A final note on antitrust enforcement during the Obama administration
As the contributions by others in this volume so thoroughly describe, eight years of antitrust enforcement by the US agencies during the Obama era saw litigation challenges that were unprecedented in number, range and complexity. The government ultimately won nearly all of them, including a dozen at the district court level, nine in the courts of appeal and three in the Supreme Court.
During the first four of those years, I observed these developments as a private practitioner. For the last four, I was in the thick of things. GCR asked me to offer some high-level observations about the significance we should attach to this record of achievement by the dedicated and hard-working public servants at the Federal Trade Commission and the Antitrust Division of the Department of Justice. In doing so, I emphasise that there was not a fundamental change in enforcement philosophy. For the past 20 years or so, there has been rough consensus among antitrust enforcers about what is problematic, the evils of cartels, and the need to tell a factually rich story of competitive harm flowing from conduct or proposed mergers. But there were changes on the margins at both the FTC and the Antitrust Division that, from my vantage points in and out of government, contributed in obvious and less obvious ways to such a record of success.
The early decision by FTC chair Jon Leibowitz and assistant attorney general Christine Varney to update the Horizontal Merger Guidelines to reflect current antitrust thinking and better identify the factors that lead enforcers to view a merger as problematic was shrewd. It gave the revised guidelines enhanced credibility in the courts, and offered judges a better framework from which to sort through the competing claims of enforcers and merging parties.
Just look at how often the 2010 guidelines were cited by district and appellate courts, and for how many purposes: to evaluate market concentration; define accurate product markets; identify potential unilateral and coordinated effects resulting from a proposed merger; assess the likelihood of entry by new competitors; and evaluate efficiency claims (eg, Anthem/Cigna, Aetna/Humana, Sysco/US Foods, Staples/Office Depot, to name a few).
Courts openly acknowledged their reliance on the guidelines to help navigate merger challenges. In the recent Anthem decision, Judge Amy Berman Jackson said the high level of concentration in the insurance market post-merger was presumptively unlawful under the guidelines “which courts regularly consult for guidance in these cases.” The appellate court likewise embraced the new and improved guidance: “Although the court is not bound by, and owes no particular deference to, the guidelines, this court considers them a helpful tool, in view of the many years of thoughtful analysis they represent, for analysing proposed mergers.” During a discussion of barriers to entry in the Aetna decision, Judge John Bates said: “[t]he courts have frequently relied on [the guidelines’] formulation of ‘timely, likely and sufficient’ to guide our analysis concerning entry.” In short, the guidelines proved to be an integral resource for antitrust enforcers and courts during the Obama era.
The past eight years also showed that both agencies got better and were more successful litigating as they did more of it. There was a long period where only a few career government antitrust lawyers had federal district court trial experience. Not anymore.
That experience paid off. Antitrust enforcers learned to narrate the story of competitive harm through a company’s own documents and its senior executives, who had to choose between walking away from prior statements they had made orally and in writing, thereby damaging their credibility, or admitting to key facts that were inconsistent with their lawyers’ defence. Look at what happened in Staples 2.0, where the FTC’s use of that evidence in its case-in-chief caused the lawyers for Staples and Office Depot to rest without putting on an affirmative case. The lawyers understandably argued at the time that they had rested because the government had not met its burden. But later they conceded that part of their risk-reward calculation was that cross-examination would have allowed the FTC to emphasise yet again to Judge Emmet Sullivan how the parties had viewed competition between them before the klieg lights were turned on.
That same dynamic played out in the DOJ’s challenge to Apple’s e-books conspiracy. Government attorneys put dozens of emails and internal documents, authored by Apple executives and referencing the e-books scheme, in front of Judge Denise Cote, and she found them compelling. By emphasising ordinary course documents, the DOJ made it difficult for the defendants to deny later during live testimony that they worked together to achieve what Judge Cote called “the twin aims of eliminating retail price competition and raising the prices for trade e-books”. When several defence witnesses tried to sell a different story, Judge Cote wasn’t buying: “The attempts by several witnesses to circumnavigate this documentary record were entirely unsuccessful and informed this court’s analysis of their credibility . . . Apple’s narrative ignores much of the evidence or relies on strained readings thereof.” To adopt Apple’s theory, Judge Cote said, “a fact-finder would be confronted with the herculean task of explaining away reams of documents and blinking at the obvious.” Ultimately, her findings against the defendants were derived liberally from the documentary record, which was “replete with admissions about their scheme”.
