Jennifer Huddleston
Much like little children who are losing a game, the Federal Trade Commission (FTC) and Department of Justice (DOJ) have decided to change the rules that govern when they engage in enforcement actions to intervene in mergers. These proposed changes follow several recent losses in court, and they are designed to increase the enforcers’ chances at deterring mergers. The draft of the DOJ/FTC merger guidelines released in July 2023 indicates concerning potential changes that would take the focus off objective economics and the consumer and, instead, place more emphasis on subjective political and policy preferences of enforcers to engage in more intervention in a variety of industries. This is because these guidelines rely on faulty policy presumptions about the nature of mergers based on selectively chosen case law and shift away from sound economics.
The changes in these draft proposed new guidelines are significant and will have a negative impact on companies of all sizes and consumers, as well as allow more government interference in the economy in general. While there is much more to dig into with the specifics of these new guidelines, at a high level they are particularly concerning for the shift away from a long‐standing focus on consumers.
New guidelines shift away from sound economics
One of the most significant trends is that the new draft guidelines shift standards without providing much, if any, economic reasoning for such changes. This is most notable in the lowering of the threshold for concentration to be considered a potential issue in whether there is a harm to competition. The proposed guidelines are much more concerned about the potential number of players in a market and the share of any one player, but notably, such changes are not backed up by economics or past examples.
As Brian Albrecht points out, economics questions the idea that concentration correlates to an anti‐competitive effect. Similarly, others have discussed how increased concentration does not mean higher prices for consumers. In fact, it would punish firms from improving efficiency in ways that lead to lower prices as such actions can lead to increased concentration due to consumer response to lower prices.
This shift in guidelines suggests that rather than relying on objective standards and looking to consumer welfare, enforcers at the DOJ and FTC are instead choosing the levels of concentration they believe will most likely allow them to succeed in the cases they want to bring. History shows that presumptions and predictions from regulators may miss what is actually occurring in a market, as well as what would play out if consumers were the ones to make the choices about products. Such a shift away from economic reasoning, however, is likely to result in the agency intervening more subjectively in a range of markets —including technology — and preventing mergers that would prove to be beneficial from occurring.
New guidelines selectively choose case law
The new merger guidelines rely significantly on case law, but not on sound precedent. In fact, the case law relied upon largely comes from the 1970s or even earlier and ignores more recent precedents. This illustrates how, once again, the FTC’s approach is not actually “updating” rules to handle a novel challenge, but a return to the past and its problems of more subjective standards.
These proposed revised guidelines are backed up by selectively drawing upon case law in ways that would position enforcers to be more likely to win cases regardless of their impact on consumers. This practice even extends to cherry‐picking dictums from these cases. For instance, when attempting to implement a preemptive strategy to hinder mergers without apparent harm to competition, the FTC leans on dictum stemming from non‐binding case law, such as United States v. Microsoft Corp. 253 F.3d 34, 79 (D.C. Cir. 2001). This reference stands out, given that it is a decision from the D.C. Circuit over two decades old and used to interpret the spirit of the Sherman Act.
As Gus Hurwitz tweets, while many of these cases are technically “good law”, this is largely due to the fact that previous guidelines for agency enforcement have led to more informal behavioral changes and settlements that meant courts have not had the opportunity to formally repudiate them in the past. The selective nature of the new guidelines is likely to meet skepticism from courts more familiar with the entire body of law and could, in fact, result in more formal repudiation of the cases on which the guidelines are based. Agency officials seeking to enforce under the new guidelines could find themselves worse off than they are now by providing courts a more formal opportunity to overturn these outdated precedents and diminish the courts’ view of the soundness of the agency’s guidelines.
The myth of the “kill zone” rises again
Proponents of stricter merger guidelines and deterring mergers and acquisitions, particularly in the technology sector, often point to the idea that large companies kill off nascent rivals through acquisitions. This, however, misunderstands the role mergers and acquisitions play and instead should serve as a reminder that new guidelines will harm small and large companies by limiting their options.
Making mergers and acquisitions more difficult eliminates one exit strategy for companies. Some small companies may be seeking to make an existing product better, and they find being acquired by that product’s original developer is the best way to reach a wider audience. Others may find that they enjoy being entrepreneurs or creating new products, but they have no desire to manage the many aspects that come with a growing company. Some may find that they do want to challenge existing giants and remain independent and eventually “go public” via an initial public offering (IPO). All of these should be considered valid strategies in different situations, but the added difficulty and scrutiny of the revised merger guidelines would make it more difficult for those small companies whose preferred strategy involves acquisition.
Beyond the reasons for exit, the idea of a “kill zone” — or any other justifications for changes to existing evaluations of mergers and acquisitions — neglects to consider the various benefits of these transactions in the market. In the tech sector, mergers are often about talent as well as product, a practice known as acquihiring. Consumers benefit from new collaborations not only from the products, but from the creative and talented individuals in charge of their creation and distribution. Of course, mergers can also create more solid competitors, which may provide consumers with broader access to a range of options.
Finally, the idea of a “kill zone” for new players in a given market has largely proven false, whether analyzed through new entry or investment.
The bottom line: the real losers in the new merger guidelines are the consumers
Much of the discussion around the new merger guidelines will focus on the impact on businesses, both large and small, and particularly how it relates to the ongoing debates around “Big Tech.” The bottom line is consumers are ultimately the ones that will feel the brunt of the negative impact if enforcement shifts away from sound economics and law and focuses more on competitors than consumers. Beyond this, new guidelines will likely stifle beneficial deals and result in costly litigation for taxpayers and businesses, ultimately passing along to consumers. While there are certainly consequences for the tech sector in such changes, this significant shift in enforcement guidance will impact a wide variety of industries and their consumers.