If you haven’t done so lately, now would be a good time to review your antitrust compliance program. Regulators are making good on their promise to reinvigorate antitrust enforcement, experts say.
For the past year, the Obama Administration and its various antitrust enforcement agencies (principally the Justice Department and the Federal Trade Commission) have warned Corporate America that antitrust issues will come under heightened scrutiny. It appears that they meant it.
“It is a tougher climate,” says Stephen Smith, co-chair of the global antitrust and competition law practice group at Morrison & Foerster. “We're already seeing an increased level of scrutiny and investigation.”
Prosecutors do take years to build antitrust investigations, so Smith and others say it’s still unclear exactly how much fruit all the increased scrutiny and investigations will bear. But nobody doubts that more scrutiny is coming.
“It’s still too early to tell how everything will play out, but anecdotally, on the ground, we are seeing more vigorous enforcement,” says Leslie Overton, a partner in the law firm Jones Day.
Overton cites increased Justice Department focus on technology companies and innovation issues. Smith says scrutiny of the healthcare, pharma, and tech sectors “traces back several years,” and believes energy and consumer products companies are now getting a look “above and beyond what we saw during the Bush administration.”
As such, Overton says it makes sense for companies to examine their compliance programs to ensure they “reflect the current environment and are effective given any changes in enforcement policy or in the company itself.”
For example, she says, a compliance program created when a company was small may not be the right program if the company has grown its way into a large market share—and, therefore, probably has different and greater risks.
Overton also warns that the corporate world may see new theories for antitrust enforcement, especially applied to innovation, under the Justice Department’s Antitrust Chief Christine Varney. Varney helped pioneer some of those theories when she worked at the FTC during the Clinton Administration; now that she’s assistant attorney general, her work may “make a comeback,” Overton says.
Foremost, the FTC may be bolder with enforcement of Section 5 of the Federal Trade Commission Act, which gives the agency broader authority beyond the antitrust laws to prohibit unfair methods of competition.
In December, the FTC used its Section 5 authority in a monopolization lawsuit against chipmaker Intel, alleging that the company “waged a systematic campaign to shut out rivals’ competing microchips by cutting off their access to the marketplace.” That case is slated to go to trial in September.
Robert Schlossberg, a partner in antitrust law at the law firm Freshfields Bruckhaus Deringer, says several investigations have been started under the rubric of Section 5. “Until there’s greater clarity about how they define unfair methods of competition, the rules of the road aren’t that clear,” he says.
Section 2 Enforcement
Another area to watch is enforcement under Section 2 of the Sherman Antitrust Act, which is typically used to bring cases against a firm with significant market share doing something considered anticompetitive to increase or maintain its monopoly. Last year Varney scrapped the Bush Administration’s interpretation of Section 2 enforcement, which may presage a more aggressive stance on monopolization cases.
“Companies with large market shares are likely to find themselves under greater scrutiny and should exercise care, communicate with their antitrust counsel, and evaluate their policies to determine their risks,” Overton says.
Smith says the Obama Administration is more willing to seek remedies or changes in business conduct in merger deals and to litigate if a resolution isn’t reached.
“Business conduct involving coordination or collaboration with competitors in the same industry or market may draw greater antitrust scrutiny,” Smith says. Ditto for business practices by market leaders aimed at competing aggressively against smaller competitors.
“Until there’s greater clarity about how they define unfair methods of competition, the rules of the road aren’t that clear.”
Freshfields Bruckhaus Deringer
Schlossberg says companies should also keep an eye on a flurry of antitrust related activity on Capitol Hill. While Congress struggles to hammer out a broader healthcare overhaul bill, the House is set to vote on legislation that would repeal the insurance industry’s antitrust exemption under the McCarran-Ferguson Act.
In addition, legislation is pending that would ban so-called “pay for delay” settlements, where the makers of brand-name drugs pay generic drug makers to keep generic versions of the drugs off the market. Among those backing the ban is FTC Chairman Jon Leibowitz. A study released by the FTC in January estimates that such payments cost consumers $3.5 billion per year.
Overton says such reverse-payment settlements “are expected to continue to be on the FTC’s radar screen, regardless of whether there is ultimately legislation addressing the issue.”
Lawmakers are also floating legislation to overturn Leegin Creative Leather Products v. PSKS, a Supreme Court decision from 2007 that said agreements between manufacturers and retailers to set minimum retail prices are not necessarily illegal.
And while it’s nothing new, Schlossberg says companies should also be mindful of regulators’ continued willingness to challenge mergers or acquisitions that don’t require pre-clearance under the Hart-Scott-Rodino Act. For example, just last month the Justice Department filed a complaint against Dean Foods, challenging its April 2009 acquisition of Foremost Farms. “Just because a merger doesn’t require filing notification with the government doesn’t mean it won’t be challenged,” he says.
