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When my family and I moved to rural America from Armenia in the mid-1990s, we found that it stood true to its reputation as the land of opportunity and abundance. Work was readily available, and my parents also found opportunities to pursue other sources of income through self-employment, contracting and starting their own businesses.

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Abstract

Physician non-compete agreements may have significant competitive implications, but they are treated variously under the law on a state-by-state basis. Reviewing the relevant law and the economic literature cannot identify with confidence the net effects of such agreements on either physicians or health care delivery with any generality. In addition to identifying future research projects to inform policy, it is argued that the antitrust “rule of reason” provides a useful framework with which to evaluate such agreements in specific health care markets and, potentially, to address those agreements most likely to do significant damage to health care competition and consumer welfare.

ICLE Senior Scholar Eric Fruits joined Supermarket News‘ SN Off the Shelf podcast to discuss the proposed merger of Kroger and Albertsons and the likelihood that the Federal Trade Commission will attempt to block the deal. Video of the full episode is embedded below.

INTEREST OF AMICI CURIAE^[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy.  ICLE promotes the use of law and economics methodologies to inform public policy debates and has longstanding expertise in antitrust law.  ICLE has an interest in ensuring that antitrust promotes the public interest by remaining grounded in sensible legal rules informed by sound economic analysis.

Amici also include fifteen scholars of antitrust, law, and economics at leading universities and research institutions across the United States.  Their names, titles, and academic affiliations are listed in Appendix A.  All have longstanding expertise in antitrust law and economics.

Amici respectfully submit that this brief will aid the Court in reviewing the order of dismissal by explaining that the district court properly held, on the pleadings, that the restraint at issue is ancillary and thus that per se treatment is inappropriate.  The restraint furthers Saks’s procompetitive goal of creating a strong and stable luxury brand through collaboration with the Brand Defendants.  Treating such a restraint as per se unlawful, as Plaintiffs ask this Court to do, would stifle the type of legitimate cooperation that facilitates output and would ultimately harm consumers.  Amici also explain why Plaintiffs and several of their amici, including the United States, make foundational errors of law and economics in arguing that ancillarity is an affirmative defense that may not be resolved on the pleadings.

INTRODUCTION AND SUMMARY OF ARGUMENT

Saks and the Brand Defendants are well-known luxury retail brands.  As luxury retailers, their business models depend on developing and maintaining a distinct, exclusive brand to differentiate their products from the lower-priced goods sold by mass-market retailers.  A primary way in which they define and protect their brands is by cultivating a premium shopping experience for customers that promotes “an atmosphere of exclusivity and opulence surrounding . . . luxury products.”  Compl. ¶ 33.  To that end, Saks and the Brand Defendants have for years collaborated through “store-within-a-store” arrangements: Saks allows the Brand Defendants to set up boutiques and concessions within Saks’s stores, which in turn helps all involved grow their customer base, augment their luxury brand status, and sell more products.  This “store-within-a-store” model not only expands customer product choice within a single retail establishment, resulting in a better shopping experience, but also creates additional jobs at Brand Defendants’ concessions in Saks’s stores.

Plaintiffs allege that the Brand Defendants agree, as part of their respective partnerships with Saks, not to hire Saks’s own luxury retail employees without the approval of a Saks manager or until six months after the employee leaves Saks.  Plaintiffs argue that these alleged no-hire provisions violate Section 1 of the Sherman Act.  The district court disagreed, concluding that the per se rule could not apply because the no-hire provisions were “ancillary” to a broader procompetitive collaboration between Saks and each of the Brand Defendants, and that Plaintiffs failed to plead a plausible claim under the rule of reason.  That decision is correct and should be affirmed.

First, the alleged no-hire agreements are ancillary to the arrangements between Saks and the Brand Defendants.  Saks invests heavily in its employees.  But without the no-hire provision, Saks would stand to lose those investments as the Brand Defendants could take advantage of their co-location within Saks’s stores to hire away Saks’s best workers, thereby free-riding on Saks’s training.  The alleged no-hire provisions eliminate that powerful economic disincentive and thereby facilitate brand-enhancing, procompetitive store-within-a-store arrangements.  That is all that is required for the agreements to be “ancillary.”  Plaintiffs’ (and their amici’s) insistence on a rigid two-prong test for ancillarity is not only at odds with economic logic but also out of step with this Circuit’s precedent—and, in any event, would not change the result here.

Second, the district court properly resolved ancillarity on the pleadings.  Ancillarity is a threshold inquiry decided at the earliest possible stage of a Section 1 case to determine whether the alleged facts justify departing from the default rule of reason standard.  That is precisely what the district court did here: based on Plaintiffs’ own allegations—including those regarding “a continual risk that the Brand Defendants would use their concessions in Saks stores to recruit employees” (Op. 32)—the district court ruled that the alleged restraints were ancillary and thus incompatible with per se condemnation.  Contrary to Plaintiffs’ argument, the district court did not improperly resolve any factual inferences.  The court considered the Complaint in its entirety and determined that Plaintiffs did not state a plausible per se claim, just as it was supposed to do before requiring the enormous expense that would result should this kind of “potentially massive factual controversy . . . proceed.”  Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558 (2007).

ARGUMENT

I.              The Alleged Restraints Are Ancillary To Procompetitive Collaboration

The per se rule is reserved for the most pernicious and anticompetitive restraints.  Before condemning a restraint as per se unlawful, therefore, courts must “have amassed considerable experience with the type of restraint at issue” and be able to “predict with confidence that it would be invalidated in all or almost all instances.”  NCAA v. Alston, 141 S. Ct. 2141, 2156 (2021).  Reserving per se condemnation for that small category of restraints ensures that the antitrust laws do not inadvertently chill procompetitive conduct.  Ancillary restraints do not fit the per se mold because they have a “reasonable procompetitive justification, related to the efficiency-enhancing purposes of [a] joint venture.”  MLB Props., Inc. v. Salvino, Inc., 542 F.3d 290, 339 (2d Cir. 2008) (Sotomayor, J., concurring in the judgment).

Here, any purported no-hire agreements form a key plank of the broader leasing, concession, and distribution arrangements between Saks and the Brand Defendants.  Op. 30-32.  It is beyond dispute that these agreements are procompetitive.  They not only enhance Saks’s and the Brand Defendants’ ability to vigorously compete against other retailers and luxury brands (i.e., increasing output in markets for luxury products) but also create jobs (i.e., increase output in labor markets).  That places the restraint far beyond the per se rule, MLB, 542 F.3d at 339 (Sotomayor, J., concurring in the judgment); only the rule of reason can be used to determine whether the restraint “stimulat[es] competition that [is] in the consumer’s best interest” or has “anticompetitive effect[s] that are harmful to the consumer.”  Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007).[2]

                  A.            The Alleged No-Hire Agreements Are Facially Procompetitive

A restraint is ancillary where it “could have a procompetitive impact related to the efficiency-enhancing purposes” of a cooperative venture.  MLB, 542 F.3d at 340 (Sotomayor, J., concurring in the judgment); see Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185, 188-89 (7th Cir. 1985) (restraint is ancillary if it “may contribute to the success of a cooperative venture that promises greater productivity and output”).  Where a restraint is deemed “ancillary to the legitimate and competitive purposes” of a venture, the restraint is presumptively “valid” and must be assessed under the rule of reason.  Texaco Inc. v. Dagher, 547 U.S. 1, 7 (2006).  There is a clear procompetitive rationale for the collaboration arrangement between Saks and the Brand Defendants: the arrangement allows customers to expand their choice in one-stop shopping, and the retailers to offer a wider range of high-end luxury goods.  And it creates a halo effect across the store-within-a-store through proximity and availability of multiple luxury brands.  All of this in turn promotes and enhances the luxury status of Saks and the Brand Defendants alike.  The alleged no-hire restraints enable and are ancillary to that larger endeavor.

As Plaintiffs allege, Defendants each derive much of their respective brand value from their ability to project a “luxury brand[] aura[],” which both entices customers and creates demand for Defendants’ goods “over other, lower-priced goods.”  Compl. ¶¶ 23, 26, 28.  For this reason, Defendants “go[] to great lengths to market” and otherwise “maintain[] their luxury brands’ auras.”  Id. ¶¶ 23, 26.  They “accomplish this feat,” in part, by ensuring that their brick-and-mortar stores provide a “luxury shopping experience[].”  Id. ¶ 27.  Defendants do that with sophisticated “décor and design” and premium “customer service” from skilled employees “who reflect their respective brand images and cultures.”  Id. ¶¶ 27-29.

Store-within-a-store arrangements further enhance the luxury brand shopping experience for both consumers and retailers.  In these arrangements, Saks allows the Brand Defendants to set up mini-stores or concessions within Saks’s large stores.  These arrangements, similar to those used by “[a]lmost all department store chains,” Kinshuk Jerath & Z. John Zhang, Store Within a Store, 47 J. Mktg. Rsch. 748, 748 (2010), are mutually beneficial and procompetitive.  The presence of the popular luxury brands helps draw brand-loyal customers into Saks, thus increasing foot traffic and broadening Saks’s customer reach—directly boosting sales output.  Compl. ¶ 28; see Jerath & Zhang, supra, at 756-57 (“The introduction of new products through stores within a store can bring new consumers to the store who want to purchase the focal product and also purchase other products.”).  The Brand Defendants benefit from access to Saks’s considerable customer base, Compl. ¶ 28, and their presence also makes possible cross-brand marketing opportunities.  Consumers benefit as well: they have access to a wider array of products, and have it all at hand in a single store.  And they have the benefit of workers highly trained with respect to the luxury goods they sell.  Id. ¶¶ 27-29, 32-34.

But there is a significant practical impediment to allowing stores-within-stores: employee raiding.  Saks invests heavily in its luxury retail employees, providing them with the “extensive training on service, selling, and product-knowledge” required to ensure that they are “knowledgeable about the particular products” for sale “as well as current trends.”  Compl. ¶¶ 32, 34.  Permitting the Brand Defendants to operate inside of Saks stores without restriction would put that investment in immediate danger.  The Brand Defendants would have every incentive to free-ride off of Saks’s investment, observing and hiring Saks’s highly trained luxury retail employees, thereby “tak[ing] advantage of the efforts [Saks] has expended in soliciting, interviewing, and training skilled labor” and “simultaneously inflicting a cost on [Saks] by removing an employee on whom [Saks] may depend.”  Id. ¶ 62.  This risk—and the mistrust it can create—disincentivizes the formation and maintenance of store-within-a-store agreements.

No-hire restraints solve this problem.  By imposing a narrow, time-limited, waivable restriction on the Brand Defendants’ ability to hire Saks employees, Compl. ¶ 92, the alleged no-hire agreements remove a roadblock from the “cooperation underlying the restraint,” which “has the potential to create the efficient production that consumers value,” Premier Elec. Constr. Co. v. Nat’l Elec. Contractors Ass’n, Inc., 814 F.2d 358, 370 (7th Cir. 1987).  In particular, the alleged no-hire restrictions help prevent free-riding by Brand Defendants on Saks’s training.  The agreement encourages Saks to invest in employee development, including by providing specific training on Brand Defendants’ products, and that investment enhances Saks’s ability to sell products from and compete against Brand Defendants’ stand-alone brick and mortar and online stores.  See, e.g., Gregory J. Werden, The Ancillary Restraints Doctrine After Dagher, 8 Sedona Conf. J. 17, 21 (2007).  “[W]ith the restraint,” Saks may “collaborate” with the Brand Defendants “for the benefit of its [customers] without ‘cutting [its] own throat.’”  Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., 9 F.4th 1102, 1110-11 (9th Cir. 2021) (quoting Polk Bros., 776 F.2d at 189).  As a result, the alleged no-hire restraints are “at least potentially reasonably ancillary to joint, efficiency-creating economic activities.”  Phillips v. Vandygriff, 711 F.2d 1217, 1229 (5th Cir. 1983); cf. Eichorn v. AT&T Corp., 248 F.3d 131, 146-47 (3d Cir. 2001) (“As an ancillary covenant not to compete, the no-hire agreement was reasonable in its restrictions on the plaintiffs’ ability to seek employment elsewhere.”).

The contrary conclusion—that the alleged no-hire restraints are not ancillary—risks stifling competition across the retail economy.  No-hire agreements are merely one of the many ancillary contractual restraints commonly used in store-within-a-store partnerships (exemplified by, for instance, the well-known collaborations between Target and Starbucks or Best Buy and Samsung) to preserve brand integrity, guard against misuse of store space, and safeguard investments in specialized training.  By solving for risks such as employee raiding or damage to property, these restrictions instill confidence in both parties, facilitating the creation of these cooperative ventures in the first place.  Categorizing the alleged no-hire provisions here as per se unlawful could chill a whole spectrum of reasonable ancillary restraints, undermining the careful balance that store-within-a-store arrangements aim to maintain and inhibiting market innovation.  That would be bad for potential employees, who would lose the opportunity to work at stores-within-stores, as well as for consumers, who would lose the convenient access to goods in-store concessions provide.

                   B.            The Rigid Two-Prong Test Advanced By Plaintiffs And Their Amici Is Not The Law, And The Alleged Restraints Here Satisfy It In Any Event

Plaintiffs and their amici resist ancillarity by, in part, insisting upon application of a strict and formalistic test not found in the law of this Circuit or any other.  In their view, an ancillary restraint must be both (1) “subordinate and collateral to a separate legitimate transaction” and (2) “reasonably necessary to achiev[e] that transaction’s procompetitive purpose.”  AOB 34-35.  This rigid two-step test is not the law in this Circuit.  But even if it were, Plaintiffs and amici misconstrue the second prong, improperly transforming it into a strict necessity standard that no circuit has adopted.  Consistent with their evident procompetitive potential, the alleged restraints here amply satisfy the actual test.

Although some courts have moved toward a delineated two-prong standard, this Court has not.  This Court’s leading opinion on ancillarity is then-Judge Sotomayor’s influential concurrence in MLB, in which she observed that a restraint is ancillary where it is “reasonably necessary to achieve any of the efficiency-enhancing benefits of a joint venture.”  542 F.3d at 338 (Sotomayor, J., concurring in the judgment).  She noted no other requirements, invoking Judge Easterbrook’s similar formulation in Polk Bros. that a restraint is ancillary where it “may contribute to the success of a cooperative venture that promises greater productivity and output.”  Id.; Polk Bros., 776 F.2d at 189; see Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 229 (D.C. Cir. 1986) (restraint is ancillary when it “appears capable of enhancing the group’s efficiency”).  That approach in turn traces all the way to then-Judge Taft’s seminal United States v. Addyston Pipe & Steel Co. decision, which assessed ancillarity using this same flexible formulation.  See 85 F. 271, 281 (6th Cir. 1898).

Even if the two-prong test advanced by Plaintiffs and their amici did apply, however, they misconstrue the second prong by paying only lip service to a “reasonably necessary” standard and in reality asking this Court to impose a “strictly necessary” test.  Instead of asking whether the restraint “promoted enterprise and productivity”—which is all that is required for a restraint to be “reasonably necessary,” Aya, 9 F.4th at 1110-11—Plaintiffs would require Defendants to show that the “restraint [is] necessary to achieve the business relationship,” AOB 36, such that in its absence, “Saks would terminate or . . . alter its purported collaborative relationships,” NY Br. 29.

No court of appeals has embraced this strict-necessity standard.  In Medical Center at Elizabeth Place, LLC v. Atrium Health System, for instance, the Sixth Circuit considered and rejected it, holding that requiring a defendant to show that a restraint “is necessary” is “too high a standard to determine what qualifies as ‘reasonable.’”  922 F.3d 713, 725 (6th Cir. 2019); see also id. at 726 (observing Judge Sotomayor’s MLB concurrence “categorically rejected” a strict necessity test).  Rather, an ancillary restraint “need not be essential, but rather only reasonably ancillary to the legitimate cooperative aspects of the venture” because “there exists a plausible procompetitive rationale for the restraint.”  Id. (quotation marks omitted).  The Ninth Circuit similarly rejected the United States’ attempt to advance this standard, and instead held in Aya that a no-hire restraint was “properly characterized as ancillary” where it “promoted enterprise and productivity at the time it was adopted.”  9 F.4th at 1111.  And the United States and a different set of plaintiffs recently argued for a strict-necessity test in the Seventh Circuit.  See Br. for the U.S. and the FTC as Amici Curiae Supporting Neither Party at 26, Deslandes v. McDonald’s USA, LLC, Nos. 22-2333 & 22-2334 (7th Cir. Nov. 9, 2022) (arguing no-hire agreement was not ancillary because it “was not necessary to encourage franchisees to sign” franchising agreements).  The panel declined to adopt it, adhering instead to the Polk Bros. test.  See Deslandes v. McDonald’s USA, LLC, 81 F.4th 699, 703 (7th Cir. 2023).

All of these decisions make sense.  The per se rule applies only when a challenged restraint is obviously and clearly anticompetitive, and a restraint that is plausibly part of a procompetitive venture should be judged by “the facts peculiar to the business to which the restraint is applied.”  Bd. of Trade of Chi. v. United States, 246 U.S. 231, 238 (1918).  A contrary decision would discourage competition; strict necessity is not only an unrealistic requirement, as businesses make these decisions ex ante, but also would require them to constantly recalibrate their policies.  The result would be that firms forego potentially procompetitive collaborations, chilling innovative policies and business models.  See Werden, supra, at 23-24 (comprehensive analysis by DOJ economist rejecting strict-necessity test).

Nor is there any legal or logical basis for Plaintiffs’ made-up “tailor[ing]” prong—that a “restraint must be ‘tailored’ to a legitimate objective to qualify as ancillary.”  AOB 35.  Courts routinely reject any “reasonabl[e] tailor[ing]” requirement, because that phrase would not “carr[y] a materially different meaning than ‘reasonably necessary’” and because a restraint “need not satisfy a less-restrictive-means test.”  Aya, 9 F.4th at 1111 & n.5.  A tailoring analysis can be part of the rule-of-reason framework employed after a restraint is deemed ancillary, but it has no role in the ancillarity inquiry itself, which evaluates whether a restraint “should be reviewed under the rule of reason” in the first place.  MLB, 542 F.3d at 341 (Sotomayor, J., concurring in the judgment).  The flaw in Plaintiffs’ argument is underscored by the only case they cite to support their purported tailoring requirement, which did not even involve ancillarity, but instead analyzed whether there was a less restrictive alternative under the rule of reason.  See NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 117 (1984); see also Aya, 9 F.4th at 1111 (“[T]he less restrictive alternative analysis falls within the rule-of-reason analysis, not the ancillary restraint consideration.”).

Properly interpreted to require only “reasonable necessity,” the two-prong test is satisfied here on the face of the Complaint.  The alleged restraint is “subordinate and collateral” to a broader venture in which Saks permits the Brand Defendants to “sell their goods and apparel” with Saks’s stores.  Compl. ¶ 21.  Although the United States argues that the Complaint “contains no allegations of any connection . . . between the alleged conspiracy and those business relationships,” U.S. Br. 15-16, that is not correct: the Brand Defendants operate “concessions at Saks stores,” Compl. ¶ 21, and Saks employees receive brand-specific training, id. ¶ 160.  As the district court held, Op. 34 n.22, the alleged restraint prevented the Brand Defendants from hiring Saks employees who sold the Brand Defendants’ merchandise, thereby protecting Saks’s training investments, see Compl. ¶¶ 156-61, 187-91, increasing the attractiveness of the broader collaboration, and promoting mutual trust between the parties, see Rothery Storage, 792 F.2d at 224 (restraint that “serves to make the main transaction more effective in accomplishing its purpose” is “subordinate and collateral”).

Plaintiff Susan Giordano’s allegations about her own experience demonstrate that this alleged restraint is ancillary.  Giordano was a Saks employee at Saks’s Loro Piana boutique for “18 months,” during which time she became “familiar[] with Loro Piana’s . . . merchandise.”  Compl. ¶¶ 157, 160.  Giordano sought employment at a standalone Loro Piana boutique, explaining that she “would surely be an asset” because of her familiarity with Loro Piana’s product gained from Saks’s training.  Id. ¶¶ 156-61.  But the no-hire restraint allegedly prevented Loro Piana from hiring Giordano, id. ¶ 161, “ensur[ing] that [Saks] [did] not lose its personnel during the collaboration” with Brand Defendants, Aya, 9 F.4th at 1110.  Courts have found just these sorts of no-hire agreements to facilitate “procompetitive collaboration” to be “reasonably necessary.”  Id.; cf. Bogan v. Hodgkins, 166 F.3d 509, 515 (2d Cir. 1999) (rejecting per se treatment for no-hire agreements).

The United States’ arguments to the contrary are unavailing.  It argues that the alleged no-hire agreements go beyond solicitation at the concessions themselves, barring the Brand Defendants from hiring even Saks employees who independently apply or approach the Brand Defendants for a job.  U.S. Br. 19.  But the no-hire agreements’ purpose, to protect against risks that employees would leave for a collaborating brand located inside their own store, applies equally regardless of whether an employee is solicited by or independently approaches a competitor.  In both instances, Saks invested in brand-specific employee training, see Compl. ¶¶ 32, 34, 156, that the no-hire agreement protects from the unique exposure of a store-within-a-store.

The United States also suggests that the restraint is not reasonably necessary because it applies to “any brand [or designer company] carried by Saks” rather than just brands that maintain concession stands.  U.S. Br. 16, 19.  But a restraint “need not satisfy a less-restrictive-means test,” Aya, 9 F.4th at 1111; regardless, Saks employees receive detailed training on all luxury brands sold in the stores, even those that do not maintain concession stands, see Compl. ¶ 34.  The alleged no-hire agreement notably does not extend to the many luxury brands whose goods are not “carried by Saks,” id. ¶ 175, leaving Saks employees free to take their talents to those competing employers or to other retailers of luxury goods.  And the United States’ suggestion that the duration of the agreement is too long, U.S. Br. 19, ignores that employees receive continuous training to remain “knowledgeable about the particular products [sold] . . . as well as current trends,” Compl. ¶ 34 (emphasis added).  If employees could leave their employment with Saks and immediately join the competitor, then the alleged restraint would have no effect at all, and Saks would lose the incentive to invest in ongoing specialized training regarding competitor brands.

