What to Expect in 2021 Merger Enforcement: Trends and Developments from 2020
Overview and Key Issues from 2020
Despite the economic disruptions brought on by the coronavirus pandemic, including a shift to remote work, deal activity was robust with both businesses and the antitrust authorities adapting to the new challenges. In fact, the US antitrust enforcement officials continued to be aggressive in 2020 in what the FTC itself described as "an unprecedented" number of merger challenges.
While the election of former Vice President Joe Biden as president will result in a change in leadership at both agencies, antitrust enforcement typically is relatively immune from fundamental policy swings. However, given public statements and transition announcements, it would not be surprising to see a more aggressive approach to antitrust enforcement, at least on the margins.
As a result, 2020 provides a number of insights for parties to contemplate as they consider transactions in 2021 and beyond:
1. FTC and DOJ Issued New Guidelines. The federal enforcers released formal guidance on a number of topics that provide insight for merger reviews. In June, FTC and DOJ issued Joint Vertical Merger Guidelines to supersede the 1984 Non-Horizontal Merger Guidelines. In September, DOJ issued a Modernized Merger Remedies Manual that emphasized its strong preference for structural relief and a focus on compliance with consent decrees. In November, DOJ also issued Updated Guidance Regarding the Use of Arbitration, which explains selection criteria for cases where arbitration may be an appropriate litigation tool. DOJ also received public comments on whether it should revise the 1995 Bank Merger Competitive Review Guidelines, including comments by several prominent figures in antitrust and politics. In December, FTC (without DOJ) issued a Commentary on Vertical Merger Enforcement to complement the Joint Vertical Merger Guidelines.
2. FTC Commissioners More Often Divided. There have always been disagreements among FTC commissioners, but the divisions seemed particularly sharp in the past several years. This year alone, Democratic commissioners published dissents to the Joint Vertical Merger Guidelines, FTC's Commentary on Vertical Merger Enforcement and FTC's actions in Altria/Juul, AbbVie/Allergan, Eldorado/Caesars, and Pfizer/Mylan. Dissenting commissioners took the opportunity to offer views on many topics including pharmaceutical competition, potential harms to innovation, the sufficiency of divestiture buyers, and whether additional theories of harm should be pursued. The Republican majority often declined to respond or issued a joint statement to reaffirm the analysis and investigation process reflected in the Commission's actions. This past year, however, the Republican commissioners also responded directly to Commissioner Chopra with a pointed rebuke in AbbVie/Allergan. This debate and division is likely to continue past the Trump administration.
3. FTC and "Big Tech" Transactions. On February 11, 2020, FTC announced five Special Orders issued under FTC Act § 6(b), which authorizes FTC to conduct investigations that do not have a specific enforcement purpose. These orders mandated that Alphabet, Amazon, Apple, Facebook, and Microsoft provide information and documents related to nonreportable transactions consummated between January 1, 2010 and December 31, 2019. Apart from these investigations, FTC filed a lawsuit against Facebook, in part to challenge the social media giant's consummated acquisitions of alleged nascent rivals Instagram and WhatsApp, both of which FTC investigated and declined to challenge during the Obama Administration. These efforts appear to be a continuation of the emphasis on competition in the technology space that gained steam in 2019 and helped drive DOJ's 2020 nonmerger challenge of Google's conduct in the search-engine space. And they reflect an emphasis on so-called "killer acquisitions" whereby incumbent firms are alleged to acquire startups and new entrants.
4. Successful Efficiencies Defense. Evidence of merger-specific efficiencies to counter a prima facie case that their transaction may substantially lessen competition is an accepted defense in merger review. Historically, however, this has been an uphill battle for defendants, but a district court gave defendants a rare victory in 2020. The District Court for the District of Columbia rejected a challenge to Sprint/T-Mobile by state attorneys general despite finding that the states presented a strong prima facie case. The court found that Sprint and T-Mobile presented "sufficiently verifiable and merger-specific" efficiencies to outweigh anticompetitive effects, including increased network capacity, reduced costs, expanded network coverage, and accelerated introduction of 5G services, combining to deliver an annual consumer welfare gain of $540 million in 2020 and $18.17 billion in 2024.
5. Nascent & Future Competition. In addition to scrutinizing potential issues caused by the merger of parties with competing products on the market today, antitrust authorities also analyze whether parties have products in development that might compete in the future or whether a transaction potentially harms incentives to innovate. In 2020, FTC analyzed future competition issues in a number of pharmaceutical mergers—Össur/College Park, AbbVie/Allergan and Pfizer/Mylan—and secured divestitures to settle each matter. Commissioners Chopra and Slaughter, however, wrote dissents in AbbVie/Allergan and Pfizer/Mylan to criticize, in part, what they perceive to be a narrow focus on product overlaps as opposed to broader harms to innovation in the form of increasing barriers to entry and decreasing investment in research and development.
