Facebook parent Meta Platforms Inc. filed suit against the Federal Trade Commission in the U.S. District Court for the District of Columbia on Nov. 29, alleging the FTC’s administrative proceedings against the company are “structurally unconstitutional,” and that they violate the Fifth Amendment’s Due Process Clause, the Seventh Amendment’s right to trial by jury, and Articles I and III of the U.S. Constitution.

The suit — which also names Commissioners Lina Khan, Rebecca Kelly Slaughter and Alvaro Bedoya — raises complex issues of constitutional and administrative law.

In brief, it’s about the limits of agency authority and, not incidentally, what authority Congress can properly delegate to federal agencies. It is also, at least arguably, an expression of backlash to regulatory overreach.

Such a backlash seemed increasingly likely, if not inevitable, given the FTC’s recent blitz of activity in the tech sector. That includes not just enforcement matters but an ambitious regulatory agenda.

Read the full piece here.

In the headline to a Dec. 7 press release, the Federal Trade Commission (FTC) announced that it, in concert with the U.S. Justice Department (DOJ) and U.S. Department of Health and Human Services (HHS), had managed to “Lower Health Care and Drug Costs, Promote Competition to Benefit Patients, Health Care Workers.” According to the subhead: “Recent agency actions have helped lower costs, increase care quality for consumers and promote competition across the health care market.”

The headline sounds great. One wonders about the extent to which the subhead is true.

Read the full piece here.

Way back in May, I cracked wise about the Federal Trade Commission’s (FTC) fictional “Bureau of Let’s Sue Meta,” noting that the commission’s proposal (really, an “order to show cause”) to modify its 2020 settlement of a consumer-protection matter with what had then been Facebook—in other words, a settlement modifying a 2012 settlement—was the FTC’s third enforcement action with Meta in the first half of 2023. That seemed like a lot, even if we ignored, say, Meta’s European and UK matters (see, e.g., here on the EU Digital Markets Act’s “gatekeeper” designations; here on the Norwegian data-protection authority; here and here on the Court of Justice of the European Union, and here on the UK Competition Appeal Tribunal).

Read the full piece here.

The U.S. Justice Department’s landmark antitrust case against Google has wrapped up, leaving the parties to await Judge Amit Mehta’s bench-trial decision in the matter.

But based on the arguments presented and the publicly available evidence, the government has not made its case that the company committed “monopoly maintenance.”

Read the full piece here.

Idon’t mean to sound like a broken record, but why is the Federal Communications Commission (FCC) playing a broken record?

I’ve been writing a fair bit about Federal Trade Commission (FTC) rulemaking initiatives. On the theory that you deserve a nominal break from all of that, this post is mostly about the FCC.

On Sept. 28, the FCC published a “fact sheet” and a notice of proposed rulemaking (NPRM) on “Safeguarding and Securing the Open Internet.” Just shy of a month later, on Oct. 25, the FCC published another “fact sheet” and NPRM—this one, on “Preventing Digital Discrimination.”

My International Center for Law & Economics (ICLE) colleague Eric Fruits has written about the proposals here, here, here, here, here, and, with our colleague Ben Sperry, here. ICLE’s Kristian Stout is here. Eric explains how, in relatively straightforward fashion, the anti-discrimination requirements could lead to price regulation, notwithstanding the FCC’s own observation that “there is little to no evidence of intentional digital discrimination of access.”

Read the full piece here.

 

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).

Amicus respectfully submits this brief in support of Petitioner Apple Inc.[1]

INTEREST OF AMICUS CURIAE

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 and economic learning to inform policy debates and has longstanding expertise evaluating antitrust law and policy.

ICLE has an interest in ensuring that antitrust law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. That includes fostering consistency between antitrust law and other laws that proscribe unfair methods of competition, such as California’s Unfair Competition Law, and advising against far-reaching injunctions that could deteriorate the quality of mobile ecosystems, thereby harming the interests of consumers and app developers.

INTRODUCTION AND SUMMARY OF ARGUMENT

This Court has admonished that “injunctive relief should be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs.” Califano v. Yamasaki, 442 U.S. 682, 702 (1979); see also Application for a Stay at 5, Murthy v. Missouri, No. 23-411 (Sept. 14, 2023) (review granted on government’s stay motion arguing “the injunction sweeps far beyond what is necessary to address any cognizable harm to respondents”). The nationwide injunction issued in this case, which applies to millions of non-party app developers, cannot be reconciled with that principle.