II.            The District Court Properly Decided Ancillarity On The Pleadings

Nothing in the antitrust laws prohibits a district court from resolving ancillarity on the pleadings, and the court’s decision to do so here was procedurally proper and analytically sound.  Determining whether a challenged restraint is “naked” or “ancillary” is a threshold inquiry for a Section 1 claim because “[t]his all-important classification largely determines the course of subsequent legal evaluation of [the] restraint.”  Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 1904 (5th ed., 2023 Cum. Supp.).  Put another way, resolving ancillarity at the outset of the case dictates the mode of analysis employed by the court: naked restraints are subject to per se treatment, while ancillary restraints are analyzed under the rule of reason.

This does not mean that ancillarity must be resolved at the pleadings—depending on the circumstances, it may be resolved after the pleadings but before summary judgment, at summary judgment, or even at trial.  See In re HIV Antitrust Litig., 2023 WL 3088218, at *23 (N.D. Cal. Feb. 17, 2023) (summary judgment); N. Jackson Pharmacy, Inc. v. Caremark RX, Inc., 385 F. Supp. 2d 740, 743 (N.D. Ill. 2005) (pre-summary judgment Rule 16 motion).  Rather, ancillarity is a threshold issue that sets the stage for the analysis that follows, and deciding it at the pleadings stage permits defendants to defeat meritless claims before undergoing costly discovery.

The district court properly resolved the question on a motion to dismiss here because Plaintiffs’ own allegations made clear that the alleged no-hire agreements were ancillary.  Plaintiffs and their amici make two arguments: first, that ancillarity cannot be resolved on the pleadings, and second, that the district court improperly resolved facts in Defendants’ favor.  Neither argument persuades.

                  A.            Ancillarity Is A Threshold Inquiry, Not An Affirmative Defense

Courts analyzing Section 1 claims must first determine the proper framework to apply: the per se rule or the rule of reason (or, in some cases, an abbreviated “quick look” analysis).  See Leegin, 551 U.S. at 886-87.  To make that determination, “[a] court must distinguish between ‘naked’ restraints, those in which the restriction on competition is unaccompanied by new production or products, and ‘ancillary’ restraints, those that are part of a larger endeavor whose success they promote.”  MLB, 542 F.3d at 339 (Sotomayor, J., concurring in the judgment) (quoting Polk Bros., 776 F.2d at 188).  “This all-important classification largely determines the course of subsequent legal evaluation of any restraint.”  Areeda & Hovenkamp, supra, ¶ 1904; see Thomas B. Nachbar, Less Restrictive Alternatives and the Ancillary Restraints Doctrine, 45 Seattle U. L. Rev. 587, 634 (2022) (“In order to do any real work, the ancillary restraints doctrine has to precede the rule of reason.”); Herbert Hovenkamp, The Rule of Reason, 70 Fla. L. Rev. 81, 140 (2018) (“The ancillary restraints doctrine is not a comprehensive method for applying the rule of reason, but rather an early stage decision about which mode of analysis should be applied.”).  Thus, ancillarity is a gating inquiry.  By determining at the outset of the case whether a challenged restraint is naked or ancillary, the court ensures it applies the proper analytical framework.

Because this determination guides how the parties conduct discovery and try the case, it is important to decide ancillarity at the earliest possible stage.  This avoids “expensive pretrial discovery” on the wrong questions and issues.  And it avoids discovery altogether in cases that do not state a claim and should never proceed past the pleadings.  Limestone Dev. Corp. v. Vill. of Lemont, 520 F.3d 797, 803 (7th Cir. 2008) (noting importance of carefully evaluating antitrust claims at pleading stage “lest a defendant be forced to conduct expensive pretrial discovery in order to demonstrate the groundlessness of the plaintiff’s claim” (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558-59 (2007))).

Treating ancillarity as a gating inquiry also is consistent with the Supreme Court’s admonition that per se treatment must be confined to a narrow class of cases.  As the Court has explained, “the per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue and only if courts can predict with confidence that it would be invalidated” under the rule of reason.  Leegin, 551 U.S. at 886-87; Dagher, 547 U.S. at 5 (“Per se liability is reserved for only those agreements that are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.” (quotation marks omitted)).  That predictive confidence must be rooted in the “demonstrable economic effect” of the restraint at issue, not a plaintiff’s suspicion that the restraint is harmful.  Leegin, 551 U.S. at 887.  This is a high bar.  Only when a restraint is “so obviously lacking in any redeeming pro-competitive values” may courts apply the per se rule.  Cap. Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 542 (2d Cir. 1993).

Because per se analysis is warranted only when justified by “demonstrable economic effect,” resolving the issue of ancillarity on the pleadings ensures that plaintiffs cannot invoke per se treatment on mere say-so.  The ancillarity inquiry, by definition, considers the relationship of the challenged restraint to the parties’ business collaboration—that is, the inquiry explores the likely “economic effect” of the restraint within the context of commercial realities.  That is precisely what the Supreme Court requires before expanding the per se rule into new frontiers.  Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19 n.33 (1979) (“[T]he per se rule is not employed until after considerable experience with the type of challenged restraint.”); Bogan, 166 F.3d at 514 (“The Supreme Court is slow to . . . extend per se analysis to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.” (quotation marks omitted)).

If ancillarity could be resolved only after the pleadings stage, as Plaintiffs and their amici urge, then a Section 1 plaintiff could survive dismissal simply by invoking the per se rule without regard for the restraint’s “economic effect” or the courts’ ability to “predict with confidence that [the restraint] would be invalidated.”  Leegin, 551 U.S. at 886-87.  A simple example underscores the absurdity of that rule: ever since they were recognized in Addyston Pipe as axiomatic ancillary restraints, no-hire provisions are commonly included in agreements for the sale of a business.  The approach proposed would require litigation through discovery to decide if such a provision were ancillary.

Moreover, neither the federal courts nor the academy have amassed sufficient experience with this subject to allow default per se treatment.  Indeed, the only study that attempted to analyze the relevant economic considerations in a systematic way concluded that eliminating no-hire provisions “causes minimal reductions in job concentration and no increase in wages.”  Daniel S. Levy et al., No-Poaching Clauses, Job Concentration and Wages: A Natural Experiment Generated by a State Attorney General, Advanced Analytical Consulting Group, Inc., at 1 (Jan. 23, 2020).  That inconclusive literature falls far short of justifying a rule that would effectively extend per se treatment to all no-hire agreements.

If anything, the economic incentives weigh strongly in favor of deciding ancillarity at the earliest possible stage allowed by the record.  This is because a rule prohibiting courts from deciding ancillarity at the pleadings stage would be a free pass to discovery (and the “potentially enormous expense” associated with it), which would “push cost-conscious defendants to settle even anemic [Section 1] cases.”  Twombly, 550 U.S. at 559.  That pressure, in turn, would distort normal business incentives—faced with the prospect of huge discovery costs from meritless claims, rational businesses would understandably refrain from entering into legitimate, procompetitive collaborations.  Plaintiffs and their amici offer no good reason for adopting a rule that would undercut the very efficiency-enhancing purposes antitrust law is meant to advance.  See Morrison v. Murray Biscuit Co., 797 F.2d 1430, 1437 (7th Cir. 1986) (“The purpose of antitrust law, at least as articulated in the modern cases, is to protect the competitive process as a means of promoting economic efficiency.”); see also MLB, 542 F.3d at 339 (Sotomayor, J., concurring in the judgment) (restraints do not receive per se treatment when they have a “reasonable procompetitive justification, related to the efficiency-enhancing purposes of [a] joint venture”).

The United States asserts that ancillarity is only a “defense” to per se illegality, rather than a threshold inquiry to determine whether a case calls for departing from the rule of reason.  U.S. Br. 12-13.  None of the United States’ cases, however, limit the ancillarity restraints doctrine in this way.  The lone Second Circuit case the United States cites was a criminal matter where the standard applied to motions to dismiss is far more lenient and deferential to the United States than that mandated for civil cases in Twombly.  In such cases, courts treat the government’s characterization of conduct as within the four corners of a recognized per se theory as sufficient for indictment purposes.  See United States v. Aiyer, 33 F.4th 97, 116 (2d Cir. 2022) (indictments need only “contain[] the elements of the offense charged” and enable defendant to enter plea).  Moreover, in that case, the defendant had not even challenged on appeal the district court’s conclusion that the indictment at issue adequately alleged a per se antitrust violation.  See id. at 116-23.  The panel never characterized ancillarity as a “defense.”  See id.

The same goes for Blackburn and Board of Regents.  Although the courts in those cases ultimately concluded the restraints at issue were not ancillary, neither case held that ancillarity was only a defense.  Blackburn v. Sweeney, 53 F.3d 825, 828-29 (7th Cir. 1995); Bd. of Regents of Univ. of Okla. v. NCAA, 707 F.2d 1147, 1153-56 (10th Cir. 1983).  Freeman is similarly off base.  While the court there offhandedly referred to the defendant’s overall argument against the antitrust claim as a “defense,” it did so after the ancillarity discussion.  Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1151-52 (9th Cir. 2003).  The court did not use the term with specific reference to ancillarity, and in any event its use of “defense” was not meant in the same way that Plaintiffs and their amici use it—that is, as an issue that cannot be resolved at the outset of the case.  AOB 39; U.S. Br. 12-13, 15.  In short, none of the government’s cases hold that ancillarity is strictly a defense or is otherwise immune from resolution on the pleadings.

The Seventh Circuit’s recent decision in Deslandes doesn’t advance the government’s cause either.  Although the court in Deslandes summarily stated that “the classification of a restraint as ancillary is a defense,” 81 F.4th at 705, plaintiffs can plead themselves out of court, Hadid v. City of New York, 730 F. App’x 68, 71 (2d Cir. 2018), which is what Plaintiffs have done here.  Nor should it be followed: the Seventh Circuit cited no case law and offered no analysis to support its bald assertion.  Deslandes, 81 F.4th at 705.  And, as explained, any suggestion that ancillarity can be treated only as a defense would undo the clear demarcation between the rule of reason and per se treatment.  If courts can’t evaluate ancillarity at the outset, restraints that should be presumptively analyzed under the rule of reason would instead be presumptively treated as per se illegal.  That result is plainly inconsistent with the Supreme Court’s antitrust precedents.

In a related argument, Plaintiffs contend that ancillarity cannot be decided on the pleadings, but instead “requires discovery.”  AOB 39.  But that also is wrong.  “In considering a motion to dismiss, the court is not required to don blinders and to ignore commercial reality.”  Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1110 (7th Cir. 1984), abrogated on other grounds by Schmees v. HC1.COM, Inc., 77 F.4th 483 (7th Cir. 2023).  Consistent with this principle, courts routinely resolve ancillarity on the pleadings where it is clear from the complaint that the restraint may be procompetitive.  For example, in Helmerich & Payne International Drilling Co. v. Schlumberger Technology Corp., the court dismissed a restraint of trade claim at the pleading stage where “the pleadings in [the] case [made] clear” that the challenged non-solicitation provision was “ancillary” to “a larger business transaction between two independent parties.”  2017 WL 6597512, at *4 (N.D. Okla. Dec. 26, 2017).  Similarly, the court in Gerlinger v. Amazon.Com, Inc. determined that a purported price-fixing arrangement between Borders and Amazon was “ancillary” to the companies’ broader website hosting agreement, in part because the “context in which the agreement was entered into” confirmed its procompetitive potential.  311 F. Supp. 2d 838, 848-49 (N.D. Cal. 2004).  The court reached this conclusion on a motion for judgment on the pleadings.  Id.  Other courts have similarly decided ancillarity on the pleadings alone.  See Kelsey K. v. NFL Enters. LLC, 2017 WL 3115169, at *4 (N.D. Cal. July 21, 2017) (motion to amend), aff’d, 757 F. App’x 524, 526 (9th Cir. 2018); Hanger v. Berkley Grp., Inc., 2015 WL 3439255, at *5 (W.D. Va. May 28, 2015) (motion to dismiss); Caudill v. Lancaster Bingo Co., 2005 WL 2738930, at *3-6 (S.D. Ohio Oct. 4, 2005) (motion for judgment on the pleadings).  Contrary to Plaintiffs’ argument, the district court’s pleading-stage ancillarity ruling was entirely proper.

                   B.            The District Court Did Not Reach Past Plaintiffs’ Allegations

Ancillarity can support dismissal when it is “apparent from the allegations in the complaint,” as even the United States acknowledges.  U.S. Br. 15.  Here, the district court’s ancillarity ruling was amply supported by Plaintiffs’ own allegations.  Plaintiffs allege that Saks and the Brand Defendants collaborate in the sale of luxury goods by partnering to sell the Brand Defendants’ goods both directly at Saks stores and through concessions within them.  Compl. ¶¶ 21, 28; see supra, at 4-10.  By cooperating in this way, Saks and the Brand Defendants can leverage each other’s employees and brands to create a distinct “shopping experience for customers”—that is, the “atmosphere of exclusivity and opulence surrounding . . . luxury products,” Compl. ¶ 33, needed to promote “demand for[] luxury goods over other, lower-priced goods,” id. ¶ 23.  The upshot is a procompetitive collaboration that, in the words of Polk Bros., “promises greater productivity and output.”  776 F.2d at 189.

The district court also properly relied on the Complaint to conclude that “absent the no-hire agreement, there would be a continual risk that the Brand Defendants would use their concessions in Saks stores to recruit [Saks] employees.”  Op. 32 (citing Compl. ¶¶ 56-57, 83).  Minimizing the risk of such “free rid[ing]” is a common, efficiency-enhancing feature of ancillary restraints.  Rothery Storage, 792 F.2d at 229 (restraints were ancillary where they “preserve[d] the efficiencies of the [collaboration] by eliminating the problem of the free ride”); Polk Bros., 776 F.2d at 190 (agreement was ancillary to a joint sales venture where it limited the potential that one retailer would free ride on the sales efforts of another).  That includes procompetitive restraints on employee movement.  Aya, 9 F.4th at 1110 (restraint was ancillary to business collaboration where it guarded against risk of one party “proactively raiding . . . employees” of another party).

Notably, the risk of free riding wasn’t hypothetical: as the district court pointed out, the Complaint specifically alleges that Plaintiff Giordano sought to leverage the experience she acquired while working at the Loro Piana boutique as a Saks employee to seek employment with Loro Piana.  Op. 34 n.22.  The district court also highlighted Plaintiffs’ allegations that without the no-hire agreements, Brand Defendants such as Louis Vuitton could “take advantage” of Saks’s hiring efforts by recruiting Saks employees away from Saks after that company had already invested time and money to recruit and train its personnel.  Op. 32; Compl. ¶¶ 62-63; see Compl. ¶ 53 (alleging that “a Defendant would save on training costs and receive the immediate benefit of a well-trained, motivated salesperson” by hiring “from one of its rivals”).  This poaching, according to Plaintiffs, would “inflict[] a cost on [Saks] by removing an employee on whom [Saks] may depend.”  Compl. ¶ 62.  Thus, Plaintiffs’ own allegations demonstrate the alleged no-hire agreement is ancillary.  By addressing the free-rider problem, the agreement eliminates an externality “that may otherwise distort the incentives of [the Brand Defendants] and limit the potential efficiency gains of [the collaboration].”  MLB, 542 F.3d at 340 (Sotomayor, J., concurring in the judgment).  Nothing more was required to resolve ancillarity on the pleadings.

Plaintiffs and their amici argue the district court erred by drawing factual inferences in favor of Saks, rather than Plaintiffs.  AOB 37-40; N.Y. Br. 26-27.  According to Plaintiffs, ancillarity was a “contested factual issue” that could be resolved in Saks’s favor only by improperly rejecting Plaintiffs’ allegations.  AOB 37-38.  Plaintiffs’ argument is misplaced.

“Determining whether a complaint states a plausible claim for relief [is] a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”  Jessani v. Monini N. Am., Inc., 744 F. App’x 18, 19 (2d Cir. 2018) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)).  As part of that exercise, courts consider “a host of considerations: the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiff’s inferences unreasonable.”  Fink v. Time Warner Cable, 714 F.3d 739, 741 (2d Cir. 2013); see Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 F. App’x 32, 35 (2d Cir. 2012).

That is precisely what the district court did here.  It considered the “full factual picture presented by the complaint”—including the nature of the Defendants’ business relationship and the role of the no-hire agreement in the context of that relationship—to conclude that the alleged no-hire agreement was ancillary to a procompetitive collaboration.  Fink, 714 F.3d at 741 (emphasis added); Op. 28-34.  And in doing so, the court properly demonstrated that Plaintiffs’ own allegations precluded per se treatment.  See Weisbuch v. Cnty. of Los Angeles, 119 F.3d 778, 783 n.1 (9th Cir. 1997) (“Whether [a] case can be dismissed on the pleadings depends on what the pleadings say.”).  Plaintiffs can’t avoid the consequences of their allegations by truncating the court’s properly holistic review of the pleadings—indeed, “[i]f the pleadings establish facts compelling a decision one way, that is as good as if depositions and other expensively obtained evidence on summary judgment establishes the identical facts.”  Id.

The district court’s ancillarity ruling was sound.

CONCLUSION

For the foregoing reasons, this Court should affirm.

[1] All parties have consented to the filing of this brief.  Pursuant to Federal Rule of Appellate Procedure 29(a)(4)(E), counsel for ICLE represents that no counsel for any of the parties authored any portion of this brief and that no entity, other than amici curiae or their counsel, monetarily contributed to the preparation or submission of this brief.

[2] The alleged no-hire agreements also do not fit the per se mold because they are part of a dual-distribution relation in which the Brand Defendants sell their products to end consumers through “their own standalone boutiques” as well as through distributors, “including Saks.”  Compl. ¶ 21; see Beyer Farms, Inc. v. Elmhurst Dairy, Inc., 35 F. App’x 29, 29-30 (2d Cir. 2002) (holding that a restraint was “subject to scrutiny under the ‘rule of reason’” because the complaint alleged a “dual-distributorship relationship”); Elecs. Commc’ns Corp. v. Toshiba Am. Consumer Prods., Inc., 129 F.3d 240, 243 (2d Cir. 1997) (similar).

The Biden administration’s Oct. 30 “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” proposes to “govern… the development and use of AI safely and responsibly” by “advancing a coordinated, Federal Government-wide approach to doing so.” (Emphasis added.)

This “all-of-government approach,” which echoes the all-of-government approach of the 2021 “Executive Order on Competition” (see here and here), establishes a blueprint for heightened regulation to deal with theorized problems stemming from the growing use of AI by economic actors. As was the case with the competition order, the AI order threatens to impose excessive regulatory costs that would harm the American economy and undermine competitive forces. As such, the order’s implementation warrants close scrutiny.

Read the full piece here.

ICLE Chief Economist Brian Albrecht joined the Human Action Podcast to discuss the work of Nobel Prize winner Claudia Goldin, with an emphasis on the male-female wage gap. Video of the full episode is embedded below.

Executive Summary

In October 2022, the Kroger Co. and Albertsons Cos. Inc. announced their intent to merge in a deal valued at $24.6 billion.[1] Given the Federal Trade Commission’s (FTC) increasingly aggressive enforcement stance against mergers and acquisitions, as well as Chair Lina Khan’s previous writings on food retail specifically,[2] the agency appears poised to try to block the transaction—even with divestitures.[3] The FTC and U.S. Justice Department’s (DOJ) recently unveiled draft revisions to the agencies’ merger guidelines further suggest that they plan to challenge more mergers—and to do so more aggressively than under past administrations.[4]

But attempting to block this transaction would go against the analytical framework the FTC has historically used to evaluate similar transactions, as well as the agency’s historical precedent of accepting divestures as a remedy to address localized problems where they arise. Such breaks with the past sometimes happen; our understanding of the law and economics evolves. But in the case at hand, these breaks from tradition would reflect a failure to consider relevant and significant changes in how consumers shop for food and groceries in today’s world.

The FTC has a long history of assessing retail mergers in a manner significantly at odds with the aggressive approach it is currently signaling. Only one supermarket merger has been challenged in court since American Store’s acquisition of Lucky Stores in 1988: the Whole Foods/Wild Oats merger in 2007.[5] Over the last 35 years, the FTC has allowed every other supermarket merger and most retail-store transactions to proceed with divestitures. Within the last two years alone, these have included Tractor Supply/Orschlein and 7-Eleven/Speedway.[6] The FTC’s historic approach recognizes the reality that competitive concerns regarding supermarket mergers can be readily and adequately remedied by divestitures in geographic markets of concern; indeed, even Whole Foods/Wild Oats was ultimately resolved with a divestiture agreement following a fractured circuit court decision.[7]

The retail food and grocery landscape has changed dramatically since American/Lucky and Whole Foods/Wild Oats. But the ways in which the market has changed point toward its becoming more competitive, further undermining a possible FTC case. With the growth of wholesale clubs, delivery services, e-commerce, and other retail formats, the industry is no longer dominated by traditional supermarkets. In addition, these changing dynamics have made geographic distance, traffic patterns, and population density decreasingly relevant in a consumer’s choice of where they purchase food and groceries. Today, Kroger is only the fourth-largest food and grocery retailer in the United States, behind Walmart, Amazon, and Costco. If the merger goes through, the combined firm will move into third place in market share but would still account for just 9% of nationwide sales.[8]

The upshot is that the food and grocery industry is arguably as competitive as it has ever been. Unfortunately, recent developments suggest the FTC may well ignore or dismiss the economic realities of this rapid transformation of the food and grocery industry, substituting instead the outdated approach to market definition and industry concentration signaled by the draft guidelines.[9]

In light of these developments in the food-retail market and the FTC’s likely break from precedent, this paper highlights important areas where both the commission and commentators’ stances appear to run headlong into legal precedent that mandates an evidence-based approach to merger review, even as the best available evidence points to a dynamic and competitive grocery industry. The correct understanding of the law and the industry appears entirely at odds with a challenge to the proposed merger.

A.     The FTC’s Merger-Enforcement Policy Is on a Collision Course with the Law

The Kroger/Albertsons merger proceeds against a backdrop of tough merger-enforcement rhetoric and actions from the FTC. Recent developments include the publication of aggressive revised merger guidelines, a string of cases brought to block seemingly benign mergers, process revisions that burden even unproblematic mergers, and FTC leadership’s contentious and expansive interpretation of the merger laws. The FTC’s ambition to remake U.S. merger law is likely to falter before the courts, but not before imposing a substantial tax on all corporate transactions—and, ultimately, on consumers.

