Federal antitrust review of mergers and acquisitions in the United States is a strange system. Whether the Federal Trade Commission or the Department of Justice leads the review determines what rules apply, and ultimately can determine whether the transaction is approved without regard to the merits of the transaction. The Standard Merger and Acquisition Reviews Through Equal Rules (“SMARTER”) Act aims to reshape the system to make it more predictable by implementing two changes recommended by the bipartisan Antitrust Modernization Commission in 2007. Earlier this month, the Act was approved by the House of Representatives for the fourth consecutive year, and last week the Act was introduced into the Senate.
Two Changes Under the Proposed Act
The SMARTER Act would require the FTC to follow the same procedures as the DOJ when enforcing antitrust law by (i) removing the FTC’s authority to use administrative proceedings to challenge a merger under the Clayton Act and (ii) aligning the standards applicable to preliminary injunction actions brought by the FTC with the standards applicable to DOJ. While those changes sound modest, adopting them would make merger review more predictable and equitable – and therefore ultimately more transparent and credible.
Currently, companies contemplating a merger that meets HSR reporting thresholds must submit information about the proposed transaction to the Pre-Merger Notification Office, which works with both the FTC and the DOJ. If the proposed merger raises potential competition concerns, one of the two agencies will conduct an investigation (called the “clearance process”) based on several factors, including, most significantly, the agencies’ experience investigating the industry. In some industries, which agency will be responsible for clearance is clear: the FTC will review hard liquor and pharmaceuticals; the DOJ reviews beer and steel industries.
Different Rules Can Produce Inequitable Results
Which agency reviews a deal is critical. While the FTC brings challenges to mergers under the FTC Act in its own administrative courts, the DOJ must proceed in federal courts under the Clayton Act. That is the theory, anyway. In fact, the FTC has not conducted an administrative hearing in more than 20 years because such a hearing is understood to be so expensive and protracted that it isn’t worth it to the parties to the transaction. So, in practice, the FTC’s announcement that it intends to pursue administrative action scuttles the deal. For example, earlier this spring, J.M. Smucker Co. pulled out of its $285 million deal to purchase the Wesson cooking oil business from Conagra Brands when the FTC filed an administrative complaint seeking to prevent the transaction. Similarly, in July 2017, DraftKings and FanDuel abandoned their merger shortly after the FTC filed an administrative complaint. All four deals the FTC tapped for administrative hearing in 2016 followed the same path.
To obtain a preliminary injunction to temporarily block parties from consummating a challenged merger, the FTC must proceed to federal court, but can obtain an injunction merely by establishing that entry of the injunction “would be in the public interest.” The DOJ, by contrast, has to meet the traditional preliminary injunction standard and establish, among other requirements, a likelihood of success in the merits and irreparable harm if the preliminary injunction is not entered. The FTC’s “public interest” standard is generally regarded to be lower and easier to establish.
Opponents Contend the Current System Works Fine
Opponents of the SMARTER Act argue that the current system works well, so change is a needless risk. Their position is bolstered by the observation that the DOJ has a lower clearance rate for mergers it reviews than the FTC has for its mergers. On such rationale, former FTC Commissioner Terrell McSweeny criticized earlier versions of the bill, calling them a “solution in search of a problem.” But such arguments are disingenuous.
For example, on the preliminary injunction standard, while supporters of the status quo have argued that, whatever linguistic differences there are in the two standards for a preliminary injunction, courts have interpreted the standards similarly. However, the argument is belied by the FTC’s own briefing. See, for example, the discussion at Federal Trade Commission, v. Elders Grain, Inc. and Illinois Cereal Mills, Inc., 868 F.2d 901 (7th Cir. 1989), where the Court evaluated the differences between private and public interests. Perhaps there is justification for a lower standard for obtaining a preliminary injunction, but it is inconsistent to argue that the standards are effectively the same to justify the status quo and yet argue that the standard is lower before the courts.
Similarly, the DOJ’s lower merger clearance rate illustrates the problem with having two agencies with different standards undertake the same responsibility. Parties challenged by the FTC either abandon their merger or settle with the FTC, suggesting perhaps that the FTC’s administrative powers are too great to challenge without the benefit of an objective arbiter, such as the court system. Put more sharply, if all of the FTC’s opponents concede without fighting where mergers cleared by the DOJ result in periodic legal challenges, we have to wonder if the FTC is picking fair fights.
More than a decade after the Antitrust Modernization Commission recommended that the same procedures be applied to the FTC’s and the DOJ’s antitrust review, such common-sense changes remain appropriate. If a Republican legislature and a Republican President cannot or will not adopt the proposals, where opponents marshal little in the way of counterargument, then we are likely to be left with the current imperfect system.