August 24, 2010
On August 19, 2010, the U.S. Department of Justice ("DOJ") and Federal Trade Commission ("FTC") issued revised Horizontal Merger Guidelines ("2010 Guidelines"). The release of the 2010 Guidelines marks the first major changes to the Guidelines in over 18 years; they will replace the 1992 Guidelines (which were subsequently amended in 1997). A copy of the 2010 Guidelines is available on the DOJ’s website at http://www.justice.gov/atr/public/guidelines/hmg-2010.html and on the FTC’s website at http://www.ftc.gov/os/2010/08/100819hmg.pdf. In announcing the release of the 2010 Guidelines, Christine Varney, Assistant Attorney General in charge of the DOJ’s Antitrust Division, explained that the revisions were meant to "provide more clarity and transparency" into how the federal antitrust agencies evaluate the likely competitive impact of mergers and were intended to "provide businesses with an even greater understanding of how [the agencies] review transactions." The FTC vote approving the 2010 Guidelines was 5-0. Chairman Leibowitz issued a written statement, noting that "the new Guidelines provide a clearer and more accurate explanation to merging parties, courts, and antitrust practitioners of how the agencies review transactions."
The guidelines explicitly anticipate that revisions will be required "from time to time to reflect changes in enforcement policy or to clarify aspects of existing policy." There has never been such a long interval between major guidelines updates since they were first issued in 1968. Thus, it came as little surprise when, in September 2009, the DOJ and FTC announced that they would jointly explore whether the guidelines should be revised. A series of workshops followed, and the FTC issued proposed revisions for public comment on April 20, 2010.
Like the prior guidelines, the 2010 Guidelines purport to describe the analytical process that the U.S. antitrust enforcement agencies use to investigate and decide whether to challenge proposed horizontal mergers and acquisitions. As the title denotes, the guidelines address only horizontal mergers (i.e., transactions between competitors or potential competitors). They do not address possible vertical issues, which may arise in mergers between firms that do not compete, but operate at different levels within the same supply chain. Nor do the 2010 Guidelines address or modify potential reporting requirements under the Hart-Scott-Rodino ("HSR") Act. As was the case with previous versions of the guidelines, the 2010 Guidelines apply regardless of whether the transaction is HSR reportable and whether or not the deal has closed.
The 2010 Guidelines differ from the 1992 Guidelines in several important ways. In terms of overarching thematic changes, the 2010 Guidelines reject a rigid analytical framework for merger review. Instead, they stress that "merger analysis does not consist of uniform application of a single methodology" but is "a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools . . . ." Another major and widely incorporated change is that the 2010 Guidelines increase the extent to which economic analysis will be used in merger review. Indeed, FTC Commissioner J. Thomas Rosch issued a separate statement concurring in their adoption but criticizing the guidelines’ "overemphasis on economic formulae and models based on price theory."
Some of the specific differences between the 1992 and 2010 Guidelines include the following:
In addition to revising the traditional framework, the 2010 Guidelines also address a number of topics that were not discussed in the prior guidelines. These topics, including the following, have long been an integral part of the agencies’ analytical process but until now were not squarely addressed in the guidelines:
The 2010 Guidelines mark an important development in U.S. merger review practice. It remains to be seen how the agencies will apply the 2010 Guidelines in practice and whether they will succeed in closing the gaps that have long existed between the letter of the guidelines and the way the agencies actually practice merger review. The prevailing view, however, is that the guidelines come much closer than the 1992 Guidelines to accurately capturing the agencies’ review methodology. It is even more difficult to predict how courts will reconcile the conclusions in the 2010 Guidelines with the body of well-developed merger case law that relies, in part, on the framework contained in the prior guidelines. It is by no means clear that the new guidelines will trump this prior case law where inconsistent or in tension. Indeed, a number of assertions and analytical methods described in the new guidelines have never been tested before in merger litigation.
In this connection it bears noting that a recent decision by the Southern District of New York ("SDNY") may portend reluctance by the courts to accept certain elements of the 2010 Guidelines. In New York v. Group Health Inc., 2010 U.S. Dist. LEXIS 60196, No. 06-Civ. 13122 (S.D.N.Y. May 11, 2010), the SDNY rejected the plaintiff’s request to amend its complaint to include the "upward pricing pressure" ("UPP") test as a way of proving the challenged merger was anticompetitive. The UPP test was incorporated into the 2010 Guidelines and purports to predict the competitive impact of a merger by examining the diversion ratio between the firms’ products (i.e., the number of units by which sales of the merger partner’s product are reduced when sales of the product in question increase by one unit) and the variable margin earned on the merger partner’s product. The court in Group Health, Inc. expressed skepticism about whether such a model could be used in lieu of the traditional market definition analysis to assess the competitive effects of a merger. Of course, one must be careful not to exaggerate the significance of the Group Health case. It may be years before courts will review the various changes in the new guidelines and before any determination can be made about judicial acceptance of the guidelines.
Another open question is whether the changes to the 2010 Guidelines will open the floodgates and permit a greater number of challenges to proposed transactions. Some of the tone and language embraced by the guidelines mirrors the aggressive antitrust enforcement agenda of the current Administration. The broader array of analytical tools available to the agencies, along with the de-emphasis on market definition and adoption of a "no-one-size-fits-all" methodology for evaluating the competitive effects of mergers, may permit greater creativity and flexibility for the agencies to define a competitive problem. Additionally, the language used in the guidelines expresses more skepticism in describing the entry and efficiencies defenses. That said, these changes may simply be a more accurate reflection of the current state of the agencies’ merger review procedures, and not a meaningful policy change.
In any event, given the ongoing uncertainty regarding the application of the 2010 Guidelines, companies weighing a merger or acquisition of a competitor should review and consider the 2010 Guidelines with the assistance of experienced antitrust counsel. As the new guidelines note, the merger review process is a fact-specific inquiry and enforcement outcomes may vary considerably. More than ever, it is critical that companies carefully consider the merger review process, the likely sources of relevant evidence under the guidelines, and the potential judicial reaction to the application of new doctrines, well in advance of launching a new transaction.
 For information on the FTC’s recently proposed changes to the HSR form and instructions, see Gibson Dunn’s alert, "U.S. Federal Trade Commission Proposes Significant Changes to HSR Filing Form Requirements and Instructions."
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