The retail food and grocery market has changed substantially since the last time a supermarket merger was challenged in court. If the merger goes to trial, the court will need to address issues that have not been litigated in decades, if ever. Depending how the court rules, the market definition for future supermarket mergers may be substantially revised. Moreover, if the FTC attempts to litigate allegations of labor-market or input-market monopsony, the agency runs the risk of a humiliating loss that could stymie future attempts to expand the role of monopsony in competition enforcement and policy. The FTC thus would do well to even-handedly assess the Kroger Albertsons merger, remaining open to new evidence and sensible remedies. This is especially true given the agency’s losing streak in court—culminating with its unsuccessful challenges of the Meta/Within and Microsoft/Activision Blizzard deals.[10]

B.     The Product Market Is Broader Than Local Supermarkets

Because of recent changes in market dynamics, it no longer makes sense to limit the relevant market to supermarkets alone. Rather, consumer behavior in the face of omnipresent wholesale clubs, e-commerce, and local delivery platforms significantly constrains supermarkets’ pricing decisions.

Recent FTC consent orders involving supermarket mergers have limited the relevant product market to local brick-and-mortar supermarkets and food and grocery sales at nearby hypermarkets (e.g., Walmart supercenters), while excluding wholesale-club stores (e.g., Costco), e-commerce (e.g., Amazon), and further-flung stores accessible through online-delivery platforms (e.g., Instacart). This is based on an assertion that the relevant market includes only those retail formats in which a consumer can purchase nearly all of a household’s weekly food and grocery needs from a single stop, at a single retailer, in the shopper’s neighborhood. This is, however, no longer how most of today’s consumers shop. Instead, shoppers purchase different bundles of groceries from multiple sources, often simultaneously.[11] This pattern has substantial implications for supermarkets’ competitive environment, and underscores why the FTC should not rely on outdated market definitions.

Past FTC consent orders have defined the relevant geographic markets to be areas that range from a two- to ten-mile radius around each of the merging parties’ supermarkets.[12] The radius depends on such factors as population density, traffic patterns, and the unique characteristics of each market. It would, however, be reasonable to expand the relevant geographic market when club stores are present, as these have a larger catchment area than supermarkets. Finally, the rapid growth of e-commerce and delivery services make distance, traffic patterns, and population density decreasingly relevant in a consumer’s choice of where they purchase food and groceries. As with product-market definitions, this is a crucial empirical issue that should be evaluated in the FTC’s merger review and any litigation.

C.     Labor Monopsony Concerns Are Unlikely to Hold Up in Court

More than in any previous retail merger, opponents of the Kroger/Albertsons deal have raised the specter of potential monopsony power in labor markets. But these concerns reflect a manifestly unrealistic conception of labor-market competition. Fundamentally, the market for labor in the retail sector is extremely competitive, and workers have a wide range of alternative employment options—both in and out of the retail sector. At the same time, both Kroger and Albertsons are highly unionized, providing a counterbalance to any potential exercise of monopsony power by the merged firm.

D.    The Alleged ‘Waterbed Effect’ Is Not Borne Out by Evidence

Some critics of the merger have speculated that the merged company would be able to exercise monopsony power against its food and grocery suppliers (i.e., wholesalers and small manufacturers), often invoking an economic concept called the “waterbed effect.” The intuition is that the largest buyers may use their monopsony power to negotiate lower input prices from suppliers, leading the suppliers to make up the lost revenue by raising prices for their smaller, weaker buyers.

But these arguments are far from compelling. It is very difficult, for example, to hypothesize any relevant market for purchasing a good where the merged firm would have market power. Critics also often fail to consider the ability of many producers—both small and large—to sell directly to consumers, as demonstrated by the rise of online shopping, with its low entry barriers entry and low-cost structure.

Much of the discussion of the waterbed effect focuses on harm to competing retailers, rather than consumers. But this is not the harm that U.S. antitrust law seeks to prevent. It is thus not surprising that at least one U.S. court has rejected waterbed-effect claims on grounds that there was no harm to consumers.

E.     Divestitures Historically Have Proven an Appropriate and Adequate Remedy

Historically, the FTC has allowed most grocery-store transactions to proceed with divestitures, such as Ahold/Delhaize (81 stores divested), Albertsons/Safeway (168 stores), and Price Chopper/Tops (12 stores). The extent of the remedies sought depends on the extent of post-merger competition in the relevant local markets, as well as the likelihood of significant entry by additional competitors into the relevant markets. The benefit of selling off stores is that you can allow the vast majority of stores—where there is no worry about anticompetitive effect—to merge, while targeting the areas that have the highest concern.

Despite a long history of divestitures serving as an appropriate and adequate remedy in supermarket mergers, some point to the Albertsons/Safeway merger divestitures to Haggen as evidence that divestitures are no longer an appropriate remedy. But several factors idiosyncratic to Haggen and its acquisition strategy led to the failure of that divestiture, and it does not properly stand for the claim that all supermarket divestitures are doomed.

In September 2023, Kroger and Albertsons announced a $1.9 billion divestiture proposal to sell 413 stores, eight distribution centers, two offices, and five private-label brands to C&S Wholesale Grocers LLC.[13] If consummated, the deal would cover operations spanning 17 states and the District of Columbia, and C&S has committed to maintain collective-bargaining agreements with labor.[14] As antitrust enforcers review whether these proposed divestitures are adequate, they should learn from the Haggen experience, rather than view it as justification to reject reasonable divestiture options that have worked for other mergers.

I.  Introduction

In October 2022, the Kroger Co. and Albertsons Cos. announced their intent to merge the two companies in a deal valued at $24.6 billion.[15] Kroger is the fourth-largest food and grocery retailer in the United States—behind Walmart, Amazon, and Costco—while Albertsons is fifth.[16] Both chains trail market-leading Walmart  by a considerable margin. Kroger operates 2,726 stores under the Kroger, Harris Teeter, and Smith’s banners, while Albertsons operates 2,278 stores under the Safeway, Albertsons, and Von’s grocery banners.[17] By contrast, Walmart and Sam’s Club combined store count is greater than 5,300, and the company’s grocery revenue is more than twice that of Kroger and Albertsons combined.[18]

While the proposed Kroger/Albertsons merger is a large transaction in terms of dollar valuation and the combined firm would move into third place in market share, it would still account for just 9% of nationwide sales.[19] In some localities, the market share would be much larger, however, raising questions regarding whether the merger would increase Kroger/Albertson’s monopoly power in those retail markets and convey monopsony power in wholesale markets and local labor markets. To address such questions, Kroger and Albertsons have announced a $1.9 billion divestiture proposal that would include the sale of 413 stores and eight distribution centers across 17 states to C&S Wholesale Grocers LLC.[20]

But given the Federal Trade Commission’s (FTC) recent disposition toward proposed mergers and Chair Lina Khan’s previous writings about food retail, it is widely expected that the FTC will not be satisfied with any remedy offers from the companies—including offers to divest stores—and will instead attempt to block the merger.[21] California Attorney General Rob Bonta has also signaled that he is likely to challenge the deal.[22] In anticipation, Kroger’s chief executive officer announced that both companies are “committed to litigate” if the enforcers act to block the merger.^[23]

What can we expect of such a court battle? The precedent is slightly complicated. While several retail mergers have been challenged in court, including Staples/Office Depot in 2015[24] and Whole Foods/Wild Oats in 2007,[25] no supermarket mergers have been litigated since the State of California’s 1988 challenge to American Store’s acquisition of Lucky Stores.[26] Both the supermarket business and antitrust analysis have changed dramatically over the intervening 35 years. In this paper, we describe some of the changes that have occurred within food retail over the past 35 years, and how they should be addressed by the merging parties, the FTC, and—if litigated—by the courts.

As with most merger analysis, many of the most important questions hinge on a proper definition of the relevant market. The most obvious changes we have observed in food retail in recent decades, including the rise of wholesale club stores and e-commerce, are directly relevant to the question of market definition. The most recent FTC consent orders involving supermarket mergers defined the relevant product market to include “traditional” brick-and-mortar supermarkets, as well as food and grocery sales at hypermarkets (e.g., Walmart supercenters), while excluding wholesale club stores (e.g., Costco) and e-commerce (e.g., Amazon and home-delivery services).[27] This is based on the longstanding assertion that the relevant market includes only those retail formats in which a consumer can purchase all or nearly all of their household’s weekly food and grocery needs during a single stop at a single retailer.

Any attempt by the FTC to maintain this outdated market definition will likely be challenged in court. Research has shown that consumer behavior has changed over time, in that the typical consumer no longer makes once-a-week shopping trips to a single food and grocery retailer.[28] Instead, the typical consumer makes multiple weekly trips and multi-homes across several different retailers and retail formats. This change alone blurs the line between traditional supermarkets and other retail formats. The extent to which wholesale clubs, e-commerce, and delivery services should be included in the relevant market is a key empirical issue that surely will—and should—be evaluated in the FTC’s merger review and any ensuing litigation.

Geographic market is also an issue. The most recent FTC consent orders have defined the relevant geographic markets to be areas that range from a two- to ten-mile radius surrounding each of the merging parties’ supermarkets.[29] The radius depends on such factors as population density, traffic patterns, and the unique characteristics of each market. That, too, needs revision. Based on academic research, industry surveys, and reports from companies that find club stores compete with supermarkets and have larger catchment areas, we conclude that it would be reasonable to expand the relevant geographic market when club stores are present. In addition, the rapid growth of e-commerce and delivery services make distance, traffic patterns, and population density decreasingly relevant in a consumer’s choice of where they purchase food and groceries. As with product-market definition, this is a crucial empirical issue that should be evaluated in the FTC’s merger review and any ensuing litigation.

More than in any previous retail merger, opponents of the Kroger/Albertsons merger have raised the specter of potential monopsony power in labor markets. We argue that these concerns are likely overblown and will be nearly impossible to demonstrate if the merger were to be litigated. Fundamentally, the market for labor in the retail sector is highly competitive, with workers having a wide range of alternative employment if a particular employer attempted to exploit any claimed monopsony power. In addition, both Kroger and Albertsons are highly unionized. Through their collective-bargaining agreements, unions exercise monopoly power in labor negotiations that likely counterbalances any attempted exercise of monopsony power by the merged firm.

Lastly, some critics of the merger have speculated that the merged company may have and exercise monopsony power among its food and grocery suppliers (e.g., wholesalers and small manufacturers). In particular, critics invoke a concept colloquially called the “waterbed effect,” where pushing input prices down for some retailers ends up raising the price for other retailers. Why prices are “pushed” down is not always clear in popular discussions, nor is it clear that it qualifies as an antitrust harm in any way. Being the easiest trading partner would also result in lower prices.

We conclude this may be the weakest argument raised in opposition to the merger. The United Kingdom has evaluated “waterbed effect” allegations in at least two supermarket mergers and found no evidence indicating any anticipated effects from the mergers on input prices that would harm consumers.[30] More importantly, much of the discussion of waterbed effects focuses on harm to competing retailers, rather than to consumers. At least one U.S. court has rejected waterbed-effect claims on the grounds that (1) the plaintiffs did not demonstrate any harm to consumers, and (2) firms can substitute to other suppliers, thereby mitigating any anticipated waterbed effect.[31]

Given the size of a merged Kroger and Albertsons, it would be easy, but naïve, to conclude that the merger should be blocked.[32] The retail food and grocery market has changed substantially since the last time a supermarket merger was challenged in court. If the merger goes to trial, the court will address issues that have not been litigated in decades, if ever. Depending how the court rules, the market definition for future supermarket mergers may be substantially revised. Moreover, if the FTC attempts to litigate allegations of labor-market or input-market monopsony, the agency runs the risk of a humiliating loss that could stymie future attempts to expand the role of monopsony in competition enforcement and policy.

II.     The Agencies Are Trying to Rewrite Merger-Review Standards

The recently published FTC-DOJ draft merger guidelines are a particularly notable backdrop for the Kroger/Albertsons merger, leading many commentators to expect the FTC to take a hardline stance on the deal.[33] Merger case law, however, has not changed much in recent years. Given the merging parties’ apparent willingness to litigate the case, if necessary, the likelihood of a protracted legal battle appears to be high. As we explain below, at least at first sight, any case against the merger would be largely built on sand, and the commission’s chances of succeeding in court appear slim.

The Clayton Act of 1914 grants the U.S. government authority to review and challenge mergers that may substantially lessen competition. The FTC and DOJ are the two antitrust agencies that share responsibility to enforce this law. Traditionally, the FTC investigates retail mergers, while the DOJ oversees other sectors, such as telecommunications, banking, and transportation.

Before the FTC and DOJ officials appointed by the current administration came into office, the settled practice was for the antitrust agencies to follow the 2010 Horizontal Merger Guidelines, which outline the analytical framework and evidence they use to evaluate mergers. The 2010 guidelines describe four major steps of merger analysis:

1. The first step is to define the relevant product and geographic markets affected by the merger. The goal is to identify the set of products and regions that are close substitutes to the merging parties’ products and regions.
2. The second step is to assess the merger’s competitive effects, or how the merger may harm competition in the defined markets.
3. The third step is to examine the role of market entry as a potential counterbalance to the merger’s competitive effects. For entry to be sufficient to deter or undo the anticompetitive effects of a merger, it must be timely, likely, and sufficient in scale and scope.
4. The fourth and final step is to evaluate the efficiencies the merger would generate, or how the merger may benefit consumers by reducing costs and improving quality.

The antitrust agencies weigh all these factors to determine whether a merger is likely to harm competition and consumers. If they find that a merger raises significant competitive concerns, they may seek to block it or require remedies such as divestitures or behavioral commitments from the merging parties.

Several factors, however, suggest that authorities are unlikely to follow this measured approach when reviewing the Kroger/Albertsons merger. Primarily, the FTC and DOJ have recently issued draft revised merger guidelines. The 2023 guidelines have not yet been adopted, although the public comment period is closed. Compared to the previous iteration, which guided recent consent decrees, the new guidelines contain more stringent structural presumptions—that is, a presumption that a merger that merely increases concentration (as all horizontal mergers do) by a certain amount violates the law, rather than deferring to more nuanced economic analysis connecting specific market attributes to a likelihood of actual consumer harm.[34] These new, more stringent structural presumptions are not justified by new economic learnings about the economic effects of concentration. As now-FTC Bureau of Economics Director Aviv Nevo and colleagues wrote in 2022 (just before he joined the commission):

If the agencies were to substantially change the presumption thresholds, they would also need to persuade courts that the new thresholds were at the right level. Is the evidence there to do so? The existing body of research on this question is, today, thin and mostly based on individual case studies in a handful of industries. Our reading of the literature is that it is not clear and persuasive enough, at this point in time, to support a substantially different threshold that will be applied across the board to all industries and market conditions.[35]

Although elements of Nevo and coauthors’ proposed framework are present in the new proposed guidelines, the guidelines also incorporate new language that reflects a persistent thumb on the scale, systematically undermining merging parties’ ability to justify their merger. For example, while a presumption of harm is triggered at a certain level of concentration (an HHI of 1800), in markets where there has previously been consolidation (over an unspecified timeframe), an impermissible “trend [toward concentration] can be established by… a steadily increasing HHI [that] exceeds 1,000 and rises toward 1,800.”[36] Traditionally, an HHI under 1500 would be considered “unconcentrated” and presumed to raise no competitive concerns.[37]

While the FTC will likely point to the renewed focus on concentration measures as capturing the Clayton Act’s focus on lessening competition and the tendency to create a monopoly, the draft guidelines make clear that commission now views concentration as problematic in itself, regardless of whether it lessens competition. For example, the draft guidelines state “efficiencies are not cognizable if they will accelerate a trend toward concentration.”[38] Such a statement effectively negates any efficiency defense available to all but the very smallest firms. Efficiencies will almost always increase concentration—especially if those efficiencies come from economies of scale. If a merger creates efficiencies, the merged firm can lower costs, cut prices, and attract more customers. Attracting more customers with better products and prices will likely increase competition.

The economic evidence is quite strong that efficiency increases concentration.[39] If no efficiency defense is possible, any horizontal merger could accelerate a trend toward concentration (if it had been previously becoming more concentrated). Spinning in these circles is why the notion of a “trend” toward concentration raising particular concern hasn’t been reflected in guidelines since 1968,[40] and reached its apotheosis in Von’s Grocery in 1966[41]—one of the most thoroughly reviled merger cases in U.S. history.[42]

Before updating the merger guidelines, the FTC had already started to tighten its merger-enforcement policy. Among other actions, the agency brought high-profile cases against the Illumina/GRAIL, Meta/Within, and Microsoft/Activision Blizzard deals.[43] So far, all three challenges have resulted in defeat for the FTC in adjudication. Taken together, these cases suggest the agency is willing to push the law beyond its limits in an attempt to limit corporate consolidation, whatever the actual competitive effect. The courts have thus far shown themselves unwilling to buy the agencies more speculative claims of harm. In contrast, the DOJ recently was able to block Penguin-Random House from merging with Simon & Schuster.[44] On the surface, this may seem like a novel case similar to those the FTC has been pursuing; it involved monopsony power against authors. But in this case, the parties agreed that, if there was harm to the authors, there would be fewer books, thereby harming consumers.[45] Fighting over harms to consumers (not concentration) is textbook antitrust litigation.[46]

Finally, the FTC’s leadership has been particularly bearish about the potential consumer benefits of corporate mergers and acquisitions. This inclination is reflected in Chair Khan’s assertion that the Clayton Act embodies a “broad mandate aimed at prohibiting mergers even when they do not constitute monopolization and even when their tendency to lessen competition is not certain.”[47] One way to prohibit mergers is to make them more costly without even going to court. This is what will happen under the agencies’ proposed changes to the premerger notification rules (“Hart-Scott-Rodino Act”).[48] Despite no evidence presented of anticompetitive mergers slipping through the cracks due to the current reporting being too lax, the revised guidelines would greatly increase the cost of merging, thereby reducing the number of mergers.

Even the FTC estimates a massive increase in compliance costs of approximately $350 million, to more than $470 million per year. But that estimate is likely a serious underestimate, as it is based on, among other things, an unscientific “estimate” of the time involved and a dated assumption about the average hourly costs imposed on filers’ senior executives and firms’ counsel.

A survey that the U.S. Chamber of Commerce conducted of 70 antitrust practitioners about the proposed HSR revisions found that the new rules would increase compliance costs by $1.66 billion, almost five times the FTC’s $350 million estimate.”[49] While this general approach to blocking more mergers will not be directly applicable in any particular case, it highlights the FTC’s willingness to not follow “the old rules.”

All of these factors—in concert with the merging parties’ claim that they are prepared to go to court if the FTC decides to block the transaction outright[50]—suggest that there is a particularly high likelihood that the Kroger/Albertsons merger will be challenged and litigated, rather than approved, or challenged and settled.

For the reasons outlined in the following sections, however, the FTC is unlikely to prevail in court. The market overlaps between the merging parties are few and can be resolved by relatively straightforward divestiture remedies, as already proposed by the parties—which, even if disfavored by the agency, are routinely accepted by courts. Likewise, the FTC’s likely market definition and potential theories of harm pertaining to labor monopsony and purchasing power more generally appear speculative at best. The upshot is that the FTC’s desire to bring tougher merger enforcement appears to be on a collision course with the law as it is currently enforced by U.S. courts.

III.   The Relevant Market Is Broader Than Hyper-Local Supermarkets

The retail food and grocery landscape has changed dramatically since the last litigated supermarket merger. Consumer-shopping behavior has shifted toward more frequent shopping trips across a wide variety of formats, which include warehouse clubs (e.g., Costco); e-commerce (e.g., Amazon); online-delivery platforms (e.g., Instacart); limited-assortment stores (e.g., Trader Joe’s and Aldi); natural and organic markets (e.g., Whole Foods); and ethnic-specialty stores (e.g., H Mart); in addition to traditional supermarkets. Because of these enormous changes, the market definition assumed in previous FTC consent orders likely will be—and should be—challenged, given the empirical evidence.

A.     Recent Trends in Retailing Have Upended the ‘Traditional’ Grocery Market Definition

The FTC is likely to find the relevant product market to be supermarkets, which the agency has previously defined as retail stores that enable consumers to purchase all of their weekly food and grocery requirements during a single shopping visit. This product-market definition has remained mostly unchanged for at least a quarter of a century. In both the Albertsons/Safeway merger and the Ahold/Delhaize merger, consent orders between the FTC and the merging parties defined the relevant market to be “the retail sale of food and other grocery products in supermarkets.”[51] The orders defined supermarkets as “full-line grocery stores” that provide “one-stop shopping” that enables consumers “to shop in a single store for all of their food and grocery needs.”[52]

On the one hand, the consent orders’ product-market definitions included supermarkets located within hypermarkets, such as Walmart supercenters. Hypermarkets sell both products that are not typically sold in traditional supermarkets, as well as a sufficient range of food and grocery products such that consumers can “purchase all of their weekly grocery requirements in a single shopping visit.”[53]

On the other hand, the consent orders excluded club stores—such as Costco, Sam’s Club, and BJ’s Wholesale Club—as well as “hard discounters, limited assortment stores, natural and organic markets, [and] ethnic specialty stores.”[54] The orders claim that these stores are excluded from the relevant product market because “they offer a more limited range of products and services than supermarkets and because they appeal to a distinct customer type.”[55] In addition, the orders indicate that “supermarkets do not view them as providing as significant or close competition as traditional supermarkets.”[56] Prior consent orders omitted any discussion of whether online retailers or delivery services should be included or excluded from the relevant market. This product-market definition has remained mostly unchanged—and mostly unchallenged—since the Ahold/Giant merger a quarter-century ago.[57]

Figure 1 shows that retail sales by supermarkets, warehouse clubs, supercenters, and other grocery stores have been relatively stable at 5-6% of U.S. gross domestic product (GDP).[58] Figure 2 shows that supermarkets’ share of retail sales dropped sharply from the early 1990s through the mid-2000s, with that share shifting to warehouse clubs and supercenters. These figures are consistent with the conclusion that warehouse clubs and supercenters successfully compete against traditional grocery stores. Indeed, it would be reasonable to conclude that the rise of warehouse clubs and supercenters at the expense of traditional supermarkets is one of the most significant long-run trends in retail.

