July 18, 2019

The Insatiable American Antitrust Appetite: What Merger Retrospectives Could Mean for Growing Companies

Antitrust pressures are mounting for merging, growing and already-large companies as the Federal Trade Commission (FTC), Department of Justice (DOJ), congressional panels, presidential candidates and even the American public have started to zealously question the impact large companies have on competition and consumers. Recently, the FTC held hearings on “merger retrospectives” and the value of reviewing previously-cleared mergers. During those hearings, FTC chairman Joseph Simons stated, “I see merger retrospectives as critical to ensuring the success of our merger enforcement program.”

In addition, U.S. Democratic presidential hopeful Senator Amy Klobuchar recently vowed to direct her attorney general to undertake aggressive retrospective reviews of mergers, and to introduce legislation to increase funding for the antitrust enforcement agencies by increasing Hart-Scott-Rodino filing fees in order to counteract what she calls “the new gilded age” of consolidation and concentration. And just this week, the antitrust subcommittee of the House Judiciary Committee held a hearing on antitrust implications of large online tech platforms. And Mayor Pete Buttigieg has proposed designating mergers of a certain size presumptively “invalid,” and requiring companies to affirmatively demonstrate why their deals should be allowed to move forward without remedies. 

These are not the first discussions to consider the impact large companies may have in the enforcement of antitrust laws, nor will they be the last as antitrust issues continue to generate attention amongst government officials and the public at large.

With the current political attention to the competitive effects of large companies, these recent remarks feed a growing public appetite with respect to the potential for antitrust law to address evolving marketplace concerns. Merging, growing or expanding companies should consider and be mindful of the implications the current national debate may have on their potential antitrust exposure.

The FTC Perception – Merger Review

On April 12, 2019, the FTC held hearings on reviewing previously-cleared mergers to discuss, among other topics, prospective merger analysis and the future of merger review. As FTC chairman Simons made clear in his opening remarks, merger retrospectives are important to ensure merger enforcement uses appropriate predictive code analysis and to empower the agencies to challenge future mergers for their likely anticompetitive effects. FTC Commissioner Rebecca Kelly Slaughter echoed the Chairman’s statements, adding that merger review helps the agency determine whether “in a specific case, further enforcement action – such as unwinding a consummated merger or challenging anticompetitive conduct – is necessary to protect and restore competition.”

Commissioner Slaughter made similar remarks earlier this year, advocating retrospective merger review to consider whether further enforcement would be necessary to protect and restore competition. In response to the FTC’s January 2019 approval of the Staples-Essendant Inc. merger, Commissioner Slaughter issued a dissenting opinion criticizing the general direction of merger enforcement and calling for a retrospective analysis of the Staples-Essendant deal, along with other close cases where agency staff had identified potential anticompetitive harms.

The concept of FTC merger retrospectives is not new. Indeed, the FTC has relied on merger retrospectives in the past to better inform and improve upon current merger enforcement and investigation strategy. However, implementing a merger review to unwind a consummated deal that previously had been reviewed by one of the enforcement agencies – in the absence of nefarious conduct on the part of the merged entity or significant changes in the relevant markets – would have a significant impact on the future of mergers. While the FTC has not indicated it necessarily will unwind previously-cleared mergers, it has not foreclosed the possibility if necessitated by its duty to protect and restore competition.

Though there may be uncertainty about the FTC’s willingness to undo previously-consummated mergers, the FTC’s statements suggest that any such drastic measure would be one of many potential remedial actions available to the FTC to counteract anticompetitive conduct discovered after a merger is cleared.

Emerging Public Perceptions – Big Companies Are Inherently Bad

Like the FTC, the American public is engaging in a conversation about whether big companies should be broken up versus the benefits of big companies. Unlike the FTC, which suggests unwinding a merger as a potential remedy to counteract anticompetitive conduct (e.g., exclusionary conduct when a company with significant market share leverages its market power to foreclose competition), the emerging public debate suggests that large companies are inherently bad due solely to their size and, therefore, should be broken up regardless of whether they have engaged in any separate anticompetitive conduct.

