In an accompanying statement, Commissioner Rosch provided his own thoughts regarding the final version of the Guidelines, finding some agreement with Commissioner Leibowitz’s assessment.

“These Guidelines properly consider competitive effects first, and market definition second, thereby making clear that while market definition is important to assessing competitive effects and that the market must be defined at some point in the process, ultimately merger analysis must rest on competitive effects of a transaction.”

Commissioner Rosch rejected the notion of many that under the 1992 version of the Guidelines, market shares and structure were “gating items,” or necessary predicates for considering the competitive effects of the merger.  Under the revised Guidelines, according to Commissioner Rosch, the competitive effects is given more appropriate consideration.

The Merger Guidelines no doubt provide greater clarity on a number of issues.  For example, the Guidelines contain a section dealing with Powerful Buyers and lists the types of evidence to be considered when looking at the competitive effects of a merger, including the impact on innovation and the potential elimination of a “maverick” firm.  The two year guidance for entry has been eliminated and the threshold numbers for the Herfindahl-Hirschman Index have been increased, as expected.

For Commissioner Rosch, though, the changes fall short of what is required.  For example, Commissioner Rosch notes that the Guidelines say little about non-price competitive effects and do not provide a “clear framework for analyzing non-price considerations” (i.e. how do you factor in a loss of innovation?).  According to Commissioner Rosch, economic theory should be, at best, a secondary consideration with empirical inferences to be in the forefront.

“The antitrust defense bar and its clients do not need safe harbors. That bar (including the many who are members of the Antitrust Section) are among the best and brightest lawyers in the world.  What that bar and their clients deserve is what these Guidelines promise at the outset  — namely, that they will be a complete and accurate description of what our enforcement staff considers in merger investigations and that they will be a helpful guide to courts.  These Guidelines are neither.”

Essentially, Commissioner Rosch found fault with the heavy emphasis of economist and the antitrust defense bar in the revision process which “inevitably led to overemphasis on economic formulae and models based on price theory.”

Perhaps the tension identified by Commissioner Rosch emanates from the fact that heavy reliance on “empirical inference” rather than economic theory and analysis potentially leads to greater subjectivity and would be less help than more to the courts.  The courts have required more in terms of evidence in the past and the Guidelines’ apparent move away from market definition is certainly a significant departure from the prior guidelines and indeed inconsistent with judicial precedent.  What impact the Merger Guidelines will have in the courts in the future remains to be seen.

“The touchstone of the Proposed Consent Order is the protection of consumers and competition.  Thus, the Proposed Consent Order provides structural relief designed to restore the competition lost as a result of Intel’s past conduct, and injunctive relief that prevents Intel from engaging in future unfair methods of competition.  The injunctive relief would prohibit Intel, when faced with new competitive threats, from engaging in the exclusionary and unfair conduct alleged in the Complaint.  These provisions are designed to open the door to fair and vigorous competition in the relevant markets, leading to lower prices, more innovation, and more choice for consumers.  The immediacy of this relief is particularly important in these rapidly changing markets.”  (Analysis of Proposed Consent Order to Aid Public Comment)

The settlement appears, though, to reflect a number of concessions by the FTC.  As noted, the settlement does not immediately alter Intel’s alleged monopoly status with the x86 CPU processors.  Moreover, certain of the requested relief sought in the complaint is not reflected in the settlement, such as providing notice to the FTC of acquisitions in the future.  Other relief sought in the complaint, which was broad and categorical, has been refined and narrowed in the settlement.  Indeed, an entire section of the settlement expressly carves out exceptions to the restrictions imposed on Intel’s commercial conduct in the future (see Section IV.B.).  For example, the FTC tries to strike a balance with the limitations to be imposed on Intel in entering exclusive contracts with OEM’s in the future.  In the complaint, the FTC had sought to limit Intel’s practices in entering into these exclusive contracts.  In the settlement, the FTC obtained those limitations while making it clear that it was not banning the practice entirely.

