ownership). The FTC had suffered a setback in its antitrust case against Welsh, Carson, Anderson & Stowe and U.S. Anesthesia Partners, in which the agency alleged a “multi-year anticompetitive scheme to consolidate anesthesia practices in Texas, drive up the price of anesthesia services provided to Texas patients, and increase their own profits.”

Read the full piece here.

I. Introduction

From the outset of the Biden administration, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) indicated their intention to step up merger enforcement. For example, the FTC declared: “Too many deals that should have died in the boardroom get proposed because merging parties are willing to take the risk that they can ‘get their deal done’ . . . .”[1]

Late last year, the FTC and the DOJ released new merger guidelines that lowered the bar for challenging mergers,[2] while abandoning principles that had made the merger review process reasonably predictable.[3] The FTC also proposed new regulations that would greatly increase the burden of merger notification under the Hart-Scott-Rodino Act (“HSR”). Pending changes in the regulations would “greatly increase the time and resources required.”[4]

We use a model of costly and uncertain merger review to identify likely impacts of the recent and ongoing policy changes by the FTC and the DOJ. Merging parties in our model decide whether to begin the review process and, if they do, whether to go to court if their merger is challenged. In making both decisions, the merging parties maximize expected profits in the face of uncertainty about what actions the agency or court will take.

As the FTC observed, merging parties can bet on longshots, proposing mergers they think are likely to be challenged. A longshot can be a good bet if merger profitability is sufficiently great. But it is equally true that merging parties can pass on profitable mergers that they think are likely to go unchallenged. The cost of the review process can be too great with a non-trivial probability of a challenge and low merger profitability.

The FTC and the DOJ indicated that a significant number of anticompetitive mergers have slipped through the review process, and we reflect that in a base case. We then incorporate policy changes that the agencies have implemented or have proposed. These policy changes (1) increase the likelihood of a merger challenge, (2) increase uncertainty associated with challenge decisions, and (3) increase the cost of merger notification.

II. The Model

The model begins with a pool of potential mergers that require notification and that are neither obviously anticompetitive nor obviously procompetitive. These mergers are close enough to the margin that potential merging firms are uncertain about the decision the agency or court would make. The pool is characterized by a joint distribution of competitive impact and merger profit as reckoned by the merging firms.[5] We assume that they are negatively related, so mergers with more adverse impact tend to be more profitable.[6]

Merging parties maximize expected incremental profit from merging by making two decisions — whether to propose the merger, and whether to go to court if the merger is challenged. The parties know the profitability of the merger and the costs of going through each stage of the regulatory process. The merging parties assess the competitive impact of the merger as x. A positive x signifies a “good” merger, and a negative value signifies a “bad” merger.

The agency or court decides in favor of the merging parties if, and only if, x + ε > t. The merging parties know x and t, but only the enforcement agency or court knows ε. The merging parties treat ε as noise, a random variable drawn from a known distribution.

The model has five decision points. First, potential merging parties determine whether to notify the merger and begin the review process. Second, the enforcement agency decides whether to initiate a substantial investigation by making a second request for information under the provisions of HSR.

Third, the agency decides whether to challenge the merger after investigation. Fourth, the parties decide whether to abandon the merger or allow a court to decide its fate. In the past, most merger challenges were resolved by agreed-upon remedies, but the U.S. agencies now prefer to litigate.[7] Finally, a court decides the legality of the merger after considering the evidence.

The model abstracts from real-world complexity, especially the varying terms of merger agreements in which the merging parties pledge to use their best efforts to get the merger consummated. Because many mergers are abandoned when challenged, the model allows that. The model does not allow abandonment of a proposed merger as an alternative to responding to a second request because merger agreements typically do not allow that.

Merging firms know a proposed merger’s profit, the cost of each stage of the merger review process, the decision thresholds employed by the agencies and courts, and the distribution of ε. Thus, they can look ahead to the probabilities of favorable decisions at each future stage and reason back to determine whether, at the first and fourth decision points, they do better by abandoning the merger or moving forward in the merger review process.

The pool of potential mergers is generated by essentially the same process. Every possible merger is evaluated both as to profitability and as to the probabilities of favorable outcomes in the regulatory process. The parties then settle on best-choice mergers. The least profitable of the best-choice mergers are deterred by the costs of the regulatory process, perhaps even without being notified under HSR.

III. Calibration of the Base Case

The cost of HSR notification has been estimated at $100,000;[8] a rough estimate for second-request compliance is $1 million; and a rough estimate for trial cost is $5 million. To calibrate the model, we must scale these costs to merger profitability. With the most profitable mergers excluded from our pool of marginal mergers, we arbitrarily assume that the maximum profit from merging is $10 million. With profit scaled to the interval [0, 1], this yields costs of 0.01, 0.1, and 0.5 for HSR notification, second-request compliance, and trial.

To reflect the fact that antitrust law prohibits only mergers that substantially lessen competition, t should be slightly negative at the trial stage, and we assume that the agency attempts to mimic the court in making challenge decisions. And t should be substantially positive at the second-request stage to avoid missing anticompetitive mergers. Thus, t is set at –0.1 for the trial and challenge decisions and 0.3 for the second-request decision.

The results are not sensitive to the distribution of ε, and we assume a rather flat distribution.[9] Because the merging parties learn about the agency’s thinking from the review process, we assume that the standard deviation of ε at the challenge stage is half that at the second-request and trial stages.

