On August 19, 2010, the US Department of Justice ("DOJ") and Federal Trade Commission ("FTC") issued revised Horizontal Merger Guidelines ("2010 Guidelines"). The release of the 2010 Guidelines marks the first major changes to the Guidelines in over 18 years; they will replace the 1992 Guidelines (which were subsequently amended in 1997). A copy of the 2010 Guidelines is available on the DOJ's website at http://www.justice.gov/atr/public/guidelines/hmg-2010.html and on the FTC's website at http://www.ftc.gov/os/2010/08/100819hmg.pdf. In announcing the release of the 2010 Guidelines, Christine Varney, Assistant Attorney General in charge of the DOJ's Antitrust Division, explained that the revisions were meant to "provide more clarity and transparency" into how the federal antitrust agencies evaluate the likely competitive impact of mergers and were intended to "provide businesses with an even greater understanding of how [the agencies] review transactions." The FTC vote approving the 2010 Guidelines was 5-0. Chairman Leibowitz issued a written statement, noting that "the new Guidelines provide a clearer and more accurate explanation to merging parties, courts, and antitrust practitioners of how the agencies review transactions."
The guidelines explicitly anticipate that revisions will be required "from time to time to reflect changes in enforcement policy or to clarify aspects of existing policy." There has never been such a long interval between major guidelines updates since they were first issued in 1968. Thus, it came as little surprise when, in September 2009, the DOJ and FTC announced that they would jointly explore whether the guidelines should be revised. A series of workshops followed, and the FTC issued proposed revisions for public comment on April 20, 2010.
Like the prior guidelines, the 2010 Guidelines purport to describe the analytical process that the U.S. antitrust enforcement agencies use to investigate and decide whether to challenge proposed horizontal mergers and acquisitions. As the title denotes, the guidelines address only horizontal mergers (i.e., transactions between competitors or potential competitors). They do not address possible vertical issues, which may arise in mergers between firms that do not compete, but operate at different levels within the same supply chain. Nor do the 2010 Guidelines address or modify potential reporting requirements under the Hart-Scott-Rodino ("HSR") Act. As was the case with previous versions of the guidelines, the 2010 Guidelines apply regardless of whether the transaction is HSR reportable and whether or not the deal has closed.
The 2010 Guidelines differ from the 1992 Guidelines in several important ways. In terms of overarching thematic changes, the 2010 Guidelines reject a rigid analytical framework for merger review. Instead, they stress that "merger analysis does not consist of uniform application of a single methodology" but is "a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools . . . ." Another major and widely incorporated change is that the 2010 Guidelines increase the extent to which economic analysis will be used in merger review. Indeed, FTC Commissioner J. Thomas Rosch issued a separate statement concurring in their adoption but criticizing the guidelines' "overemphasis on economic formulae and models based on price theory."
Some of the specific differences between the 1992 and 2010 Guidelines include the following:
- Evidence of Competitive Effects: One significant change is the addition of a new section that describes several categories and sources of evidence -- beyond the usual market share and concentration statistics -- that the agencies have found informative in predicting the likely competitive effects of a merger. Such evidence includes post-merger price increases (for consummated mergers), econometric studies, head-to-head competition between the merging parties, "disruptive" pre-merger behavior by a "maverick" merging party (such as the introduction of a new technology), and information gathered from the merging parties, customers, and competitors.
- Shifting Role of Market Definition and Clarifications to Market Share Calculation Methodology: To quote the DOJ's press release, the 2010 Guidelines seek to "[e]xplain that market definition is not an end itself or a necessary starting point of merger analysis." This is a shift from the 1992 Guidelines which treat market definition as the first step in analyzing the competitive implications of a horizontal merger. Additionally, the 2010 Guidelines provide greater detail regarding the methodologies employed by the agencies to define the relevant product and geographic markets and to calculate market concentration.