“Section IV.B.8 would allow Intel to enter into no more than ten exclusive agreements over the next ten years when it provides an OEM with “extraordinary assistance” under certain circumstances. The Commission recognizes that Intel has worked with OEMs and other customers to create innovative products that have benefitted consumers. The Commission wants to ensure that Intel has the opportunity to continue to invest monies in projects with OEMs and other customers to support future innovations. Intel, like any other firm, will only invest in research and development if it achieves a return on that investment. Section IV.B.8 recognizes that in “extraordinary” circumstances Intel should be able to negotiate exclusivity for a specific product in which it has invested research and development resources with an OEM or other customer.”

“By accepting this settlement, we open the door to competition today and address Intel’s anticompetitive conduct in a way that may not have been available in a final judgment years from now.  Everyone, including Intel, gets a greater degree of certainty about the rules of the road going forward, which allows all the companies in this dynamic industry to move ahead and build better, more innovative products.”

Clearly, for the FTC, the settlement was “the bird in the hand,” and was more valuable than trying to find two birds later in a bush that is ever changing.

According to the complaint, U-Haul and AMERCO’s Chairman, Edward J. Shoen, developed two strategies designed to eliminate competition between U-Haul and Budget for one-way rentals, both of which were designed to secure higher rates.  Shoen then allegedly communicated these strategies internally to the regional managers of U-Haul, instructing the regional managers to set their pricing and then “LET BUDGET KNOW.”  Shoen allegedly sent other similar instructions in 2006.  In one internal communication, Shoen is alleged to have instructed local U-Haul dealers to contact Budget and Penske dealers to get them to raise their prices:

“We are successfully meeting or beating our Budget and Penske competitors.  However, their rates are WAY TOO LOW.  When you and your MCP [regional manager] decide it is time to bring some One-Way rates back up above a money loosing [sic] 35 mile, have your Dealers let the Budget and Penske Dealers know.  Try ‘Are you tired of renting 500 miles for $149 and a $28 commission?  Then, tell your Budget/Penske rep that U-Haul is up and they should be too.’”

In addition to allegedly communicating these strategies internally at U-Haul, the complaint alleges that Shoen also communicated to U-Haul’s competitors his interest in their raising their prices to meet U-Haul’s.  The complaint quotes generously from a transcript of an AMERCO earnings press conference in 2008 to bolster the claim that U-Haul and AMERCO invited competitors to collude on price.  For example, Shoen is quoted in the complaint as saying in this conference:

“[F]or the last 90 days, I’ve encouraged everybody who has rate setting authority in the Company to give in more time and see if you can’t get it to stabilize.  In other words, hold the line at a little higher.

And if they [Budget] perceive that we’ll let them come up a little bit, I remain optimistic they’ll come up, and it has a profound affect on us.”

There are a number of interesting observations about this matter, short-lived as it was.  First, the complaint does not allege that U-Haul actually conspired with Budget or any other competitor to maintain or raise prices.  The complaint does not allege a violation of Section 1 of the Sherman Act for conspiracy.  Rather, the complaint is premised on a single claim brought under Section 5 of the Federal Trade Commission Act based on U-Haul’s alleged invitation to its competitors to collude.  Three of the Commissioners (Chairman Leibowitz, Commissioner Kovacic and Commissioner Rosch) voting out the complaint, issued a separate statement highlighting this point, evidently trying to send a message to the business community that the FTC will not wait for collusion to occur before it acts:

“The parties have settled an invitation-to-collude case and not a Sherman Antitrust Act Section 1 conspiracy case.  Put differently, the complaint in this case alleges an unfair method of competition in violation of Section 5 of the FTC Act that does not also constitute an antitrust violation.  . . . Today’s Commission action is instead based on evidence that Respondents unilaterally attempted to enter into such an agreement.  The Commission therefore has reason to believe that Respondents engaged in conduct that is within Section 5’s reach.” Statement.