The lower court’s use of a nationwide injunction to address narrow alleged injuries has severe consequences that are best understood through the lens of law and economics principles. The district court recognized that Apple’s walled-garden ecosystem yields procompetitive consumer benefits, including greater privacy and data security, and that such benefits are cognizable under federal antitrust law. Pet. App. 261a-270a. Yet the district court’s nationwide injunction undercuts precisely those benefits. Apple’s practice of vetting unsafe payment systems and malware on its App Store depends on its ability to prevent third parties from “steering” consumers towards purchase mechanisms other than Apple’s secure in-app purchasing (“IAP”) system. In addition, the anti-steering policy prevents free-riding and protects Apple’s incentive to invest in its platform to improve the curation of apps, privacy, safety, and security.

These harms to Apple’s platform are not offset by benefits to consumers, or even to developers taken as a whole. All the injunction does is alter the allocation of app store fees between developers, because even if Apple’s ability to collect a commission through its IAP is limited, Apple would still have the right to collect a commission in other ways for the use of its proprietary software and technology. It could do so by readjusting whom it charges for access to the App Store, and how much it charges.

For instance, rather than charge a commission to developers on paid downloads of apps and on in-app purchases of digital goods and services, as it does now, Apple could instead charge all developers a fee for accessing the App Store. While this might ostensibly benefit big developers who rely heavily on in-app purchases and paid downloads to monetize their apps, it is not at all clear that the net effects would be positive. One thing does seem clear, however: The current model, in which small, free apps pay few fees, would likely cease to be tenable under a nationwide federal injunction.

Put differently, despite not violating federal antitrust law, the district court’s sweeping remedy risks harming the vast majority of app developers, who have not requested the injunction and are now operating on the iOS for free. And it may ultimately harm tens of millions of consumers using Apple’s App Store and iOS.

ARGUMENT

I.              The Injunction Is Unnecessarily Broad and Would Affect Millions of Developers, Not Just Epic

The district court imposed an injunction that affects Apple’s anti-steering provisions across the board, and thus redefines Apple’s relationship with many developers—not just Epic. As it stands, the injunction is overly broad and at odds with established jurisprudence. Gill v. Witford, 138 S. Ct. 1916, 1933-34 (2018); Califano, 442 U.S. at 702. And it reduces consumer welfare by precluding more beneficial conduct than the harmful behavior it deters.

There are about thirty million registered app developers of native iOS apps. Pet. App. 10a. There are about two million apps  available in the United States storefront for the App Store, and most of them were created by third-party developers. See Apple Inc. v. Pepper, 139 S. Ct. 1514, 1519 (2019). All the developers have signed Apple’s guidelines regarding the exclusive use of Apple’s IAP and the related anti-steering provisions. By contrast, the trial evidence established that a little over 100 developers use Epic’s Epic Store. See Pet. App. 115a (citing Trial Tr. 1220:18-20). Yet, the anti-steering injunction would affect all App Store developers. The plaintiff is not even among these developers, because Epic was jettisoned from the App Store in 2020 for introducing an in-app payment system that bypassed Apple’s IAP. Epic has only one subsidiary that is active on the App Store. See Pet. App. 12a; D.Ct. ECF No. 825-8.

It is thus unclear why the district court found it necessary to issue an injunction covering all developers who are licensed to make iOS apps for the App Store’s U.S. storefront, not just Epic’s subsidiary and the approximately 100 developers who use the Epic Store.

Two considerations are especially pertinent. First, Califano precludes the Ninth Circuit’s erroneous assertion that an injunction need only be “tied to Epic’s injuries.” Pet. App. 82a; Califano, 442 U.S. at 702. Indeed, as the government argued in a recently granted petition that raises similar issues, an overbroad injunction cannot be justified on the theory that the non-parties are simply incidental beneficiaries of the injunction for the prevailing parties. Application for a Stay, supra, at 34-36; see Order Granting Review & Order Granting Stay, Murthy v. Missouri, No. 23-411 (Oct. 20, 2023). Instead, “[i]njunctive relief may ‘be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs.’” Id. at 34-35 (quoting Califano, 442 U.S. at 702).

