DOJ and FTC Increase Focus on Labor Issues in Transactions
Recently, there has been increased attention to the concept of monopsony among policy makers and practitioners, and both the Federal Trade Commission (FTC) and the Department of Justice (DOJ) are focusing more on supply-side effects of transactions. Most recently, Doha Mekki, Counsel to Assistant Attorney General Makan Delrahim, testified to Congress last month that when analyzing transactions, DOJ will require parties to produce documents that shed light on whether proposed transactions will harm workers. Bruce Hoffman, Director of the FTC Bureau of Competition, testified to Congress last year that he had instructed FTC staff to examine the potential labor-market effects of all proposed mergers, and parties have begun to receive questions about labor effects as part of the investigative process.1 Clients should expect that labor issues are likely to receive attention from the agencies when they consider potential transactions and should be prepared to address those issues.
Monopsony Issues Over Time
Historically, the antitrust bar and the antitrust authorities have focused most of their energy on monopoly/market power that a supplier may gain or use against a purchaser. Over the years, there has been only intermittent attention paid to issues of monopsony power—a single or dominant buyer flexing its muscle against suppliers.
There is well-established case law that buyer-side naked cartels will be considered per se offenses,2 and that buyer-side collaborations ancillary to an arrangement that has the potential to enhance efficiency will be assessed under the rule of reason.3 While monopsonization cases are rare, one case reached the Supreme Court, Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Company, Inc.4 That case set the standard for predatory bidding. On the merger side, the Horizontal Merger Guidelines recognize that mergers between buyers may be challenged, including on the basis of effects in an input market.5 But concerns with buyer-side power in mergers have generally been limited to the agriculture and health care industries, where the agencies have looked at consolidation among firms that buy agricultural commodities from farmers and ranchers and at insurance mergers that could reduce payments to physicians.6
Recent Litigation and Enforcement Uptick
Buyer-side issues gained renewed attention in 2010 when DOJ brought actions against a number of high-tech companies whose CEOs had agreed not to poach each other's employees.7 Then, in 2016, DOJ and the FTC issued guidance relating to hiring practices and announced that DOJ intended to investigate criminally any naked no-poach or wage-fixing agreements entered into after the issuance of the guidance. Since that time, both DOJ and the FTC, as well as state Attorneys General, have taken enforcement actions against conduct affecting labor markets.8
The case law on monopsony is somewhat murky, and challenging a transaction based only on impacts in a labor market would likely be more difficult than challenging a transaction based on a clear theory of output reduction and end-consumer harm. If the agencies were to bring a case based purely on labor impacts, they would likely need to show a compelling story of harm in a well-defined market for employees. This type of theory would have the most traction in a concentrated industry, where labor is specialized and limited to a small set of employers, so that employers would have significant leverage in hiring. It would also be important for the agency to define a limited geographic market and show that employees are reluctant to move out of the area to find other work, another fact that would increase the risk of monopsony power. Even on these facts, a challenge would be difficult, but cannot be ruled out.
The agencies are clearly increasing their scrutiny of buyer-side competitive effects and are particularly focused on effects on employees. Companies should establish strong compliance programs to ensure they do not enter into naked buyer agreements, especially with respect to HR issues. Companies should also assess whether potential mergers may affect labor markets, and should assume that proposed transactions may be subject to scrutiny in this regard. As always, the facts will drive how much scrutiny the agencies will bring to bear on each deal, but companies should expect that the agencies will conduct at least a cursory assessment of labor issues in all deals they review and any review of these issues carries with it the risk of delay, added expense, and potential challenge.
Whether we will see significant enforcement against buyer-side agreements or transactions that affect employees remains to be seen, but this issue remains an area of focus for the agencies. Accordingly, companies should act with caution to avoid the risk of prolonged investigation or enforcement actions in this area.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
See, e.g., Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 219 (1948). The DOJ has stated that it "makes no distinction between seller cartels and buyer cartels in its cartel enforcement program." Org. for Econ. Co-operation and Dev., Roundtable on Monopsony and Buyer Power: Note by the United States 2 (2008), note 3 at 4.
For example, joint purchasing arrangements are commonly assessed under the rule of reason. See, e.g., Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985). The joint DOJ/FTC Health Care Guidelines even include a safe harbor for joint purchasing agreements. U.S. Dep't of Justice & Federal Trade Comm'n, Statements of Antitrust Enforcement Policy in Health Care 54–56 (Aug. 1996).
549 U.S. 312 (2007). In Weyerhaeuser the plaintiff alleged predatory bidding and the Court held that the standard applicable to predatory pricing also applied to predatory bidding claims. To prove a predatory bidding claim, a plaintiff must show: (i) the monopsonist's bidding led to below-cost pricing of the monopsonist's product in the downstream market because the monopsonist had increased its costs by overbidding; and (ii) the monopsonist had a "dangerous probability of recouping the losses incurred in bidding up input prices." Id. at 325.
U.S. Dep't of Justice & Federal Trade Comm'n, Horizontal Merger Guidelines 33 (2010).
In United States v. Rice Growers Ass'n of Cal., Civ. No. S-84-1066, 1986 WL 12562 (E.D. Cal. Jan. 31, 1986) at *9-10, the court enjoined the merger between two rice millers on the basis of harm to competition in the input market for paddy rice grown in California. More recently, DOJ challenged the proposed merger of Anthem and Cigna, including on the grounds that it would create monopsony power in the market for buying healthcare services and would decrease payments to providers and decrease quality. United States v. Anthem, Inc., No. 1:16-cv-01493 (D.D.C. Dec. 19, 2016). This claim was not ruled on at either the district court or appellate level.
See, e.g., United States v. Lucasfilm Ltd., 1:10-cv-02220 (D.D.C. Dec. 21, 2010) (Competitive Impact Statement).
DOJ entered into a consent decree with Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp. to settle allegations of a naked no-poach agreement. See United States v. Knorr-Bremse AG, 1:18-cv-00747 (D.D.C. Apr. 3, 2018) (Competitive Impact Statement). The FTC sued a therapist staffing service and the former owner of a competing service for fixing wages. See In the Matter of Your Therapy Source, LLC, Neeraj Jindal, and Sheri Yarbray, No. 171-0134 (FTC July 31, 2018) (Decision and Order). Several state Attorneys General have brought enforcement actions against no-poach agreements between franchisors. See, e.g., Press Release, Wash. State Office of the Att'y Gen., AG Ferguson Announces Fast-Food Chains Will End Restrictions On Low-Wage Workers Nationwide (Jul. 12, 2018).