Dear Readers,
It has long bubbled under the surface, but there is an inherent tension between the archetypal monopolization/abuse of dominance provisions of global antitrust rules, and the subsequent introduction of merger control legislation.
This is perhaps no more evident than in the parallel sets of rules that hold sway in the two formative antitrust jurisdictions in the world: the U.S. and the EU. Merger control rules, in the form of the U.S. Clayton Act, and the EU Merger Regulation (“EUMR”), respectively, were introduced on the coattails of judicial and regulatory decisions seeking to impose antitrust rules to mergers and acquisitions. Those moves sought to control acquisitive behavior by potentially dominant or “monopolistic” firms, by subjecting such conduct to review under the existing antitrust rules, particularly Section 2 of the U.S. Sherman Act of 1890, and (what is now) Article 102 of the Treaty on the Functioning of the European Union (“TFEU”).
The authorities and courts were clearly seeking to fill (what they saw as) a lacuna in the law. But filling this lacuna would prove to be far from a straightforward exercise. The key differences between “antitrust” and “merger control” rules are due not only to the context in which they were enacted, but also to the mechanisms used for their enforcement. What are now known as the “antitrust” rules are enforced ex post, whereas the subsequently-introduced “Merger Control” rules are designed to provide for ex ante control of potentially anticompetitive mergers. The details and the procedures differ; but, in both cases, the relevant agencies and/or courts are required to assess the potential anticompetitive effects of a given market transaction. This is similarly the dynamic in the the multitude of jurisdictions that take inspiration from the U.S. and EU legislative frameworks.
Taking a charitable interpretation, it perhaps could not have been foreseen at the time of the adoption of these ex ante rules that there would be such deep tensions between the two regimes that each represents. These tensions have now come home to roost in terms of the ongoing controversy concerning how antitrust authorities ought to (and can legitimately) treat acquisitions by dominant companies where such actions do not trip the procedural or substantive thresholds used for “merger control.” Nonetheless, they could, in principle, nonetheless fall foul of the principles set out in earlier case law.
The pieces in this Chronicle expound on this and other aspects of the growing debate that dances around this tension, which in contemporary terms is expressed using colorful terms such as “killer acquisitions,” particularly in the tech sector. In so doing, the actors in such controversies invoke classic themes in the application of law where a specific rule potentially conflicts with another of broader application, not to mention questions of the hierarchy of norms (be it due to the Treaty status of certain rules in the EU, or the fact that key U.S. and EU precedents are interpretations of the foundational texts (the Constitution or the Treaty, respectively).
These themes and tensions raise their heads in multiple ways in the pieces presented in this edition of the Chronicle. This is self-evident from a brief perusal of the themes raised by the articles’ opening salvos.
To open, Mihkel Tombak notes how many competition authorities operate under provisions for transactions of “minor importance” where the parties involved can avoid mandatory pre-merger notification. Several industries have seen merger waves whereby consolidator firms engage in a strategy of so-called “strategic rollups” – the serial acquisition of numerous small firms in a highly fragmented industry (what some have – perhaps cynically – termed “Sashimi M&A”). The piece examines the literature on sequential mergers. While individual transactions may not raise competition concerns, the author concludes that ultimately, certain merger sequences may warrant the scrutiny of regulators.
Allen Grunes notes the historical fact that mergers and monopolization have traditionally been regarded as separate and distinct branches of antitrust. Recent questions regarding the potential use of Section 2 of the Sherman Act to attack mergers raises the question of whether merger enforcement has been ineffective. However, the real answer may simply be that merger analysis is less developed when it comes to mergers involving nascent competitors. Merger analysis under Hart-Scott-Rodino is a predictive exercise. The “actual potential competition” doctrine, with its stringent causation requirement, adds an additional layer of difficulty. By contrast, Section 2 of the Sherman Act gives the agencies the ability to look back at completed mergers, including those of nascent competitors. Forthcoming revisions to the merger guidelines may address some of these issues.
Building on the themes above, Richard Pepper & Roque Botas Armero discuss the Article 102 TFEU prohibition on the abuse of a dominant position interacts with merger control. The EU Commission has generally used this power against dominant companies who have foreclosed rivals and exploited their customers. However, a 1973 European Court judgment, Continental Can, held that acquisitions can also infringe Article 102 where they sufficiently strengthen a dominant position. The article provides a brief and timely history of the application of Article 102 to mergers and acquisitions, and addresses an ongoing preliminary ruling request to the European Court of Justice that considers the relevance of the principle following the introduction of the EU Merger Regulation. The tension noted above could not be cast in sharper relief.
Adopting another orphan topic, David Henry evokes the often-neglected theme of legal certainty. This principle has long been a core tenet of European merger control; not to mention regulation in all domains worldwide. In his view, this principle risks being eroded through authorities attacking non-reportable transactions. On the one hand, there is the revival of the Article 22 corrective mechanism enshrined in the EU Merger Regulation. Then there is the recent Opinion of the Advocate General in Case C-449/21 – Towercast. If followed by the European Court of Justice, in the author’s view, there would likely be considerably more uncertainty for the business community with a chilling effect on ultimately benign, or even pro-competitive, transactions.
Taking a satellite view, Ron Knox notes how mergers have been a persistent tactic used by powerful companies to grow their power and monopolize markets. In the author’s view, for many decades, economists, lawyers, and policymakers have worked to circumvent the functioning of the laws intended to prevent monopolization through mergers and, in doing so, to undermine the will of Congress in passing the Clayton Act and other laws. The author examines the legislative and judicial record supporting the strong enforcement of the anti-merger laws, and proposes that to restore the intent behind the these laws, there should be a significant shift in merger enforcement policy to support open markets.
Ted Tatos analyzes the unique issues raised by the vertical relationship between digital platforms and app developers. In the author’s view, this relationship imposes a largely ignored upward pricing pressure on prices. Digital platforms aim to create walled gardens, leveraging lock-in to cabin consumer substitution within the platform’s boundaries. Digital marketplace owners always collect a platform fee, or “take rate” regardless of the particular app purchased. This article discusses the attendant effects: (1) upward pricing pressure on apps and in-app purchases as platforms benefit from eliminating price competition within their marketplaces, (2) the limited usefulness of diversion ratios, and (3) recognition that in the event one of the platforms acquires an app purchaser, the upward pricing effects are likely to overwhelm any countervailing elimination of double marginalization, even if this effect could be shown to be merger-specific.
Turning to the specific case of financial services, Robert C. MacKay analyzes several aspects of recent changes in the banking industry, some of which correspond to the financial crisis in 2008 and the government’s subsequent financial reforms. The banking industry was greatly impacted by the crisis, including the types of banks that persist. Specifically, the piece analyzes the decreasing number of community banks, the tends of increasing banking assets and deposits, the consolidation within the banking industry, and distributional implications related to bank size. In particular, the author looks at how bank merger reviews combine traditional priorities of protecting competition with additional priorities to provide financial stability and services (and thus renders bank merger review distinct from that in other sectors).
Building on this theme, Lawrence B. Landman notes how that for (at least) the past thirty years the U.S. and EU competition authorities have claimed to protect competition to innovate. They have also claimed that they can protect competition in so-called “innovation markets.” In all these cases however, the authorities have in fact sought to protect competition in hypothetical (or one might say “imaginary”) “future markets.” Among many novel thoughts raised in this piece, the author shows that U.S. courts have long interpreted the Sherman Act to protect competition in future markets; and notes how those same courts could (and perhaps should) do the same when interpreting the Clayton Act. This article therefore provides useful food for thought as this controversy pans out.
As always, many thanks to our great panel of authors.
Sincerely,
CPI Team