Second, Apple already settled a class-action lawsuit with developers regarding developer-consumer communications. As part of the Cameron v. Apple Inc. settlement, Apple deleted a prohibition on targeted communication between developers and consumers outside of the app, meaning that developers are now free to communicate outside the apps about external purchasing options (or anything else). See Order: Granting Motion for Final Approval of Class Action Settlement; Granting in Part and Denying in Part Mot. for Attorney’s Fees, Costs, and Service Award; and Judgment at 13, Cameron v. Apple Inc., No. 19-cv-03074 (N.D. Cal. June 10, 2022), ECF No. 491. That settlement, spurred by a properly certified Rule 23 class action representing around 6,700 app developers, did not, however, require Apple to modify or remove the anti-steering provision at issue here (links and buttons within apps). See Declaration of Steve W. Berman in Support of Developer Plaintiffs’ Motion for Preliminary Approval of Settlement with Defendant Apple Inc. at 7-41, Cameron v. Apple Inc., No. 19-cv-3074 (Aug. 26, 2021), ECF No. 396-1.

It is jarring that the courts would now issue a much broader injunction in a case involving a single plaintiff. This could cause serious harm to nonparties who had no opportunity to argue for more limited relief. Zayn Siddique, Nationwide Injunctions, 117 Colum. L. Rev. 2095, 2125 (2017). And it also raises the question whether such a blanket remedy is even necessary given that Cameron v. Apple strikes a balance between Apple’s ability to safeguard its investments and maintain the safety and security of its ecosystem, and app developers’ ability to steer users to alternative payment systems. That agreement was found acceptable by Apple and some 6,700 app developers. Why should it be overridden by an injunction in a case involving a single plaintiff, when app developers have already had the opportunity to join a properly certified class action before, and have either chosen not to do so or have agreed to a different settlement? Further, if a single plaintiff’s allegations of harm can undercut a court-approved, negotiated settlement involving a much larger number of plaintiffs, that diminishes the incentives of parties to fashion and negotiate reasonable settlements in the first instance.

A broad injunction may well be warranted when it is difficult to separate the parties affected by the enjoined conduct from those that are not. But this is not the case here. The identity of the parties that have supposedly been harmed is clear—they are, at most, Epic’s subsidiary and the approximately 100 developers that use the Epic Store. Even if the district court’s conclusions regarding harm to Epic’s subsidiary and other developers with apps on the Epic Store were correct, it would be easy—and necessary—to carve a much narrower remedy than the one the district court imposed. See Barr v. Am. Ass’n of Pol. Consultants, Inc., 140 S. Ct. 2335, 2354-55 (2020).

Overly broad injunctions represent a Constitutional threat, as several members of this Court have warned. See, e.g., United States v. Texas, 143 S. Ct. 1964, 1980 (2023) (Gorusch, J., concurring); Trump v. Hawaii, 138 S. Ct. 2392, 2425 (2018) (Thomas, J., concurring); see also Lewis v. Casey, 518 U.S. 343, 360 (1996). “[G]ranting a remedy beyond what [is] necessary to provide relief to [the plaintiff is] improper.” Lewis, 518 U.S. at 360. In addition to such constitutional implications, overly broad injunctions also raise problems from a law and economics perspective such as hindering and even destroying beneficial conduct. If an injunction is not properly tailored, the beneficial conduct which it precludes may be greater than the harmful conduct which it prevents, resulting in a loss to both total social welfare and consumer welfare.

II.           Platforms Have Legitimate Business Reasons for Anti-Steering Provisions

By casting an overly wide net, the district court’s injunction throws the proverbial baby out with the bathwater. Anti-steering provisions are commonly used by digital platforms and other businesses because they serve a series of legitimate aims, such as allowing for the recoupment of investments. They also result in tangible procompetitive benefits, such as increased privacy, security, and market-wide output. These rules can be procompetitive, as this Court has recognized. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2289 (2018) [hereinafter Amex].

Absent intervention by this Court, Apple will have to comply with a nationwide injunction that risks diminishing these benefits. If the decision is not corrected, the precedent could have a harmful ripple effect, subjecting other platforms to overly broad injunctions against anti-steering provisions, even though those anti-steering provisions may help sustain and improve the overall quality of those platforms.

