Realigning Merger Remedies with Antitrust Goals

Introduction

The current focus on antitrust enforcement is supported by an important dialogue on evidence of declining competition in the US economy.^[2] We do not yet know the full extent to which rising concentration, slowing rates of start-ups and widening inequality gaps are the product of the lax antitrust enforcement that has prevailed in the United States for three decades. However, as this story continues to sharpen, it remains clear that vigorous merger enforcement should be, and currently is, high on the antitrust agenda. The US Department of Justice Antitrust Division (the DOJ or Antitrust Division) and Federal Trade Commission (FTC) are in unique positions to learn from their past experience in merger enforcement, particularly with regard to the effectiveness of their remedies.

This commentary highlights the importance of merger remedies in the broader debate about the goals of antitrust in protecting competition, consumers and workers in and era of more vigorous merger enforcement. But it also highlights how remedies policy relates to the factors that have driven lax post enforcement, such as error-cost analysis, or erroneously assigning higher risk to challenging pro-competitive mergers and lower risk to not challenging ultimately harmful ones.^[3]

This chapter identifies several themes around merger remedies. One is the alignment of remedies policy with the goal and operation of antitrust as a mechanism of law enforcement. That is, namely, the development of effective remedies that deter future anticompetitive conduct.^[4] A second theme is the continuing shift in agency policy on structural and conduct remedies, as revealed by changing guidance, the implications of agency self-studies, a growing body of merger retrospectives and even agency enforcement actions involving past, failed remedies. A third theme emerges in the lessons from cases in which the agencies moved to enjoin a merger because a more effective remedy could not be found. These lessons are powerful, but a look at historical enforcement data in the United States reveals a troubling, weakening trend in this regard. A final theme emerges from growing evidence on failed remedies and its implications for policy at a time when the role of antitrust enforcement is critical in addressing competition problems in the US economy.

Aligning merger remedies with the goals of antitrust

The importance of deterrence

The antitrust agencies enforce the antitrust laws through a process of discovery, investigation and deterrence of violations. The agencies can deploy a number of remedies, including injunctions and disgorgement in civil cases, fines and incarceration in criminal cases brought by the DOJ, and civil penalties for decree violations. Enforcement against anticompetitive agreements (e.g., cartels) through Section 1 of the Sherman Act is perhaps the best illustration of antitrust as law enforcement, where the optimal deterrence value of penalties is a central focus. A small but important case illustrates this concept. The DOJ’s settlement in Gunnison Energy and SG Interests Inc levied minimal damages on two companies for rigging bids for natural gas leases on public land in Colorado. Dozens of public comments highlighted the inadequacy of the penalty. Judge Matsch agreed. He denied a motion for entry of a final judgment under the Antitrust Policies and Procedures Act (referred to as the Tunney Act),^[5] noting: ‘There is no basis for saying that the approval of these settlements would act as a deterrence [sic] to these defendants and others in the industry.’^[6]

The role of antitrust enforcement in deterring anticompetitive behaviour maps directly over to merger remedies, at least as to ‘specific deterrence’ or deterring future violations by a defendant.^[7] For example, the DOJ’s 2020 Merger Remedies Manual (the 2020 Remedies Manual) superseded both the 2004 and 2011 versions of the Policy Guide to Merger Remedies before it was withdrawn by the Biden Administration's Antitrust Chief in April 2022.^[8] Nonetheless, the 2020 Remedies Manual explains: ‘Preserving competition is the “key to the whole question of an antitrust remedy,” and preserving competition is the only appropriate goal with respect to crafting merger remedies.’^[9] The 2020 Remedies Manual further states that preserving competition, which includes the concept of restoring competition ‘requires replacing the competitive intensity that would be lost as a result of the merger’.^[10] In this context, a remedy that preserves competition, restores competition and replaces competitive intensity would preclude the ability and incentive for a market participant to exercise market power. Thus, competition is itself the greatest deterrent to anticompetitive conduct.