The retail food and grocery industry has changed dramatically. In particular, a great deal of attention has been paid to consolidation in the industry. Lina Khan & Sandeep Vaheesan, for example, note that “[t]he share of groceries sold by the four biggest food retailers more than doubled between 1997 and 2009, from seventeen percent in 1994 to twenty-eight percent in 1999 and thirty-four percent in 2004.”[59]

Below, we note that the average consumer shops for food and groceries more than once a week and shops at more than one retail format in a given week. Competition in groceries is not just between supermarkets. While Khan & Vaheesan recognize that supermarkets started to compete with warehouse clubs and supercenters, they fail to update their market definition to reflect that competition.[60] Over the period of increasing concentration within groceries, warehouse clubs and supercenters were steadily eroding supermarkets’ share of retail sales.

Figure 2 shows that, in 1994, supermarkets accounted for 81% of retail sales, which fell to 61% by 2004.[61] Over the same period warehouse clubs and supercenters grew from 14% of retail sales to 35%. In 2021, supermarkets accounted for 56% of retail sales and warehouse clubs and supercenters accounted for 42%. Since the Ahold/Giant merger in 1998, warehouse clubs and supercenters have doubled their share of retail sales, while supermarkets’ share has dropped by more than 25%.[62] Put simply, the four largest supermarket retailers were occupying a larger share of a shrinking segment.

Based on these observations, the product-market definition that the FTC has employed in its consent orders over the past more than two decades is likely to be—and should be—challenged to include warehouse clubs, in addition to accounting for online retail and delivery.

B.     The Once-a-Week Shopper Is No Longer the Norm

In the past, the FTC has specified that, for a firm to be in the relevant market of “supermarkets,” it must be able to “enable[e] consumers to purchase substantially all of their weekly food and grocery shopping requirements in a single shopping visit.”[63] This definition suffers from several deficiencies.

The first deficiency is that this hypothetical consumer behavior is at odds with how many or most consumers behave today.

• Surveys conducted by the Food Marketing Institute and The Hartman Group report the average shopper makes 1.6 weekly trips to buy groceries.[64]
• Earlier research by FMI and Hartman find, in addition, other household members take another 0.6 trips, implying that the total number of trips per household each week is about 2.2, or approximately one trip every three days.[65]
• Surveys conducted by Drive Research show the average household makes an average of 8.1 grocery shopping trips a month, or around two trips a week F(Table 1).[66]

There is no evidence that consumers view retailers that provide one-stop shopping for an entire week’s food and grocery needs as distinct from other retailers who provide food and groceries. In fact, evidence suggests that many consumers “multi-home” across several different retail categories.

• Survey data published by Drive Research indicate that many households spread their shopping across grocery stores, mass merchants, warehouse clubs, independent grocery stores, natural and specialty grocery stores, dollar stores, and online retailers (Table 1).[67]
• Acosta, a sales and marketing consulting firm, reports that 76% of consumers shop at more than one retailer a week and about one third “retail hop” among three or more retailers a week for groceries and staples.[68]
• Research from the University of Florida found that, in 2017, an average consumer visited 3.2 to 4.3 different formats of food outlets a month, depending on income level.[69]
• Survey results from PYMNTS, a data-analysis firm, demonstrate a significant shift in consumer spending away from traditional supermarkets. For example, in 2020, approximately 98% of consumers who bought at least one common household product each week—“center aisle” products, such as paper towels, cleaning supplies, and canned goods—made the purchase at a grocery store. In 2023, more than a third of consumers (37%) say they purchase none of these products from a traditional grocery store, with online purchases accounting for much of the shift.[70]

Thus, while one-stop weekly food and grocery shopping at single retailers was once typical, the evidence indicates such a phenomenon is much less common today.

C.     Supermarkets Compete with Warehouse Clubs

The FTC’s earlier consent orders provide four reasons to exclude warehouse clubs from the relevant market that includes supermarkets:

1. They offer a “more limited range of products and services” than supermarkets;
2. They “appeal to a distinct customer type” from supermarket customers;
3. Shoppers do not view warehouse clubs as “adequate substitutes for supermarkets;” and
4. Supermarkets do not view warehouse clubs as “significant or close competition,” relative to other supermarkets.[71]

In contrast to these conclusions, there is widespread recognition today that warehouse clubs impose significant competitive pressure on supermarkets.[72]

• The National Academies of Sciences concludes that, over time, the entry and growth of warehouse clubs, superstores, and online retail has “blurred” the distinctions among retail formats.[73] More importantly for merger-review analysis, the National Academies concludes that the retail sector is “highly competitive,” in part because of the entry and growth of warehouse clubs, superstores, and online retail.[74]
• Based on their empirical analysis, Paul Ellickson and coauthors conclude that warehouse clubs are “relevant substitutes” for supermarkets, even when the club stores are outside the geographic area typically used by the FTC in merger reviews.3[75]
• Prior to her appointment as FTC chair, Lina Khan and her coauthor concluded that competition from warehouse clubs “fueled” grocery mergers in the late 1990s.[76]

The FTC’s consent orders note that warehouse clubs offer a “more limited range of products and services” than supermarkets. The orders identify products sold at supermarket as “including, but not limited to, fresh meat, dairy products, frozen foods, beverages, bakery goods, dry groceries, detergents, and health and beauty products.”[77]

The annual reports for Costco, Walmart (which include Sam’s Club), and BJ’s, however, indicate that each company offers the same range of products the FTC consent orders identify as being offered by supermarkets.[78] Indeed, the reports indicate that supermarkets do consider wholesale clubs to be competitors and vice versa. BJ’s annual report goes to great lengths to explain its efforts to compete with supermarkets by offering similar manufacturer-branded products at lower prices.[79] The role of warehouse clubs cannot be assumed or asserted away. Indeed, any identification of the relevant market for retail food and grocery sales should begin with a presumption that warehouse clubs provide competitive pressure, since that is what the economics research finds.

It is true that warehouse stores typically carry fewer stock-keeping units (“SKUs”) than supermarkets. Costco’s annual report indicates the company carries fewer than 4,000 SKUs in its warehouse stores and offers 10,000 to 11,000 SKUs for online purchases.[80] BJ’s annual report says that the company carries “approximately 7,000 core active stock keeping units.”[81] In contrast, the BJ’s report notes, “supermarkets normally carry an average of 40,000 SKUs, and supercenters may stock 100,000 SKUs or more.” But these differences in SKU counts do not in themselves demonstrate fundamental differences in product offerings between the two store formats.[82]

The main difference between the two formats is that warehouse clubs tend to offer a smaller range of sizes and packaging and a smaller variety of brands. For example, Costco notes that many of the products it stocks “are offered for sale in case, carton, or multiple-pack quantities only.”[83] Another difference can be observed in the variety of brands offered. For example, Costco has invested in developing its Costco Wholesale and Kirkland Signature private labels.[84] In contrast, CFRA Research analyst Arun Sundaram observes that Sam’s Club “typically offers a bigger national-brand product selection than its club cohorts.”[85] Such differences are insufficient to exclude wholesale clubs from the relevant market. If warehouse clubs offer similar products, see themselves as competing with supermarkets, and customers view them as substitutes, warehouse clubs must be in the same market.

D.    E-Commerce Has Changed the Food Landscape

In the years since the Ahold/Giant merger in 1998, online shopping and home delivery have grown from niche services serving only 10,000 households nationwide to a landscape where approximately one-in-eight consumers purchase groceries “exclusively” or “mostly” online.[86] This shift has increased competition and innovation in the supermarket industry, as traditional supermarkets have adapted to changing consumer preferences and behaviors by offering more delivery and pickup options, expanding their online assortments, and enhancing their digital capabilities.[87] Some have invested in their own e-commerce platforms and many have partnered with such third-party providers as Instacart, Shipt, and Peapod.[88]

One might surmise that e-commerce simply replaced in-person shopping, but with the same stores competing. This is not what has been observed. E-commerce has also increased competition by bringing in new companies with which traditional stores need to compete (e.g., Amazon) and by increasing the options available to consumers through services like Instacart, which allow for direct price and product comparisons among many stores. Each of these innovations has blurred the lines between brick-and-mortar food and grocery retailers and e-commerce, as well as the lines between supermarkets and other retail formats.

In 2023, more than a third of consumers (37%) say they purchase no center-aisle products (products such as paper towels, cleaning supplies, and canned goods) from a traditional grocery store, with online purchases accounting for much of the shift.[89] The fluidity between supermarkets, grocery stores, and online purchases makes the distinction nearly meaningless.

If a consumer uses Instacart to purchase and deliver groceries from Safeway, is that a supermarket purchase or e-commerce? What if the same consumer uses Instacart to purchase and deliver the same goods from Costco or Target? Does the consumer care which retailer the food and groceries came from when competition is just a click away? Indeed, the National Academies of Sciences concludes it is “often impossible” to distinguish between brick-and-mortar retail sales and e-commerce.[90]

E-commerce and club stores also matter for defining the geographic market. Past FTC consent orders have defined the relevant geographic markets to be areas that range from a two- to ten-mile radius around each of the merging parties’ supermarkets. We conclude that, because club stores have a larger catchment area than supermarkets, it would be reasonable to expand the relevant geographic market in localities where club stores are present.

Combined, the rapid growth of e-commerce and delivery services make distance, traffic patterns, and population density decreasingly relevant in a consumer’s choice of where they purchase food and groceries. Dimitropoulos and coauthors note (1) the presence of warehouse clubs expands the relevant geographic market, (2) online-delivery options expand the geographic market “far away,” and (3) online food and grocery purchases can be delivered from fulfillment centers, as well as from traditional stores.[91]

Because of these observations, the product market-definition that has been employed in the FTC’s consent orders over the past more than two decades is likely to be—and should be—challenged and should be revised to include warehouse clubs and to account for online retail and delivery.

IV.   The Merger Is Unlikely to Increase Labor Monopsony Power

In recent years, there has been an increasing emphasis in antitrust discussions on labor markets and potential harms to workers. The recent draft merger guidelines added an explicit section on mergers that “May Substantially Lessen Competition for Workers or Other Sellers.”[92] Even before the guidelines’ publication, some observers predicted that the FTC was set to push a case on labor competition.[93] While, in theory, antitrust harms can occur in labor markets, just as in product markets, proving that harm is more difficult.

An important fact about the proposed Kroger/Albertsons merger is that both companies have many unionized workers. Around two-thirds of Kroger employees[94] and a majority of Albertsons employees[95] are part of the United Food and Commercial Workers International Union (UFCW), which represents 1.3 million members. Even if the merger would increase labor monopsony power in the absence of unions, the FTC will have to acknowledge the reality of the unions’ own bargaining power.

Delegates of the UFCW unanimously voted to oppose the merger[96] Rather than monopsony power or lower wages, however, the union’s stated reason for their opposition was lack of transparency.[97] While lack of transparency may be problematic for the UFCW members, it does not constitute an antitrust harm. Kroger, for its part, has contended that the merger will benefit employees, citing a commitment to invest an additional $1 billion toward increased wages and expanded benefits, starting from the day the deal closes.[98] Albertsons claims that no store closures or frontline associate layoffs will result from the transaction and that the merger will “secure the long-term future of union jobs by establishing a more competitive alternative to large, non-union retailers.”[99]?As with most announced goals, however, there is no enforcement mechanism for this commitment at present, although one could be litigated.

Rather than relying on proclamations from any of the parties, we need economic analysis of the relevant labor markets, asking the types of questions raised above regarding the output markets. A policy report from Economic Policy Institute estimates that “workers stand to lose over $300 million annually” from the merger,[100] but the report arrives at that estimate by using an estimate of the correlation between concentration (HHI) in labor markets and wages. While academic research may benefit from such an estimate, it is unhelpful in merger analysis. As a long list of prominent antitrust economists recently wrote, “regressions of price on HHI should not be used in merger review… [A] regression of price on the HHI does not recover a causal effect that could inform the likely competitive effects of a merger.”[101]

While HHI regressions are of little practical help in this context, according to standard economic theory, it is possible that the average worker would be harmed for traditional labor-monopsony reasons. It is, however, more difficult to identify anticompetitive labor-market harms than to identify analogous product-market harms. For the product market, if the merger simply enhanced monopoly power without producing efficiency gains, the quantity sold would decrease, either because the merging parties raise prices or because quality declines. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. A strong union could counteract a firm’s monopsony power to some extent, by collectively advocating for higher wages, fewer layoffs, and other worker benefits. Indeed, obtaining and exerting labor market power is a union’s raison d’être.

Of course, the presence of a unionized workforce does not render monopsony impossible; unions’ ability to offset the effects of a monopsony or monopoly may also be limited, and monopsony power could increase under a merger, even with unions. Still, the existence of union bargaining power makes any monopsony case more difficult and is an important factor to consider in evaluating a merger’s likely labor-market effects—particularly in this case, given the high rates of union membership at both companies.

Moreover, the FTC needs to be careful with any labor case. For labor markets, a decline in the number of workers employed (which harms the workers) may not be anticompetitive. The reduction in input purchases may be because of efficiency gains.[102] For example, if two merging hospitals integrate their information-technology resources, therefore requiring fewer overlapping workers, the merged firm will employ fewer IT workers. This may even reduce the wages of specialized IT workers, even if the newly merged hospital does not exercise any market power to suppress wages.

The same applies for any inputs from an efficiency-enhancing merger: inputs may decrease. But using fewer inputs is not an antitrust harm. The key point is that monopsony needs to be treated differently than monopoly. The antitrust agencies cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased.

Another difficulty with pursuing a labor monopsony case is that the usual antitrust tools, such as merger simulation, cannot be easily applied to the labor market. Unlike the DOJ’s recent success in blocking Penguin-Random House from merging with Simon & Schuster on grounds that the merger would hurt authors with advances above $250,000,[103] the labor market for most employees of Kroger and Albertsons is much larger than those two companies, or even the largest definition of grocery stores. Indeed, it cannot be narrowed down to a handful of companies.

Any labor case would require showing that the merger would harm workers by reducing their bargaining power. For most workers involved, there are still many potential employers competing. One relevant piece of evidence for this is that press releases Kroger issued during the COVID-19 pandemic highlighted that the company was hiring workers from a wide variety of firms and industries—from hospitality (Marriott International) to restaurants (Waffle House) to food distribution (Sysco).[104] While we are not aware of publicly available data that would more comprehensively illustrated worker flows among different companies, such flows of retail workers into and out of roughly adjacent labor markets makes intuitive sense. As economist Kevin Murphy has explained:

If you look at where people go when they leave a firm or where people come from when they go to the firm, often very diffuse. People go many, many different places. If you look at employer data and you ask where do people go when they leave, often you’ll find no more than 5 percent of them go to any one firm, that they go all over the place. And some go in the same industry. Some go in other industries. Some change occupations. Some don’t. You look at plant closings, where people go. Again, not so often a big concentration of where they go to. If you look at data on where people are hired from, you see much the same patterns. That’s kind of a much more diffuse nature.[105]

If, as is likely, an overwhelming majority of Kroger’s workers’ next best option (what they would do if a store closed) was not an Albertsons store, but something completely outside of the market for grocery-store labor (or even outside the retail-food industry more broadly), the merger would not take away those workers’ next best option. If true, the merger cannot be said to increase labor monopsony power to the extent necessary to justify blocking a merger.

V.     ‘Waterbed Effects’ Are Highly Speculative

One potential antitrust harm that has been discussed frequently in recent years is the so-called “waterbed effect,” in which “a large and powerful firm improves its own terms of supply by exercising its bargaining power, [but] the terms of its competitors can deteriorate sufficiently so as ultimately to increase average retail prices and, thereby, reduce total consumer surplus.”[106] The waterbed effect is not unique to mergers, but can apply any time there is differential buyer-market power. The firm with more market power gets a better deal from suppliers and its competitors are ostensibly harmed because they cannot get the same deal. Long before the proposed merger, but still in the context of retail, people were speculating about a waterbed effect regarding Walmart.[107]

In the context of the Kroger/Albertsons merger, critics have again raised the possibility of a waterbed effect. Michael Needler Jr.—the president and chief executive of Fresh Encounter, a chain of 98 grocery stores based in Findlay, Ohio—raised the possibility in a U.S. Senate hearing on the merger.[108] He was also quoted by The New York Times as saying:

When the large power buyers demand full orders, on time and at the lowest cost, it effectively causes the water-bed effect. They push down, and the consumer packaged goods companies have no option but to supply them at their demands, leaving rural stores with higher costs and less availability to products.[109]

In a letter to the FTC, the American Antitrust Institute raised several concerns about the merger, arguing that:

The waterbed effect is likely to worsen with Kroger-Albertsons enhanced buyer power post-merger, with adverse effects on the ability of independent grocers to compete in a tighter oligopoly of large grocery chains.[110]

The implied argument in this version of the waterbed effect goes as follows: A merged Kroger and Albertsons would have additional market power over some of its suppliers. It could then exercise that market power to extract discounts from those suppliers, which would be unavailable to its competitors. The merged firm could then pass those cost savings on to consumers in the form of lower retail prices, thereby increasing Kroger/Albertsons’ sales. Some of these sales would come at the expense of smaller competitors, who could no longer compete on price. And because of these reduced sales, they would purchase less from their suppliers, further eroding their bargaining power with suppliers. Ultimately, consumers of the smaller retailers may face higher retail prices. Thus, under this theory, consumers of the merged firm would pay lower retail prices, while consumers of the smaller retailers would pay more.

Even if all of that were true, however, what remains unknown (and unaddressed under this argument) is whether consumers as a whole would be better or worse off. That, of course, is precisely the result that would be required to establish harm under antitrust law.

Roman Inderst & Tommaso Valletti are credited with the first formal theoretical model of a waterbed effect and how it could potentially harm consumers as a whole (as opposed to merely certain competitors or the subset of consumers who continue to buy from them).[111] In order to establish consumer harm under their model, three key assumptions must be met:

1. Retailers buy their inputs from a supplier who can price discriminate among retailers;
2. Retailers can access an alternative source of supply, but must incur a fixed switching cost, which is the same across all retailers; and
3. Retailers compete on price.

Because a larger retailer can spread the fixed switching costs across more units, its per-unit costs will be lower. This provides the larger retailer with a better bargaining position with its suppliers to extract lower input prices. If the large retailer reduces its prices to consumers, the reduced sales to smaller competing retailers results in those competitors having higher per-unit switching costs, thus reducing their ability to change suppliers, reducing their bargaining power with the initial supplier, and increasing the price they pay to the supplier for inputs.

While the model shows how the effect is possible and that it could harm consumers, it does not imply that the waterbed effect necessarily harms consumers. In fact, the same waterbed effect would also occur if a merger generated efficiency gains (as the authors point out), but with considerably different welfare and antitrust implications. Setting aside mergers, in Inderst & Valletti’s model, if one firm discovers a cheaper importer, for example, it would give that firm more buyer power, because it presents a more credible threat of leaving for a competitor. Recognizing that the firm has a better “outside option,” the wholesaler offers better terms. This, too, generates a waterbed effect, but it is clearly pro-competitive, as it would help consumers. Unless we are willing to declare finding another source of supply to be anticompetitive, we should be hesitant about jumping to the conclusion that the waterbed effect is anticompetitive.

Inderst & Valletti’s model also demonstrates that, with relatively low supplier-switching costs, the supplier has little scope to price discriminate among retailers. As a result, “any further growth of the large buyer… will reduce all retail prices.”[112] This is true even in the presence of a waterbed effect. Thus, for a waterbed effect to result in higher average retail prices for consumers, the large retailer’s buying advantage must be “sufficiently larger in size,” and smaller retailers must face much high switching costs, with those switching costs serving as the reason why the supplier can effectively price discriminate across the retailers.[113] For many products, this simply won’t be the case.

A competition authority that pursued a waterbed theory to block a merger must first demonstrate that a waterbed effect exists. Because each product sold in a food and grocery retailer may have its own idiosyncratic manufacturing, wholesale, and distribution characteristics, this evaluation likely must be conducted on a product-by-product basis. Then, for each market, the authority must evaluate the suppliers’ abilities to price discriminate (which could raise additional antitrust issues). Last, the authority must evaluate competing firms’ anticipated price response to any identified waterbed effect. While Inderst & Valletti provide a seemingly straightforward theoretical approach to evaluating allegations of a waterbed effect, applying their model to the real world of food and grocery mergers would likely amount to a costly and time-consuming wild goose chase.

That is likely why finding empirical demonstration of a waterbed effect has been so elusive. Indeed, we are not aware of any empirical literature indicating the existence of a waterbed effect in retail markets, let alone any evidence of consumer harms from such an effect.[114] Indeed, UK competition authorities have been unconvinced of any waterbed effects in the food and grocery mergers in which the issue has been raised. In 2006, the UK Office of Fair Trading concluded:

[T]here are theoretical questions that would need to be resolved before concluding that the price differentials observed are evidence of a waterbed effect. For example, it is not clear how suppliers would be able to charge significantly above cost to smaller retailers without rivals undercutting them in the market; similarly, it is not clear why suppliers would price persistently below cost to the large supermarkets.[115]

In the United States, only one district court has issued an opinion on the waterbed effect. In DeHoog, consumers sued to block AB InBev’s acquisition of SABMiller.[116] The consumers alleged that the merged firm would be a “powerful buyer” that “demands lower prices or other concessions from its suppliers, causing the supplier to, in turn, increase prices to smaller buyers.” The district court rejected the consumers’ waterbed claim because (1) the alleged harm was to competing brewers, not to consumers, and (2) competing brewers could switch to different hops, thereby avoiding any waterbed effect.

DeHoog highlights the high hurdles an antitrust authority or private plaintiff would need to clear in order to successfully allege a waterbed effect. Challengers must demonstrate that switching costs are insurmountably high and that a waterbed effect exists. They must demonstrate then that the waterbed effect harms consumers, rather than competitors.

Demonstrating a waterbed effect in the Kroger/Albertsons merger may be especially challenging. Although the notion has been invoked by several critics of the merger, we are not aware of any specific product or product category in which a potential waterbed effect has been alleged.[117] If the FTC chooses to pursue the waterbed-effect theory, it must identify the relevant products that would be subject to the effect and demonstrate the anticipated consumer harm associated with it. If the agency relies on the waterbed effect in an effort to block the Kroger/Albertsons merger, then it would be reasonable to conclude that its “traditional” claims of horizontal market power are especially weak.

