Antitrust Law Daily FTC head Simons discusses acquisitions of emerging competitive threats
Thursday, November 12, 2020

FTC head Simons discusses acquisitions of emerging competitive threats

By Peter Reap, J.D., LL.M.

Addressing the ABA Antitrust Section’s Fall Forum, Simons reviewed how future competition is important, even when uncertain.

FTC Chairman Joseph J. Simons took the opportunity of addressing the ABA Antitrust Section’s Fall Forum 2020 today to focus on the hot topic of the acquisitions of emerging competitive threats by firms with significant market power. His remarks pointed out that what separates monopolists’ acquisitions of nascent competitive threats from ordinary mergers of existing competitors is an added layer of uncertainty. He also provided a brief update on the FTC’s recent antitrust enforcement efforts.

Recent enforcement efforts. Before beginning with his main topic, Simons provided the virtual audience with an update on the FTC’s "incredibly busy and successful" fiscal year that concluded in September. Despite the many challenges created by the ongoing pandemic, the Bureau of Competition (BC) had more merger enforcement actions in FY2020 than any other year in the past 20 years. In addition, the BC has a full slate of conduct matters pending before federal courts, with many other important investigations underway. In the past year it brought three cases under Section 2 of the Sherman Act, continuing a trend of robust Section 2 enforcement spanning multiple administrations over multiple decades. To achieve these results during such difficult times is truly remarkable, he noted.

Nascent competitors. Antitrust enforcers should be concerned about competition between firms that might not occur until the future, or that might be more significant in the future, as opposed to just being concerned about competition that is already occurring, according to Simons. Successful companies are always looking forward, leading to product innovations and more efficient operations. But when that foresight leads to anticompetitive strategies—for instance, eliminating or suppressing competition through acquisitions or unlawful practices—the result is less competition and consumer harm. Because companies are always looking to the future, antitrust enforcers should too. Existing law supplies two frameworks through which the acquisition of nascent competitors can be analyzed: Section 2 of the Sherman Act and Section 7 of the Clayton Act.

Section 2 of the Sherman Act. One of the leading Section 2 cases on conduct that targets fledgling rivals is, of course, the D.C. Circuit’s opinion in Microsoft. In that case, the court held that Microsoft had engaged in monopolization by targeting nascent competitive threats to its PC operating system monopoly. the court observed that "it would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven competitors at will—particularly in industries marked by rapid technological advance and frequent paradigm shifts." Although there were no mergers at issue in Microsoft, it is straightforward to apply this concept to an acquisition by a dominant firm, Simons observed.

Another significant case dealing with nascent threats to competition was the FTC’s case against Actavis. The Supreme Court in Actavis addressed what has come to be called a reverse-payment settlement, that is, one in which the patent-holder pays off the allegedly infringing generic defendant seeking to compete, and the generic abandons its patent challenge and agrees to forgo entry until some future date. A central question was whether showing harm to competition depended on an assessment of the likely outcome of the patent suit—that is, whether earlier entry was probable. In Actavis, the Court said no, explaining that the relevant harm there was preventing the risk of competition—competition that, if it materialized, would benefit consumers through lower prices and more choices, and take sales away from the incumbent. In both Microsoft and Actavis, Simons recounted that the government was not required to show that, "but for" the challenged conduct, there would have been lower prices or enhanced output or innovation.

Section 7 of the Clayton Act. It is "well established that Section 7 is an incipiency statute that protects not just actual competition but also potential and nascent competition." Some cases have applied Section 7 too narrowly in the context of weighing the nature and strength of evidence that the parties will become actual competitors, Simons opined. Because "the purpose of Section 7 is to prohibit acquisitions that ‘may’ substantially lessen competition or ‘tend’ to create a monopoly," agencies and courts should avoid such narrow interpretations of Section 7.

Simons proposed a hypothetical in which incumbent monopolist carefully watched for the emergence of competitive threats and routinely acquired promising ones at an early stage, before their full potential was manifest. Suppose that there were four potential entrants, but the monopolist acquired only one or two of the potential entrants, he posited. This would still reduce the risk of competition to the monopolist, even though it was not likely that either one of the acquired firms would have entered the market and provoked a competitive response. "[T]he reduction in the risk of competition in this scenario is nonetheless material and should be actionable under either or both Section 7 and Section 2," he said.

Finally, Simons recounted that under Microsoft, the acquiring party has an opportunity to defend or justify the transaction, even if it is a monopolist, and even when the target poses some level of competitive threat. The court and or the FTC are required to consider whether the transaction is likely to produce efficiencies; that is, if the merging parties are able to put forward evidence verifying the claimed benefits and demonstrating that the transaction is necessary to achieve those benefits. However, this is a challenging bar to satisfy, in his view. He noted that under the Horizontal Merger Guidelines "particularly substantial" potential harms require "extraordinarily great" efficiencies and stated his belief that "there is ample reason for courts—and the Commission—to apply this rigorous standard to acquisitions of nascent competitors by dominant firms."

MainStory: TopStory Antitrust AcquisitionsMergers GCNNews FederalTradeCommissionNews

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