FTC, DOJ propose more stringent merger guidelines focused on labor and competition

The Federal Trade Commission and the Department of Justice proposed merger guidelines Wednesday that reflect the Biden administration’s aggressive enforcement approach to corporate acquisitions that considers not only their effect on competition but on the labor market, antitrust attorneys said.

The proposed guidelines call for regulators to review planned acquisitions with an eye toward whether the deal would “substantially lessen competition for workers or other sellers.”

When a merger is part of a series of multiple acquisitions, the proposal calls for FTC and DOJ to examine the whole series, a break from previous guidelines that did not specifically consider serial acquisitions.

The FTC and DOJ would also ensure the proposed merger would “not significantly increase concentration in highly concentrated markets,” thus diluting competition in already competition-weak markets, the proposed guidelines state.

FTC Chair Lina Khan defended the proposed guidelines in a statement Wednesday.

“Open, competitive, resilient markets have been a bedrock of America’s economic success and dynamism throughout our nation’s history,” Khan stated.

“Faithful and vigorous enforcement of the antitrust laws is key to maintaining that success,” she added. “With these draft merger guidelines, we are updating our enforcement manual to reflect the realities of how firms do business in the modern economy. Informed by thousands of public comments—spanning healthcare workers, farmers, patient advocates, musicians, and entrepreneurs—these guidelines contain critical updates while ensuring fidelity to the mandate Congress has given us and the legal precedent on the books.”

The public will have 60 days to comment on the proposed guidelines.

William Kovacic, a former FTC chair and now a George Washington University Law School professor, said the guidelines are meant to “advance a program of more extensive enforcement.”

“Unmistakably, the aim is to use the document to persuade courts to extend the frontiers,” he said, adding the guidance is also designed to provide businesses with a clear checklist on any possible transactions.

“You only need to read four pages in the document to get a pretty clear idea of what the potential danger zones are going to be, so I think that will be useful,” Kovacic said.

However, he said it will take another two years to understand how these guidelines will work in practice.

“You need a lot of experience of parties coming in and seeking to apply these guidelines, live by these guidelines, use them — and vitally how a court is going to react,” Kovacic said. “The success of earlier guidelines depended heavily on judicial acceptance.”

The guidelines are not law, but courts can find them important and persuasive, he said.

Under Khan’s leadership, the FTC has sought to block “vertical mergers,” which involve companies that provide different products or services in the same supply chain. Recently, a federal judge rejected the FTC’s effort to block Microsoft’s $69 billion acquisition of the video game company Activision. The agency plans to appeal the case.

The FTC has also challenged Meta’s proposed acquisition of Within Unlimited.

Michelle Mantine, a partner at Reed Smith, said FTC and DOJ have “upped the ante” on merger review but added she is pleased the guidelines are “more grounded in the law than ideological type statements.”

“Some of the recent guidance that has either been withdrawn or executed … has been a little theoretical in nature, and this is much more concrete,” Mantine said.

Merger guidelines “have been around since 1968, and while there have been a number of updates over time to reflect market reality … I feel like this is the first time that I’ve seen such a heavy emphasis on case law,” Mantine added.

In addition, the proposed guidelines are “more digestible for the everyday person or company to understand what is the goal of the law,” said Mantine, who heads Reed Smith’s antitrust team. “I would encourage companies to ask the questions – I’m sure they’re asking themselves – publicly, as I think they will be considered for further revisions.”

Some of the case law cited in the guidelines is not recent, said Bradley Weber, a partner at Locke Lord.

“I think the reason they do that is because most of the more recent cases, especially from the Supreme Court, don’t really support some of the things that are included in these guidelines,” Weber said.

For example, “most courts in the last several decades haven’t really looked at labor markets as something that should be a concern when you’re considering the impact of a merger,” Weber added.

Sara Razi, a partner at Simpson Thacher, called the proposed guidelines’ new standard for setting market concentration under the long-used Herfindahl-Hirschman Index (HHI) a substantial change that will lead to stricter review of mergers in concentrated markets.

HHI is calculated by squaring the market share of each business and then adding up the resulting numbers — thus the higher the number, the greater the market concentration. The proposed guidelines would lower the HHI threshold from 2,500 to 1,800.

“That is a substantial change, a lower level of concentration at which the agency will presume a merger is anti-competitive,” said Razi, co-chair of Simpson Thacher’s antitrust and trade regulation practice.

Weber, of Locke Lord, said the agencies had lowered the threshold “pretty significantly,” adding that mergers in markets that used to be considered less concentrated will now require further investigation.

Weber also said the guidelines will make it more difficult for companies that acquire multiple small companies to avoid investigation.

“A new part of the guidelines says that the agencies will look at the combined effect of these smaller transactions to see if they’re anti-competitive. That was not in the prior guidelines,” Weber said.

Peter Guryan, co-chair of Simpson Thacher’s antitrust and trade regulation practice, said merger guidelines are typically updated every 10 years. But “you saw this administration come in and rescind the vertical merger guidelines from the prior administration,” he added.

Related: Mergers could be delayed by months under new FTC, DOJ filing rules

Weber, picking up on the theme of change, said the pendulum could swing back under Biden’s successor.

A new administration could look at these guidelines and say, ‘These don’t reflect reality,” Weber said. “‘It was these progressive, antitrust people who pushed them through’ and so they could be scrapped under new leadership in the agencies.”