VI.   Remedies Can Resolve Any Remaining Competitive Concerns

While the above sections argue that the FTC will (and should) have a hard time making a case that the Kroger/Albertsons merger is overall anticompetitive, there may be some specific geographic markets where concerns remain. In the face of such concerns, the FTC historically has allowed most supermarket transactions to proceed with divestitures, such as Ahold/Delhaize (81 stores divested), Albertsons/Safeway (168 stores), and Price Chopper/Tops (12 stores).[118] The extent of the remedies sought depends on the extent of post-merger competition in the relevant markets, as well as the likelihood of entry by additional competitors.[119] Dimitropoulos and coauthors have noted that most divestitures required by consent orders in recent supermarket mergers have occurred in geographic markets with fewer than five remaining competitors.[120]

There is good reason (and a long history of examples in previous grocery-merger settlements) to think that targeted divestitures in certain markets—as have been proposed from the start of this process by the merging parties[121]—should be sufficient to address any geographic-market-specific concerns that may arise.

One reason that divestiture—instead of outright blocking—should be appropriate in this case is that the vast majority of Kroger and Albertsons stores are in geographic markets where the other is not located (Figure 3). As such, there is no antitrust concerns from a product-market perspective. The merger does not affect competition in the South (where Kroger is focused) or in the Northeast (where Albertsons is focused). In these regions, the merger generates all of the efficiencies without the possible downside of a loss to competition.

In some other geographic locations, however, the companies do currently compete, and antitrust concerns could therefore arise. This is where divestiture comes in. By most measures, there appear to be some 1,400 overlapping stores; resolving this overlap entails divestiture of no more than 700, or 14% of the two companies’ more than 5,000 stores.[122] By the same token, only a limited number of geographic markets have Kroger and Albertsons stores in close proximity, suggesting that targeted divestitures could address those concerns, while allowing the merger to proceed unimpeded in the great majority of markets.[123]

Previous remedies sought by the FTC in merger cases have generally been successful in achieving their goals. The FTC’s most recent merger-remedies study, covering 89 orders from 2006-2012, provides additional support for the feasibility of divestitures as an effective remedy.[124] The study found that the vast majority of divestitures succeeded in maintaining competition in the affected markets. All remedies involving divestiture of an ongoing business were successful. Divestitures of more limited “selected assets” also largely succeeded, although at a lower rate. Overall, the FTC concluded that more than 80% of the orders examined achieved the goal of maintaining or restoring competition post-merger.[125]

Nonetheless, despite a long history of divestitures serving as an appropriate and adequate remedy in food-retail mergers, some advocates for stronger antitrust are extremely skeptical of divestiture remedies. As authors from the American Economic Liberties Project and the Open Markets Institute put it in one recent article:

It should not fall on our overburdened antitrust enforcers to pore over the individual assets changing hands in service of coming up with a carve-out that somehow brings a merger into technical compliance with an arbitrary Reaganite standard devised by bad-faith ideologues.[126]

Such concerns are leveled at the grocery industry, in particular, with critics consistently pointing to the Albertsons/Safeway merger divestitures to Haggen as evidence that, in this industry (if not elsewhere), divestiture is no longer an appropriate merger remedy.[127] But these arguments ring hollow. Several factors idiosyncratic to Haggen and its acquisition strategy led to that divestiture’s failure.

A.     Distinguishing the 2014 Haggen Divestiture

In 2014, the parent company of Albertsons announced plans to purchase rival food and grocery chain Safeway for $9.4 billion.[128] Prior to the merger, Albertsons was the fifth-largest grocer in the United States and operated approximately 1,075 supermarkets in 29 U.S. states. At the time, Safeway was the second-largest and operated more than 1,300 stores nationwide.[129] During its merger review, the FTC identified 130 local markets in Western and Midwestern states where it alleged the merger would be anticompetitive.[130] In response, Albertsons and Safeway agreed to divest 168 supermarkets in those geographic markets.[131] Haggen Holdings LLC was the largest buyer of the divested stores, acquiring 146 Albertsons and Safeway stores in Arizona, California, Nevada, Oregon, and Washington.

Following the acquisition, Haggen almost immediately encountered numerous problems at the converted stores. Consumers complained of high prices, and sales plummeted at some stores. The company struggled and began selling some of its stores. Less than a year after the FTC announced the divestiture agreement, Haggen filed for bankruptcy. Following the bankruptcy, Albertsons bought back 33 of the stores it had divested in its merger with Safeway.

In retrospect, Haggen may not have been an appropriate buyer for the divested stores. Before acquiring the divested stores, Haggen was a small regional chain with only 18 stores, mostly in Washington State. The acquisition represented a tenfold increase in the number of stores the company would operate. While Haggen was once an independent, family-owned firm, at the time of the acquisition, the company was owned by a private investment firm that used a sale-leaseback scheme to finance the purchase. Christopher Wetzel notes that Haggen failed to invest sufficiently in the marketing necessary to create brand awareness in regions where Haggen had not previously operated.[132] Such issues would need to be avoided in any future divestitures, and experience shows they can be.

Around the same time that it filed for bankruptcy, Haggen also filed a lawsuit against Albertsons in federal district court, arguing that Albertsons engaged in “coordinated and systematic efforts to eliminate competition and Haggen as a viable competitor.”[133] Haggen claimed that Albertsons made false representations to both Haggen and the FTC about its commitment to providing a smooth transition that would allow Haggen to be a viable competitor. Among other allegations, Haggen claimed that Albertsons overstocked the divested stores with perishable meat and produce, provided inaccurate and misleading price information that led to inflated prices, and failed to perform maintenance on stores and equipment.

None of these claims were demonstrated, as the matter settled months after the complaint was filed. Even so, FTC consent orders typically provide asset-maintenance agreements to address the kinds of issues raised by Haggen. David Balto reports that, after the 1995 Schnucks/National merger, the FTC sued Schnucks, alleging that it had violated a provision of the asset-maintenance agreement in the consent order.[134] The suit resulted in a settlement in which Schnucks paid a $3 million civil penalty and was required to divest two additional properties. These two properties were stores that had been closed by Schnucks, but that presumably could be reopened by a new buyer.

The problems with the Haggen divestiture need not be repeated. In particular, there are many companies of various sizes that have the capabilities and desire to expand. In recent merger-consent orders, divested stores have been acquired by both retail supermarkets and wholesalers with retail outlets, including Publix, Supervalu, Big Y, Weis, Associated Wholesale Grocers, Associated Food Stores, and C&S Wholesale Grocers.[135] Several of these companies have successfully expanded—in some cases outside of their “home” territories. For example, Publix is a Florida-based chain that operates nearly 1,350 stores in seven southeastern states.[136] Publix expanded to North Carolina in 2014, Virginia in 2017, and has announced plans to expand into Kentucky this year.[137] Weis Markets is a Pennsylvania-based chain that operates more than 200 stores in seven northeastern states.[138] Last year, the company announced plans to spend more than $150 million on projects, including new retail locations and upgrades to existing facilities.[139] And Rochester, New York-based Wegmans has successfully entered Delaware, Virginia, and the District of Columbia in recent years.[140]

While the relevant product and geographic markets for supermarket mergers has shifted enormously over the past few decades, divestitures remain an appropriate and adequate remedy for any competitive concerns. The FTC has knowledge and experience with divestiture remedies and should have a good understanding of what works. In particular—and, perhaps, unlike in the Haggen example—firms acquiring divested assets should have an adequate cushion of capital, experience with the market conditions in which the stores are located, and the operational and marketing expertise to transition customers through the change.

B.     Proposed C&S Divestiture

As noted, Kroger and Albertsons have contemplated divestitures from the beginning, even including a provision in their merger agreement preemptively agreeing to divest up to 650 stores.[141] More recently, however, the companies have made their divestiture plans more concrete. In September 2023, the companies presented a proposal (both publicly and to the FTC) proposing to divest 413 stores, eight distribution centers, and three store brands to C&S Wholesale Grocers for $1.9 billion.[142] The agreement also allows C&S to purchase up to 237 additional stores if needed to resolve antitrust concerns. C&S also has committed to maintain any existing collective-bargaining agreements with labor unions.[143]

The specific characteristics of the proposed buyer of the divested stores suggests that it is unlikely to fall prey to the limitations that scuttled the Haggen divestiture. Unlike Haggen, the purchasing party here has experience operating more than 160 supermarkets under brands like Grand Union. This existing operation of stores makes C&S better positioned as a buyer than Haggen was when it attempted to rapidly expand from 18 to 168 stores.[144]

While C&S is primarily a wholesaler, its Grand Union retail operations and the transition support offered under the divestiture agreement should position it to successfully operate the divested stores. In that way, the divestiture does not just spin off or increase the size of a horizontal competitor. Rather, the plan jumpstarts greater vertical integration by C&S, whose wholesale operations include the production of private-label products.

Indeed, by enabling C&S to take better advantage of the benefits of vertical integration, the divestiture appears to ensure that C&S will emerge with a structure more in line with the rest of the food-retail market. Over the past decade, many retailers (including Kroger and Albertsons) have shifted toward “bringing private label production in-house.”[145] This move by firms (even without any market power) likely reflects competitive advantages gained from vertical integration.

The targeted nature of the divestiture would allow the merger to proceed in the majority of geographic markets where there are no competitive concerns between Kroger and Albertsons. Divesting stores only where localized overlaps in specific regions exist enables the realization of efficiencies and benefits in the many remaining markets. The FTC will still need to closely scrutinize the buyer and the proposed divestiture package. But the announced plan demonstrates that the merging parties are taking seriously the need for divestitures.

Of course, as with any complex business transaction, there is always some possibility that aspects of a divestiture may not fully go according to plan. The recent piece by Maureen Tkacik & Claire Kelloway throws out many of these possibilities.[146] It’s possible that C&S turns out to not want to run grocery stores but only wants to resell the properties. It’s possible that C&S will be unable to afford the leases. Regulators and merging parties alike operate under inherent uncertainty when predicting competitive outcomes. Antitrust analysis does not deal with certainties, but rather with probabilistic assessments of likely competitive effects.

The relevant question is whether the divestiture is likely to effectively maintain competition in the markets of concern, not whether it can be guaranteed to perfectly do so in all scenarios. When we take more episodes than Haggen’s into account, despite the uncertainty, the FTC’s experience shows that targeted divestitures with an experienced buyer are likely to adequately protect consumers post-merger. The possibility that some unforeseen complication may arise does not negate the high probability that competition will be preserved. Antitrust regulation requires reasonable predictive judgments, acknowledging that business transactions inherently carry risks.

With the FTC’s knowledge of the industry and of its own past successes and failures, divestitures remain an appropriate and adequate remedy for this merger. The parties appear committed to working cooperatively with regulators to craft divestitures that fully resolve competitive concerns. Rather than blocking the deal outright, the FTC can allow the merger to proceed, conditioned on acceptable divestitures that protect consumers, while permitting efficiency gains across the majority of stores.

 

[1] Press Release, Kroger and Albertsons Companies Announce Definitive Merger Agreement, Kroger (Oct. 14, 2022), https://ir.kroger.com/CorporateProfile/press-releases/press-release/2022/Kroger-and-Albertsons-Companies-Announce-Definitive-Merger-Agreement/default.aspx.

[2] In an article written with Sandeep Vaheesan before she became chair of the FTC, Lina Khan expressed disdain for grocery-industry consolidation and deep skepticism of even the best divestiture packages. See Lina Khan & Sandeep Vaheesan, Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents, 11 Harv. L. & Pol’y Rev. 235, 254 (2017) (“Retail consolidation has enabled firms to squeeze their suppliers… and led to worse outcomes for consumers.”) & 289 (“Even if divestitures could be perfectly tailored and if they preserved competition in narrow markets in every instance, they would fail to advance the citizen interest standard.”).

[3] See, e.g., David Dayen, Proposed Kroger-Albertsons Merger Would Create a Grocery Giant, The American Prospect (Oct. 17, 2022), https://prospect.org/power/proposed-kroger-albertsons-merger-would-create-grocery-giant; Richard Smoley, Kroger, Albertsons, and Lina Khan, Blue Book Services (May 2, 2023), https://www.producebluebook.com/2023/05/02/kroger-albertsons-and-lina-khan.

[4] U.S. Dep’t of Justice & Fed. Trade Comm’n, Draft Merger Guidelines (Jul. 19, 2023), available at https://www.justice.gov/d9/2023-07/2023-draft-merger-guidelines_0.pdf. See also Gus Hurwitz & Geoffrey Manne, Antitrust Regulation by Intimidation, Wall St. J. (Jul. 24, 2023), https://www.wsj.com/articles/antitrust-regulation-by-intimidation-khan-kanter-case-law-courts-merger-27f610d9.

[5] Prior to Whole Foods/Wild Oats, the last litigated supermarket merger was the State of California’s 1988 challenge to American Store’s acquisition of Lucky Stores. Several retail mergers have been challenged in court, however, such as Staples/Office Depot in 2015. See Press Release, FTC Challenges Proposed Merger of Staples, Inc. and Office Depot, Inc., Federal Trade Commission (Dec. 7, 2015), https://www.ftc.gov/news-events/news/press-releases/2015/12/ftc-challenges-proposed-merger-staples-inc-office-depot-inc.

[6] This includes approving Albertsons/Safeway (2015), Ahold/Delhaize (2016), and Price Chopper/Tops (2022). See Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of Cerberus Institutional Partners V, L.P., AB Acquisition, LLC, and Safeway Inc. (File No. 141 0108) (Jan. 27, 2015) available at https://www.ftc.gov/system/files/documents/cases/150127cereberusfrn.pdf; Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of Koninklijke Ahold N.V. and Delhaize Group NV/SA (File No. 151-0175) (Jul. 22, 2016), available at https://www.ftc.gov/system/files/documents/cases/160722koninklijkeanalysis.pdf; Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of The Golub Corporation and Tops Markets Corporation (File No. 211-0002, Docket No. C-4753) (Nov. 8, 2021), available at https://www.ftc.gov/system/files/documents/cases/2110002pricechoppertopsaapc.pdf.

[7] Decision and Order, In the Matter of Whole Foods Market, Inc., (Docket No. 9324) (May 28, 2009), available at https://www.ftc.gov/sites/default/files/documents/cases/2009/05/090529wfdo.pdf; FTC v. Whole Foods Market, 548 F.3d 1028 (D.C. Cir. 2008).

[8] Number based on authors’ calculations, using data from 90^th Annual Report, Progressive Grocer (May 2023), https://progressivegrocer.com/crossroads-progressive-grocers-90th-annual-report.

[9] See Draft Merger Guidelines, supra note 4.

[10] FTC v. Meta Platforms Inc., U.S. Dist. LEXIS 29832 (2023); FTC v. Microsoft Corporation et al., No. 23-cv-02880-JSC (N.D. Cal. Jul. 10, 2023), available at https://s3.documentcloud.org/documents/23870711/ftc-v-microsoft-preliminary-injunction-opinion.pdf.

[11] See, e.g., George Kuhn, Grocery Shopping Consumer Segmentation, Drive Research (2002), available at https://www.driveresearch.com/media/4725/final-2022-grocery-segmentation-report.pdf.

[12] See, e.g., In the Matter of Cerberus Institutional Partners, supra note 6, at 3.

[13] Press Release, Kroger and Albertsons Companies Announce Comprehensive Divestiture Plan with C&S Wholesale Grocers, LLC in Connection with Proposed Merger, The Kroger Co. (Sep. 8, 2023), https://www.prnewswire.com/news-releases/kroger-and-albertsons-companies-announce-comprehensive-divestiture-plan-with-cs-wholesale-grocers-llc-in-connection-with-proposed-merger-301921933.html.

[14] Id.

[15] See Press Release, supra note 1.

[16] Progressive Grocer, supra note 8.

[17] Who Are the Top 10 Grocers in the United States?, Foodindustry.com (last visited Oct. 10, 2023), https://www.foodindustry.com/articles/top-10-grocers-in-the-united-states-2019.

[18] Id.

[19] Number based on authors’ calculations, using data from Progressive Grocer Staff, 90^th Annual Report, Progressive Grocer (May 2023), https://progressivegrocer.com/crossroads-progressive-grocers-90th-annual-report.

[20] Kroger, supra note 13.

[21] See Khan & Vaheesan, supra note 2.

[22] See Leah Nylen & Jeannette Neumann, California Preparing Lawsuit to Block Merger of Kroger, Jewel Parent, Bloomberg (Oct. 12, 2023), https://www.chicagobusiness.com/retail/california-preparing-lawsuit-block-kroger-albertsons-deal.

[23] Alexander Coolidge, Report: Kroger CEO Is “Committed to Litigate” If FTC Regulators Fight Albertsons Merger, Cincinnati Enquirer (May 11, 2023), https://www.cincinnati.com/story/money/2023/05/11/kroger-commited-to-litigate-if-ftc-blocks-albertsons-deal/70206692007.

[24] Press Release, FTC Challenges Proposed Merger of Staples, Inc. and Office Depot, Inc., Federal Trade Commission (Dec. 7, 2015), https://www.ftc.gov/news-events/news/press-releases/2015/12/ftc-challenges-proposed-merger-staples-inc-office-depot-inc.

[25] Jesse Greenspan, FTC To Challenge Whole Foods, Wild Oats Merger, Law360 (Jun. 5, 2007), https://www.law360.com/texas/articles/26191/ftc-to-challenge-whole-foods-wild-oats-merger.

[26] State of Cal. v. American Stores Co., 872 F.2d 837 (9^th Cir. 1989) (granting preliminary injunction).

[27] See, e.g., In the Matter of Cerberus Institutional Partners, supra note 6, at 2-3.

[28] See, e.g., Food Marketing Institute & The Hartman Group, Consumers’ Weekly Grocery Shopping Trips in the United States from 2006 to 2022 (Average Weekly Trips per Household), Statista (May 2022), available at https://www.statista.com/statistics/251728/weekly-number-of-us-grocery-shopping-trips-per-household.

[29] See, e.g., In the Matter of Cerberus Institutional Partners, supra note 6, at 3.

[30] Safeway Merger Report, UK Competition Commission (2003), available at https://webarchive.nationalarchives.gov.uk/ukgwa/20120119163858/http:/www.competition-commission.org.uk/inquiries/completed/2003/safeway/index.htm (“Overall, therefore, there is little evidence of an immediate or short-term ‘waterbed’ effect. … [O]ur surveys produced insufficient evidence on this point for us to conclude that any waterbed effect would be exacerbated by any of the mergers.”); Anticipated Merger between J Sainsbury PLC and ASDA Group Ltd: Summary of Final Report, UK Competition & Markets Authority (Apr. 25, 2019), available at https://assets.publishing.service.gov.uk/media/5cc1434ee5274a467a8dd482/Executive_summary.pdf (“Overall, it seems unlikely that many retailers will raise their prices in response to the Merger; and even if some individual retailers do, the overall effect on UK households is unlikely to be negative. On that basis, our finding is that the Merger is unlikely to lead to customer harm through a waterbed effect.”).

[31] DeHoog v. Anheuser-Busch InBev, SA/NV, No. 1:15-CV-02250-CL, 2016 U.S. Dist. LEXIS 137759, at *13-16 (D. Or. July 22, 2016).

[32] Leading to truculent statements like that of California Attorney General Rob Bonta that “[r]ight now, there’s not a lot of reason not to sue [to block the merger].” See Nylen & Neumann, supra note 19.

[33] See, e.g., Dayen, supra note 3; Smoley, id.

[34] For instance, the Herfindahl–Hirschman Index (HHI) at which mergers are deemed problematic has been lowered from 2500 (and a post-merger increase of 200) to 1800 (and a post-merger increase of 100). Likewise, combined market shares of more than 30% are generally deemed problematic under the new guidelines (if a merger also increase the market’s HHI by 100 or more). The revised guidelines also focus more heavily on monopsony and labor-market issues. See Draft Merger Guidelines, supra note 4, at 6-7.

[35] John Asker et al, Comments on the January 2022 DOJ and FTC RFI on Merger Enforcement, available at https://www.regulations.gov/comment/FTC-2022-0003-1847 at 15-16 (emphasis added).

[36] Draft Merger Guidelines, supra note 4, at 21.

[37] See U.S. Dep’t of Justice & Fed. Trade Comm’n, 2010 Horizontal Merger Guidelines (Aug. 19, 2010) at §5.3, available at https://www.justice.gov/atr/horizontal-merger-guidelines-08192010#5c.

[38] Draft Merger Guidelines, supra note 4, at 26.

[39] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23, 27 (2019).

[40] See U.S. Dep’t of Justice, Merger Guidelines (1968) at 6-7, available at https://www.justice.gov/archives/atr/1968-merger-guidelines.

[41] United States v. Von’s Grocery Co., 384 U.S. 270 (1966).

[42] See, e.g., Robert H. Bork, The Goals of Antitrust Policy, 57 Am. Econ. Rev. Papers & Proceedings 242 (1967) (“In the Von’s Grocery case a majority of the Supreme Court was willing to outlaw a merger which did not conceivably threaten consumers in order to help preserve small groceries in the Los Angeles area against the superior efficiency of the chains.”).

[43] Supra note 10; FTC v. Illumina, Inc., U.S. Dist. LEXIS 75172 (2021).

[44] United States v. Bertelsmann SE & Co. KGaA, No. CV 21-2886-FYP, 2022 WL 16949715 (D.D.C. Nov. 15, 2022).

[45] Id. (“The defendants do not dispute that if advances are significantly decreased, some authors will not be able to write, resulting in fewer books being published, less variety in the marketplace of ideas, and an inevitable loss of intellectual and creative output.”)

[46] Brian Albrecht, Business as Usual for Antitrust, City Journal (Nov 22, 2022), available at https://www.city-journal.org/article/business-as-usual-for-antitrust.

[47] Lina M. Khan, Rohit Chopra, & Kelly Slaughter, Comm’rs, Fed. Trade Comm’n, Statement on the Withdrawal of the Vertical Merger Guidelines (Sep. 15, 2021) at 3, available at https://www.ftc.gov/system/files/documents/public_statements/1596396/statement_of_chair_lina_m_khan_commissioner_rohit_chopra_and_commissioner_rebecca_kelly_slaughter_on.pdf.