The U-Haul complaint is instructive on several grounds.  First, as is clearly stated by the Commissioners, the FTC is looking at business practices to determine if they are “unfair methods of competition” and not simply violations of Section 1 of the Sherman Act.  Executives of companies should not find solace in the fact that their anticompetitive comments may not have reached their competitors and resulted in an actual agreement to collude on price.  According to the FTC, no such agreement is necessary for action to be taken.  Second, executives of companies must be mindful not only of what is contained in their internal documentation (including email) but also what is stated in public press releases and earnings reports.  A sure-fire way to catch the attention of the government is to have an earnings release where there is discussion of the need for a competitor to raise its prices, as was allegedly the case here.

In a complaint voted out by the Commission (4 to 1) on May 6, 2010, the FTC alleges that D&B acquisition of QED violated Section 7 of the Clayton Act and Section 5 of the FTC Act.  The Commission alleges that D&B’s company, Market Data Retrieval (”MDR”), holds over 90% of the kindergarten through twelfth grade educational marketing databases in the United States as a result of the merger.  The FTC’s complaint further alleges that MDR and QED “were the only two significant competitors in the K-12 data market” and that the acquisition substantially lessened competition by, among other things, “[r]educing the number of significant competitors from two to one, creating a virtual monopoly” and “allowing MDR, unconstrained by effective competition, to increase prices.”  Commenting on the filing, Richard Feinstein, Director of the FTC’s Bureau of Competition, stated in the accompanying press release: “When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That’s going to get the FTC’s attention every time.”  The complaint seeks divestiture of QED.

Despite its lack of detail, the complaint is notable as an indication that the FTC will challenge consummated mergers, even when the size of the transaction is relatively small.  Of course, whether the FTC prevails is another matter.  This merger was apparently consummated over fourteen months ago, and the complaint does not allege that despite the purported ”merger to monopoly,” that MDR had increased prices post acquisition or that pricing had in fact been adversely affected by any increase in market power.  In addition, although claiming that the merger reduced the number of “significant competitors,” at least two other firms that compete in the alleged market are noted in the complaint, but dismissed as “insignificant players.”  From the complaint, it appears that the FTC will contend that reputational issues pose significant barriers to entry and diminish the effectiveness of these two smaller firms as players in this alleged market.

Time will tell whether the FTC can make its case.  One thing is certain:  clearly this is not the last we will hear from the FTC when it comes to challenging consummated mergers.

_________

*Parker Poe Adams & Bernstein LLP is counsel to Polypore International, Inc. in a consummated merger challenge brought by the FTC. That matter was tried before Administrative Law Judge D. Michael Chappell last year. Eric Welsh was co-lead trial counsel.

Certainly, the Proposed Revisions offer to make important changes to the Merger Guidelines.  For example, product market definition would not necessarily be a determinative consideration.  “Market definition is not an end in itself:  it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.”  Proposed Revisions, p. 7.  The Proposed Revisions though would apply a more expansive description of the definition of the “hypothetical monopolist” test used in determining product markets.  In addition, the threshold numbers for the Herfindahl-Hirschman Index (”HHI”) would be increased (see Part 5.3) but would not be considered as necessarily providing a safe harbor.  Also, a section would be added addressing “powerful buyers” (see Part 8).  Here again, according to the revisions, the presence of so-called “power buyers” would not be determinative:  “[T]he Agencies do not presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger.”  Proposed Revisions, p. 27.  Finally, the two year guidance for market entry – formerly a central touchstone in merger cases — has been eliminated (see Part 9).

Interestingly, though, the Proposed Revisions are not viewed by some as a dramatic change from the existing Merger Guidelines.  Commenting on the Proposed Revisions at the Spring Meeting, Deputy Assistant Attorney General for Civil Enforcement, Molly S. Boast, stated that the revisions were intended to bring the Merger Guidelines in line with current practice at the Agencies when reviewing mergers. Others might disagree.  In any event, what is apparent, is that the Proposed Revisions suggest a shift away from “guidelines” to “indicators.”  This appears to have been a conscious move to provide the agencies more flexibility in how they consider a merger.

