Last week saw two notable competition-related developments from the Federal Trade Commission (FTC). The first relates to the FTC’s approval of eight new compulsory process resolutions in high-priority areas. The second concerns the FTC’s withdrawal of its approval of the Vertical Merger Guidelines issued by the FTC and Department of Justice Antitrust Division in 2020.
Compulsory Process Resolutions
On September 14, 2021, the FTC voted 3-2 to approve new compulsory process resolutions in eight key enforcement areas with the goal of enabling more aggressive investigations of conduct in these areas. The eight new compulsory process resolutions concern: (1) repair restrictions, (2) abuses of intellectual property, (3) monopolization offenses, (4) interlocking directors & officers and common ownership, (5) deceptive and manipulative conduct on the internet, (6) bias in algorithms and biometrics, (7) acts or practices affecting United States Armed Forces Services members and veterans, and (8) acts or practices affecting children.
The FTC uses the compulsory process as an investigatory tool through the issuance of demands for data, documents, and testimony via civil investigative demands (CIDs) or subpoenas. CIDs also permit the Commission to require recipients to file written reports or answer questions under oath.
According to the FTC’s press release, the resolutions are aimed at broadening its ability “to obtain evidence in critical investigations on key areas where the FTC’s work can make the most impact.” The resolutions also will purportedly permit the FTC to “better utilize its limited resources” to quickly investigate potential misconduct. The FTC views the resolutions as one method to increase efficiency at the FTC, which certain Commissioners believe has become necessary due to the “increased volume of investigatory work” caused by a “surge” in merger filings in recent months.
In practice, these resolutions allow a single Commissioner, instead of a majority of sitting Commissioners, to approve compulsory process requests in any investigation within the scope of the resolution for the next 10 years. What practical effect these resolutions will have remains to be seen; however, businesses engaged in conduct that may be implicated by the resolutions should be aware that FTC staff will now have an expedited ability to carry out compulsory process requests, which will very likely increase the number and scope of investigations conducted by the FTC.
FTC Commissioners Noah Phillips and Christine Wilson voted against the resolutions, asserting that they do nothing to make investigations more effective and merely remove the FTC’s oversight of investigations, leaving room for reduced accountability as well as errors, overreach, excess costs, and decision making rooted in political motivations. Chair Lina Khan and Commissioner Rebecca Slaughter disagreed, emphasizing that the dissenting Commissioners overlook the fact that a subpoena must always receive Commissioner signoff, that Commissioners can and do receive briefings on the state of investigations, and that no enforcement action can move forward without majority support from the Commissioners.
This publication highlights those areas impacted by the resolutions that are immediately relevant to antitrust policy and enforcement.
- Repair Restrictions: Repair restrictions have been a recent focus of the FTC (as well as the recent Biden Executive Order on Competition), so it is of little surprise that the FTC approved a resolution in this area to attempt to expedite impending investigations. This resolution looks to build on the FTC’s recent Policy Statement on Right to Repair. According to the FTC’s press release, the resolution will cover a wide swath of conduct, including facilitating the FTC staff’s impending investigation of violations of the Magnuson Moss Warranty Act’s anti-tying provisions, which prohibit warrantors from conditioning warranties on a consumer’s use of an article or service identified by brand, trade, or corporate name unless that article or service is provided without charge to the consumer.
- Abuse of Intellectual Property: With this resolution, which permits staff to investigate abuses of intellectual property rights, businesses in the pharmaceutical, technology, and gasoline refining industries can expect increased investigations surrounding their intellectual property practices given the FTC’s emphasis on those industries in its press release. That said, the resolution itself is broadly worded and could result in a spike in investigations in other industries where intellectual property rights are prevalent.
- Monopolistic Practices: This resolution seeks to build on the FTC’s recent focus on perceived market power abuses by technology companies and other large businesses. In particular, businesses in digital markets can expect increased investigatory activity given the FTC’s emphasis on these markets in its press release. However, the resolution is broad and will apply to any industry where the FTC perceives that market power abuses are likely. In their Joint Statement, Chair Khan and Commissioner Slaughter specifically highlighted that small businesses, franchisees, and startups routinely report that dominant firms abuse their market power and preclude the smaller firms from competing. As a result, increased investigations are likely in markets where franchisees or startups may be struggling to gain a foothold.