[48] Premerger Notification Rules, 88 Fed. Reg. 42178 (RIN 3084-AB46), proposed Jun. 29, 2023 (to be codified at 16 C.F.R. Parts 801 and 803).

[49] Antitrust Experts Reject FTC/DOJ Changes to Merger Process, U.S. Chamber of Commerce (Sep. 19, 2023), https://www.uschamber.com/finance/antitrust/antitrust-experts-reject-ftc-doj-changes-to-merger-process. The surveyed group was made up seasoned antitrust veterans from across a variety of backgrounds: 80% had been involved in more than 50 mergers and 59% in more than 100.

[50] Supra note 23.

[51] Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of Cerberus Institutional Partners V, L.P., AB Acquisition, LLC, and Safeway Inc. (File No. 141 0108) (Jan. 27, 2015) available at https://www.ftc.gov/system/files/documents/cases/150127cereberusfrn.pdf. Analysis of Agreement Containing Consent Order to Aid Public Comment, In the Matter of Koninklijke Ahold N.V. and Delhaize Group NV/SA (Jul. 22, 2016) (File No. 151-0175) available at https://www.ftc.gov/system/files/documents/cases/160722koninklijkeanalysis.pdf.

[52] In the Matter of Cerberus Institutional Partners, supra note 6, at 2.

[53] In this paper, the terms “hypermarket” and “supercenter” are used synonymously. See Richard Volpe, Annemarie Kuhns, & Ted Jaenicke, Store Formats and Patterns in Household Grocery Purchases, Economic Research Service Economic Information Bulletin No. 167 (Mar. 2017), https://www.ers.usda.gov/webdocs/publications/82929/eib-167.pdf?v=0 (supercenters are also known as hypermarkets or superstores).

[54] In the Matter of Cerberus Institutional Partners, supra note 6, at 3.

[55] Id.

[56] Id.

[57] See In the Matter of Koninklijke Ahold, supra note 6.

[58] Data obtained from: U.S. Census Bureau, Report on Retail Sales and Trends: Annual Retail Trade Survey: 2021, https://www.census.gov/data/tables/2021/econ/arts/annual-report.html.

[59] Khan & Vaheesan, supra note 2, at 255.

[60] Id. (“Grocers sought to bulk up in order to compete with the scale of warehouse clubs and large discount stores, fueling further mergers and leading many local grocers to close….”).

[61] U.S. Census Bureau, supra note 58.

[62] Id.

[63] In the Matter of Cerberus Institutional Partners, supra note 6, at 2.

[64] Food Marketing Institute & The Hartman Group, Consumers’ Weekly Grocery Shopping Trips in the United States from 2006 to 2022 (Average Weekly Trips per Household), Statista (May 2022), available at https://www.statista.com/statistics/251728/weekly-number-of-us-grocery-shopping-trips-per-household.

[65] Michael Browne, Grocery Shopping Has a Hold on Consumers, Study Finds, Supermarket News (Jun. 27, 2018), https://www.supermarketnews.com/issues-trends/grocery-shopping-has-hold-consumers-study-finds.

[66] Kuhn, supra note 11.

[67] Id.

[68] Trip Drivers: Top Influencers Driving Shopper Traffic, Acosta (2017), available at https://acostastorage.blob.core.windows.net/uploads/prod/newsroom/publication_phetw_0rzq.pdf.

[69] Lijun Angelia Chen & Lisa House, US Food Shopper Trends in 2017, Univ. of Fla, IFAS Extension Pub. No. FE1126 (Dec. 7, 2022), https://edis.ifas.ufl.edu/publication/FE1126.

[70] Karen Webster, Consumer Shopping Data Shows Troubling Signs for Grocery Stores’ Future, PYMNTS (Feb. 6, 2023), https://www.pymnts.com/news/retail/2023/consumer-shopping-data-shows-troubling-signs-for-grocery-stores-future.

[71] See, e.g., In the Matter of Cerberus Institutional Partners, supra note 6, at 3.

[72] See Paul B. Ellickson, Paul L.E. Grieco, & Oleksii Khvastunov, Measuring Competition in Spatial Retail, 51 RAND J. Econ. 189 (2020) (“[C]lub stores are able to draw revenue from a significantly larger geographic area than traditional grocers. Hence, club stores are relevant substitutes for grocery stores, even if they are located even several miles away, a fact that could easily be overlooked in an analysis in which stores are simply clustered by geographic market.”).

[73] National Academies of Sciences, Engineering, and Medicine, A Satellite Account to Measure the Retail Transformation: Organizational, Conceptual, and Data Foundations (2021), available at https://www.bls.gov/evaluation/a-satellite-account-to-measure-the-retail-transformation.pdf (“[T]he restructuring that started first with the warehouse clubs and superstores and then moved on to e-commerce has begun to blur the lines between the retail industry and several other sectors….”).

[74] Id. at 25 (“[C]hanges experienced by retail over the past few decades suggest that the sector is highly competitive and is undergoing substantial change and reorganization. As discussed earlier, the changes described involve warehouse clubs and superstores … e-commerce … digital goods, imports, and large firms….”).

[75] Ellickson et al., supra note 72, (“Due to their size and attractiveness for larger purchases, club stores represent strong competitors to grocery stores even, when they are a significant distance away.”).

[76] Khan & Vaheesan, supra note 2, at 255 (“Grocers sought to bulk up in order to compete with the scale of warehouse clubs and large discount stores, fueling further mergers and leading many local grocers to close….”).

[77] See, e.g., In the Matter of Cerberus Institutional Partners, supra note 6, at 2.

[78] Costco Wholesale Corporation, Annual Report (Form 10-K) (Aug. 28, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/0000909832/000090983222000021/cost-20220828.htm; BJ’s Wholesale Club Holdings, Inc., Annual Report (Form 10-K) (Mar. 16, 2023), https://www.sec.gov/ix?doc=/Archives/edgar/data/1531152/000153115223000026/bj-20230128.htm; Walmart Inc., Annual Report (Form 10-K) (Mar. 27, 2023), https://www.sec.gov/ix?doc=/Archives/edgar/data/104169/000010416923000020/wmt-20230131.htm.

[79] BJ’s Wholesale Club Holdings, Inc, id.

[80] Costco Wholesale Corporation, id.

[81] BJ’s Wholesale Club Holdings, Inc, id.

[82] Id.

[83] Costco Wholesale Corporation, id.

[84] Id.

[85] Russell Redman, Report: Club Stores Absorbing Grocery Market Share from Supermarkets, Winsight Grocery Business (Apr. 20, 2023), https://www.winsightgrocerybusiness.com/retailers/report-club-stores-absorbing-grocery-market-share-supermarkets.

[86] Hean Tat Keh & Elain Shieh, Online Grocery Retailing: Success Factors and Potential Pitfalls, 44 Bus. Horizons 73 (Jul.-Aug., 2001); Appinio & Spryker, Share of Consumers Purchasing Groceries Online in the United States in 2022, by Channel, Statista (Sep. 2002).

[87] Navigating the Market Headwinds: The State of Grocery Retail 2022, McKinsey & Co. (May 2022), available at https://www.mckinsey.com/~/media/mckinsey/industries/retail/how%20we%20help%20clients/the%20state%20of%20grocery%20retail%202022%20north%20america/mck_state%20of%20grocery%20na_fullreport_v9.pdf.

[88] Id.; Dimitri Dimitropoulos, Renée M. Duplantis, & Loren K. Smith, Trends in Consumer Shopping Behavior and Their Implications for Retail Grocery Merger Reviews, CPI Antitrust Chron. (Dec. 2021), available at https://www.brattle.com/wp-content/uploads/2022/01/Trends-in-Consumer-Shopping-Behavior-and-their-Implications-for-Retail-Grocery-Merger-Review.pdf.

[89] See Webster, supra note 70.

[90] National Academies of Sciences, Engineering, and Medicine, supra note 73 (“As e-commerce has grown in recent years, it has become increasingly difficult to separate out the e-commerce portion of the industry. Most e-commerce could be identified within the nonstore retailer category as of 2013, but e-commerce is becoming so pervasive that it is now not only difficult to clearly identify individual firms as predominantly e-commerce firms, but also often impossible to clearly classify individual retail sales as either e-commerce or not.” citations omitted).

[91] Dimitropoulos, et al., supra note 88 (“Of course, adjustments to geographic market definition likely would need to be factored into the analysis, as club stores tend to have larger catchment areas than traditional grocery stores, and online delivery can reach as far away as can be travelled by truck from a central fulfilment center.”)

[92] Draft Merger Guidelines, supra note 4, at 25-7.

[93] Maeve Sheehey & Dan Papscun, Kroger-Albertsons Merger Tests FTC’s Focus on Labor Competition, Bloomberg Law (Dec. 2, 2022) https://news.bloomberglaw.com/antitrust/kroger-albertsons-merger-tests-ftcs-focus-on-labor-competition.

[94] Kroger Union, UFCW (last accessed Jul. 26, 2023), https://www.ufcw.org/actions/campaign/kroger-union.

[95] Albertsons and Safeway Union, UFCW (last accessed Jul. 26, 2023), https://www.ufcw.org/actions/campaign/albertsons-and-safeway-union.

[96] Press Release, America’s Largest Union of Essential Grocery Workers Announces Opposition to Kroger and Albertsons Merger, UFCW (May 5, 2023), https://www.ufcw.org/press-releases/americas-largest-union-of-essential-grocery-workers-announces-opposition-to-kroger-and-albertsons-merger.

[97] Id. (“Given the lack of transparency and the impact a merger between two of the largest supermarket companies could have on essential workers – and the communities and customers they serve – the UFCW stands united in its opposition to the proposed Kroger and Albertsons merger”).

[98] Press Release, Kroger and Albertsons Companies Announce Definitive Merger Agreement, Kroger (Oct. 14, 2022), https://ir.kroger.com/CorporateProfile/press-releases/press-release/2022/Kroger-and-Albertsons-Companies-Announce-Definitive-Merger-Agreement/default.aspx.

[99] Bill Wilson, Teamsters Union Says ‘No’ to Kroger, Albertsons Merger, Supermarket News (Jun. 13, 2023),  https://www.supermarketnews.com/retail-financial/teamsters-union-says-no-kroger-albertsons-merger.

[100] Ben Zipperer, Kroger-Albertsons Merger Will Harm Grocery Store Worker Wages, Economic Policy Institute (May 1, 2023), https://www.epi.org/publication/kroger-albertsons-merger.

[101] Nathan Miller et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10 J. Antitrust Enforcement 248 (2022).

[102] See Geoffrey A. Manne, Dirk Auer, Brian C. Albrecht, Eric Fruits & Lazar Radi?, Comments of the International Center for Law and Economics on the DOJ-FTC Request for Information on Merger Enforcement (2022), at 29, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4090844.

[103] See United States v. Bertelsmann SE & Co. KGaA, 1:21-CV-02886, 2022 WL 16949715 (D.D.C. Nov. 15, 2022).

[104] Press Release, The Kroger Family of Companies Provides New Career Opportunities to 100,000 Workers, Kroger (May 14, 2020), https://ir.kroger.com/CorporateProfile/press-releases/press-release/2020/The-Kroger-Family-of-Companies-Provides-New-Career-Opportunities-to-100000-Workers/default.aspx. While the exact job-to-job switches are unknown, at least during the pandemic we know that some workers at non-grocery employers viewed at least some grocery-industry jobs as substitutes.

[105] Transcript of Proceedings at the Public Workshop Held by the Antitrust Division of the United States Department of Justice, U.S. Justice Department (Sep. 23, 2019), available at https://www.justice.gov/atr/page/file/1209071/download.

[106] Roman Inderst & Tommaso M. Valletti, Buyer Power and the ‘Waterbed Effect’ 59 J. Ind. Econ. 1, 2 (2011).

[107] Albert Foer, Mr. Magoo Visits Wal-Mart: Finding the Right Lens for Antitrust, American Antitrust Institute Working Paper No. 06-07, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1103609.

[108] Michael Needler Jr., Senate Hearing on Kroger and Albertsons Grocery Store Chains, at 1:43:00, available at https://www.c-span.org/video/?524439-1/senate-hearing-kroger-albertsons-grocery-store-chains.

[109] Julie Creswell, Kroger-Albertsons Merger Faces Long Road Before Approval, New York Times (Jan. 23, 2023), https://www.nytimes.com/2023/01/23/business/kroger-albertsons-merger.html.

[110] Diana Moss, The American Antitrust Institute to the Honorable Lina M. Khan, American Antitrust Institute (Feb. 7, 2023), available at https://www.antitrustinstitute.org/wp-content/uploads/2023/02/Kroger-Albertsons_Ltr-to-FTC_2.7.23.pdf.

[111] Inderst & Valletti, supra note 106. For a short history of the development of the waterbed model, see Eric Fruits, Sloshing Around with the “Waterbed Effect,” Truth on the Market (Sep. 5, 2023), https://truthonthemarket.com/2023/09/05/sloshing-around-with-the-waterbed-effect.

[112] Inderst & Valletti, supra note 106, at 9.

[113] Id. at 10.

[114] There has been some investigation of the waterbed effect in two-sided markets in telecommunications, but these markets are very different from retail food and grocery. See Christos Genakos & Tommaso Valletti, Testing the “Waterbed” Effect in Mobile Telephony, 9 J. Eur. Econ. Assoc. 1114 (Dec. 2011) (evaluating the effect of cutting mobile-termination fees on mobile-subscription prices).

[115] UK Competition & Markets Authority, supra note 30.

[116] DeHoog v. Anheuser-Busch InBev, supra note 31.

[117] See, e.g., Albert Foer, Mr. Magoo Visits Wal-Mart: Finding the Right Lens for Antitrust, American Antitrust Institute Working Paper No. 06-07 (Nov. 30, 2006), available at https://ssrn.com/abstract=1103609 (alleging a Walmart waterbed effect without identifying any product or product category with the relevant characteristics that would make it subject to the effect).

[118] See In the Matter of Cerberus Institutional Partners, supra note 6; In the Matter of Koninklijke Ahold, id., In the Matter of the Golub Corporation, id.

[119] See Dimitropoulos, et al., supra note 88.

[120] See id.

[121] See, e.g., Abigail Summerville and Anirban Sen, Analysis: Kroger, Albertsons Spin-Off Is Extra Ammunition in Regulatory Battle, Reuters (Oct. 17, 2022), https://www.reuters.com/business/retail-consumer/kroger-albertsons-spin-off-is-extra-ammunition-regulatory-battle-2022-10-17 (“Kroger Co and Albertsons Cos Inc are willing to divest up to 650 supermarket stores to secure regulatory clearance for their $24.6 billion deal….”); Dan Papscun, Kroger-Albertsons Divestiture Bid Aims to Head Off Challenge, Bloomberg Law (Oct. 14, 2022) https://news.bloomberglaw.com/antitrust/kroger-albertsons-divestiture-plan-is-bid-to-deflect-regulators (“The FTC must factor the divestiture proposal in its deal analysis, now that the companies themselves have built it into their own proposal, said Steven Cernak, a Bona Law partner. The companies’ divestiture proposal makes the tie-up ‘a tougher deal for the FTC to challenge,’ Cernak said.”).

[122] See Kroger/Albertsons: Companies Have Overlap of More Than 1,400 Stores; Khan Highly Critical of Failed Supermarket Divestitures, The Capitol Forum (Nov. 2, 2022), https://thecapitolforum.com/kroger-albertsons-companies-have-overlap-of-more-than-1400-stores-khan-highly-critical-of-failed-supermarket-divestitures.

[123] Id.

[124] The FTC’s Merger Remedies 2006-2012: A Report of the Bureaus of Competition and Economics, Fed. Trade Comm’n (Jan. 2017), available at https://www.ftc.gov/system/files/documents/reports/ftcs-merger-remedies-2006-2012-report-bureaus-competition-economics/p143100_ftc_merger_remedies_2006-2012.pdf.

[125] Id. at 2.

[126] Maureen Tkacik & Claire Kelloway, The No Spin-Off Zone, The American Prospect (Oct. 11, 2023), https://prospect.org/power/2023-10-11-no-spin-off-zone-kroger-albertsons-merger/.

[127] See, e.g., Dayen, supra note 3 (“As the Haggen affair makes clear, the whole idea of using conditions to allow high-level mergers and competition simultaneously has been a failure.”). See also Tkacik & Kelloway, id. (“The Kroger-Albertsons merger shows us why regulators need to permanently divest the concept of, well, divesting.”).

[128] Scott Neuman, Grocery Chains Safeway and Albertson’s Announce Merger Deal, The Two Way (Mar. 6, 2014), https://www.npr.org/sections/thetwo-way/2014/03/06/286935900/grocery-chains-safeway-and-albertsons-announce-merger-deal.

[129] See In the Matter of Cerberus Institutional Partners, supra note 6, at 2.

[130] See id., at 3-5.

[131] See id., at 5.

[132] Christopher A. Wetzel, Strict(er) Scrutiny: The Impact of Failed Divestitures on U.S. Merger Remedies, 64 Antitrust Bull. 341 (2019).

[133] Jon Talton, Haggen: What Went Wrong?, Seattle Times (Mar. 15, 2016), https://www.seattletimes.com/business/economy/haggen-what-went-wrong.

[134] David A. Balto, Supermarket Merger Enforcement, 20 J. Pub. Pol’y & Marketing 38 (Spr. 2001).

[135] See In the Matter of Cerberus Institutional Partners, supra note 6; In the Matter of Koninklijke Ahold, id., In the Matter of the Golub Corporation, id.

[136] See Facts and Figures, Publix (last visited Oct. 10, 2023), https://corporate.publix.com/about-publix/company-overview/facts-figures.

[137] See Caroline A., The History of Publix: Entering New States, The Publix Checkout (Jan. 4, 2018), https://blog.publix.com/publix/the-history-of-publix-entering-new-states; Press Release, Publix Breaks Ground on First Kentucky Store and Announces Third Location, Publix (Jun. 23, 2022), https://corporate.publix.com/newsroom/news-stories/publix-breaks-ground-on-first-kentucky-store-and-announces-third-location.

[138] Weis Markets, LinkedIn https://www.linkedin.com/company/weis-markets/about, (last accessed Jul. 26, 2023).

[139] Sam Silverstein, Weis Markets Unveils $150M Expansion and Upgrade Plan, Grocery Dive (May 2, 2022), https://www.grocerydive.com/news/weis-markets-unveils-150m-expansion-and-upgrade-plan/623015.

[140] Russell Redman, Wegmans lines up its next new store locations, Winsight Grocery Business (Dec. 1, 2022) https://www.winsightgrocerybusiness.com/retailers/wegmans-lines-its-next-new-store-locations.

[141] See, e.g., Summerville & Sen, supra note 121.

[142] See Catherine Douglas Moran & Petyon Giora, Mapping Kroger and Albertson’s Store Divestiture Deal with C&S, Grocery Dive (Sept. 12, 2023), https://www.grocerydive.com/news/mapping-kroger-and-albertsons-store-divestiture-deal-with-cs/693186.

[143] Kroger, supra note 13.

[144] Grocery Dive Staff, The Friday Checkout: C&S Would Catapult to Major Retailer Status with Kroger-Albertsons Deal, Grocery Dive (Sept. 8, 2023), available at https://www.grocerydive.com/news/cs-wholesale-grocers-major-grocer-kroger-albertsons-merger-deal/693127.

[145] Catherine Douglas Moran, Why More Grocers Are Bringing Private Label Production In-House, Grocery Dive (June 13, 2023), available at https://www.grocerydive.com/news/grocers-private-label-production-in-house-sales-manufacturing/651986.

[146] Tkacik & Kelloway, supra note 119

tl;dr

Background: Concerns have been raised that the proposed merger of grocers Kroger and Albertsons may leave the combined firm with monopsony power in the markets for wholesale produce  and for grocery workers. This follows last year’s ruling by a federal court blocking the merger of Penguin Random House LLC and Simon & Schuster, similarly on grounds of labor-market monopsony. The argument is that the company would dominate in areas where the merging firms formerly competed for employees and other inputs. The combined firm could then use that power to suppress wages, reduce employment, or impose unreasonable working conditions on workers.

This isn’t the first time U.S. antitrust regulators have targeted monopsony in labor markets. In addition to merger review, other recent efforts have included lawsuits against “no-poach” agreements, as well as the Federal Trade Commission’s (FTC) recent proposal to ban  noncompete agreements in employment contracts.

But… Monopsony power often derives from labor-market frictions that antitrust can’t address. Most labor markets aren’t highly concentrated and most workers have multiple potential employers from which to choose. In other words, labor markets are generally poor targets for antitrust enforcement. As explained below, this raises several significant challenges for antitrust enforcers.

KEY TAKEAWAYS

MOST LABOR MARKETS ARE COMPETITIVE

So-called “company towns,” in which one firm dominates or actually owns a community, are rare. Most workers in the labor force have a broad range of employment opportunities across occupations, industries, and locations. A supermarket cashier can find employment at another supermarket, at another retail outlet, or shift their occupation to hospitality, food service, or distribution and logistics. They can also move to locations with better employment opportunities. A merger of supermarkets won’t suppress those opportunities.

The most compelling monopsony claims tend to concern labor markets that demand extensive or idiosyncratic skills, which couldn’t easily be transferred to other occupations or industries. For example, the Penguin/Simon & Schuster case centered on writers of bestsellers whose book advances exceed $250,000.

PRODUCT MARKETS IN ANTITRUST

All antitrust claims require defining a relevant market, but the endeavor is significantly more complicated in the context of labor markets. 

For example, what is the relevant labor market for supermarket employees? Surely, Costco employees should be included, even if Costco does not technically qualify as a “supermarket,” but what about employees of other retailers? What about hospitality and fast-food workers? When examining the labor market for workers who lack extensive or idiosyncratic skills, just about any reasonable definition of the relevant market would be too large to allege that any one firm possesses market power.

In a perfect world, these questions could be tested empirically. Unfortunately, antitrust enforcers often don’t have the requisite data and must rely on anecdotal evidence to delineate labor markets.

GEOGRAPHIC MARKETS IN ANTITRUST

U.S. workers are highly mobile. Roughly half of American adults live in a state other than the one in which they were born. Indeed, much of U.S. demographic history concerns people relocating for work. This makes it especially challenging to define a relevant geographic market for labor-monopsony claims. 

