Why “Ramping Up” Merger Enforcement Isn’t So Easy

Antitrust enforcement is garnering headlines everywhere—from Lina Khan taking the helm at the Federal Trade Commission (FTC) to the recent dismissal of the FTC’s and state attorneys’ general complaints against Facebook.  While these headlines reflect a healthy debate about the extent of regulatory enforcement, a remarkably bipartisan consensus is emerging around increased vigor in merger enforcement.  Drawing support from a broad array of constituencies—from those worried about increasing concentration of economic power to those worried about the power of big tech to limit social discourse—proponents of increased enforcement advocate for heightened merger standards.  Absent legislative changes (which certainly have been proposed, but whose prospects for enactment are much less clear), existing precedent may act as a significant barrier to a substantial shift in the merger review paradigm.

To assess the state of the law, we examine certain recent merger cases in which government enforcers failed to block mergers: Sabre’s proposed acquisition of Farelogix (United States v. Sabre Corp., U.S. District Court for the District of Delaware, decided on April 7, 2020), T-Mobile’s proposed acquisition of Sprint (New York v. Deutsche Telekom AG, U.S. District Court for the Southern District of New York, decided on February 10, 2020), Evonik’s proposed acquisition of Peroxychem (FTC v. RAG-Stiftung, U.S. District Court for the District of Columbia, decided on February 3, 2020), and AT&T’s proposed acquisition of Time Warner (United States v. AT&T, Inc., U.S. District Court for the District of Columbia, decided on June 12, 2018).[1]  As we look ahead to merger enforcement under the Biden administration, and in particular following renewed calls to challenge mergers involving big tech and nascent competition, what lessons can be drawn from these failed merger challenges?  We find that a number of similar threads run through them.

Whose Burden Is It, Anyway?

In each of these cases, the court focused heavily on the allocation of burdens of proof and persuasion.  In Sabre/Farelogix, applying the United States v. Baker Hughes burden-shifting framework, Judge Leonard Stark of the U.S. District Court for the District of Delaware handed victory to the defendants “because the burden of proof was on the DOJ,” and DOJ had failed to prove that the proposed transaction would harm competition in a properly-defined relevant antitrust market.[2]

In Evonik/Peroxychem, Judge Timothy Kelly of the U.S. District Court for the District of Columbia similarly concluded that the FTC’s prima facie case lacking, finding the FTC’s overly simplified market definition to have been an “important misstep.”  And even had the FTC succeeded in establishing a prima facie case that the proposed acquisition would likely result in significant anticompetitive effects, Judge Kelly still “could not conclude that [the FTC] ha[d] shown a likelihood of success” in view of the defendants’ rebuttal evidence and the additional evidence proffered by the FTC in support of its claims of anticompetitive harm.[3]

In T-Mobile/Sprint, Judge Victor Marrero of the U.S. District Court for the Southern District of New York likewise applied the Baker Hughes framework.  Despite the benefit of a presumption of illegality, the plaintiff state attorneys general still lost because they were unable to overcome the defendants’ rebuttal evidence of claimed efficiencies, the future competitive significance of the target company, and evidence relating to remedies.[4]

Finally, in AT&T/Time-Warner—a vertical merger challenge—Judge Richard Leon of the U.S. District Court for the District of Columbia highlighted the importance of burden allocation in applying the Baker Hughes framework.  Without any presumption of illegality, DOJ had failed to meet its burden: The defendants had successfully undermined and discredited DOJ’s evidence, leaving DOJ unable to show a probability of substantially lessened competition.[5]

These decisions make clear that, in addition to presenting a coherent and well-supported theory of market definition and market shares, government enforcers must be prepared to move beyond presumptions and seriously engage with the merging parties’ rebuttal evidence.

You Can’t Ignore Market Realities in a Totality-of-the-Circumstances Analysis

Another cross-cutting theme in these four decisions is the courts’ approach to the forward-looking analysis that Section 7 of the Clayton Act requires.  Judge Stark in Sabre/Farelogix criticized the government for ignoring market realities in attempting to define a relevant market and for failing to adduce sufficient evidence to enable him to conduct the requisite forward-looking analysis of likely anticompetitive effects.[6]