The 2020 Remedies Manual makes clear, as has previous guidance, that seeking a full stop injunction to prevent a merger from being consummated is a form of relief for a transaction that violates Section 7, as are modifications such as structural or conduct remedies in cases where the parties want to avoid litigation.^[11] However, the 2020 Remedies Manual articulates, for the first time, principles for remedies that support strong deterrence value. These include avoiding remedies that create ongoing regulation of a market, impart only temporary relief, place the risk of failure on consumers and are unenforceable.^[12] This approach is consistent with antitrust as law enforcement. However, major differences among merger remedies, in theory and in practice, raise questions about whether they align closely with antitrust’s goal of deterrence.

For example, evidence of ‘misalignment’ between the goals of antitrust and merger remedies continues to be revealed after the fact – in the markets in which merger defendants operate, post-consummation. Until merger policy more rapidly and effectively incorporates this type of evidence, there remains no first ‘line of defence’ to protect competition and consumers from failed merger remedies. The judicial review process under the Tunney Act, which requires that entry of a consent judgment be deemed in the public interest, is neither reliable nor consistent for this purpose.^[13] Federal judges have expressed reservations about the deterrence value of remedies in only a limited number of cases, otherwise routinely approving consent orders. Effective remedies that deter anticompetitive conduct should therefore be considered a major policy goal, as noted by former Assistant Attorney General for the Antitrust Division, William Baer: ‘Getting remedies right is central to merger enforcement policy.’^[14]

Shifts in agency policy

The pervasive tension between structural and conduct remedies

The US antitrust agencies’ policies governing how merger remedies achieve the goals of antitrust have changed over time. This reflects a continuing tension in the balancing of theory and practice. For example, the Antitrust Division’s 2004 remedies guidelines stated that structural remedies were preferred to behavioural fixes: ‘They [structural remedies] are relatively clean and certain, and generally avoid costly government entanglement in the market. A carefully crafted divestiture decree is “simple, relatively easy to administer, and sure” to preserve competition.’^[15] Between 2009 and 2011, however, the DOJ challenged a number of high-profile vertical merger cases and largely settled them with conduct remedies, including in Comcast/NBCU, Live Nation/Ticketmaster and Google/ITA.^[16]

In 2011, the Antitrust Division rewrote the remedies guidelines to put less emphasis on structural remedies and more emphasis on conduct remedies. Presumably this codified the DOJ’s approach to vertical merger enforcement at the time, which gave considerable deference to efficiencies claims arising from vertical integration. But the 2011 remedies guidelines awkwardly walked a line between promoting effective remedies and accommodating efficiencies claims. They noted, for example, that merger-related efficiencies are of secondary importance to restoring competition, while at the same time explaining that a remedy ‘preserve[s] the efficiencies created by a merger, to the extent possible, without compromising the benefits that result from maintaining competitive markets’.^[17] In 2018, the Trump Administration’s Antitrust Division withdrew the 2011 remedies guidelines as a part of modernising the merger review process and ultimately produced the 2020 Remedies Manual.

A major motivation for withdrawal of the 2011 remedies guidelines was their permissive approach to conduct remedies.^[18] Indeed, as the 2020 Remedies Manual indicates, conduct remedies in effect:

regulate the merged firm’s post-merger business conduct or pricing authority . . . substitute central decision making for the free market . . . require the merged firm to ignore the profit-maximizing incentives inherent in its integrated structure . . . are typically are difficult to craft and enforce . . . [and] are inappropriate except in very narrow circumstances.^[19]

As the DOJ’s many policy shifts have proceeded, the agencies’ track record on effective remedies remains murky.