For instance, U.S. presidential hopeful Elizabeth Warren’s political campaign announced that she pledges to break up large household companies because these companies allegedly “have too much power.” Politicians from the other end of the spectrum appear to agree—with President Trump and Senator Ted Cruz identifying “Amazon.com, Facebook and Google” as big technology companies that should be broken up because they are allegedly “larger and more powerful” than other companies that were previously broken up for anticompetitive conduct. It is not clear whether these politicians contemplate that enforcement agencies would be required to demonstrate anticompetitive conduct on the part of the large companies before they sued to have the companies’ previously-cleared deals unwound.

Conversely, these big companies continue to grow because the public “zealously” uses them and, presumably, values the benefits they receive by the cost-efficiencies arguably available to larger companies. In 2019, approximately two-thirds of American adults have purchased something on Amazon, more than 60% of all search queries handled by leading U.S. search engine providers run through Google, and approximately seven in 10 American adults have Facebook accounts.

In June, a congressional panel investigating competition in the technology sector began its broad antitrust investigation into tech companies like Alphabet Inc.’s Google, Amazon and Facebook, exploring the market power online platforms have over news publishers. Those same companies provided testimony before the panel this week. Likewise, the DOJ’s antitrust chief Makan Delrahim has cautioned large tech companies that serve as significant players in important digital spaces.

This debate is not limited to booming tech giants, since even smaller companies that have grown large quickly have been subjected to antitrust challenges. Consider the current litigation against the fashion startup Rent the Runway. Once just a fledging company, Rent the Runway reached unicorn status earlier this year when it achieved a $1 billion valuation. But during the same week, LA startup FashionPass sued Rent the Runway for its allegedly anticompetitive exclusivity agreements with fashion designers. While such agreements are typically low-risk when they are between companies with relatively-low market shares, the antitrust risks increase as those companies grow and the agreements have more potential to foreclose the parties’ competitors from accessing supply and customer streams. In the case of Rent the Runway, FashionPass has alleged Rent the Runway’s significant market power in the clothing subscription industry has allowed it to harm competition by making it impossible for FashionPass and other competitors to purchase the same highly-desirable clothing as Rent the Runway. Because Rent the Runway’s actions allegedly have prevented FashionPass from offering these in-demand styles to its own customers, FashionPass alleges it cannot effectively compete against Rent the Runway on the merits of its business. Rent the Runway has filed a motion to dismiss FashionPass’s claims, arguing in part that FashionPass failed to plausibly define a relevant market or allege that the market has been substantially foreclosed.

Growing companies with increasing market share—be it from a merger, capital growth, or innovation— should take note of the Rent the Runway example, and regularly review their agreements with suppliers and customers to reevaluate whether changing market conditions have increased their risk for exposure to antitrust investigations or litigation. In short, companies that are growing, merging, and expanding to new markets can expect their antitrust exposure to grow and expand as well.

What Merging, Growing or Expanding Companies Can Expect Moving Forward

Despite public perception, merging, growing or expanding companies have not traditionally been “bad” or anticompetitive under the federal and state antitrust laws due solely to their size. Federal antitrust enforcers historically have required a finding of anticompetitive conduct to support breaking up large companies via unwinding merged companies, divestiture, or other remedial steps. What’s more, merger reviews are a resource-intensive undertaking for a federal agency, so the FTC does not currently have the resources to feasibly review and/or challenge all mergers approved over the last two decades. Instead, it is likely any potential retrospective review by the FTC will be limited to large-scale mergers that have been challenged by the FTC, see, e.g., hospital mergers in the 1980s and early 1990s, or mergers that received a split decision from the Commissioners such as Staples-Essendant, Inc.

Companies with mergers or growth in certain market areas may be more susceptible to retrospective review by the FTC or DOJ, including large technology companies, companies operating in digital spaces, hospitals and pharmaceutical companies—all of which involve market areas where the FTC and DOJ have expressed an interest in the impact large companies may have on competition.

With increasing public antitrust advocacy, proactive measures will prove useful for growing companies. In particular, conduct that may have been reasonable and procompetitive for a small or moderately-sized company may be riskier if that company later acquires a larger market share in its industry (either through acquisitions or through superior business acumen). Growth, while beneficial for a company, may bring unwanted attention from antitrust enforcers, competitors and private litigants.

Companies should be mindful that expansion may bring new antitrust implications that are unique to their newly-acquired market power. Companies would benefit from reviewing their business agreements and practices as they grow to ensure they continue to take appropriate precautions to minimize their antitrust risks.

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