In T-Mobile/Sprint, Judge Marrero emphasized the importance of the “totality-of-the circumstances approach” to Section 7 of the Clayton Act, which requires courts to “judge the likelihood of anticompetitive effects in the context of the ‘structure, history, and probable future’ of the particular markets that the merger will affect.”  This mandate required weighing a “variety of factors” to determine the effects of the proposed transaction on competition, of which market share evidence was but one component.[7]  Judge Marrero concluded that the defendants’ rebuttal evidence rendered the plaintiffs’ market share statistics an inaccurate reflection of the world with the merger; the “particularities of the wireless telecommunications industry and its exceptional impact both on the entire population of the country and on the national economy” presented circumstances that “create[d] unusual procompetitive pressures and incentives while constraining anticompetitive forces.”  The “complexity and dynamism” of the relevant markets provided “essential context” for resolution of the litigation, leading Judge Marrero to reject plaintiffs’ predictions of post-merger price increases or a decline in the quality of wireless service. [8]

Similarly, in Evonik/Peroxychem, the FTC lost its motion for preliminary injunctive relief where it had presented an “oversimplifi[ed]” view of competitive conditions in the industry.  Like Judge Stark and Judge Marrero, Judge Kelly emphasized the holistic nature of the Section 7 analysis, in which “[o]nly an examination of the real-world evidence—including ordinary course documents, bidding data, and testimony from market participants—can supply an accurate picture of the industry and competitive dynamics.” [9]

Judge Leon took a similar approach in AT&T/Time Warner, likewise endorsing the totality-of-the-circumstances framework in analyzing the proposed merger’s likely effects.  His task was to “weigh[] the parties’ competing visions of the future of the relevant market and the challenged merger’s place within it”—an analysis that demands “[n]othing less than a comprehensive inquiry into future competitive conditions in that market.”[10]

The lesson is again that reviewing courts are likely to look beyond a mechanistic application of the Philadelphia National Bank presumption, requiring litigants to take a broader view of the marketplace in preparing their case.

Beware the Perils of Litigation By Slide Deck

Yet another repeated theme across these cases is the plaintiffs’ over-reliance on, and efforts to inflate the evidentiary value of, certain of the merging parties’ business documents.[11]

In AT&T/Time Warner, Judge Leon was unimpressed by the DOJ’s proffer of the defendants’ prior public statements and ordinary course business documents, finding them to be of “marginal probative value.”  Judge Leon criticized the DOJ’s reliance on “random statements from defendants’ ‘ordinary course’ business documents,” its use of “snippets of such statements” in its filings, and its general strategy of “trial by slide deck.”  He found “minimal” the probative value of statements that were “drafted by a lower-level AT&T employee” who had “nothing to do with the substance of the decision to acquire Time Warner,” and “were contained in a preliminary draft and were subsequently removed or changed” and had not been shown to be viewed or relied upon by any upper-level AT&T witness.[12]

Judge Marrero was similarly unmoved by text messages and business documents introduced by the plaintiffs in T-Mobile/Sprint.  Judge Marrero gave “less weight” to documents written by executives of Deutsche Telekom (T-Mobile’s controlling shareholder) discussing theories regarding effects of consolidation in a foreign market than he gave to T-Mobile’s “actual history of aggressive competition and the incentives for the company to continue competing” that the proposed merger would provide.  Also lacking probative value were text messages written by a Sprint executive who “lack[ed] any input on T-Mobile pricing or regulatory strategy and [had] stressed at trial that he expressed [the] hypothetical [in question] without any underlying basis.”[13]

Finally, in Evonik/Peroxychem, Judge Kelly was likewise underwhelmed by the FTC’s proffered evidence of the threat of post-merger price increases.  He pointedly observed that the record before him contained “no evidence that Evonik intends to raise prices post-merger,” and that “[l]acking a smoking gun,” the FTC instead “fir[ed] away with a few squirt guns.”[14]

These cases show that courts are not likely to be swayed by a myopic focus on so-called “bad” documents created deep within an organization; rather, a more practical, real-world assessment of the merging parties’ actual conduct in the marketplace is likely to carry the day.

Novel Theories Have Their Pitfalls

Several of these cases also highlight the risks of gambling on an unorthodox or novel application of the law to the facts at hand.  In Sabre/Farelogix, DOJ ignored controlling Supreme Court precedent instructing how markets are defined when two-sided platforms are at play.  In Evonik/Peroxychem, it was the FTC’s insistence on pursuing a supply-side substitution theory when it could not back up that unorthodox theory with real-world facts.  In AT&T/Time Warner, it was the government’s invocation of the novel “increased bargaining leverage” theory, which concededly had never been successfully used to block a proposed vertical merger.[15]  In short, if the theory of harm is novel, seldom-used, or geared towards challenging existing unfavorable precedent, government litigants can expect to face rigorous scrutiny from the reviewing court.