For years, the defence strategy in antitrust cases brought by enforcers was to hypothesise an alternative universe where markets were broad, marginal players were serious competitive threats and potential efficiencies almost too large to count. A talented economist would take the stand to describe this view, ignore or downplay the business documents and behaviour refuting it, and offer some quantitative analysis to justify it. The tactic used to work a fair percentage of the time. But the government has gotten pretty good at showing where the facts just don’t support the image being created by the defence in the courtroom. The government’s recent success bears that out.
Being willing to litigate – and being successful at it – has other beneficial effects for antitrust enforcement. It affects the private-sector risk calculus at all stages of the merger and acquisition process. Some deals are never attempted because outside antitrust advisors candidly advise that the likelihood of ultimate success is less than it might have been in another era. Later in the process, more deals get abandoned when the FTC or DOJ makes clear its intent to litigate after its initial investigation.
Take the Comcast/Time Warner and Applied Materials/Tokyo Electron deals, for example. In April 2015, Comcast dropped its plan to acquire Time Warner Cable after the DOJ expressed serious concern that the $45 billion merger would make Comcast a sort of “gatekeeper” for internet-based services that rely on a broadband connection to reach consumers. That same month, Applied Materials and Tokyo Electron abandoned their plans to merge after the DOJ informed the companies that their remedy proposal failed to resolve the Antitrust Division’s competitive concerns. The $10 billion deal was announced in September 2013, but the companies struggled to come up with a plan sufficient (in the DOJ’s view) to minimise the effects of combining two of the three largest manufacturers of critical inputs for modern electronic devices (think smartphones and flat-screen TVs).
In this instance, the parties publicised their decision to back away from the merger in light of the DOJ’s challenge: “Based on the DOJ’s position, Applied Materials and Tokyo Electron have determined that there is no realistic prospect for the completion of the merger,” Applied Materials said in a press release. Virtually the same happened at the FTC in 2014: the agency’s announcement in December that it would challenge Verisk’s proposed acquisition of EagleView stopped the $650 million deal in its tracks. The parties abandoned their plans the same day the FTC notified them of the imminent litigation.
Being ready to litigate – and being seen to be good at it – also positions the enforcers to demand more meaningful settlement terms, especially in horizontal merger challenges. As many of you know, I have for years been the canary in the coal mine on the dangers of settlements in which parties come up with a “resolution” that allows them to close their deal. Such resolutions often leave consumers bearing the risk that conduct restrictions or modest divestitures will solve any antitrust problems. Being ready to go to court makes it easier for the antitrust agencies to just say no and reject questionable settlement offers, as the DOJ did when ABI offered non-structural and impractical remedies in its effort to buy Grupo Modelo in 2012. The subsequent injunction action we initiated (and the detailed complaint we filed) caused ABI to divest entirely its operations related to brewing and distributing Grupo Modelo products in the US, and the settlement worked. Today, sales in the US of Corona and its related products are at record levels, and growing.
Of course, some deals go to litigation even where the guidelines and recent agency practice suggest that a government challenge is likely. I found it interesting in recent years that it often happened because sellers had merger insurance – they sought to protect their downside by demanding a substantial reverse break-up fee to cover the risk that the deal would be challenged. GE did that when it agreed to be acquired by Electrolux, as did Baker Hughes in the Halliburton deal. Humana and Cigna demanded that kind of insurance before committing to the extended antitrust review and eventual injunctions that precluded their acquisition, respectively, by Aetna and Anthem. While I question whether most sellers are adequately compensated by such fees for the trauma their companies endure during the merger review and litigation process, the fact that they are increasingly a fixture of problematic merger deals at least suggests that some outside antitrust advisers are recalibrating risk assessment.
