On June 17, 2011, the U.S. Department of Justice’s Antitrust Division (“Division”) issued an updated version of its policy guide to merger remedies, the first such revision since the original guide was issued in October 2004. The policy guide is not only utilized as a tool by Division staff in reviewing mergers and analyzing proposed remedies, but also offers businesses greater transparency in the Division’s approach to merger remedies. The purpose of the update is “to ensure [the policy guide] continues to reflect actual division practice.” Therefore, the updated policy guide takes into account lessons learned by the Division as well as changes in the merger landscape, including increasing transnational mergers and complex vertical transactions. Still, the “touchstone principle” for the Division in analyzing remedies remains the same — successful merger remedies “must effectively preserve competition in the relevant market.”
The updated policy guide to merger remedies contains some changes in the Division’s approach to structural remedies, but more significantly, reflects a fundamental shift in the Division’s approach to conduct remedies. When the Division determines that a particular merger is anticompetitive, businesses may either litigate in an attempt to unblock the merger or settle with the government, resulting in a consent decree. Merger remedies essentially form the backbone of a consent decree and allow a merger to proceed while still protecting consumers.
Mergers generally fall into two categories, horizontal and vertical. Horizontal mergers occur between firms that are actual or potential competitors that often have similar sets of assets. Vertical mergers occur between firms that do not operate in the same markets, and as a result, may not involve overlapping assets between the merging entities. Merger remedies also generally fall into two categories, structural remedies or conduct remedies. Structural remedies usually entail the sale of physical assets (divestiture) by merging entities or may require the merged company to create new competitors through the sale or licensing of intellectual property. Conduct remedies generally involve terms that dictate particular aspects of the merged companies’ post-consummation business conduct.
The updated merger policy guide underscores the Division’s increasing recognition of the utility of conduct remedies, particularly with respect to vertical policy mergers. The original guidelines established an explicit preference for structural remedies over conduct remedies because “[structural remedies] are relatively clean and certain, and generally avoid costly government entanglement in the market.” In contrast, conduct remedies suffered from potentially substantial drawbacks, including direct costs associated with monitoring a merged firm’s activities and ensuring compliance with decrees, indirect costs resulting from evasion of the “spirit” of the remedy by the merged firm, the potential for restraining procompetitive behavior, and the potential for regulation to hamstring the merged firm’s ability to efficiently adapt to changing market conditions. However, in a major shift, the updated guidelines now state “[c]onduct remedies can be an effective method for dealing with competition concerns raised by vertical mergers and also are sometimes used to address concerns raised by horizontal mergers (usually in conjunction with a structural remedy).” Experts in the field have indicated that this shift had been foreshadowed by recent consent decrees in cases such as U.S. v. Ticketmaster Entertainment, Inc., U.S. v. Comcast Corp., and U.S. v. Google. The updated merger guide indicates that a conduct remedy might be a particularly useful tool when a structural remedy would eliminate a merger’s potential efficiencies, but, absent a remedy, the merger would harm competition. Still, the updated merger policy guide emphasizes the importance of precise drafting of conduct remedies, warning “[a] decree that is not clearly and carefully drafted can be an invitation for a defendant to try to evade the intent of the decree.” The updated guidelines also outline the most common forms of conduct relief including firewall, non-discrimination, mandatory licensing, transparency, anti-retaliation provisions, and prohibitions on certain contracting practices, as well as others.
With respect to structural remedies, the updated merger policy guidelines indicate a departure from the Division’s previous aversion to the use of “crown jewel” provisions. These provisions generally require the addition of certain specified — and typically more valuable — assets to the initial divestiture package in the event that those assets are unable to be sold to a viable purchaser within a certain period. The updated merger policy guidelines now indicate that when divesture of less than an existing, intact business or divesture of a package of assets selected by the merging companies is accepted by the Division, a crown jewel provision may be necessary. In such cases, the crown jewel provision is thought to ensure that the divestiture package results in a buyer that will preserve competition in the market. The updated merger policy guide also specifically sanctions the use of “upfront buyer” proposals wherein the parties will propose the divestiture of a specific package of assets to a particular buyer. The Division must be satisfied that the proposed sale will preserve competition. Further, the updated merger policy guide suggests a greater openness to the use of operating and monitoring trustees to ensure the effective implementation of remedies.
Additionally, the updated merger policy guide clearly establishes collaboration with regulatory agencies as a best practice when mergers involve firms in regulated industries. Further, the guidelines note the importance of Division awareness of the approaches of international and state antitrust authorities in order to promote cohesive remedies, to the extent practicable.
Finally, the updated merger policy guide introduces a major organizational change in the Division. Now, the Division’s Office of the General Counsel has primary responsibility for enforcing Division decrees. The Office directly oversees the ongoing compliance review and evaluation of potential decree violations by the Division’s litigating sections and makes recommendations to the Assistant Attorney General of the Division. Previously the responsibility for enforcing merger remedies lay with the Division’s civil sections according to the allocation of industries or commodities among those sections. This change represents an effort to concentrate and develop remedy expertise. The new approach is also more closely in line with the historical division of responsibilities at the Federal Trade Commission.
To view the updated Antitrust Division Policy Guide to Merger Remedies, click here.