As can be seen in Table 1, the foregoing assumptions make the base case consistent with the belief currently held by the FTC and the DOJ that a significant number of anticompetitive mergers were being consummated. Of the mergers evaluated as bad by the merging firms, 19.3 percent are consummated. Deterrence does work tolerably well; 61.4 percent of the bad mergers are never proposed, and 19.0 percent are abandoned when challenged.

TABLE 1: Base Case Outcomes

IV. The Impact of the New Policies

The U.S. enforcement agencies have adopted an aggressive enforcement posture, which we model as increasing the challenge decision threshold from –0.1 to 0.2. Table 2 presents the distribution of outcomes with just this change in policy.

A more aggressive challenge posture greatly enhances the deterrence of bad mergers. The fraction of bad mergers nonetheless consummated decreases from 19.3 percent all the way down to 2.2 percent. But the fraction of good mergers that are not consummated increases from 9.2 to 27.4 percent. In a merger review process with costs and noise, tightening enforcement necessarily deters both good and bad mergers. An aggressive challenge posture also proves costly in that the number of trials increases by more than 500 percent.

TABLE 2: Outcomes with an Aggressive Challenge Policy

In our view, the new Merger Guidelines increase uncertainty about which mergers are challenged, which is modeled as doubling the standard deviation of the noise at the challenge stage. Table 3 presents the distribution of outcomes under the new Merger Guidelines but no change in enforcement. Increasing the noisiness of merger challenge decisions undermines deterrence: The fraction of bad mergers deterred or enjoined decreases from 80.7 to 75.4 percent.

TABLE 3: Outcomes with More Noise in Challenge Decisions

The FTC proposes far a more onerous merger notification process, which the U.S. Chamber of Commerce estimated will quadruple the cost.[10] Factoring in some additional delay costs because the more onerous process will take longer, we assume that the cost quintuples. Table 4 presents the distribution of outcomes with the higher notification cost, with no other policy changes. The deterrence effect is clear. The fraction of the good mergers never proposed increases from 6.9 to 11.1 percent.

TABLE 4: Outcomes with Higher Notification Cost

The impact of all three policy changes together is shown in Table 5. The three policy changes substantially reduce the fraction of bad mergers consummated, from 19.3 percent down to 4.4 percent, but an even greater reduction is achieved by more aggressive enforcement alone. Increased uncertainty associated with merger challenges makes some longshots attractive, and some pay off. More aggressive enforcement alone also deters only 9.2 percent of the good mergers, whereas all three policy changes deters 30.4 percent.

TABLE 5: Outcomes with All Policy Changes

V. Conclusion

While the merger policy changes of the FTC and the DOJ can be expected to deter many anticompetitive mergers, the cost are likely to be steep. Of the additional mergers deterred, most are viewed as procompetitive by the merging parties. In 2021, the two Republican FTC commissioners argued that the Democrat majority was using “bureaucratic red tape to weigh down all” mergers.[11] Had they not resigned, they likely would made similar comments when new merger guidelines were released and new HSR regulations were proposed. The model explains why they would have been right.

[1] Fed. Trade Comm’n, Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021).

[2] Gregory J. Werden, The Risk Concept in the New Merger Guidelines: Treating a Proposed Merger Like Schrödinger’s Cat, Antitrust, Spring 2024, at 30.

[3] Gregory J. Werden, Market Delineation under the New Merger Guidelines: Gerrymandering Redux, in The 2023 U.S. Merger Guidelines: A Review 173 (2024).

[4] Richard B. Brosnick & Carlos M. de la Cruz III, First Major Overhaul of HSR Act Will Greatly Increase Time and Resources Required to Complete HSR Filing, Ackerman Practice Update (Jan. 10, 2024).

[5] To generate a pool of marginal mergers, the distribution of impact and profit is truncated by confining impact to the interval [–0.5, 0.5] and profit to the interval [0, 1].

[6] The results presented assume a truncated normal distribution and are insensitive to its parameters. The results presented assume a correlation of – 0.5 between impact and profit before truncation and a standard deviation of 0.5 before truncation for both impact and profit. These standard deviations make the marginal distributions rather flat, so truncation lops off fat tails.

[7] See Leon Greenfield et al. Fix-It-First: Navigating a Seismic Shift in US Antitrust Agency Approaches to Merger Remedies, Wilmer Hale Client Alert (Apr. 20, 2023).

[8] U.S. Chamber of Commerce, Comments on HSR Proposed Rulemaking (Sept. 27, 2023).

[9] A completely flat distribution is called a uniform distribution. We instead assume a normal distribution but with a standard deviation potentially as high that with a uniform distribution.

[10] U.S. Chamber of Commerce, Comments on HSR Proposed Rulemaking (Sept. 27, 2023).

[11] Christine S. Wilson & Noah Joshua Philips, Dissenting Statement Regarding the Statement of the Commission on the Prior Approval Provisions in Merger Orders (Oct. 29, 2021).

The Federal Trade Commission (FTC) and Congress are showing renewed interest in a Great Depression-era law, the Robinson-Patman Act, that discourages sales discounts. This is bad news for hard-strapped American consumers, who have had to cope with prices that have risen more than 20% since February 2020. As such, reinvigorated enforcement of the RPA, a statute that was designed to protect less-efficient small businesses from vigorous competition, appears hard to justify. The FTC may wish to consider the major downsides of RPA prosecutions before it takes action.

Read the full piece here.