Another lesson learned from recent enforcement success is that when you are confident in your legal and factual position, don’t let an adverse decision or two cause you to give up. Persistence pays off. Hats off to the FTC on this one. The agency’s bipartisan consensus over both Democratic and Republican administrations hung tough on three major antitrust issues of our time, despite judicial setbacks.
Look first at healthcare. Despite early judicial scepticism, the FTC continued to challenge consolidation among healthcare providers. Increasingly, the government’s view prevailed. Recent appellate decisions in the Ninth, Seventh and Third Circuits validated the commission’s analysis of market definition, competitive effects and efficiencies in proposed hospital mergers. In the St Luke’s/Saltzer and Hershey/Pinnacle cases in particular, the appellate courts adopted the guidelines’ view that a defendant’s claimed efficiencies must be merger-specific, verifiable and cannot arise from anticompetitive reductions in output or service.
For years, “pay-for-delay” cases that challenged settlements between drug inventors and their generic competitors – a priority at the FTC since Bob Pitofsky and I were there in the 1990s – did not fare well at trial or in the appellate courts until Justice Breyer’s 2013 majority opinion in FTC v Actavis validated both the theory of consumer harm, and the application of the antitrust laws to agreements between drug pioneers and generics. The Supreme Court decision intensified scrutiny of “pay-for-delay”, with the FTC leading a litany of government and private follow-on lawsuits against brand-name drug manufacturers challenging alleged payments to would-be competitors who make generic substitutes in order to keep them out of the market. Today more than a dozen cases are moving through federal district courts and the First, Second, Third, Seventh and Eleventh Circuits.
Similarly, initial efforts of antitrust enforcers to combat anticompetitive actions taken by those who claimed immunity, due to some state government involvement in their profession or market, ran into the occasional judicial buzzsaw. But over time, the Supreme Court backed the FTC on its insistence that a “state action” defence demonstrates proof that the legislature “clearly articulated” and “affirmatively expressed” a state policy to pre-empt antitrust law in the affected market, as in FTC v Phoebe Putney Health System (2013); and that allegedly immunised regulatory actors, who are also market participants, be subject to active, meaningful supervision by the state, as in North Carolina Board of Dental Examiners v FTC (2015).
In all three areas, the government took the long view – in the face of sceptical courts – where it was convinced that competition and consumers were being harmed. In all three, it paid off.
Cartel enforcement courtroom success during the Obama years deserves mention too. In challenges to price fixing and bid rigging involving municipal bonds, LIBOR, real estate foreclosure auctions, coastal shipping and LCD panels, juries repeatedly voted to convict corporate officials and, in the AU Optronics case, the corporation itself. Foreign nationals abroad faced increased threat of prosecution. Extradition from Canada, the UK and of foreign nationals transiting through Germany was no longer a theoretical threat. The DOJ showed as well that criminal antitrust laws apply with full force to financial markets. Fines hit record levels, totalling almost $9 billion in that eight-year period. The Antitrust and Criminal Divisions found they could effectively work together in joint investigations like Forex and LIBOR. My Criminal Division colleagues, Leslie Caldwell and Mythili Raman, deserve much credit for the results we achieved together.
Support from the Obama administration was important to our success. I had been told that being assistant attorney general for the Antitrust Division was an ideal job because the attorney general, and the deputy and associate attorneys general would leave you alone. That was not my experience, but I am glad for it. On issue after issue, Eric Holder, Loretta Lynch, Sally Yates, Jim Cole, Tony West and Stuart Delery were actively involved in, and ultimately supportive of, the Antitrust Division’s law enforcement decisions, both civil and criminal. They defended the notion of vigorous antitrust enforcement on the Hill and within the administration. And when competition principles butted heads with private sector efforts to restrict airline competition, limit spectrum opportunities for smaller wireless carriers or misuse the ITC to obtain back-door IP injunctions, they were our advocates within the administration. It made a difference every time.
In 2014, before leaving the DOJ, Eric Holder addressed the American Bar Association’s antitrust section and concluded a long summary of competition enforcement achievements with the following:
When the history of this era is written, it will be said that [antitrust enforcement] – at this time – made our nation more open, more just and more ready to confront the economic issues of the day. That will be high praise – but because of my colleagues’ dedication, their vision – it will be well deserved.
I think history will prove him right.