Conduct remedies are oriented around a ‘design’ standard, namely compliance with the requirements of the remedy. This stands in stark contrast to structural remedies that are shaped around a ‘performance’ standard or an ‘obligation in terms of ultimate goals that must be achieved’.^[20] The implications of this contrast for the deterrence value of merger remedies are clear.^[21] For example, conduct remedies articulate prohibited, permitted and required conduct – requirements that do nothing to change the merged firm’s incentives to exercise market power and encourage circumvention of the rules. Conduct remedies also depend on smaller market participants, under the weak protection of anti-retaliation provisions, coming forth to lodge complaints about non-compliance. Conduct remedies thus require continuing monitoring and enforcement by the agencies and the courts, which are not well suited to act as regulators. Conduct remedies also carry a higher risk of failure, a risk that is more likely to be shouldered by consumers, not the merging parties.^[22]

The Tunney Act review in Comcast/NBCU illustrates most of the foregoing concerns. There, Judge Leon expressed misgivings about the effectiveness of the proposed behavioural remedy, stating that ‘because of the way the Final Judgment is structured, the Government’s ability to “enforce” the Final Judgment, and, frankly, this Court’s ability to oversee it, are, to say the least, limited’.^[23] Judge Leon went on to say that ‘the Government, at the public hearing, freely admitted that “[w]e can’t enforce this decree”.’^[24] In the ABInBev/Miller Coors merger, numerous parties filed amicus briefs as part of the Tunney Act review process.^[25] They emphasised the drawbacks of the conduct remedy in the consent order, which is designed to constrain ABInBev/Miller Coors’ powerful incentives to favour the distribution of its own products over smaller rivals.^[26] These cases reflect the concern that an unenforceable or hard-to-monitor consent order has questionable deterrence value.

The government’s experience also emphasises the risk that complex merger remedies will not be executed successfully, therefore reducing deterrence value. In complex cases, for example, a potential buyer will likely inherit a diverse package of assets involving a combination of research and development, manufacturing and distribution from players that are deeply entrenched in the market. Structural remedies in these cases may be accompanied by conduct remedies, including limited-term supply agreements and licensing and access provisions to ensure that the buyer has continued access to technology or distribution controlled by the merged company. Managers of the merged company must therefore integrate business ecosystems while spinning off divested assets and delivering on promised efficiencies. Completing these tasks presses on the bounds of managerial capability. At the same time they create significant changes that are likely to affect profit incentives, relationships between affiliates and other key operational factors.

Recent large mergers illustrate the significant execution risk associated with complex remedies, including the Monsanto/Bayer merger, which involved the largest dollar-value remedy ever taken by a US agency.^[27] In the merger of wireless carriers Sprint and T-Mobile, the DOJ took a remedy rather than blocking a harmful 4-3 merger, settling on a complex package of divestitures and behavioural access requirements, to be handed off to a satellite television provider, Dish Network, with no experience in the wireless markets.^[28]

Putting merger enforcement action to the test

Injunctions versus consent orders

In the mid-2010s, the Obama FTC and DOJ completed a remarkable ‘streak’ of successfully blocking or forcing the abandonment of several large, presumptively illegal mergers. These deals included Staples/Office Depot, Sysco/US Foods, John Deere/Precision Planting, GE/Electrolux, Applied Materials/Tokyo Electron, Halliburton/Baker Hughes and Anthem/Cigna.^[29] All involved highly concentrated markets and poor, if any, prospects for new entry. Had there been any doubt that the most effective remedy in these cases was a full stop injunction, the absence of viable buyers of potential divestiture assets eliminated it completely.

For example, in the Sysco/US Foods, Staples/Office Depot and Halliburton/Baker Hughes transactions, viable buyers of possible divestiture assets did not exist. Divesting assets to rival market incumbents in these cases would have shifted market share from one entrenched player to another, risking even higher, post-merger levels of concentration and loss of competitive intensity. Divestitures to a potential market entrant more effectively dilute higher market concentration or tighter vertical integration that follows large horizontal and vertical mergers, respectively. However, such a buyer would need to function independently, successfully maintain the assets and quickly reinject the competition lost by the merger and would be difficult, if not impossible, to find in highly concentrated markets.

More recently, the FTC and DOJ have successfully moved to block several more major deals that violated Section 7. These include the merger of Aon and Willis Towers Watson, a 3-2 merger of the largest global insurance brokers, and Cengage and McGraw Hill, another highly concentrative, presumptively illegal 3-2 merger in the US textbook publication market.^[30] Also challenged was Visa Inc’s acquisition of Plaid Inc, which have eliminated the latter’s payments platform, which could eventually challenge Visa’s monopoly in online debit services.^[31] The FTC also challenged the hospital merger of Hackensack Meridian Health and Englewood Healthcare Foundation.^[32] All of these transactions were abandoned in the face of government opposition.

