In what has become the highly regulatory world of Hart-Scott-Rodino federal merger review, it is easy to forget that this is still law enforcement - the Federal Trade Commission or the Antitrust Division cannot block mergers by administrative fiat. Instead, they must go to federal district court and carry their burden of proof before an independent federal judge. Aside from hospital mergers (where their record has been abysmal), the agencies have generally been quite successful in court over the years. But three recent losses in diverse jurisdictions - U.S. v. Oracle in Northern California, FTC v. Arch Coal in the District of Columbia, and U.S. v. Dairy Farmers of America in Kentucky - suggest that long-brewing trends may have reached a judicial tipping point.
For decades, the agencies' burden in court has been eased by the presence of certain judicial or statutory helpers. Among the most important of these is the presumption, dating from the Supreme Court's Philadelphia National Bank opinion in 1963, that increases in market concentration are a predictor of anticompetitive effects. A similar simplification flows from the FTC Act's Section 13(b) statutory language that all the FTC must show to be entitled to a preliminary injunction is that there are "substantial, difficult and doubtful" questions going to the merits; many courts treated this language as requiring little more than a prima facie case, if even that. These and other analytical shortcuts and legal crutches led both agencies to offer more formalistic analysis in their court pleadings and evidence than they in fact applied in making the decision whether to file the lawsuit in the first place. Until very recently, this approach often sufficed to obtain the preliminary injunction sought, which was usually enough to kill the deal.
But while simplifying presumptions may make sense as a policy matter, they can produce a wrong result from a given set of facts. Judges generally are more concerned about the litigants before them than the implications of their aggregated decisions, and more sophisticated analysis is inherently at tension with simple rules. The 1982 Merger Guidelines revisions reflected the beginning of movement toward more careful analysis of the specific facts in merger cases, and the 1992 and 1994 revisions to the Merger Guidelines essentially abandoned the Philadelphia National Bank presumption, treating concentration as merely a starting point for analysis. This shift is no doubt part of the reason for the smaller number of merger challenges in recent years, as fact-based prosecutions are harder than those based on presumptions.
Now, in quick succession, we have three court losses illustrating how hard it really is to prove that a merger is likely to have anticompetitive effects in the post-presumptions era.
The 164-page Oracle opinion, which rejects every important element of the Antitrust Division's case, will be cited by merger defendants for a long time. Besides emphatically disregarding all presumptions, the Court completely rejected customer testimony proffered by the Division, asserting that it simply reflected preferences, not careful analysis of what was possible if the acquisition was allowed to proceed. Strikingly, the Arch Coal opinion also rejects what has become a standard evidentiary tool for enforcers - customer (or putative "victim") testimony about how the transaction is likely to harm them. If customer testimony is to be trumped by more "objective" analysis, the road to winning merger cases will get even harder for the agencies.
Also sobering for the agencies is the fact that, in both Arch Coal and DFA , the courts (over the strong objection of the agency) allowed the parties to adjust the deal and performed its analysis on that adjusted deal, in one case after the investigation began and in the other after the case was brought. If this approach holds, merger parties have a lot more tactical options than they have had in the past.
Are these cases just coincidental outliers? Or do they indicate a new level of resistance by district judges to some of what have been the ordinary tools of federal merger litigation? Interesting questions to ponder.