A.            The framework for assessing competitive effects in a two-sided market requires a broad examination of the market as a whole

The district court properly found that Apple’s procompetitive justifications for the anti-steering provisions in its IAP system outweighed any anticompetitive effects of those provisions. In fact, Epic failed to make even a prima facie case under the requisite rule-of-reason analysis, as Epic failed to show that Apple’s app distribution and IAP system caused the significant, market-wide competitive harm that the Supreme Court deemed necessary to a showing of anticompetitive harm in Amex.

In Amex, the Court recognized the importance of platform economics and network effects to understanding the market and competitive effects at issue. Two-sided platforms intermediate between two groups, offering a different product or service to each. 138 S. Ct. at 2280 (citing e.g., David Evans & Richard Schmalensee, Markets with Two-Sided Platforms, 1 Issues in Competition L. & Pol’y 667 (2008); David Evans & Michael Noel, Defining Antitrust Markets When Firms Operate Two-Sided Platforms, 2005 Colum. Bus. L. Rev. 667 (2005)).

The Court noted that two-sided platforms are characterized by indirect network effects, where the value of the platform to each group depends on the scale of, or number of members in, the other. Id. at 2280-81. Specifically, the Court observed that “two-sided transaction platforms exhibit more pronounced indirect network effects and interconnected pricing and demand.” Id. at 2286 (emphasis added) (citing Benjamin Klein et al., Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 583 (2006)). Hence, “[e]valuating both sides of a two-sided transaction platform is . . . necessary to accurately assess competition.” Id. at 2287.

B.            Anti-steering provisions can be procompetitive

At issue in Amex were various anti-steering provisions American Express had placed in its contracts with merchants. The plaintiffs had alleged that the anti-steering provisions violated Section 1 of the Sherman Act. 138 S. Ct. at 2283. But in Amex, the Court recognized that “there is nothing inherently anticompetitive about . . . antisteering provisions.” Id. at 2289. Those vertical provisions can, among other things, prevent merchants from free-riding, thereby increasing the availability of “‘tangible or intangible services or promotional efforts’ that enhance competition and consumer welfare.” Id. at 2290 (quoting Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890-91 (2007)).

As in Amex, understanding the competitive effects of conduct between the platform and parties on either side of the platform—for example, vertical agreements between the IAP and app developers—requires examining effects on the system as a whole. And just as in Amex, there are legitimate, procompetitive reasons for anti-steering provisions.

First, as discussed above, anti-steering provisions help prevent free-riding. Simply put, “free-riding” occurs when someone uses a valuable resource without paying for it. Free-riding—even the potential for free-riding—tends to undermine incentives to provide the resource in the first place, as well as incentives to improve it in later development. It presents an especially serious challenge to the provision of goods or services where it is difficult to exclude those who have not paid, as with city parks or policing. Everyone, even those who would be willing to pay if they had to, has an incentive to avoid fees. Thus, where free-riding is possible, desirable goods and services tend to be underfunded, reducing their provision (or, in antitrust terms, output), or, in the alternative, are provided dependent on government subsidy. The most common solution to free-rider problems is to create ways to exclude those who are unwilling to pay.

In this case, Apple owns a valuable resource that it has created and steadily improved—the iPhone and iOS ecosystem, including the App Store. Apple currently charges commissions between 15% and 30% for digital goods sold through the App Store, including for certain in-app purchases. Epic would like to access that ecosystem without paying. But while Epic may benefit from its long-term strategy to reduce the fees it pays to Apple, consumers might not. If reductions in revenue from the iOS ecosystem mean that Apple has less incentive to invest in it, Epic’s gain may come at the consumer’s expense.

The district court correctly rejected Epic’s main claim, as Epic failed to establish cognizable harm under the antitrust laws. That foreclosed Epic’s ability to directly circumvent the App Store and pay a lower commission, or none at all. In granting a nationwide injunction against Apple’s anti-steering provisions, the district court facilitated precisely the type of free-riding that failed to gain traction under federal antitrust law. Doing so will greatly exacerbate any free-rider problem Epic itself might have caused Apple, to the likely detriment of many developers and most consumers.

The situation is further complicated by the fact that the district court’s injunction is vaguely written and is thus likely to be interpreted quite differently by different parties. Ultimately, if it allows app developers to link users outside of the in-app payments flow, and bypass Apple’s IAP fees, it will further enable free-riding and undermine Apple’s incentives to invest in iOS, iPhones, and iPads. And the injunction could undermine the incentive for Apple’s competitors to develop whatever products might someday displace the current ones through competition.

