FTC and DOJ Issue Revised Horizontal Merger Guidelines

Sculpture: Man wrestle horse, outside FTC. Signifies taming of the markets.

The Federal Trade Commission and Department of Justice on Friday, August 19, 2010, issued revised Horizontal Merger Guidelines that outline how the federal antitrust agencies evaluate the likely competitive impact of mergers and whether those mergers comply with U.S. antitrust law. These changes to the Guidelines mark the first major revision of the merger guidelines in 18 years, and is intended to give businesses a better understanding of how the FTC and DOJ will evaluate proposed mergers moving forward.  For example, the new Guidelines explain that the effect on innovation is something that will be considered when determining whether a horizontal merger is acceptable. The rationale is relatively straight forward: “Competition often spurs firms to innovate.”

The FTC and the DOJ had jointly announced their effort to revise the Horizontal Merger Guidelines in September 2009. This announcement by the agencies was followed by a series of workshops over the course of the Winter of 2009/2010. The FTC issued proposed revisions for public comment on April 20, 2010. For those interested, the FTC has posted all of the written comments received.

Originally, the Horizontal Merger Guidelines were first adopted in 1968, and then revised in 1992. The Guidelines have and will serve as an outline of the main analytical techniques, practices and enforcement policies the FTC and the DOJ use to evaluate mergers and acquisitions involving actual or potential competitors. The newly issued Guidelines take into account legal and economic developments that have occurred since the 1992 revision, but according to the agencies are not intended to represent a change in the direction of merger review policy. Instead they are intended to offer more clarity on the merger review process to better assist the business community and, in particular, parties to mergers and acquisitions.

More generally speaking, the 2010 Horizontal Merger Guidelines outline the principal analytical techniques, practices, and the enforcement policy of the FTC and DOJ with respect to mergers and acquisitions involving actual or potential competitors (“horizontal mergers”) under the federal antitrust laws. The relevant statutory provisions include Section 7 of the Clayton Act, 15 U.S.C. § 18; Sections 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and 15 U.S.C. § 2; and Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.  Notwithstanding, it is Section 7 of the Clayton Act that is most often implicated. Section 7 of the Clayton Act prohibits mergers if “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

The revised Guidelines are derived from the collective experience and expertise of the FTC and DOJ acquired through assessing thousands of transactions.  As a result of this experience these two agencies have identified certain types of evidence that help them characterize the influence and impact a particular merger is likely to have on the marketplace.  Hence, a primary goal of the 2010 guidelines is to help the agencies to uniformly identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that either are competitively beneficial or likely will have no competitive impact on the marketplace.   A byproduct is to give the business community information about what types of mergers are likely to result in the most scrutiny.

The Horizontal Merger Guidelines, which were first adopted in 1968, and revised in 1992, serve as an outline of the main analytical techniques, practices and enforcement policies the FTC and the Department of Justice use to evaluate mergers and acquisitions involving actual or potential competitors under federal antitrust laws.  The guidelines issued today take into account the legal and economic developments since the 1992 guidelines were issued. They are not intended to represent a change in the direction of merger review policy, but to offer more clarity on the merger review process to better assist the business community and, in particular, parties to mergers and acquisitions.

The 2010 Guidelines are different from the 1992 Guidelines in several important ways. The guidelines:

  • Clarify that merger analysis does not use a single methodology, but is a fact-specific process through which the agencies use a variety of tools to analyze the evidence to determine whether a merger may substantially lessen competition.
  • Introduce a new section on “Evidence of Adverse Competitive Effects.” This section discusses several categories and sources of evidence that the agencies, in their experience, have found informative in predicting the likely competitive effects of mergers.
  • Explain that market definition is not an end itself or a necessary starting point of merger analysis, and market concentration is a tool that is useful to the extent it illuminates the merger’s likely competitive effects.
  • Provide an updated explanation of the hypothetical monopolist test used to define relevant antitrust markets and how the agencies implement that test in practice.
  • Update the concentration thresholds that determine whether a transaction warrants further scrutiny by the agencies.
  • Provide an expanded discussion of how the agencies evaluate unilateral competitive effects, including effects on innovation.
  • Provide an updated section on coordinated effects. The guidelines clarify that coordinated effects, like unilateral effects, include conduct not otherwise condemned by the antitrust laws.
  • Provide 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.
  • Add new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.

With respect to innovation, the Guidelines explain that the FTC and DOJ “may consider whether a merger is likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger.” The Guidelines explain that that curtailment of innovation that would be troubling could take several forms. Specifically, curtailment of innovation could be of concern if it is believed that the merger would reduce incentive to continue with an existing product-development effort or if there would be a reduced incentive to initiate development of new products.

Conversely, the Guidelines also address when a merger might seem appropriate. For example, the FTC and DOJ will also consider whether the merger is likely to foster innovation that would not otherwise have take place, by bringing together complementary capabilities that could not otherwise be combined absent a merged company. Following this thinking, the Guidelines also explain that one primary benefit of mergers is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products. For example, efficiencies achieved through merger may lead to more innovation and new or improved products.

“Because of the hard work of all involved at both agencies, private parties and judges will be better equipped to understand how the agencies evaluate deals. That improvement in clarity and predictability will benefit everyone,” said FTC Chairman Jon Leibowitz. “We thank Christine Varney and her team at DOJ for their terrific work on this initiative, demonstrating once again how effectively and collegially the two agencies work together.”

“The revised guidelines better reflect the agencies’ actual practices,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The guidelines provide more clarity and transparency, and will provide businesses with an even greater understanding of how we review transactions. This has been a successful process due to the commitment of the talented staff from both agencies and the excellent working relationship with the FTC led by Jon Leibowitz.”


Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Join the Discussion

One comment so far.

  • [Avatar for Paul F. Morgan]
    Paul F. Morgan
    August 23, 2010 01:13 pm

    The part of this I personally find concerning is something that I had publicly complained about in a large DOJ public AIPLA presentation some years ago [in a dark room, without identifying myself]. Namely: “..the new Guidelines explain that the ‘effect on innovation’ is something that will be considered when determining whether a horizontal merger is acceptable.” As I noted there, while the DOJ has successfully obtained some consent settlements on that issue, from at least one drug company, there is no actual supporting case law for such a general no-actual-market-based alleged AT violation. I.e., based merely on the merging [or joint venture?] of companies having done some of their research and getting some of their patents in the same general technology.
    [Without also at least proving up solid evidence of serious prior efforts, and clear intent, by both companies first to both market directly competitive products in the same relevant market, and then to eliminate that intended competition by their later proposed merger or other joint activities.]
    The flumoxed DOJ speaker [obviously not used to anyone questioning their public pontifications] then tried to cite the Government’s Aircraft Manufacturors License suit for legal authority in response. I noted that I was very familiar with that case, and that it was an uncontested consent judgment. [I refrained from also noting that anyone other than a government attorney trying to cite an uncontested pre-trial settlement as legal authority would get bounced down the courthouse steps by the judge.]