Make Sure Your Expert is Battle-Ready

Another lesson of these cases is that, where the government’s case rests largely upon its expert’s analysis, the expert better be ready to defend it.  In T-Mobile/Sprint, the experts battled to a draw.  But in Sabre/Farelogix and AT&T/Time-Warner, the government’s experts lost credibility, which reverberated throughout the courts’ decisions.  In Sabre/Farelogix, Judge Stark found the DOJ’s economic expert’s analysis to be “simply unpersuasive.”  In AT&T/Time Warner, Judge Leon charted the deficiencies in the government’s economic model, concluding it failed to generate “probative predictions of future harm.”  And in Evonik/Peroxychem, Judge Kelly pointed out that expert modeling based on flawed definitions of relevant markets is of “little use.”[16]  The reality is that, unlike the merging parties whose affirmative case can be put on through charismatic executives, government plaintiffs often must rely on their economic experts to make their affirmative case.  These cases demonstrate that where the expert’s presentation is not watertight, the government’s case will suffer.

Take the Parties’ “Fixes” Seriously

These four decisions also reflect the plaintiffs’ failure adequately to account for the merging parties’ efforts to remedy concerns about their deals.  In both T-Mobile/Sprint and Evonik/Peroxychem, the parties had negotiated divestitures and commitments with other government agencies, which played a significant role in addressing the transaction’s potential competitive effects.[17]

While the parties in AT&T/Time-Warner and Sabre/Farelogix had no formal remedies in play, the respective courts nevertheless recognized the parties’ informal efforts to ensure that the merger would not have the claimed competitive effects.  In AT&T/Time-Warner, the acquisition target had sent out binding offers of “baseball” arbitration to its distributors—a commitment that the government argued should be ignored or, at the very least, proven to be binding and effective by the defendants.  Judge Leon disagreed, as he had confidence that the offer would have a “real-world effect.”  Similarly, in Sabre/Farelogix, where Sabre’s CEO had made public commitments around the product at issue, Judge Stark believed that the CEO “intend[ed] to abide by the commitments he has expressed to customers and the market.”[18]

In short, these cases demonstrate that the merging parties can address potential concerns, even with steps that fall short of formal divestiture commitments.

Merely Calling It a “Defense” Doesn’t Make It So

Finally, in several of these cases, the court rejected the plaintiff’s effort to cast defense arguments as standalone defenses on which the defendants bore the ultimate burden of proof, rather than as rebuttal evidence to be weighed in the overall competitive effects analysis.

This was most apparent in T-Mobile/Sprint, where the plaintiffs sought to portray the parties’ claimed efficiencies as an impermissible defense to a presumptively anticompetitive deal.  But Judge Marrero hewed to a “trend among lower courts” recognizing (or at least assuming) that evidence of efficiencies could rebut the presumption that a merger would be anticompetitive.  Judge Marrero accepted evidence that a merging party (in this case, Sprint) was a “‘weakened competitor’ that [could not] compete effectively in the future [could] serve to rebut a presumption that the merger would have anticompetitive effects.”  Taken together with efficiencies, this strengthened the merging parties’ case that the plaintiffs’ market share statistics did not accurately reflect the proposed merger’s likely effects on competition.[19]

Similarly, Judge Stark in Sabre/Farelogix appears to have implicitly considered the defendants’ efficiencies-related evidence, also without accepting the DOJ’s effort to characterize it as a defense.  For example, Judge Stark recognized that Sabre intended to integrate the product at issue into Sabre’s platform, allowing Sabre “to better meet the demands of airlines and travel agencies,” which mirrored the defendants’ argument that the merger would allow Sabre to build a “better mousetrap.”[20]

Again, these cases demonstrate that, in the face of evolving case law and an embrace of a broad totality-of-the-circumstances analysis by the courts, government plaintiffs cannot rely on an outdated playbook premised on compartmentalized arguments.

Conclusion

Despite the diversity in enforcers, judges, and industries involved in these four cases, the decisions provide valuable lessons as we look ahead to the possibility of increased merger enforcement.  These losses make clear that merely establishing a presumption of likely anticompetitive effects does not guarantee a government plaintiff a litigation victory, and that the government plaintiffs’ cases faltered on an inability to muster the evidence needed to support a prima facie case.  These decisions also emphasize the importance of allocating burdens under the Baker Hughes framework, as well as a recognition that Section 7’s “totality of the circumstances” approach to competitive effects requires courts to take a comprehensive view of the marketplace and how it will likely develop with and without the merger.