Second, as a two-sided market, the App Store is valuable only because it is used by both consumers and developers, and Apple has to balance both sides of the market. The risk of developers leaving the iOS ecosystem creates a built-in ceiling on the prices Apple can charge, as users will be less inclined to pay for Apple products if valuable apps are not there. The commission-fee business model gives Apple and other platforms significant incentives to develop new distribution mediums (like smart TVs, for example) and to improve existing ones. Such development expands the audience that software can reach.

Apple’s “closed” distribution model also allows the company to curate the App Store’s apps and payment options. For example, Apple’s guidelines exclude apps that pose data security threats, threaten to impose physical harm on users, or undermine child-safety filters. These rules increase trust between users and previously unknown developers, because users do not have to fear their apps contain malware. They also reduce user fears about payment fraud. Rivals could free-ride on Apple’s curation by mimicking its decisions and undercutting it on price. Doing so does not enhance competition on the merits: It eviscerates it by eroding Apple’s incentives to enforce such rules.

Apple’s closed business model also enables it to maintain a high standard of performance on iOS devices by excluding apps and payment systems that might slow devices or crash frequently. Users may not know when device performance is affected by a given app or purchase mechanism, so an open system would mean the potential for apps that crash the entire device. Apple’s closed model ensures that unscrupulous developers cannot impose negative externalities on the entire ecosystem.

By increasing the total value of the platform, these benefits also increase the number of market-wide transactions. In a two-sided market, it is output—not prices—that tells us what is happening on the market as a whole, and it is therefore output that should be used as the relevant parameter to determine whether conduct is procompetitive or anticompetitive. “What is material is whether Apple’s overall pricing structure reduces output by deterring app developers from participating in the market or users from purchasing apps (or iOS devices at all) because of the amount of the app developer commission.” Geoffrey A. Manne & Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425, 457 (2019). Notably, the district court found that it could not ascertain whether Apple’s alleged restrictions had “a negative or a positive impact on game transaction volume.” Pet. App. 253a; see also id. (“no evidence that a substantial number of developers actually forego making games because of Apple’s commission.”); id. at 319a (finding Epic failed to show reduction in output and that “[t]he record contains substantial evidence that output has increased.”).

Ultimately, however, the benefits of anti-steering provisions are obvious only if one adopts the correct, holistic vision of app stores as a two-sided market; conversely, they appear less relevant if one applies “one-sided logic in two-sided markets.” Julian Wright, One-sided Logic in Two-sided Markets, 3 Review of Network Econ. 44, 45-51 (2004). In this sense, in a two-sided market, anti-steering provisions can reduce transaction friction and bolster security and safety, thereby improving the platform’s overall quality and, ultimately, attracting more users. See Amex, 138 S. Ct. at 2889 (sustaining similar anti-circumvention rules as procompetitive for these reasons). Developers may get a smaller share of revenues, but it is a smaller slice of a much larger pie. Thus, while the ability to circumvent Apple’s commission fee can, on the surface, appear to benefit some developers, in the longer term most developers and consumers will be worse off.

Apple’s anti-steering provisions increase safety and curation, and an injunction against them can reduce the overall value of Apple’s platform. That would in turn discourage developers and users from using the iOS ecosystem, and would prompt a downward spiral in quality and choice for both sides of the market—which would depreciate the value of the platform even further.

C.            Open and closed platforms are not inherently good or bad: They represent alternative business models with potential advantages and disadvantages

Any comparison between “open” and “closed” platforms should account for the fact that there are tradeoffs between the two; it should not simply assume that “open” equals “good” while “closed” equals “bad.” Such analysis also must consider tradeoffs among consumers, and among developers, in addition to tradeoffs between developers and consumers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device.

There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which especially benefits smaller developers and those whose apps fall outside the popular gaming sector. In short, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free to consumers and pay no IAP fees.