Despite the successes in enjoining illegal mergers, it is important to note that these cases represent only a small fraction of total reported merger transactions. Public agencies are subject to significant resource constraints, not only in screening reportable transactions, but in litigating challenged mergers that potentially violate Section 7. Moreover, only a small fraction of mergers are reportable to the federal antitrust agencies under the Hart-Scott-Rodino Act.^[33] Of those that are cleared to the DOJ or FTC for a closer look, the majority receive early termination because they raise no competitive issues.

A small percentage of merger transactions receive a second request for further information that will aid an agency in making a competitive assessment. This rate has averaged, as a percentage of total clearances, about 21 per cent between 1993 and 2021.^[34] However, that rate has trended slightly downward from 1993 to 2021, indicating that the agencies are scrutinising fewer deals over time. Enforcement statistics reveal that even fewer transactions are challenged by the agencies under Section 7. Merger challenges fall into two major categories: those that are settled by consent decree containing remedies, filed simultaneously with a complaint; and those that are abandoned or restructured in response to an agencies’ signal that it intends to seek a preliminary injunction, or that are litigated. The rate of challenges has averaged, as a percentage of total clearances, about 15 per cent from 1993 to 2021.^[35]

Further unpacking this statistic reveals that the agencies rely more heavily on remedying harmful, challenged mergers than they do on seeking to enjoin them. Over the period 1993–2021, the average percentage of challenged merger transactions that resulted in a consent decree was almost 15 per cent higher than deals that were abandoned, restructured or litigated in response to government opposition.^[36] Moreover, cases settled with consent decrees increased at a higher rate than challenges that the agencies did not settle. In addition to settling more challenged mergers, therefore, the agencies are increasingly resolving them with remedies, rather than moving to block them. This ‘weakening’ of merger enforcement has direct implications for merger enforcement and its central goal of ‘getting remedies right’.

A final development worth noting is that, more recently, the Biden Administration’s enforcers have encountered the problem of 'litigating the fix'. With more vigorous enforcement, as revealed by the agencies’ attempts to enjoin more mergers, has come a willingness of defendants in merger cases to take their proposed remedies to court. There, federal judges have grappled with not only substantive questions around the effectiveness of a proposed remedy but also the assignment of burdens on the government and the merging parties. These tensions are apparent in cases such as Illumina, Inc. and GRAIL, Inc. involving cancer detection tests and in the ASSA ABLOY and Spectrum Brands hardware merger.^[37] Above all else, the 'litigating the fix' problem has revealed that deep-pocketed defendants are willing to take on more aggressive government enforcers that are resource-constrained, but it has also put the question of obtaining effective remedies squarely at the centre of the merger control debate.

Ongoing challenges

Growing evidence on failed remedies and ineffective remedies

As progressive antitrust advocates and observers monitor agency enforcement actions for better alignment of merger remedies with the deterrence goals of antitrust enforcement, another important trend is emerging – growing evidence on failed remedies. For example, in the merger of retail grocers Safeway and Albertsons, the FTC-approved sale of almost 150 stores to a regional west coast grocer (Haggen) led to the failure and shuttering of the divested stores only a few months later.^[38] In Hertz/Dollar Thrifty, the buyer of the divested assets (Advantage Rent-a-Car) filed for bankruptcy soon after the sale.^[39] And despite divestitures in the UnitedHealth/Sierra and Aetna/Prudential mergers, analysts have documented post-merger premium increases.^[40]

