The Neo-Brandeisian Merger Paradox: A Return to Double Standards
Merger policy has unsurprisingly emerged as a key focus area of the neo-Brandeisian antitrust revolution against large technology companies. Specifically, the neo-Brandeisians and their predecessors have attempted to reinvigorate enforcement by targeting supposed “killer acquisitions” that reduce potential competition, as well as vertical transactions that exclude rivals. To date, their record has fallen far short of the rhetoric: the FTC not only lost its challenge to Meta/Within, which it alleged would reduce potential competition, but also its attempt to obtain a preliminary injunction in Microsoft/Activision, a vertical deal combining Microsoft’s Xbox game console with Activision’s gaming content. Meanwhile, its challenge to Meta’s consummated acquisitions of Instagram and WhatsApp remains ongoing, but only after the FTC’s first complaint was dismissed. But rather than reconsider its agenda, the FTC is looking to stack the deck by reintroducing double standards into merger law.
This approach is explained in part by the fact that the neo-Brandeisians’ preferred strategy to challenge mergers—a presumption of anticompetitive harm based on combined market shares—is of little avail in blocking vertical deals: a merger of two companies that do not compete does not increase market concentration. The same is true with potential competition cases, whether on the “perceived potential competition” theory—the acquisition of a firm that is perceived as a potential competitor—or the “actual potential competition” theory—the acquisition of a firm that is a likely entrant, even if not perceived as such—as firms that do not yet participate in a market have no market share. For this reason, to make its prima facie case, the FTC must rely on either circumstantial evidence based on past anticompetitive conduct or, in the event of a consummated transaction, direct evidence of actual harm.
Such evidence must satisfy two sets of standards. One standard concerns causation, or the level of certainty required to show that the merger resulted in anticompetitive harm. For Section 7 of the Clayton Act, the Supreme Court in Brown Shoe v. United States made clear that a “likelihood” test applies such that mergers with a “probable anticompetitive effect” are unlawful. The second is the evidentiary standard, which in civil antitrust matters is a “preponderance of the evidence.” Put another way, to win its case, the government needs to provide evidence that is “more likely than not” to be on the mark. However, at one time, defendants were thought to have to present evidence “clearly showing that the merger is not likely to have anticompetitive effects” which created a double standard that tipped the scales in the government’s favor and chilled mergers. While the government’s evidentiary standard was a preponderance of the evidence, the defendants’ was in effect clear and convincing evidence.
Courts ultimately abandoned this double standard by requiring defendants to satisfy the same evidentiary threshold as the government—that is, the preponderance of the evidence or more likely than not standard. As now Justice Thomas explained in United States v. Baker Hughes, “requiring a ‘clear showing’ in this setting would move far toward forcing a defendant to rebut a probability with a certainty.” What’s more, courts’ rejection of a clear and convincing standard in favor of a likelihood test coheres with the merging parties’ demonstration of efficiencies, which the current Merger Guidelines explain “must be likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of the proposed merger.” At bottom, this consistent application of a likelihood test rightly puts the government and merging parties on an even playing field in merger cases.
Against the backdrop of losing Meta/Within and Microsoft/Activision, the FTC appears to have identified two strategies for redeploying a double standard in its crusade against mergers by “Big Tech.” First, the FTC decided to challenge Meta’s acquisitions of Instagram and WhatsApp under Section 2 of the Sherman Act. In the FTC’s view, United States v. Microsoft only imposes a “reasonable capability” causation standard for Sherman §2 cases involving alleged harm to potential competition—a lower threshold than the “likelihood” standard under Clayton §7. By bringing a case against Meta under Sherman §2, the FTC would thus be able to rig the game in its favor; a mere reasonable capability causation standard for the FTC to show harm to competition, but a higher likelihood standard for Meta to prove that its acquisitions are not anticompetitive.
Unfortunately for the FTC, even if United States. v. Microsoft does indeed lower the government’s causation standard relative to Clayton §7, Sherman §2 does not give the FTC the advantage it thinks it does. Unlike Clayton §7, which requires that the merging parties prove that efficiencies are merger-specific, the Microsoft test only requires that the procompetitive benefits are likely to result from the conduct—there is no inquiry into necessary causation. And while it is no doubt a key factual dispute between the FTC and Meta whether the efficiency benefits of the Instagram and WhatsApp acquisitions were merger-specific, Meta should almost definitely be able to articulate the existence of cognizable efficiency benefits flowing from the two deals, which is all it would need under the Microsoft test to shift the burden back to the government to make the difficult showing that “reasonably capable” anticompetitive harms outweighed these likely benefits—a balancing which the Microsoft court did not conduct.
As an alternative approach, the FTC and DOJ’s Draft Merger Guidelines appear to try and articulate a double standard in actual potential competition cases by again heightening the defendant’s evidentiary threshold. Specifically, the Draft Merger Guidelines hold that if “the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant, unless there is substantial direct evidence that the competitive effect would be de minimis.” While the Guidelines provide no real support for the “substantial direct evidence” standard, it seems to strongly resemble the “clear showing” standard abandoned by the courts.
Moreover, while the Meta-Within court defined “reasonable probability” as “more likely than not,” scholars have noted that in other contexts “reasonable probability” has been used in a way consistent with a threshold lower than “likelihood.” Indeed, the Draft Merger Guidelines themselves refer to the “possibility that the potential entrant would have entered” in describing the rationale for the actual potential competition doctrine, which suggests that their use of “reasonable probability” may be close to Microsoft’s “reasonably capability” test. While such an interpretation of the Clayton Act’s causation standard should and likely would lose in court, the Draft Merger Guidelines confirm that, as with the FTC’s challenge to Facebook, judges and policymakers must be wary of the antitrust agencies seeking to return to the failed double standard approach to merger enforcement that they once enjoyed as a way to bolster their persecution of large technology companies.