This is particularly true in urban environments, where there are many employment opportunities within commuting distance, especially for workers with fewer skills or less experience. Hence, stronger claims of labor-market monopsony tend to concern rural markets with limited job opportunities. It’s much easier to claim that Walmart holds labor-monopsony power in a small town than in even a medium-sized city.

UNION POWER AND ANTITRUST

Antitrust enforcers also need to account for the countervailing market power held by labor unions. Obtaining and exerting market power is unions’ raison d’être. As the old song says: “There is power in a union.”

For instance, if the FTC challenges the Kroger-Albertsons merger (as is expected) by alleging labor-market monopsony, the agency will have to contend with the fact that roughly 60% of the merged company’s workforce will be unionized. Attempts to exercise monopsony power would likely be dampened by the effects of unions collectively bargaining to maintain high wages and prevent layoffs.

BALANCING CONSUMER & WORKER WELFARE

The final challenge to labor-monopsony cases is that the primary purpose of antitrust enforcement is widely accepted to be protecting against harms to competition or to consumers. In labor cases, this will almost inevitably require important tradeoffs. 

While a merger might suppress the wages that would otherwise be paid by the merging companies, these wage reductions may then be passed on to consumers in the form of lower prices. Reduced labor input for a particular type of worker or workers does not mechanically translate into reduced output for consumers. This can be the case, for example, when a merger results in restructuring. 

In evaluating a merger, the agencies and the courts must balance the anticipated harms to employees against the potential benefits to consumers. This is a daunting task that may prove insurmountable in many cases.

For more on this issue, see the International Center for Law & Economics (ICLE) issue brief “Five Problems with a Potential FTC Challenge to the Kroger/Albertsons Merger.” See also, “FTC Should Allow Kroger-Albertsons Merger to Go Through” by Eric Fruits and Geoffrey Manne.

 

I.        Introduction

We appreciate the opportunity to comment on the proposed changes to the premerger notification rules recently published by the Federal Trade Commission (“FTC”), with the concurrence of the Assistant Attorney General of the Antitrust Division of the U.S. Department of Justice (“DOJ” or “Division”).[1]

Merger law in the United States has largely tracked developing economic theory.[2] This approach has tended to reject structural presumptions about a merger’s likely effects on competition and consumers (understanding, that is, that “big” is not necessarily “bad”). It encourages weighing the potential anticompetitive effects of a transaction against its potential procompetitive efficiencies.

That trend in enforcement and jurisprudence notwithstanding, current leadership at the agencies has signaled a more aggressive approach to enforcement, dismissing likely efficiencies and other merger benefits. For instance, the Chair of the FTC has argued that Section 7 of the Clayton Act:

is a broad mandate aimed at prohibiting mergers even when they do not constitute monopolization and even when their tendency to lessen competition is not certain. . . . [E]ven if a merger does create efficiencies, the statute provides no basis for permitting the merger if it nevertheless lessens competition.[3]

The substantive changes to both the merger guidelines and the premerger notification form relate to this goal of more aggressive merger enforcement. As we explain below, while certain changes are required by statutory amendments to the Clayton Act, many of the proposed amendments would be both unnecessary and inappropriately burdensome and costly. Collectively, they would exceed the agencies’ statutory authority, under Section 7A of the Clayton Act,[4] to require the production of “such documentary material and information relevant to a proposed acquisition as is necessary and appropriate … to determine whether such acquisition may, if consummated, violate the antitrust laws.”[5]

While further research, enforcement experience, and legal precedent might develop such that certain additional information would reasonably be required of all filers, the agencies have not presented the requisite developments in the NPRM or, to the best of our knowledge, elsewhere. Such developments should, at least, precede the imposition of substantial new filing requirements. The HSR regulations and form are not supposed to be a substitute for, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.[6]

The scope of the NPRM and the diversity of additional information that filers would be required to produce should the proposals be adopted together raise a fundamental question: how will the new requirements materially improve merger screening?  Are the agencies often or systematically clearing anticompetitive mergers because of information not included in initial filings, and that staff cannot glean via, e.g., follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests? Would such mergers fail to clear under the proposed filing requirements?  Answers to these and other questions, which nowhere appear in the NPRM, are needed to maintain that these changes are necessary and appropriate, given the other means by which the agencies can obtain information to inform premerger screening (such as through second requests).

Section I offers some background concerning the purpose of the HSR form and filing requirements, and on the changes that have been proposed. Section IV provides a brief discussion of the proposed changes that are necessary or otherwise reasonable. Section V discusses the changes that are problematic. These would increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers; they would impose additional burdens on agency staff; yet it is unlikely that they would provide countervailing benefits to competition and consumers.

II.      Background: Merger Enforcement and the HSR Premerger Notification Form?

At the outset, we note that the proposed changes to the premerger notification rules (“NPRM”) were closely followed by the agencies’ publication of new draft merger guidelines.[7] That makes some sense, as the two are closely intertwined. Section 7 of the Clayton Act prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”[8] In 1976, Congress enacted the Hart–Scott–Rodino Antitrust Improvements Act (“HSR Act”) to facilitate enforcement of Section 7. Specifically, the HSR Act created a premerger notification mandate, under which transactions exceeding certain market share or value thresholds must be reported to the DOJ and FTC at least 30 days prior to closing.[9] The agencies use these 30 days to screen proposed large transactions and to determine whether further scrutiny is needed as to whether a transaction might violate the Clayton Act.[10]

The premerger notification process is a congressionally created mechanism that requires parties to relatively large transactions to provide the agencies with notice of, and opportunity to go to court to enjoin, those transactions before they close. Initial filings are a critical basis on which agency staff can screen proposed mergers effectively, although, of course, the production required by the HSR form itself is far from the only source of information available to staff screening mergers prior to closing.

Reviewing staff can—and routinely do—ask merger-specific follow-up questions during that initial 30-day period, in addition to consulting third parties and other sources of information. The agencies can then issue a request for additional information, called a second request, to the parties to get further details about a transaction and to decide whether to seek to enjoin the merger from proceeding.[11] With that second request, the reviewing agency may extend the screening period for an additional 30 days.[12] In the interim—often prompted by additional staff questions—parties may elect to “pull and refile,” which restarts the initial 30-day clock and permits additional information gathering by the staff in advance of a decision regarding whether to issue a second request.

The HSR premerger notification requirements address a basic problem of antitrust law: you can’t “unscramble an egg.”[13] Once a merger is finalized, businesses begin intermingling their operations, personnel, finances, business plans, trade secrets, and intellectual property in various ways. The larger the firms—or the more complex the integration or consolidation—the more difficult it becomes to undo (or “unwind”) a consummated merger. Premerger notification creates an opportunity for the antitrust agencies to identify and pause pending mergers, in order to allow for more thoroughgoing investigation of their potential competitive effects before any eggs have been scrambled.

When the HSR Act was adopted, it was expected that only 150 or so transactions each year would be large enough to trigger review.[14] In time, that estimate proved to be off by more than an order of magnitude; in recent years, more than that many transactions are notified each month.[15] The effect has largely been to transition merger law in the United States from an ex post enforcement-based regime to an ex ante regulatory regime.[16]

Despite this change, the premerger notification regime is generally viewed as successful. [17] This is because the program has been designed and managed with the understanding that it is meant only to identify mergers that are likely problematic; and, conversely, that it is meant not to impede the vast majority of mergers that are unlikely to be problematic (but likely procompetitive or benign). [18] Combined with the merger guidelines—which have (in the past) provided clear guidance on how the agencies will review materials submitted as part of the premerger notification process—the HSR Act’s premerger notification process has created a robust and relatively low-burden system. This system enables business and antitrust agencies alike to identify problematic transactions, while allowing most deals to proceed with minimal cost or delay. The balance is captured in a December 2020 advance notice of proposed rulemaking that contemplated other premerger-filing amendments: “[t]he Agencies have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns, while at the same time not receiving filings related to acquisitions that are very unlikely to raise competition concerns.”[19]

A very large majority of reported mergers are consummated without challenge or allegation of likely anticompetitive effects. For example, the agencies reported challenging only 32 of the 3,520 transactions reported in fiscal year 2021; that is, 0.009%.[20] Across the 10-year period from fiscal years 2012-2021 (inclusive), in the vast majority of cases, neither agency even issued a second request. It is reported that DOJ issued second requests in frequencies ranging from 0.7% to a high of 2.1% in 2012, while FTC issued second requests in 1.4% to 1.9% of investigations.[21]

The agencies’ multiple opportunities to receive and request information prior to the consummation of a transaction, along with the relative infrequency with which additional information is requested, or with which transactions are challenged, are the context in which to ask whether it is “necessary and appropriate” to require the production of certain information with the initial HSR filing. As a simple example, if roughly 2% of noticed transactions receive a second request, the compliance burden of requesting information of all firms as part of the premerger notification process is roughly 50 times greater than it would be if the information were requested only with a second request.[22] And that burden is one imposed on both reviewing staff and filers.

III.    Direct Costs

From the outset, it is important to understand that the proposed amendments are anything but costless. Estimates suggest the new rules will lead to somewhere between $350 million and $2.23 billion in additional annual compliance costs. Not only will these additional costs deter firms, at the margin, from filing—and hence from merging—but they will also be passed on to consumers (at least in part) when firms do. The substantial costs that would be imposed by many of the proposed requirements raises the bar for deeming such amendments appropriate.

Even the FTC estimates a massive increase in compliance costs of approximately $350 million, to more than $470 million per year. But that estimate is likely a serious underestimate, as it is based on, among other things, an unscientific “estimate” of the time involved and a dated assumption about the average hourly costs imposed on filers’ senior executives and firms’ counsel.

The U.S. Chamber of Commerce conducted “a survey of 70 antitrust practitioners asking them questions about the proposed revisions to the HSR merger form and the new draft merger guides.”[23] Based on average answers from the survey respondents, the new rules would increase compliance costs by $1.66 billion, almost five times the FTC’s $350 million estimate. For the current rules, the average survey response puts the cost of compliance at $79,569.[24] Assuming there are 7,096 filings (as the FTC projects for FY 23), the total cost under the current rules would be $565 million. Under the new rules, the average survey response estimates the expected cost of compliance to be $313,828 per transaction, for a total cost of $2.23 billion.[25] The relevant total costs for all filing are summarized in Table 1. Table 2 presents the numbers on a per-filing basis.

Even if we assume the U.S. Chamber of Commerce’s survey was biased toward practitioners who work on more complex and costly transactions, it is dramatically higher than the FTC’s estimate. The FTC estimates that 45% of filings have overlaps.[26] For simplicity, assume survey respondents work only on overlaps and the remaining 55% of filings require no extra work.[27] Even with these extreme assumptions, the amendments would increase the cost of filing by nearly $750 million—more than double the FTC’s estimate.

On any reasonable estimate, the amendments are likely to impose substantial new costs on all filers and may have significant effects on firms’ incentives to merge—and important consequences for consumers when they do. They may also have an outsize impact on relatively small filers. The merits of these amendments should thus be carefully considered against their substantial and widespread costs.

IV.    Required and Reasonable Changes to the Reporting Requirements

The HSR form has been amended many times since 1976.[28] Some of the amendments have been minor or even ministerial, and many—not all—have been required by statutory amendments to the pertinent provisions of the Clayton Act.[29] For example, revised reporting thresholds were noticed in January 2023,[30] January 2022,[31] and February 2021,[32] and the commission published an advance notice of proposed rulemaking regarding various potential changes in December 2020.[33]

Consistent with past practice, some of the amendments proposed in the NPRM implement 2022 amendments to pertinent provisions of the Clayton Act, while others appear to streamline or clarify reporting requirements. That is, some of the proposed changes are necessary and others appear at least appropriate.

First, as noted in the NPRM, certain proposed amendments implement 2022 statutory amendments imposed by the Merger Filing Fee Modernization Act of 2022.[34] For example, the 2022 statutory amendments require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern” and correspondingly requires that the agencies collect such information with premerger filings, and that they promulgate regulations to that effect.[35] The NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of 2022 congressional charge.

Second, the NPRM’s proposal to amend Part 803 to require electronic filing[36] will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development.[37] As observed in the NPRM, the agencies have been accepting electronic HSR filings since March 2020.[38] Many filers have taken advantage of the electronic-filing option since then. Furthermore, premerger screening by staff can be carried out more efficiently with electronic documents. Given the increased digitization of pertinent documents across the economy, it is reasonable to assume that the formal routinization of electronic filing will streamline both premerger filing and the screening of filings by agency staff. The extent to which this will make premerger filing and screening more efficient depends on the successful implementation of an e-filing platform. If successful, the benefits should be substantial.

V.      Problematic Changes to the Filing Rules Are Not Justified by the NPRM or Otherwise

While several of the NPRM’s proposed changes appear to be reasonable attempts to implement new statutory mandates or, as in the case of electronic filing, pragmatic initiatives to update and streamline the filing and review processes, others appear cumbersome, costly, and unnecessary or, at best, substantially unjustified by the NPRM or other available evidence.

For example, Parts 4(c) and 4(d) of the current premerger notification form require merging parties to provide copies of “all studies, surveys, analyses and reports which were prepared . . . for the purpose of evaluating or analyzing the acquisition” and “all Confidential Information Memoranda . . . that specifically relate to the sale.”[39] The proposed changes would require an additional “narrative that would identify and explain each strategic rationale for the transaction.”[40] That narrative would not have been created in the ordinary course of business, and likely not even in the context of contemplating a transaction. Creating it would come at a real cost, in terms of billable hours and executives’ time. This might imply a requirement that the parties prepare a reply brief to a potential future antitrust challenge to the transaction, without the benefit of knowing the specific arguments that the agencies would make against it.

In brief, the changes proposed in the NPRM would force parties to submit far more information than the HSR rules now require. Much of this information appears to be of, at best, peripheral value to screening mergers under the Clayton Act. The result is that the NPRM would greatly increase the burden placed on all merging parties, while apparently offering little countervailing value to competition and consumers, or even to the staff charged with premerger screening. Some have even suggested this may be the purpose of the changes: “killing deals softly”[41] by making mergers more costly in an effort to deter at least some of them, including even some that ultimately would be cleared by agencies and courts.

A.          Non-Horizontal Information

The NPRM would require both filing entities to submit considerable additional material about supply and other non-horizontal relationships between the parties, including both formal agreements, such as supply, distribution, purchase, and franchise agreements,[42] and a “supply relationships narrative section that would require each filing person to provide information about existing or potential vertical, or supply, relationships between the filing persons.”[43] The latter type of information would not likely be documented in the ordinary course of business.

The NPRM acknowledges that “this will increase the burden on filers whose transaction involves existing supply relationships or who supply or purchase from companies that compete with the other filing party.”[44] The NPRM also acknowledges that 2001 amendments to the HSR rules removed some additional vertical information that had been required “because the type of information collected did not prove useful enough to the Agencies as a screen for potential non-horizontal relationships to justify the burden of providing it at that time.”[45] The extra burden is now supposed to be justified, however, as “it would allow them to quickly identify those transactions that raise concerns about non-horizontal competitive effects.”[46]

The basis of the commission’s claim about a newfound utility for such required production is unclear. There remains the basic question of how the new requirements will materially improve merger screening. The agencies do not offer any evidence to suggest they often or systematically clear anticompetitive mergers because of information that is not included in initial filings, that staff cannot obtain via follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests, etc. In other words, there is little to suggest that many mergers would be challenged, but for the supposed lacunae in the HSR requirements.

It is worth recalling, in that regard, that a “second request” extends the initial 30-day screening period by an additional 30 days, and that Section 7A of the Clayton Act affords the agencies considerable discretion in determining “ all the information and documentary material required to be submitted pursuant to such a request.”[47] That is, the agencies have ample opportunity to obtain necessary documents that are not included in the initial premerger notification.

When the draft merger guidelines were issued, an accompanying statement by FTC Commissioner Alvaro M. Bedoya, joined by Chair Lina Khan and Commissioner Rebecca Slaughter, also addressed the question of what is missing from the extant filing requirements—i.e., what missing information impedes merger screening, to the detriment of competition and consumers? Addressing “periods of high merger activity” generally, and mergers by large tech firms specifically, the statement argues that a:

lack of relevant information is especially problematic during periods of high merger activity . . . The Commission’s recent 6(b) inquiry into unreported acquisitions by Apple, Amazon, Facebook (now Meta), Google, and Microsoft during 2010-2019 also highlighted the importance of collecting more information on the firm’s history of acquisitions, including non-horizontal and small prior acquisitions. The study captured how these firms structured acquisitions, the sectors they had identified as strategically important for acquisitions, and how these acquisitions figured into the companies’ overall business strategies.[48]

Of course, small or non-horizontal mergers might be competitively significant under particular facts and circumstances. But the study in question does not find, or even suggest, that such transactions have been typically, frequently, or in any instance anticompetitive, much less that the NPRM’s proposed changes would have allowed the staff to spot such anticompetitive mergers before they were consummated. Indeed, the study does not appear to address at all the question of whether any mergers of interest were anticompetitive. And the report expressly states that it “does not make recommendations or conclusions regarding the HSR thresholds.”[49]

A recently published paper by Ginger Zhe Jin (former director of the FTC’s Bureau of Economics), Mario Leccese, and Liad Wagman (formerly a senior economic and technology advisor in the FTC’s Office of Policy Planning who, in that capacity, played a leading role in conducting the above 6(b) study) is at least somewhat in tension with the commissioner’s representation of the study.[50] The paper finds, among other things, that “GAFAM acquisitions are less concentrated across tech categories than other top acquirer groups,” and that “[o]verall, we find that technology acquisitions do not shield GAFAM from competition, at least not from other GAFAM members or other firms that acquire in the same categories.”[51]

To be sure, neither the FTC study nor the related—more thorough—investigation by Jin, Leccese, and Wagman, demonstrates that none of the mergers in question had anticompetitive consequences. They do, however, sharpen the question of the agencies’ basis—if any—for requiring considerable additional information. In brief, the NPRM presents no evidence to contradict or reverse the 2021 determination that the screening utility of such additional non-horizontal information did not justify the burden it imposed. And that is a burden on both filing parties and reviewing staff.

B.          Labor Information

The NPRM proposes to require the production of material for “a new Labor Markets section” comprising considerable information on employees of the merging parties—information not previously identified under the HSR regulations.[52] The likely utility of this information is unclear.

1.        Overlaps in quasi-labor markets

Both the acquiring party and the target would be required to gather information on their employees in each of five standard occupational classification (SOC) categories, with occupations defined by six-digit SOC codes.[53] For each of the five largest such groups of employees, both filers would be required to identify any SOC codes in which they both employ workers, as well as any overlap in employees’ commuting zones and the total number of employees within each commuting zone.[54]

The NPRM acknowledges that neither six-digit SOC codes (developed by the U.S. Bureau of Labor Statistics) nor commuting zones (as determined by the U.S. Agriculture Department’s Economic Research Service) were developed to facilitate competition analysis generally, or merger screening specifically. Thus, they do not determine the product/labor markets or geographic markets in which labor competition might be impeded. The NPRM nonetheless suggests that such information will serve as a useful “screen” or “initial proxy for labor issues while balancing the burden on filers by limiting the request to their five largest categories of workers.”[55]

Given the systematic misfit between the proposed “Labor Markets” section and any actual labor markets, given the agencies lack of experience in analyzing the local labor-market effects of proposed mergers, and given the hard questions of when or under what conditions such labor-market effects might be both material and unlikely to covary with product-market effects, we suggest that the screening utility of the new information remains unclear.

In addition, the NPRM seeks comment on the question of whether such information would be costly to collect. In that regard, it is worth noting that firms are highly unlikely to collect or maintain this employee information in the manner proposed in the ordinary course of business. Hence, the gathering of such information might represent a substantial new burden on HSR filers. Compiling such information is not what is ordinarily understood to be “production” in the discovery context, and it would be a burden with unclear benefits to competition and consumers.

Of course, certain labor-market information may be pertinent to the analysis of certain mergers. But if it is unclear what new labor information would be useful, reasonable, and necessary to merger screening, then further research—as well as further enforcement experience—is warranted to determine the scope of such information before the imposition of costly regulations. As noted in the introduction to these comments, the HSR rules and form are not supposed to be substitutes for enforcement experience or, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.

2.        Worker and workplace-safety information

In addition, both filing firms would be required to identify various “worker and workplace safety information.”[56] Specifically, for the five years immediately preceding the filing:

…any penalties or findings issued against the filing person by the U.S. Department of Labor’s Wage and Hour Division (WHD), the National Labor Relations Board (NLRB), or the Occupational Safety and Health Administration (OSHA) in the last five years and/or any pending WHD, NLRB, or OSHA matters. For each identified penalty or finding, provide (1) the decision or issuance date, (2) the case number, (3) the JD number (for NLRB only), and (4) a description of the penalty and/or finding.[57]

The purported rationale for this requirement appears strained. The NPRM suggests that “[i]f a firm has a history of labor law violations, it may be indicative of a concentrated labor market where workers do not have the ability to easily find another job.”[58] That is not impossible, but it does not seem likely, and the agencies provide no basis on which to think that the signaling value of such information would be significant.

According to the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), these types of violations occur most often in the construction and general-industry sectors. Of the 10 most frequently cited OSHA violations, five are in the construction sector—not commonly a highly concentrated one—and five are in “general industry.”[59] We are not aware of any literature showing a significant correlation between such violations and highly concentrated product markets (or even industries), or with highly concentrated labor markets, much less with anticompetitive mergers, and the NPRM does not cite any.

VI.    The Limits of Reasonable and Necessary Filing Requirements

As described briefly in the background section of these comments above, certain aspects of the premerger notification process are specified in the statute, while others are left to agency implementation and discretion. Section 7A(a) of the Clayton Act specifies the transactions for which notice must be given.[60] And Subsections (b)(1) and (e)(2) specify the duration of the initial waiting period, as well as that for second requests.[61] But other aspects of the premerger notification process are delegated to the agencies to develop by rule, requiring that:

The Federal Trade Commission, with the concurrence of the [DOJ] and by rule in accordance with section 553 of title 5, consistent with the purposes of this section—shall require that the notification required under subsection (a) be in such form and contain such documentary material and information relevant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to determine whether such acquisition may, if consummated, violate the antitrust laws[.][62]

Implementation of premerger notification is subject to the rulemaking process outlined in Section 553 of the APA.[63] This process requires, for instance, putting out a notice of proposed rulemaking, soliciting comments, and publishing final rules that explain their basis and respond to substantial comments.[64] Rules adopted through this process carry the force of law and are binding on parties and the courts. A challenge to such rules would need to show that the agency had been arbitrary or capricious in adopting them,[65] or that there were defects in the rulemaking process such as a failure to respond to significant comments or adoption of final rules that were not a “logical outgrowth” of those contained in the proposed changes to the rules.[66]

As described above, the proposed changes to the premerger notification requirements are significant. Indeed, the FTC’s own estimate of the costs of the proposal exceeds the entire 2023 antitrust budget for the FTC and DOJ combined.[67] More substantively, the proposed changes to the premerger notification form would impose significant costs on firms; and some would appear prejudicial.