- Clarifications to the "Hypothetical Monopolist" Test: The 2010 Guidelines generally preserve the traditional "hypothetical monopolist" test for defining markets (i.e., whether a hypothetical firm that controlled all the products in a putative market likely would be able to sustain at least a "small but significant and non-transitory increase in price"). They do, however, explain in more explicit terms that the agencies will consider the closeness of competition among potential substitutes as part of the analysis at this stage, which could result in narrower market definitions where there are differentiated products or the potential for price discrimination.
- Presumptions Based on Market Concentration: The 2010 Guidelines retain the traditional method for measuring changes in market concentration based on the Herfindahl-Hirschman Index ("HHI"), but raise the thresholds for applying presumptions of anticompetitive harm based on pre- and post-merger market concentration levels. The 2010 Guidelines consider a market with an HHI below 1500 unconcentrated -- up from an HHI of 1000 in the prior guidelines. A moderately concentrated market is defined as one with an HHI between 1500 and 2500, a significant increase from the 1992 Guidelines range of 1000 to 1800. And a market with an HHI above 2500 is considered highly concentrated, as compared to an HHI of 1800 in the 1992 Guidelines. The 2010 Guidelines note that these thresholds are not a "rigid screen" and are only one of many methods the agencies use to identify potentially anticompetitive mergers.
- Unilateral Effects: The 2010 Guidelines include a significantly expanded discussion on how the antitrust agencies evaluate unilateral competitive effects (i.e., the ability and incentive of the merged entity to increase market price or reduce market output without coordination with competitors), including effects on innovation. For example, the 2010 Guidelines describe how agencies evaluate the likelihood that a merger between firms that sell close substitutes would lead to higher prices and reduced innovation. Reflecting the overall de-emphasis on market definition, the 2010 Guidelines explain that "[d]iagnosing unilateral price effects . . . need not rely on market definition" or concentration. The 2010 Guidelines drop the presumption in the prior guidelines that a merger is likely to result in unilateral effects where the parties' combined market share is 35 percent or more.
- Coordinated Effects: As in past iterations, the 2010 Guidelines describe the circumstances under which the agencies believe a proposed merger will facilitate coordinated interaction -- i.e., enhance the ability and incentives of the merged entity and its competitors to take accommodative action to coordinate price or output. The key factors for evaluating likely coordinated effects are unchanged, but the guidelines state that the agencies may challenge a merger even if they lack evidence demonstrating precisely how the alleged post-merger coordination will occur. The 2010 Guidelines also note that coordinated effects can include conduct that is not otherwise condemned by the antitrust laws.
- Entry: The 2010 Guidelines purport to "[p]rovide a simplified discussion of how the agencies evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power." Like the prior guidelines, the 2010 Guidelines outline the factors the agencies consider in determining whether entry will be sufficiently "timely," and "sufficient" to counteract any anticompetitive effects of a proposed merger. In the 2010 Guidelines, the agencies dropped the two-year timeframe during which new entry would be considered "timely" and instead state that entry must be sufficiently rapid to prevent significant harm to consumers. In addition, a new provision states that "[e]ntry by a single firm that will replicate at least the scale and strength of one of the merging firms is sufficient."
In addition to revising the traditional framework, the 2010 Guidelines also address a number of topics that were not discussed in the prior guidelines. These topics, including the following, have long been an integral part of the agencies' analytical process but until now were not squarely addressed in the guidelines:
- Innovation: As noted, the 2010 Guidelines include language addressing "innovation competition." They provide that a merger may harm innovation competition by reducing the parties' incentives either to continue existing product development efforts or to initiate the development of new products. Using language that is sure to be invoked by merging parties, the guidelines state that the agencies must also consider "whether the merger is likely to enable innovation that would not otherwise take place, by bringing together complementary capabilities . . . ."
- Partial Acquisitions: Courts and antitrust enforcement agencies have long recognized that a partial acquisition -- an acquisition of a minority (non-controlling) ownership interest in a competitor -- may raise issues under Section 7 of the Clayton Act and Section 1 of the Sherman Act. The 2010 Guidelines address special issues that may arise in connection with partial acquisitions and explain that the agencies will evaluate whether a partial acquisition will harm competition by: (i) giving the acquiring firm the ability to influence the competitive conduct of the acquired firm, (ii) reducing the financial incentives of the acquiring firm to compete, or (iii) allowing the acquiring firm to access the competitively sensitive information (e.g., prices) of the acquired firm.