“These Guidelines should be read with the awareness that merger analysis does not consist of uniform application of a single methodology.  Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.” Proposed Revisions, pp. 1-2.

In the next several weeks, antitrust practitioners will be chiming in on the Proposed Revisions.  While formal comments may result in some changes around the edges, it should be expected that the Proposed Revisions will largely remain intact.  Attention will then be focused on what role the Merger Guidelines, as revised, will play in discussions with the Agencies and in court battles over contested mergers.

This issue has had a rollercoaster ride, starting with the Supreme Court decision of FTC v. Sperry & Hutchinson, 405 U.S. 233, 244 (1972), where the Court stated that the FTC had authority to “consider [] public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.” Since then, the application of Section 5 as a stand-alone claim for conduct outside of the antitrust laws suffered setbacks with decisions rendered by the Second and Ninth Circuits in the 1980’s and then by the FTC itself in its General Foods Co. case, 103 F.T.C. 204 (1984) where it rejected an attempt by complaint counsel to apply Section 5 to predatory pricing practices that did not violate Sec. 2 of the Sherman Act.

Section 5 was somewhat revived in the 1990’s when the FTC applied it to obtain consent decrees in several “attempt to collude” cases not reachable by the Sherman Act Sec. 1. Despite this attention by the FTC, the weight of scholarly comment remained against such application of Sec. 5.

Despite the well-reasoned commentary, the FTC’s attempt to use Section 5 for claims not reachable by the antitrust laws did not cease. In its settlement in the Negotiated Data Solutions case (”N-Data“) in January 2008 (File No. 051-0094), statements by the commissioners acknowledged that the FTC was applying Sec. 5 but not the Sherman Act to antitrust-type conduct that harmed consumers by undermining the standard-setting process. Two commissioners dissented, including Chairman Majoras who warned that the majority’s failure to “identif[y] a meaningful limiting principle” threatened to take the Commission “down a slippery slope” in its application of Section 5.

The N-Data case led to much speculation about the Commission’s view and use of Section 5 stand-alone claims in the future. Chairman Jon Leibowitz addressed the issue in September 2009 by acknowledging that N-Data “was not an antitrust case because the bad behavior did not cause or increase the firm’s monopoly power” and forecasting: “you are likely to see us try to protect consumers by expanding the use of our authority to prohibit unfair methods of competition.” Remarks of Chairman Jon Leibowitz, 36th Annual Conference on International Antitrust Law & Policy, Fordham Competition Law Institute at Fordham Law School, September 24, 2009.

Over the past two years, statements by the Commissioners have fueled the speculation over the Commission’s approach to Section 5’s reach and shined a light on a number of vexing issues. In March 2009, Commissioner Rosch addressed these matters but declined to make any firm predictions, providing instead “tentative views.” See The FTC’s Section 5 Hearings: New Standards for Unilateral Conduct? Remarks of J. Thomas Rosch, Commissioner, Federal Trade Commission, ABA Antitrust Section, Spring Meeting, Washington, D.C., March 25, 2009. Chairman Leibowitz has expressed his view that Section 5 is not confined by Sherman Act standards: “So everyone can agree (I’ve decided) that the FTC Act goes beyond the metes and bounds of the Sherman Act. The more important question is: how far beyond should we go.” See “Tales from the Crypt.” Episodes ‘08 and ‘09: The Return of Section 5 (”Unfair Methods of Competition in Commerce are Hereby Declared Unlawful”). Remarks of Commissioner Leibowitz, Section 5 Workshop, October 17, 2008. Commissioner Rosch and Chairman Leibowitz have noted that Section 5 would be used as a “gap filler.” Id. Chairman Leibowitz has also expressed reluctance to use Section 5 in the merger context. And Commissioner Rosch has repeatedly discussed application of Section 5 using “appropriate limiting principles.” Id.

