The Federal Trade Commission and the Department of Justice are on a merger litigation tear. "I'm not sure I can think of a time when there were as many merger cases in litigation as there are today," Baker Botts LLP veteran Sean Boland observed at Georgetown University Law Center's annual antitrust forum in September.
Over the past year, as many as 11 merger cases have been in some stage of antitrust litigation. The FTC lost two, which were challenges to acquisitions sought by Laboratory Corp. of America and Lundbeck Inc. The DOJ prevailed in its attempt to stop H&R Block Inc. from buying rival provider of tax preparation software TaxAct. Three cases were settled before they went to trial. Five remain pending: three FTC attempts to stop hospital mergers, the DOJ's effort to block AT&T Inc.'s acquisition of T-Mobile USA Inc. and Polypore International Inc.'s appeal of a district court order upholding the FTC's decision to break up the purchase of Microporous Products LP.
The return to boldness by antitrust regulators won't please anyone whose deal gets dragged into the regulatory maw; merging parties will do nearly anything short of canceling a transaction to avoid delays, costs and uncertainties of a trial. For merging parties generally, however, there is one upside to the feds' litigiousness: The resulting court rulings will provide much-needed judicial review of new merger guidelines issued in August 2010 by FTC Chairman Jon Leibowtiz and then-DOJ antitrust chief Christine Varney.
Issuance of the guidelines caused trepidation in the antitrust bar. Lawyers representing merging companies viewed the new policies as an attempt to boost the government's power to block deals.
First, they argue, the guidelines incorporate economic models that could make it easier to show a deal -- any deal -- is likely to raise prices and is therefore anticompetitive. The tests include measurement of upward pricing pressure caused by a merger, a way to predict how many customers a company will lose after a price increase and a merged entity's power to raise prices unilaterally. Each needs a court review to give both regulators and dealmakers a clear sense of how receptive judges will be to them.
Practitioners also say the guidelines appear to reduce the agencies' obligation to define the specific market hurt by a merger. Nearly every merger case ultimately is decided on whether the judge believes regulators defined the market properly. In the Lundbeck case, the judge ruled against the FTC because he found the agency hadn't proved that the target was actually a competitor. Without the burden of defining a market, the government would have a much easier time pursuing challenges.
The three cases decided in 2011 have demonstrated those fears to be unfounded. (To be fair to regulators, they have insisted since guidelines were issued that the obligation to define a market remained and that the bar's fears were overblown.) In each of the rulings, market definition was critical.
In the LabCorp case, the judge found the FTC had underestimated the level of post-merger competition by drawing the geographic market too narrowly and by limiting the market to labs that used a certain type of payment model. In the Lundbeck case, the company's purchase of its only rival for treating a neonatal illness was upheld because doctors rarely considered price when deciding which drug to prescribe. Therefore, the judge said, the drugs weren't competitors.
Lastly, in the H&R Block case, the judge accepted the DOJ's argument that the relevant market was limited to software for do-it-yourself tax preparation and not all forms of tax preparation as the company argued.
As market definition has largely been ironed out by the courts, future rulings will settle other murky areas. Next year's AT&T case will likely flesh out how much leeway companies have to argue that efficiencies created by a merger outweigh a combination's anticompetitive effects. AT&T predicts its acquisition of T-Mobile would create 96,000 jobs and speed the rollout of 4G broadband services. Argument in that case will be a test for the guidelines' historical antipathy toward efficiency claims and the 2010 revision requiring that efficiency claims be backed by a greater level of proof.
Also ripe for review is regulators' enhanced ability to bring unilateral effects cases. The new guidelines eliminate a prior requirement that the merged firm have a combined 35% share in the relevant market and that the merging parties' products be each other's next-best substitutes for a large fraction of customers.
The H&R Block ruling largely accepted the government's new position, but one case hardly provides the judicial imprimatur necessary to maintain such a substantial change, and more court endorsements will likely be sought before merging parties fully accept that provision.
Also likely to get judicial critique are the critical-loss and upward pricing-pressure tests in the new guidelines. Critical-loss tests allow regulators to define a market by gauging whether a hypothetical monopolist could profit with a "small, but significant" increase in price, presumably 5% to 10%. The test has been in use for some time, but the specific model endorsed by the 2010 guidelines has been criticized.
Similarly controversial is the upward price-pressure model introduced in 2010, which antitrust lawyers complain will always predict a price increase if the merging firms' products are substitutes.
Subjecting the new guidelines and their underlying economic theories to court review will require testimony from dozens of economists, industry experts and company officials. All this will be costly for the government and the merging parties, but if the regulators continue to be aggressive, the process should play out fairly quickly. In the not-so-long run, merging parties are likely to get a clearer playing field.