HOVENKAMP

WHEN ANTITRUST LAW SHOULD — AND SHOULD NOT — PREVENT MERGERS

on research by

HERBERT HOVENKAMP

James G. Dinan University Professor In a recent issue of the Hastings Law Journal, University of Pennsylvania Law School professor Herbert Hovenkamp discussed the use of “incipiency tests” in antitrust law, which may be employed to bar companies’ proposed mergers which have anticompetitive effects that may not readily be remedied after the merger has occurred. In “Prophylactic Merger Policy,” Hovenkamp offers a taxonomy of the limited situations where the government’s proactive prevention of mergers is most appropriate.

Hovenkamp is the James G. Dinan University Professor and holds a joint appointment between Penn Law and the Wharton School of Business. He is a widely recognized expert in antitrust law and American legal history.

“An important purpose of antitrust merger law is to arrest certain practices in their ‘incipiency,’ by preventing business firm acquisitions that are likely to facilitate them.”

“An important purpose of antitrust merger law is to arrest certain practices in their ‘incipiency,’ by preventing business firm acquisitions that are likely to facilitate them,” writes Hovenkamp. “Today, most mergers are challenged before they occur,” and so courts must rely upon “evidence of predicted rather than actual effects” in an attempt to foresee whether anticompetitive conduct that violates antitrust laws — such as collusion between market competitors, price discrimination, or the creation of a monopoly — will actually result. In the absence of evidence of actual effects, Hovenkamp argues, “it is important to place some limits on merger law’s prophylactic reach.”

The Clayton Act is the primary source of merger law in the United States. Section 7 of the Clayton Act uses broad language, preventing “mergers whose effect ‘may be substantially to lessen competition, or to tend to create a monopoly.’” The Sherman Act also prohibits anticompetitive behavior, condemning companies who enter into agreements to collude on conduct such as raising or lowering prices for their products.

In the article, Hovenkamp analyzes several scenarios where preventing a merger on the basis of an incipiency test would be appropriate. For example, he notes that some “horizontal mergers” between competitors would reduce the number of firms in a given market and might facilitate problematic “coordinated action” between companies. While such conduct could potentially rise to the level of anticompetitive collusion, it might be difficult to challenge under the Sherman Act in the absence of an actual agreement, Hovenkamp notes. In particular, the Sherman Act does not protect against “conscious parallelism,” where one competitor company might take the lead in raising or lowering prices to a particular level and other companies take note and follow suit without ever meeting the requirements for an actual conspiracy. Because antitrust laws would not reach that conduct, the more prudent course might be to prevent a merger from being completed in the first place.

Hovenkamp also discusses the risks associated with some “vertical mergers” in which one company purchases another. Pointing to AT&T’s proposed acquisition of Time Warner — which the U.S. government unsuccessfully challenged — Hovenkamp details how, for example, “a broadband internet provider that acquires substantial

HERBERT HOVENKAMP

programming assets may be in a position to deny that programming to distributors on rival internet providers, or else charge them a higher price.” Indeed, in its suit challenging the merger, the government alleged that allowing AT&T — which owns internet provider DirecTV — to acquire program content-provider Time Warner (“TW”) “would enable the post-merger firm to force rival distributors of TW programming to pay a higher price than TW’s current position would permit” and would “slow the development of ‘disruptive,’ procompetitive innovations such as direct online video distribution.”

Hovenkamp argues that “[a] coherent approach to vertical merger policy is… to condemn vertical mergers that are reasonably likely to facilitate an anticompetitive refusal to deal, price discrimination, or price increases that would be lawful if undertaken subsequently by a single firm.”

Indeed, “[o]ne of the most important justifications for prophylactic merger policy occurs when the feared anticompetitive conduct is that of a single firm[,]” as antitrust law often will not reach unilateral conduct undertaken by a newly-merged single company (rather than coordinated conduct by separate companies). Horizontal mergers that would create monopolies or otherwise facilitate unilateral anticompetitive behavior are therefore appropriate targets for prophylactic application of merger law.

Hovenkamp also explores the justification for incipiency tests to prevent mergers in instances of intellectual property acquisitions that might facilitate exclusionary patent enforcement, and in cases where large firms acquires small and innovative competitor startups in order to maintain market dominance. Again, in those scenarios, prophylactic action would be appropriate.

“Government equity suits against mergers seem to require the courts to peer into a crystal ball,” writes Hovenkamp. “The need to predict the future would not be particularly important if every practice that a merger threatens could readily be detected and condemned should it occur later… But too many anticompetitive practices do not fall into that category.” Where “antitrust law has inadequate tools for dealing with [anti-competitive post-merger conduct] directly,” prophylactic merger policy provides a solution.