From a litigation-strategy perspective, these four cases additionally teach (unsurprisingly) that new or unorthodox theories of harm must still be supported by sufficient facts and by the law.  They also reflect the (perhaps obvious) conclusion that, where a case is heavily reliant on expert testimony, that testimony must be credible.  These decisions further show that government plaintiffs cannot simply ignore or discount the parties’ commitments to the marketplace about post-merger conduct.  Nor can government plaintiffs expect to put the merging parties’ efficiencies or weakened-competitor evidence beyond the purview of the court’s competitive effects analysis simply by labeling it a “defense.”

Whether this trend of government merger litigation losses will continue is unclear.  However, these four decisions present useful case studies not only for government enforcers as they consider the deals undergoing regulatory review, but also for merging parties as they evaluate the prospects of getting their deal through.

ENDNOTES

[1]     United States v. Sabre Corp., 452 F. Supp. 3d 97 (D. Del. 2020), vacated, No. 20-1767, 2020 WL 4915824 (3d Cir. July 20, 2020); New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179 (S.D.N.Y. 2020); FTC v. RAG-Stiftung, 436 F. Supp. 3d 278 (D.D.C. 2020); and United States v. AT&T, Inc., 310 F. Supp. 3d 161 (D.D.C. 2018), aff’d, 916 F.3d 1029 (D.C. Cir. 2019).

[2]     Sabre, 452 F. Supp. 3d at 148; see also United States v. Baker Hughes, Inc., 908 F.2d 981 (D.C. Cir. 1990).

[3]     RAG-Stiftung, 436 F. Supp. 3d at 287, 312.

[4]     Deutsche Telekom, 439 F. Supp. 3d at 199, 206-07; see also id. at 234-39.

[5]     AT&T, 310 F. Supp. 3d at 192; see also id.at 191 n.17 (quoting Baker Hughes, 908 F.2d at 983, 990-91).

[6]     See Sabre, 452 F. Supp. 3d at 146.

[7]     Deutsche Telekom, 439 F. Supp. 3d at 198, 206 (quoting United States v. Gen. Dynamics Corp., 415 U.S. 486, 498 (1974)).

[8]     Id.at 189, 207, 233, 239-48.

[9]     RAG-Stiftung, 436 F. Supp. 3d at 287, 312-13.

[10]   AT&T, 310 F. Supp. 3d at 165 (quoting Baker Hughes, 908 F.2d at 991); see also id. at 190.

[11]   See, e.g., Deutsche Telekom, 439 F. Supp. 3d at 188.

[12]   AT&T, 310 F. Supp. 3d at 204; see also id. at 208.

[13]   Deutsche Telekom, 439 F. Supp. 3d at 236.

[14]   RAG-Stiftung, 436 F. Supp. 3d at 320-21.

[15]   Sabre, 452 F. Supp. 3d at 136-38; RAG-Stiftung, 436 F. Supp. 3d at 292; AT&T, 310 F. Supp. 3d at 198-99.

[16]   Deutsche Telekom, 439 F. Supp. 3d at 187; Sabre, 452 F. Supp. 3d at 148-49; AT&T, 310 F. Supp. 3d at 231 & n.41, 241; FTC v. RAG-Stiftung, 436 F. Supp. 3d at 319.

[17]   Deutsche Telekom, 439 F. Supp. 3d at 197-98, 224-33; RAG-Stiftung, 426 F. Supp. 3d at 304, 305 & n.19, 308.

[18]   AT&T, 310 F. Supp. 3d at 184, 217 & n.30, 241 & n.51; Sabre, 452 F. Supp. 3d 97, 131-32.

[19]   Deutsche Telekom, 439 F. Supp. 3d at 207, 217.

[20]   See, e.g., Pl.’s Post-Trial Br. (Public Redacted Version) at 38-39, United States v. Sabre Corp., No. 1:19-cv-01548-LPS (D. Del. filed Feb. 20, 2020) (ECF No. 243); see also Sabre, 452 F. Supp. 3d at 146-47.

This post comes to us from Steve Sunshine,  the head of the Global Antitrust/Competition Group at Skadden, Arps, Slate, Meagher & Flom LLP, and from Julia York, a partner in Skadden’s Antitrust/Competition Group.  It is based on their article in the Florida Law Review Forum. Skadden represented both Sabre Corporation in the Department of Justice’s merger challenge and Sprint Corporation in New York v. Deutsche Telekom AG, No. 1:19-cv-05434-VM-RWL (S.D.N.Y.). However, the views presented in this post are the authors’ own and not necessarily those of Skadden or any of its clients.

Leave a Reply

Your email address will not be published. Required fields are marked *