A particular area of substantial change discussed above has to do with the production of considerable employee or labor-regulation information, such as the parties’ history of OSHA complaints.[68] This, again, would require compiling information firms are not likely to gather and maintain in the ordinary course of business. This concern is even more severe, because the agencies’ concern with the local labor-market implications of mergers—including mergers that may have national geographic markets from a product perspective—is of recent provenance.[69] As we discussed above, the antitrust relevance of information such as OSHA complaints is dubious or, at least, unclear. It may be that the agencies will, in time, develop sufficient experience with these aspects of merger cases to justify labor-related changes to the HSR rules. At present, however, the information proposed to be required seems better suited to a research proposal—perhaps under the FTC’s study authority under Section 6(b) of the FTC Act—than it does to a regulatory requirement.

The changes to the premerger notification requirements would be significant. Perhaps the simplest metric to capture the scope of these changes is the FTC’s own estimate of compliance costs. With the current HSR premerger notification form, the FTC estimates that aggregate annual HSR compliance costs are approximately $120 million. Under the new requirements, the FTC estimates this would increase by approximately $350 million, to more than $470 million per year.[70] This exceeds the entire 2023 antitrust budget for the FTC and DOJ combined.[71]

A.          The Premerger Notification Form Risks Challenge as Arbitrary and Capricious

As an initial matter, the proposed changes clearly run contrary to legislative intent. As Chair Khan has herself noted, Congress expected only the 150 largest mergers each year would require notification to the agencies,[72] but the agencies today review several thousand reported transactions annually.[73] Former U.S. Rep. Peter Rodino, one of the authors of the HSR Act, anticipated that premerger notification would not entail the creation of new information and that compliance should not routinely delay consummation of deals.[74] Similarly, a “need to avoid burdensome notification requirements or fruitless delays”[75] was noted in the Senate. At least arguably, many of the NPRM’s proposed changes fail on all of these fronts.

Changes to the premerger notification process would carry to the force of law. So long as they are not arbitrary or capricious—and, usually, a failure to abide by the legislative history would not, in and of itself, surmount this bar—such changes are binding on parties to a merger. The hallmarks of arbitrary or capricious agency action were explained by the Supreme Court in State Farm:

Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.[76]

While the statute confers considerable discretion on the agencies’ implementation of the HSR Act’s amendments to the Clayton Act, that discretion is not unbounded. Indeed, there is good reason to believe that courts are likely to find many of the NPRM’s proposed changes to be arbitrary and capricious. The Act expressly limits the agencies to requiring production of information that is “relevant to a proposed acquisition as is necessary and appropriate . . . to determine whether such acquisition may, if consummated, violate the antitrust laws.”[77] And this text must be read in conjunction with the statutory authority to make second requests that “require the submission of additional information or documentary material relevant to the proposed acquisition.”[78] Moreover, any rules must be “consistent with the purposes of this section”—that is, to allow the antitrust agencies an opportunity to review significant mergers prior to their consummation to avoid the “unscrambling the egg” problem.

The statutory authority raises many textual questions. What constitutes “necessary” and “appropriate” information? And what does it mean for these words to be joined by the conjunction “and”? What is the extent of the limitation that information be “relevant to the proposed acquisition”? Is the “purpose of the section” limited to merger-related antitrust concerns, or more expansively related to the violation of any antitrust laws that might result from consummation of the transaction?[79] Each of these specify factors that Congress did or did not intend the agencies to consider or that may or may not be important aspects of the problem that Congress empowered the agencies to address.

Consider, for instance, what it means for materials to be “relevant to a proposed acquisition.” A natural reading would limit this to the materials that firms gathered in evaluating the transaction; and the submission of such extant materials would meet the ordinary meaning of “production” in a litigation context. The NPRM would expand the universe of relevant materials, including potentially anything that might inform a determination of the transaction’s legality. Courts are likely to say that the limit must be narrower than anything the agencies think potentially relevant to request.[80]

For example, the proposed rules would require disclosure of information about OSHA findings against the parties, on the theory that OSHA violations correlate with labor-market power. But as noted above, OSHA data suggest that the most common violations occur in industries that are minimally concentrated (e.g., construction). Similarly, the proposed rules would require parties to provide detailed information about the number of employees in broad categories working in overlapping commuting zones.[81] Such information might be useful in evaluating the competitive effects of a transaction,[82] but that utility is unclear. Furthermore, the information is not of a sort, or in a format, that parties to a merger are likely to compile in the ordinary course of business, or to aid themselves in deciding whether to pursue a merger. That is, from the parties’ perspective, this information would likely be irrelevant to a proposed acquisition, even if it might be relevant to the agencies’ evaluation of the effects of the proposed acquisition.

The point is underscored when considering the meaning of “necessary and appropriate.” As an initial matter—and echoing the concerns about information’s relevance to a proposed transaction— “appropriateness” could be determined with respect to purpose; that is, whether it is appropriate for the agencies to use the premerger notification process as a tool for developing novel theories of antitrust law or, in the alternative, whether it should be limited to screening for transactions that would violate established antitrust precedent under established methods.

“Necessary and appropriate” suggests an even more stringent constraint when read together. The availability of, and broad latitude afforded, second requests—among other tools, such as voluntary requests and “pull-and-refiles”—suggests that relatively little be required as part of the initial premerger notification. Indeed, without “and appropriate,” nothing would be required of a filing in the strict sense of “necessary,” as anything necessary might be gathered through a second request. Additional information is appropriate because it is both necessary to the process as a whole and appropriate to an initial filing by parties in general; that is, among other things, that it is not merger-specific information more efficiently gathered and screened with a proper subset of filers.

In addition, the burdens of required filing information (including those imposed by the HSR form) must be considered in light of the fact that the vast majority of mergers have not been deemed to raise competition concerns. Specifically, only 2% of all mergers subject to premerger notification receive second requests; and a second requests is not a complaint, much less a final decision that a proposed merger would be unlawful. That is, in considering the balance of what is reasonable and necessary, the agencies must be mindful of the fact that material required by HSR notification is a burden imposed on roughly 50 times the number of transactions as those deemed—in the agencies’ own judgment—to warrant a second request.

B.   Problematic Premerger Notification Rules Might Escape Challenge

Were issues like these to be raised in a challenge to the premerger notification process, the outcome may be hard to predict, but a court could well decide against the agencies. Still, there is reason to worry, independent of the question of such a challenge in the courts. The costs of the premerger notification process act as a tax on transactions. And as a tax, it is a regressive one, most likely felt by firms considering transactions on the margin of the HSR-reporting thresholds. These may disproportionately affect firms that, while large enough to be subject to notification, are relatively small or relatively infrequent filers.

That points to a question about the relative burdens and benefits of the proposed changes, but it also suggests a question regarding when, or even whether, overly burdensome regulations are likely to be challenged in court. Because the burdens of the tax are spread across the thousands of firms engaged in HSR-reportable transactions each year, no single firm—or pair of firms—would have an incentive even remotely close to the economic cost of the rules; or to put it another way, because the costs of the rule would be spread over thousands of transactions, the incentives for any given firm (or pair of firms) to challenge the requirements would be a very small fraction of the economic burdens of the requirement as a whole.

While that might seem an advantage to the agencies—at least insofar as the agencies might be concerned about litigation risk—it is not an advantage to efficient rulemaking or, specifically, to rules that provide for effective premerger screening without placing undue burdens on procompetitive or benign transactions.

In brief, the tax imposed by the new process would be imposed across a very large number of lawful mergers, including (and, very largely, comprising) mergers that would benefit both competition and consumers. As a regressive tax, it would also likely have an outsized effect on transactions at the margin of the HSR-reporting thresholds; and these may be those transactions least likely to raise competition concerns or lead to an agency challenge.

VII.   Conclusion

Certain proposed changes to the HSR-reporting rules and form may be necessary. For example, the NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of the 2022 statutory amendments to the Clayton Act that require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern.”[83]

In addition, as we have also discussed, the NPRM’s proposal to amend Part 803 to require electronic filing[84] will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development.[85] Electronic production and merger screening is in widespread use already, and more comprehensive adoption and standardization of electronic filing should help streamline premerger screening for both filers and the agency staff charged to review filings.

Many other proposals in the NPRM would greatly increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers. They would, not incidentally, also impose additional burdens on the agency staff who are charged to screen such mergers. Yet the screening value of much of the information is entirely unclear. For example, the NPRM proposes to require the production of considerable information about violations of labor regulations—such as OSHA regulations regarding worker safety—that have no evident connection (or even correlation) with highly concentrated product or labor markets, much less a demonstrated connection with harm to competition and consumers. Similarly, the utility of new information bundling industry “overlaps” based on six-digit occupational codes (not labor markets) and Department of Commerce “commuting zones” (not necessarily the geographic component of labor markets, either) is unclear.

Further enforcement experience with labor-market competition matters, and further empirical investigation, could develop such that the inclusion of additional labor information in the filing requirements would be reasonable and necessary. But such developments should precede, not follow, the formulation and imposition of such requirements. In the absence of such developments, it seems highly unlikely that the costs of the new requirements would be offset by countervailing benefits to competition and consumers.

By the NPRM’s own estimate, those costs are substantial. And the NPRM’s estimate seems extremely low, given the considerable time that senior executives and firm counsel would need to devote to compliance. Moreover, the costs of the new rules would work as a regressive tax, tending to chill mergers by smaller and less frequently transacting firms. Most of the mergers chilled by such costs would likely be—like the vast majority of mergers—either procompetitive or benign. Impeding them would thus be to the detriment—not the protection—of competition and consumers.

Finally, such costs would be imposed on all firms required to file HSR notifications, notwithstanding other means of gathering screening information, and notwithstanding that fewer than 2% of reported transactions lead even to a “second request.” Given the high and skewed costs of the proposals, and given the statutory charge to collect only information that is necessary and reasonable, many of the proposed changes seem not only unnecessary, cumbersome, and costly, but in excess of the rulemaking authority conferred by the HSR Act’s amendments to the Clayton Act.

For these reasons, we urge the commission to consider seriously the evidentiary bases of its proposed changes to the HSR rules and to scale back its proposal accordingly.

 

[1] Premerger Notification Rules, 88 Fed. Reg. 42178 (RIN 3084-AB46), proposed Jun. 29, 2023) (to be codified at 16 C.F.R. Parts 801 and 803) [hereinafter “NPRM”].

[2] See generally, e.g., William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. Econ. Persp. 43 (2000).

[3] Statement of Chair Lina M. Khan, Commissioner Rohit Chopra, and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Vertical Merger Guidelines, Fed. Trade Comm’n, Commission File No. P810034 (Sep. 15, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1596396/statement_of_chair_lina_m_khan_commissioner_rohit_chopra_and_commissioner_rebecca_kelly_slaughter_on.pdf (citing Open Markets Inst. et al., Comment Letter No. 31 on #798: Draft Vertical Merger Guidelines (“Draft VMGs”), Matter No. P810034 at 4 (Feb. 2020)).

[4] 15 U.S.C. § 18a(d)-(e).

[5] Id. at (d)(1).

[6] 15 U.S.C. § 46(b).

[7] Draft Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n, Document No. FTC-2023-0043-0001 (Jul. 19, 2023), https://www.regulations.gov/document/FTC-2023-0043-0001. For comments on the draft merger guidelines see, e.g., Comment from International Center for Law & Economics, FTC-2023-0043-1555 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1555; Comments of Economists and Lawyers on the Draft Merger Guidelines, FTC-2023-0043-1406 (Sep. 15, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1406; Comment from Gregory J. Werden, FTC-2023-0043-0624 (Aug. 12, 2023), https://www.regulations.gov/comment/FTC-2023-0043-0624; Comment from Professor Carl Shapiro, FTC-2023-0043-1393 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1393; Comment from Global Antitrust Institute, FTC-2023-0043-1397 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1397; Comment from Compass Lexecon, FTC-2023-0043-1518 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1518; Comment from Herbert Hovenkamp, FTC-2023-0043-1280 (Sep. 8, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1280.

[8] Id.

[9] Or 15 days, in the case of tender offers. 15 U.S.C. § 18(b)(1)(B), (e)(1)(A).

[10] See, e.g., Lina Khan, Chair, FTC and Jonathan Kanter, Asst. Atty. Gen., Antitrust Div., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, 4 (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.

[11] 15 USC § 18a(e)(1)(A); Cf., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, Appendix A, U.S. Dep’t Justice & Fed. Trade Comm’n (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf (summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).

[12] 15 USC § 18a(e)(2).

[13] See, e.g., Statement of Representative Rodino, Merger Oversight and H.R. 13131, Providing Premerger Notification and Stay Requirements, Subcomm. on Monopolies and Commercial Law of the Comm. on the Judiciary (Mar. 10, May 6 and 13, 1976) (“Both agencies can, and will, tell us what we have known for years—you can’t unscramble an egg.”).

[14] See Statement of Federal Trade Commission Chair Khan, Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya, Regarding Proposed Amendments to the Premerger Notification Form and the Hart-Scott-Rodino Rules, at 2 (Jun. 27, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/statement_of_chair_khan_joined_by_commrs_slaughter_and_bedoya_on_the_hsr_form_and_rules_-_final_130p_1.pdf.

[15] Id.; see also Annual Reports to Congress Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Fed. Trade Comm’n (2021), https://www.ftc.gov/policy/reports/annual-competition-reports.

[16] E.g., Joe Simms, The Effect of Twenty Years of Hart-Scott-Rodino on Merger Practice: A Case Study in the Law of Unintended Consequences Applied to Antitrust Legislation, 65 Antitrust L.J. 865 (1997).

[17] The FTC’s introductory guide to the premerger process, for instance, says of the process that: “The Program has been a success.” What is the Premerger Notification Program? An Overview, Fed. Trade Comm’n (Mar. 2009), available at https://www.ftc.gov/sites/default/files/attachments/premerger-introductory-guides/guide1.pdf. This is not to say that the program is without critics or criticism. The initial implementation, for instance, did not index reporting thresholds to inflation. By the year 2000, nearly 5,000 transactions were noticed each year. The HSR Act was subsequently amended to index thresholds to inflation. Today, roughly 2,000 transactions are noticed each year (allowing for some variation during the pandemic). See Fed. Trade Comm’n, supra note 22, available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf. See also Report of the Antitrust Modernization Committee, 158 (“the existing pre-merger review system under the HSR Act is achieving its intended objectives of providing a more effective means for challenging mergers raising competitive concerns before their consummation and protecting consumers from anticompetitive effects.”), available at https://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.

[18] Andrew G. Howell, Why Premerger Review Needed Reform-and Still Does, 43 Wm. & Mary L. Rev. 1703, 1716 (2002) (“There are several key points to draw from this legislative history. First, the premerger title of the Act was meant only to make the procedural change of requiring notification—it was not meant to change substantive law. Second, the provision was intended to encompass only the very largest of mergers. Finally, there was concern in Congress about not allowing pursuit of merger enforcement goals to place too much of a burden on commerce.”)

[19] Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042, 77055 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803)

[20] Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note at 1-2.

[21] Id. at Appendix (A summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).

[22] The difference may, of course, be greater still, given the nature of a second request. Based on the initial filing and follow-up information, the agencies have very broad discretion in seeking additional production via a second request; at the same time, we understand that staff tend not to request additional information by rote, but according to merger-specific concerns and queries.

[23] Antitrust Experts Reject FTC/DOJ Changes to Merger Process, U.S. Chamber of Commerce (Sep. 19, 2023), https://www.uschamber.com/finance/antitrust/antitrust-experts-reject-ftc-doj-changes-to-merger-process. The surveyed group was made up seasoned antitrust veterans from across a variety of backgrounds: 80% had been involved in more than 50 mergers and 59% in more than 100.

[24] Id. at 2.

[25] Id. at 3.

[26] NPRM at 42208.

[27] We note, however, that both the NPRM and the draft merger guidelines suggest a greatly expanded notion of “overlaps,” adding to the likely costs to filers and, not incidentally, burden to reviewing staff.

[28] See, e.g., HSR Statements of Basis and Purpose, FTC Legal Library, https://www.ftc.gov/legal-library/browse/hsr-statements-basis-purpose (last checked Sep. 23, 2023).

[29] For example, year 2000 amendments to the HSR Act required annual publication of adjustments to the Act’s jurisdictional and filing-fee thresholds in the Federal Register for each fiscal year, beginning Sept. 30, 2004, based on change in the gross national product, in accordance with Section 8(a)(5) of the Clayton Act.

[30] Revised Jurisdictional Thresholds, 88 Fed. Reg. 5004 (Jan. 26, 2023).

[31] Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 87 Fed. Reg. 3541 (Jan. 24, 2022).

[32] Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 86 Fed. Reg. 7870 (Feb. 2, 2021).

[33] Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803).

[34] NPRM at 42180-81 (discussing provisions of the Merger Filing Fee Modernization Act of 2022, Pub. L. 117-328, 136 Stat. 4459 (2022), Div. GG.).

[35] Id.

[36] NPRM at 42181.

[37] Id. at 42180.

[38] Id. at 42181.

[39] Antitrust Improvements Act Notification and Report Form for Certain Mergers and Acquisitions: Instructions, available at https://www.ftc.gov/system/files/ftc_gov/pdf/HSRFormInstructions02.27.23.pdf.

[40] NPRM at 42191.

[41] David C. Kully, et al., Killing Deals Softly: FTC Proposes 107-Hour Increase in Hart-Scott-Rodino Burden, Holland & Knight Alert (Jun. 28, 2023), https://www.hklaw.com/en/insights/publications/2023/06/killing-deals-softly-ftc-proposes-107-hour-increase.

[42] NPRM at 42193

[43] Id. at 42196.

[44] Id. at 42197.

[45] Id. at 42196-42197.

[46] Id. at 42197.

[47] 15 U.S.C. § 18a(e)(1)-(2).

[48] Statement of Commissioner Alvaro M. Bedoya, Joined by Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter Regarding the Proposed Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n (Jul. 19, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p234000_merger_guidelines_statement_bedoya_final.pdf (internal citations omitted, but including a reference to FTC, Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019 (Sept. 15, 2021), https://www.ftc.gov/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study.)

[49] Id. at 3.

[50] Ginger Zhe Jin, Mario Leccese, & Liad Wagman, How Do Top Acquirers Compare in Technology Mergers? New Evidence from an S&P Taxonomy, 89 J. Indus. Org. (2023), https://www.sciencedirect.com/science/article/abs/pii/ S0167718722000662.

[51] Id.

[52] NPRM at 42197.

[53] Id. at 42197-98.

[54] Id.

[55] Id. at 42198.

[56] NPRM at 42198, 42215.

[57] Id.

[58] Id.

[59]  Top 10 Most-cited Standards for Fiscal Year 2022, U.S. Dep’t Labor, Occupational Safety & Health Admin., https://www.osha.gov/top10citedstandards. The source page includes a link to a searchable database of Frequently Cited OSHA Standards by industry.

[60] 15 U.S.C. § 18a.

[61] Id.

[62] 15 U.S.V. § 18a(d).

[63] 5 U.S.C. § 553.

[64] Id.

[65] Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).

[66] See A Guide to the Rulemaking Process, Office of the Federal Register (Jan. 2011), available at https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf. In addition, regulations may be constitutionally infirm.

[67] The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fiscal Year 2023 Congressional Budget Justification, Fed. Trade Comm’n (Mar. 28, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023, Dep’t of Just., Antitrust Div (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.

[68] Id. at 42198.

[69] To demonstrate the need for information about labor market conditions in evaluating mergers, the NPRM identifies only two recent (2021 and 2022) decisions by the agencies to bring actions against firms that include labor-market concerns. Id. at 42197.

[70] NPRM at 42208 (“the total estimated additional hours burden is 759,272. . . . Applying the revised estimated hours, 759,272, to the previous assumed hourly wage of $460 for executive and attorney compensation, yields approximately $350,000,000 in labor costs.”).

[71] The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fed. Trade Comm’n, Fiscal Year 2023 Congressional Budget Justification, https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Dep’t of Just., Antitrust Div., Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023 (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.

[72] See Statement of Federal Trade Commission Chair Khan, supra note 15, at 2.

[73] See Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note 11, at 1 (noting 3,520 transactions for fiscal year 2021).

[74] Rep. Rodino himself indicated: “Government requests for additional information must be reasonable. [. . .] the Government will be requesting the very data that is already available to the merging parties, and has already been assembled and analyzed by them. If the merging parties are prepared to rely on it, all of it should be available to the Government. But lengthy delays and extended searches should consequently be rare.”

[75] S. Rep. No. 94-803, pt. 1, at 65, 67 (1976) (“A proper balance should exist between the needs of effective enforcement of the law and the need to avoid burdensome notification requirements or fruitless delays.”)

[76] 463 U.S. at 43.

[77] 15 U.S.C. § 18a(d).

[78] Id. at § 18a(e)(1).

[79] Strictly merger-related concerns would be limited to those that violate Section 7 of the Clayton Act (that is, consummation of transactions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”) Other concerns that might result from the transaction, such as an interlocking directorate prohibited by Section 8 of the Clayton Act, might therefore be excluded.

[80] See, e.g., AT&T Corp. v. Iowa Utils Bd, 525 U.S. 1133 (1999) (“the Act requires the FCC to apply some limiting standard, rationally related to the goals of the Act, which it has simply failed to do.”)

[81] NPRM at 42198.

[82] Given the coarseness of the data requested, it is doubtful whether it would be analytically useful for such purposes.

[83] NPRM at 42180-81.

[84] Id. at 42181.

[85] Id. at 42180.