Elsewhere, however, the FTC and its complaint counsel have been emphatic in opposing arguments that they sought to apply Sec. 5 to conduct not reachable by the antitrust laws. For example, in In the Matter of Polypore International, Inc., Docket No. 9327, Polypore challenged the FTC complaint for indefiniteness and for failure to state a claim of monopolization and attempted monopolization under Sherman Act standards. Complaint Counsel emphatically denied they were trying to create new law (”There is simply no express or implied attempt here to create new law.” Complaint Counsel’s Response to Respondent’ s Motion for a More Definite Statement, In the Matter of Polypore Int’l, Docket No. 9327 (emphasis in original)) and stated that the “Court need not address whether Section 5 reaches beyond the Sherman Act . . . because each claim in the Commission’s Complaint states a cause of action under traditional Sherman Act standards.” Complaint Counsel’s Response to Respondent’s Motion to Dismiss Counts II and III of the Complaint for Failure to State a Claim, p. 4, In the Matter of Polypore Int’l, Docket No. 9327.

Putting the reach of Section 5 to the side, there is also now vigorous debate regarding the standards, also known as “limiting principles,” that should be applied if Section 5 is used as a stand-alone antitrust statute. Commissioner Rosch himself raised many of these difficult questions in the Section 5 Workshop:

“All of this said, however, there exists a myriad of open questions in my mind. Most fundamentally, are my premises right? Put differently, should enforcement of Section 5 be confined to conduct that the Commission also finds does not violate the Sherman Act (or the Clayton Act)? If so, what kind of business conduct besides the conduct challenged in Valasis and N-Data should be covered by Section 5, and what kind of conduct should not be, either on legal or policy grounds? Should conduct that cannot be shown to injure the competitive process ever be considered an unfair method of competition, and, if so, when? How can the Commission avoid creating a rudderless, unbounded standard acceptable to whoever happens to be the majority of the FTC Commissioners at the time? What should be the practical, workable boundaries susceptible to coherent application? How can unfair methods of competition under Section 5 be defined to avoid capturing benign or procompetitive conduct while allowing for sufficient guidance and predictability for business? . . . Can we conclusively say that bringing the statute back to life outweighs any risks?” Welcoming Remarks, Commisioner, J. Thomas Rosch, FTC Section 5 Workshop, Washington, D.C., October 17, 2008.

Commissioner Kovacic also recently noted the unresolved concerns regarding the standards to be applied with a Section 5 claim. The Application of Section 5 of the Federal Trade Commission Act, William E. Kovacic, U.S. Federal Trade Commission, ABA Fall Forum, Washington, D.C. November 12, 2009.

With these issues still unresolved, the Commission has now marched forward with its Intel complaint, which asserts both Sherman Act Sec. 2 violations and stand-alone Section 5 claims regarding conduct not reachable by the Sherman Act. In an accompanying statement, Chairman Leibowitz and Commissioner Rosch argue the necessity of the Commission bringing a stand-alone Section 5 case because “some conduct harmful to consumers may be given a ‘free pass’ under antitrust jurisprudence.” Statement of Chairman Leibowitz and Commissioner Rosch, In the Matter of Intel Corp., Docket No. 9341. Yet, while later stating that “the Commission is well aware of its duty to enforce Section 5 responsibly,” the questions asked by Commissioner Rosch a year ago remain unanswered. Again, begging Commissioner Rosch’s prior questions, Chairman Leibowitz and Commissioner Rosch state: “Section 5 is clearly broader than antitrust laws, but it is not without boundaries, and the Commission will clearly describe and stay within those boundaries if this case comes before it for review.” Id.

Commissioner Rosch’s dissent is the more interesting document since he objects entirely on “public policy grounds” to the case being based even in part on Sec. 2 of the Sherman Act. He argues that it should have been grounded entirely on Section 5, stating, however, “the reach of Section 5, like any other statute, is not unlimited. I think the Commission can and should define those limitations as they apply to this case.” Concurring and Dissenting Statement of Commissioner J. Thomas Rosch, In the Matter of Intel Corporation, Docket No. 9341.

The Intel case will be very informative to the ongoing discussion over the reach and application of Section 5.

Parker Poe is counsel to Polypore International, Inc. in the FTC action and Eric Welsh was on the trial team.