6. Increased Focus of Sherman Act Claims. Enforcers usually bring their merger challenges under Clayton Act § 7, which specifically addresses mergers and acquisitions. But enforcers may also allege a conspiracy to restrain trade under Sherman Act § 1 and they may allege monopolization or attempted monopolization under Sherman Act § 2. DOJ can bring these claims directly under the Sherman Act while FTC brings such claims under FTC Act § 5, which prohibits "unfair methods of competition" or "unfair or deceptive acts or practices." In recent years, enforcers have emphasized use of Sherman Act challenges. Last year, we noted that both FTC and DOJ suggested that they may use Sherman Act § 2 to investigate and challenge serial acquisitions of nascent competitors to allow enforcers to analyze mergers as part of a broader pattern of conduct. In 2020, both FTC and DOJ challenged several transactions citing both the Sherman Act and the Clayton Act. DOJ alleged that the "Collaboration Agreement" between Geisinger and Evangelical constituted a conspiracy to restrain trade in violation of Sherman Act § 1, and that Visa/Plaid constituted monopolization in violation of Sherman Act § 2. FTC challenged Altria's minority investment in Juul Labs Inc and associated agreements on the basis that it violated Sherman Act § 1, while Commissioners Chopra and Slaughter argued that FTC should also have challenged the transaction as a conspiracy to monopolize electronic cigarettes in violation of Sherman Act § 2. FTC also is challenging Facebook's consummated acquisitions of Instagram and WhatsApp as part of broader monopolization scheme in violation of Sherman Act § 2.
7. Mergers in Context of Bankruptcy and Financial Hardship. As the United States deals with the economic fallout of the coronavirus pandemic, many companies have had financial difficulties and some have even declared bankruptcy. Acquisitions in a bankruptcy proceeding are not immune from statutory reporting requirements, waiting periods or antitrust scrutiny by DOJ and FTC. In fact, the US antitrust authorities review the competitive impact of a purchase in bankruptcy as any other deal. While buyers might be able to argue that one party is a failing firm whose exit is imminent without the transaction, the "failing firm defense" typically is only credited by the authorities if (1) the firm will not meet its financial obligations in the short term and cannot reorganize successfully in bankruptcy, (2) there was a good faith effort to sell to other buyers that do not pose antitrust risks, and (3) the firm ultimately had no reasonable alternative buyers. For more analysis, see Arnold & Porter's Advisory on the subject.
8. Enforcement of Consent Decrees. Parties often agree to resolve FTC and DOJ concerns through consent decrees and federal enforcers take compliance with these court orders seriously. DOJ in particular has emphasized this point in recent years and has taken action to enforce settlements when it believes the parties have not lived up to their commitments. For example, DOJ alleged that CenturyLink violated part of the consent decree filed in connection with CenturyLink/Level 3. CenturyLink agreed to modify the consent decree to extend the term, enhance compliance requirements, accept an independent monitor, and pay DOJ's fees and costs. Likewise, FTC published an article on its public blog this past year highlighting its enforcement action against ACT/CrossAmerica as proof that "[a]ny deadline in a Commission order is a 'real' deadline, and failure to meet the deadline can have real consequences." In that action, ACT faced a maximum potential penalty in the tens of millions and agreed to pay $3.5 million to settle allegations that it failed to complete divestitures by the agreed-upon deadline, failed to maintain the viability of one of the divestiture properties and failed to make required reports. For more analysis, see Arnold & Porter's Advisory on FTC's enforcement action against ACT.
9. Enforcement of Civil Investigative Demands. While investigating transactions, FTC and DOJ often issue Civil Investigative Demands (CIDs) to request information either from the merging companies or from third parties. Although recipients may be able to negotiate reasonable modifications to reduce their burden, compliance is mandatory and federal investigators may enforce CIDs in court if parties fail to comply. This past year, DOJ petitioned a district court to compel compliance with document requests issued to a consultant in connection with its investigation of a proposed transaction. DOJ eventually voluntarily dismissed its action after determining it could seek the requested documents directly from the merging parties.
10. Consistency Through Coronavirus. In response to the coronavirus pandemic, federal enforcers launched an expedited review process and joint guidelines for companies collaborating to protect health and safety during the pandemic. Substantively, however, FTC and DOJ did not suggest there would be reduced antitrust scrutiny because of the pandemic. FTC and DOJ leadership both promised to aggressively enforce antitrust laws. The antitrust authorities did not, however, ignore the potential economic impact of the pandemic on markets in their analyses of various transactions. As a practical example, Assistant Attorney General Makan Delrahim recognized in DFA/Dean that the "pandemic caus[ed] demand for milk by schools and restaurants to collapse" but DOJ nonetheless required divestitures to preserve competition among fluid milk processors. Similarly, FTC recognized that the coronavirus pandemic might disrupt already-lengthy state regulatory approvals for the divestitures required in Eldorado/Caesars and permitted a longer than typical divestiture deadline. The pandemic will continue to impact both merger practice and merger analysis, as economic ramifications reverberate through 2021.
© Arnold & Porter Kaye Scholer LLP 2021 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.