Centralized app distribution and Apple’s “walled garden” model (including IAP) increase interbrand competition because they are at the core of what differentiates Apple from Android, the other major competing platform. 1-ER-148–49. They play into Apple’s historical business model, which focuses on being user-friendly, reliable, safe, private, and secure. 1?ER-86; see also 1-ER-107 (recognizing that the safety and security of Apple’s closed system is a “competitive differentiator for its devices and operating system”). Even Epic recognized that Apple would lose its competitive advantage if it were to compromise its safety and security features. 1-ER-48 n.250 (noting Epic’s expert, Susan Athey, testified that “privacy and security are competitive differentiators for Apple”).

For Apple and its users, the touchstone of a good platform is not “openness,” but carefully curated selection and security, understood broadly as encompassing the removal of objectionable content, protection of privacy, and protection from “social engineering,” and the like. 1-ER-148–49. By contrast, Android’s bet is on the open platform model, which sacrifices some degree of security for the greater variety and customization associated with more open distribution. These are legitimate differences in product design and business philosophy. See Andrei Hagiu, Proprietary vs. Open Two-Sided Platforms and Social Efficiency 2-3 (AEI-Brookings Joint Ctr. for Regul. Stud., Working Paper No. 06-12, 2006) [hereinafter Proprietary vs. Open Platforms] (explaining that there is a “fundamental welfare tradeoff between two-sided proprietary . . . platforms and two-sided open platforms, which allow ‘free entry’ on both sides of the market” and thus “it is by no means obvious which type of platform will create higher product variety, consumer adoption and total social welfare”) (emphasis omitted); Jonathan M. Barnett, The Host’s Dilemma: Strategic Forfeiture in Platform Mkts. for Informational Goods, 124 Harv. L. Rev. 1861, 1927 (2011) (“Open systems may yield no net social gain over closed systems, can impose a net social loss under certain circumstances, and . . . can impose a net social gain under yet other circumstances.”).

Because consumers and developers could reasonably prefer either ecosystem, it is not clear that loosening Apple’s control over the App Store would necessarily lead to more app transactions market wide. Indeed, in a two-sided market context, a proprietary platform like Apple’s “may in fact induce more developer entry (i.e. product variety), user adoption and higher total social welfare than an open platform.” Proprietary vs. Open Platforms, at 15-16. In other words, preventing certain apps from accessing the App Store, and preventing certain transactions from taking place on it, may ultimately have increased the number of apps and transactions on Apple’s platform, because doing so made it attractive to a wider set of consumers and developers.

Yet the injunction brings Apple’s iOS closer to an “open” system, effectively rendering Apple’s platform more similar to Android’s. The district court found that Apple did not have a monopoly, yet under the guise of fostering competition on Apple’s platform the injunction eliminates competition where it matters most—at the interbrand, systems level between Apple and Android. See Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. Econ. Persps. 93, 110 (1994), (“[T]he primary cost of standardization is a loss of variety: consumers have fewer differentiated products to pick from, especially if standardization prevents the development of promising but unique and incompatible new systems”). By limiting intrabrand competition, in other words, Apple ultimately promotes interbrand competition. 1-ER-148–49. Again, Amex provides useful insight here, because the Court noted that the business model had “spurred robust interbrand competition,” while increasing both the quality and quantity of transactions. Amex, 138 S. Ct. at 2290.

D.            Anti-steering provisions are a legitimate way of recouping a platform’s investments

Anti-steering provisions are a legitimate way for a platform to recoup its investments. Epic has argued that Apple could simply lift restrictions on the use of third-party IAP processors (e.g., Visa and MasterCard), but still be appropriately compensated for the use of its intellectual property, ensure that iPhone users’ IAP are sufficiently secure, and guarantee quality. 1-ER-153; Epic 9th Cir. Br. 44-47. But exactly how Apple could achieve these ends without increasing its costs is a question Epic has not even tried to answer. See, e.g., 1-ER-151–52 (noting that Epic’s requests for relief “leave unclear whether Apple can collect licensing royalties and, if so, how it would do so”); 1-ER-153 & n.617 (noting it would “be more difficult” and more costly for Apple to collect commission without the IAP system). Nor did Epic, the Epic amici, or the district court properly address the effect of the proposed less restrictive alternatives on consumers rather than competing developers. See 1-ER-148 n.605 (noting it is “unclear the extent or degree to which developers would pass on any savings to consumers”).