- Interlocking Directors & Officers and Common Ownership: This resolution is aimed at facilitating investigations of anticompetitive ownership stakes in competing companies, as well as interlocking directorates (e.g., where a person simultaneously serves as an officer or director of two competing corporations), which may violate Section 8 of the Clayton Act. In approving this resolution, the FTC emphasized that interlocking directorates and common ownership continue to raise significant competitive concerns and are likely to receive increased scrutiny as a result of this resolution.
Vertical Merger Guidelines
On September 15, 2021, the FTC voted 3-2 to withdraw its approval of the Vertical Merger Guidelines (the “Guidelines”), which it published jointly with the Department of Justice (DOJ) in June 2020, along with its Commentary on Vertical Merger Enforcement. According to the FTC, these vertical merger guidance documents include “unsound economic theories that are unsupported by the law or market realities,” and withdrawal was necessary to avoid industry or judicial reliance on their flawed approach.
In their majority statement in support of the withdrawal, Chair Khan, Commissioner Chopra, and Commissioner Slaughter cited increased consolidation across the U.S. economy and a corresponding lessening of competition as prompting the withdrawal. In this same statement, the majority argued that the key flaws of the Guidelines are its discussion of the purported procompetitive benefits (i.e., efficiencies) of vertical mergers and the treatment of the elimination of double marginalization (EDM). (“Double marginalization” can arise when both the upstream and downstream markets exhibit some degree of economic market power and thus firms at each level mark up their prices above marginal cost, with consumers ultimately paying a final price that incorporates both mark-ups.) Specifically the majority viewed the Guidelines as improperly contravening the Clayton Act with their emphasis on efficiencies as a potential defense to an otherwise unlawful merger, when efficiencies are referenced nowhere in the statute. The majority also viewed this approach as ignoring market realities because many “efficiencies” make merged firms more profitable, without an effect on competition, or the predicted efficiencies never materialize.
With respect to EDM, the majority disagreed with the Guidelines’ identification of EDM as beneficial to consumers and the principal reason to treat vertical mergers differently than horizontal mergers. According to the majority, this approach is flawed because EDM is limited to specific factual scenarios.
Commissioners Phillips and Wilson voted against withdrawing approval of the Guidelines, saying that their absence leaves businesses in the lurch with no current legal framework to follow. These Commissioners also expressed concern that the majority’s decision will chill procompetitive deals and hurts consumers. In addition, the dissent asserted that the FTC’s withdrawal of the guidance only amplifies the divide between the FTC and the DOJ, since the DOJ has not (as of this writing) withdrawn its approval of the Guidelines.
The DOJ issued a statement last week confirming that the Guidelines remain in place at the DOJ. However, the DOJ statement also made clear that the DOJ is conducting a careful review of its merger guidance in collaboration with the FTC while also emphasizing that public comment will be helpful in this process.
Although the FTC’s withdrawal of the Guidelines comes with no official replacement, until new guidance is issued the FTC has made clear that it will not presume efficiencies for any category of mergers and will analyze all mergers in accordance with its statutory mandate. The FTC said it will also consider all relevant facts to determine whether a merger may lessen competition or tend to create a monopoly. The FTC majority also made clear that any process to revise the Guidelines will need to take into account the broader set of tactics that firms may use to raise rivals’ costs and the impact of an acquisition on a competitor’s access to capital. The majority further flagged harms that can arise in consolidation of digital markets and labor markets as key areas of concern that would need to be addressed in any revised guidance.
The FTC’s withdrawal does not come as a significant surprise given it has foreshadowed the likelihood of this action in the weeks leading up to this decision. Nevertheless, this move reaffirms that the current FTC is likely more willing to challenge vertical transactions using expanded theories of competitive harm, whereas the DOJ may use a different analytical framework grounded in the Guidelines. At this time, it is unclear what practical effect the withdrawal will have on courts adjudicating merger challenges, as no court has yet to issue a substantive ruling on a vertical merger challenge since the issuance of the Guidelines last year.
In this constantly evolving enforcement landscape, companies contemplating mergers or acquisitions should continue to be cognizant of the potential antitrust consequences when structuring deals and consult experienced antitrust counsel where appropriate.