VARNEY ON HORIZONTAL MERGERS
Below is an excerpt of remarks by Assistant Attorney General Christine Varney, addressing gaps in anti-trust enforcement:
I’ll note a few areas where gaps between agency practice and the Guidelines seem most pronounced and where consensus about the existence of those gaps has emerged. These are issues about which I expressly encourage additional comments as our review process continues.
To begin, many of our panelists have noted that the Agencies do not mechanically apply the five-step analytical process set forth in the Guidelines, whereby markets and market shares are first assessed, followed by a sequential consideration of potentially adverse competitive effects, entry, efficiencies, and then failing-firm considerations. None of our panelists advocated following that sequence as the best and most efficient way either to assess every merger’s likely competitive effects or to reach an enforcement decision.
To be sure, the Guidelines themselves offer a note of caution regarding the potentially misleading results that can follow from “mechanical application” of the Guidelines. Panelists have noted, however, that far more flexibility than is indicated in the Guidelines is both the norm of actual Agency practice and, moreover, appropriate given the diversity of considerations that are presented in the range of transactions confronted by the Agencies. Thus, as a matter of both actual practice and sound theory, some adjustment of the description of the analytical process used by the Agencies seems appropriate …
… The next area I would like to discuss is one where the Guidelines appear to inaccurately describe the Agencies’ enforcement policy. As the Merger Challenges Data that I referred to earlier in this talk indicate, it is relatively rare for the Agencies to challenge mergers that will lead to HHI concentration levels below 1,800. Yet the Guidelines indicate that such mergers “potentially raise significant competitive concerns.” Similarly, the Guidelines suggest that a 100 point increase in an HHI concentration level raises competitive concerns. In actual practice, however, the Agencies have only infrequently challenged mergers unless they increase concentration several times that much.
More broadly, our panelists have generally confirmed that the Guidelines overstate the importance of HHIs in merger analysis. It will not surprise you that HHIs have been the focus of neither a party presentation nor a staff recommendation since I’ve been the Assistant Attorney General. That reality reflects the current state of economic thinking, where HHI levels are given a far less prominent place as a predictive tool for assessing competitive effects than the one suggested by the current Guidelines. In that vein, I note that, while many panelists have noted their usefulness as a tool for assessing likely competitive effects, none has maintained that HHIs should be the key driver of enforcement decisions.
It is thus relatively clear that the HHI thresholds set forth in the Guidelines no longer capture agency practice or economic learning about the kinds of mergers that are most likely to lead to consumer harm. Revising the HHI thresholds to express accurately how the Agencies use HHIs seems not just appropriate but also necessary to correct what has become an affirmative misstatement at this point.
A third area I would like to discuss concerns unilateral effects. This is an area where economic thinking and Agency practice have progressed significantly since 1992, when the concept of adverse unilateral effects was first explicitly introduced in the Guidelines. That introduction was a major step forward, but the treatment of unilateral effects was sparse, and several of our panelists and commentators have noted that significant advances in thinking have taken place since 1992 …
Justice Department (Jan. 26, 2010).
The Supreme Court is also set to rule this spring on an antitrust case brought by American Needle against the National Football League and Reebok, alleging that the NFL’s exclusive licensing agreement with Reebok violated the Sherman Act. At issue is whether the NFL and its members are a single entity for the purposes of antitrust laws.
Meanwhile, the Justice Department and FTC are still mulling whether to revise their joint guidelines on horizontal mergers, to better reflect the way they approach merger analysis today. The guidelines, which were last substantially updated in 1992, inform businesses and courts on the agencies’ standards for evaluating mergers. They also inform the way other agencies view antitrust issues in mergers within certain industries, Smith says.
Varney, speaking Jan. 26 at the last in a series of workshops seeking input on modifying the guidelines, maintained that she doesn’t foresee “radical revision,” but said updating the guidelines “does appear worthwhile in a number of areas.”
For instance, she said, adjustment may be needed to the description of the five-step analytical process used. She also cited a general consensus that “market definition should not be an end-all exercise,” and that revisions are needed to the Herfindahl-Hirschman Index thresholds, which “no longer capture agency practice or economic leaning about the kinds of mergers that are most likely to lead to consumer harm.” The guidelines’ discussion of unilateral effects may also need revision to better reflect the agencies’ experience analyzing them since the concept was introduced 18 years ago.
Schlossberg says unilateral-effects analysis, which considers whether merger parties would have sufficient market power after the deal to decrease competition, “has become more nuanced and sophisticated since 1992.”
Those guidelines may be updated to “better reflect what gets done in the Beltway with what’s written on paper,” Schlossberg says, but from an enforcement standpoint they would not amount to much. “The basic philosophy of the guidelines won’t change,” he says.
He notes that any revisions could be a long way off, since the agencies would need to reach agreement on any changes. “I wouldn’t even hazard a guess as to how long that could take,” he says.