- Potential Competition: The 2010 Guidelines state that "a merger between an incumbent and a potential entrant can raise significant competitive concerns" depending on the market share of the incumbent and the competitive significance of the potential entrant. In such cases, the new guidelines state that the agencies will use projected revenues and market shares to predict the future competitive impact of the potential entrant.
- Mergers of Competing Buyers: The 2010 Guidelines include a new section addressing concerns that may arise on the buying side of the market (e.g., where firms compete to purchase inputs, supplies, or goods for resale). In such cases, the new guidelines state that the agencies will use essentially the same analytical framework that applies to mergers involving competing sellers.
- Role of Powerful Buyers: A new, separate section on powerful buyers explains that agencies will not presume that the presence of large, powerful buyers will counteract any anticompetitive impact of a merger between upstream suppliers. Such buyers, according to the 2010 Guidelines, do not always have sufficient leverage against merging parties, and other, less powerful buyers, may still be vulnerable to price increases.
The 2010 Guidelines mark an important development in U.S. merger review practice. It remains to be seen how the agencies will apply the 2010 Guidelines in practice and whether they will succeed in closing the gaps that have long existed between the letter of the guidelines and the way the agencies actually practice merger review. The prevailing view, however, is that the guidelines come much closer than the 1992 Guidelines to accurately capturing the agencies' review methodology. It is even more difficult to predict how courts will reconcile the conclusions in the 2010 Guidelines with the body of well-developed merger case law that relies, in part, on the framework contained in the prior guidelines. It is by no means clear that the new guidelines will trump this prior case law where inconsistent or in tension. Indeed, a number of assertions and analytical methods described in the new guidelines have never been tested before in merger litigation.
In this connection it bears noting that a recent decision by the Southern District of New York ("SDNY") may portend reluctance by the courts to accept certain elements of the 2010 Guidelines. In New York v. Group Health Inc., 2010 U.S. Dist. LEXIS 60196, No. 06-Civ. 13122 (S.D.N.Y. May 11, 2010), the SDNY rejected the plaintiff's request to amend its complaint to include the "upward pricing pressure" ("UPP") test as a way of proving the challenged merger was anticompetitive. The UPP test was incorporated into the 2010 Guidelines and purports to predict the competitive impact of a merger by examining the diversion ratio between the firms' products (i.e., the number of units by which sales of the merger partner's product are reduced when sales of the product in question increase by one unit) and the variable margin earned on the merger partner's product. The court in Group Health, Inc. expressed skepticism about whether such a model could be used in lieu of the traditional market definition analysis to assess the competitive effects of a merger. Of course, one must be careful not to exaggerate the significance of the Group Health case. It may be years before courts will review the various changes in the new guidelines and before any determination can be made about judicial acceptance of the guidelines.
Another open question is whether the changes to the 2010 Guidelines will open the floodgates and permit a greater number of challenges to proposed transactions. Some of the tone and language embraced by the guidelines mirrors the aggressive antitrust enforcement agenda of the current Administration. The broader array of analytical tools available to the agencies, along with the de-emphasis on market definition and adoption of a "no-one-size-fits-all" methodology for evaluating the competitive effects of mergers, may permit greater creativity and flexibility for the agencies to define a competitive problem. Additionally, the language used in the guidelines expresses more skepticism in describing the entry and efficiencies defenses. That said, these changes may simply be a more accurate reflection of the current state of the agencies' merger review procedures, and not a meaningful policy change.
In any event, given the ongoing uncertainty regarding the application of the 2010 Guidelines, companies weighing a merger or acquisition of a competitor should review and consider the 2010 Guidelines with the assistance of experienced antitrust counsel. As the new guidelines note, the merger review process is a fact-specific inquiry and enforcement outcomes may vary considerably. More than ever, it is critical that companies carefully consider the merger review process, the likely sources of relevant evidence under the guidelines, and the potential judicial reaction to the application of new doctrines, well in advance of launching a new transaction.