Consistent with Epic’s proposed approach, Apple could allow independent payment processors to compete, and charge an all-in fee of 30% when Apple’s IAP is chosen. To recoup the costs of developing and running its App Store, Apple could then charge app developers a reduced, mandatory per-transaction fee (on top of developers’ “competitive” payment to a third-party IAP provider) when Apple’s IAP is not used. Indeed, where a similar remedy has been imposed already, Apple has taken similar steps. In the Netherlands, for example, where Apple is required by the Authority for Consumers and Markets to uncouple distribution and payments for dating apps, Apple has adopted a policy under which any apps that want to use a non-Apple payment provider must still “pay Apple a commission on transactions” that is 3% less than normal (so 27% for most transactions), a slightly “reduced rate that excludes value related to payment processing and related activities.” Apple, Distributing Dating Apps in the Netherlands, (last visited Oct. 26, 2023).

III.         A State Law Should Not Undermine the Fundamental Goals of Federal Antitrust Policy

When assessing the effects of Apple’s anti-steering provisions, the courts should not ignore Federal antitrust law and, especially, the effects on competition and consumers. In other words, the fact that anti-steering provisions are procompetitive should be a relevant factor in whether a federal court grants nationwide injunctive relief. To interpret California’s Unfair Competition Law (“UCL”) as the district court has done—in a way that is at loggerheads with federal antitrust law but yet permits a nationwide injunction—is to undermine the fundamental goal of antitrust policy, and to do so on a national level. As the Court has observed, “The heart of our national economic policy long has been faith in the value of competition.” Nat’l Soc’y of Prof. Eng’rs v. United States, 435 U.S. 679, 695 (1978) (quoting Standard Oil Co. v. FTC, 340 U.S. 231, 248 (1951)).

The district court recognized Apple’s security arguments as a key procompetitive factor that determines Apple’s success and increases output across the platform, ultimately benefitting both consumers and developers. Yet the court issued an unnecessarily broad injunction against Apple’s anti-steering provisions that risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled-garden” iOS (see sections II.B and II.D on the procompetitive benefits of anti-steering provisions). See also Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[F]alse condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’”) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)).

Even more egregiously, perhaps: It risks undermining federal antitrust law by enjoining conduct under state unfair competition law that is recognized as benign—and even beneficial—under federal antitrust law. If the district court’s remedy is left to stand, state laws will be stretched beyond their territorial remit and used to contradict federal antitrust laws nationally, thus eviscerating federal antitrust policy from the bottom-up. This is not a hypothetical threat, either: California has already expressed its intent to use the UCL to “seek nationwide injunctions” on the same theory as the ruling below. Michael Acton, Epic Games-Apple US Appeals Court Ruling Shows Power of California’s Competition Law, Blizzard Says, MLex (May 10, 2023).

The district court erred in finding Apple’s anti-steering provision “unfair” despite a concurrent finding that there is no incipient antitrust violation. And a nationwide injunction based on that finding lifts what could have been a relatively contained mistake to the national level, and thereby magnifies it.

This is misguided from an antitrust perspective because it undermines some of the procompetitive benefits that anti-steering provisions in closed two-sided platforms can give to consumers and app developers. A national injunction that subverts Apple’s ability to charge a commission for the use of its software and technology through paid apps and in-app payments might also alter the current balance between the two sides of the App Store, to the detriment of smaller developers of free apps. In this zero-sum game, the gain of a handful of developers who rely on paid downloads of apps and frequent in-app purchases by users will come at the expense of the majority who do not.

CONCLUSION

For the foregoing reasons, this Court should grant Apple’s petition for a writ of certiorari.

[1] Amicus notified counsel for the parties of its intent to file this brief more than ten days before the deadline. No counsel in this matter for any party authored this brief in whole or in part, and no person other than amicus or its counsel have made any monetary contribution intended to fund the preparation or submission of this brief.

Lina M. Khan was sworn in as chair of the Federal Trade Commission (FTC) on June 15, 2021. On July 9 of that year, the FTC withdrew the commission’s 2015 “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” That three-week lag was, in practical terms, nothing. Even ignoring the many practical/ministerial/managerial things that come with assuming the chair, there’s a certain amount of process required of policy decisions at the commission.

As many noted at the time, rescinding the 2015 statement, “absent any new guidance about how the Commission interprets its authority,” did little to signal the commission’s new view of its authority. That is, apart from the vague signal that a far more expansive statement was forthcoming and, of course, a not-so-tepid statement that…

Read the full piece here.

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.