Lawmakers have not been shy about pointing out failed remedies. At a 2017 Senate Judiciary Committee hearing on the consumer welfare standard, for example, Senator Richard Blumenthal raised concerns about the Comcast/NBCU consent order and suggested reopening the investigation to consider extending the behavioural conditions or perhaps unwinding the transaction.^[41] Senator Blumenthal’s statement highlights the importance of agency learning as a vital component of rebalancing the goals and effectiveness of merger remedies. Evidence on merger remedies comes from a number of sources. Merger retrospectives, or studies of post-merger outcomes, are performed with more frequency.^[42] They demonstrate that, in many cases, consummated mergers have harmed consumer welfare through higher prices. Empirical ‘meta-analysis’ of a large number of merger retrospectives also demonstrates that divestitures often fail to resolve competitive problems.^[43] The FTC has also conducted two major studies of its divestiture remedies – one in 1999 and another in 2017.^[44] The latter study revealed important observations, including that targeted asset divestitures are much less effective than line-of-business divestitures.^[45]

It remains to be seen if and how the results of agency studies, merger retrospectives and the agencies’ own post-merger investigations will be incorporated into future enforcement decisions. In early 2020, for example, the DOJ moved to amend the original consent order in the Live Nation/Ticketmaster merger, which included prohibitions on anticompetitive conduct and retaliation against concert venue owners.^[46] A DOJ investigation revealed persistent violations of the decree since it came into effect in 2010, in the form of threats, conditions and retaliation designed to force venue operators into contracting with Ticketmaster as their primary ticketing service.^[47] Rather than pursuing a more effective structural remedy, however, the Antitrust Division only sought to extend the original decree that the company had ably violated for the past decade.

The persistent use of firewalls by the FTC in vertical mergers is also troubling. Firewalls are a behavioural remedy designed to prevent the exchange of competitively sensitive information – typically between vertical integrated divisions of a merged company – that enhances incentives to foreclose rivals. However, firewalls do nothing to reduce a firm’s incentive to exercise market power, thus creating strong incentives to ‘work around’ the firewall. Moreover, violations of a firewall are difficult to detect without ongoing monitoring of the merged firm’s internal operations. Nonetheless, the FTC approved the merger of Staples, the largest vertically integrated US reseller of office products, and Essendant, the largest US wholesale distributor of office products, subject to a firewall requirement to restrict Staples’ access to the Essendant’s customers’ information.^[48] Despite outside criticism of the remedy, the FTC again required conduct remedies, including a firewall and other non-discriminatory access conditions, in the merger of Northrup Grumman’s acquisition of Orbital ATK Inc.^[49] The merger would have combined one of the four providers of missile systems to the US government with the leading supplier of solid rocket motors, or missile propulsion systems.

Finally, the FTC’s policy on pharmaceutical mergers bears mentioning because of the agency’s unique approach of settling virtually all challenged trans­actions with consent orders requiring divestitures. Analysis of the nearly 70 pharmaceutical mergers challenged by the FTC between 1994 and 2020 reveals that a relatively small group of drug manufacturers have been involved in a significant proportion of M&A activity and purchases of divestiture assets.^[50] Moreover, many of the very firms that were the most active in these areas have been named as defendants in private, state and federal non-merger antitrust litigations and in federal criminal indictments. Accumulating lawsuits are strong evidence that the FTC’s policy has created market conditions conducive to the exercise of market power by dominant firms and tight oligopolies. This outcome is supported by the agencies’ own study, showing that divestitures in generic pharmaceutic mergers are highly ineffective.^[51] In sum, the cases referenced in this section highlight the challenges in crafting effective merger remedies. Considered in light of two decades of shifting policy and a trend away from enjoining challenged mergers, these concerns should remain a top priority in merger enforcement.

Conclusion

This chapter takes on the question of merger remedies at a time when concerns about declining competition in the United States have intensified the debate about the role of antitrust enforcement. The analysis recognises the importance of antitrust as law enforcement. By extension, effective merger remedies should achieve the goals of law enforcement by fully restoring competition and deterring future anticompetitive post-merger conduct. A growing body of evidence points in the direction of needed clarity in remedies policy and faster incorporation of agency learning into enforcement decisions. This will come from a combination of factors: strong, progressive agency leadership, coherent merger policy that is rooted in combatting rising concentration, and sufficient resources that will enable the agencies to resist pressures to settle and go to court, if necessary.

Notes