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|EI Vice President Henry B. McFarland has often analyzed the competitive effects of mergers and the desirability of relief proposals. A longer version of this article was published in a recent version of The Threshold.|
In dealing with potential anticompetitive effects from a merger, antitrust authorities have long preferred structural remedies, which affect the post-merger ownership of assets, to conduct remedies, which constrain the post-merger behavior of the merged firm. The U.S. Department of Justice (DOJ), however, recently has shown a new willingness to use conduct remedies. DOJ’s 2011 “Policy Guide To Merger Remedies” (2011 Guide) describes these remedies as a “valuable tool” to preserve a merger’s efficiencies while eliminating its competitive harm. Moreover, DOJ and the Federal Trade Commission (FTC) have used such remedies in a number of recent mergers. Nonetheless, studies by both the Canadian Competition Bureau (CCB) and the European Commission’s Directorate General for Competition (DG-Competition) of conduct remedies in past mergers show their effectiveness has been mixed at best.
Conduct remedies are typically used to address perceived problems with vertical mergers and with the holding of minority interests, although in some cases they may be used in horizontal mergers. While, the 2011 Guide describes a variety of different conduct remedies, the conduct remedies used most commonly have been access guarantees and information restrictions. These remedies provide the antitrust authorities with a more flexible response to perceived threats to competition, but they also raise a number of serious issues.
Access guarantees require the merged firm to allow other firms, typically its competitors, access to some of its assets, often intellectual property. Implementing these guarantees raises the problem of how to set the price and terms of access. If the price is set too high or the terms are too onerous, then the relief may be ineffective. If the price is too low or the terms too generous, then there may be inefficient use of the assets involved. Also, for access guarantees to be effective, the quality of the asset involved must be maintained. That is a particularly serious problem in high-technology industries, where the technology being offered to competitors may be allowed to lag behind that of the merged entity, thus putting the competitors at a serious disadvantage.
Several recent consent decrees have addressed this issue by requiring that price, terms, and quality of access be based on competitive benchmarks. For example, prices charged competitors may be based on those charged to other customers that the merged party does not compete with and thus has no desire to foreclose. Alternatively, prices and terms may be based on the levels that prevailed before the merger.
The success of these approaches to setting the price, terms, and quality of access remains to be seen. Often, guaranteeing access requires setting a wide variety of terms and conditions, and it may be very difficult to determine if the terms under which any given firm is offered access are consistent with the consent decree. The DG-Competition study found that access guarantees “have only worked in a very limited number of instances,” due to “inherent difficulties” in setting and monitoring the conditions of access. The study concludes that the use of these remedies should be limited to cases where these difficulties can be minimized.
Access guarantees likely will require ongoing monitoring. The CCB study found evidence that a failure to appoint monitors reduced the effectiveness of conduct remedies. Moreover, disputes over the application of the remedies may involve the agencies and the merged firm in protracted litigation. Certain consent decrees have provisions that allow firms that believe they have not been granted appropriate access to apply to DOJ for permission to begin binding arbitration. Such provisions may not always be effective. The CCB study found that in some cases formal arbitration methods were difficult to use.
Conduct remedies that restrict the flow of information, such as by preventing different divisions of a firm from sharing information post-merger, appear less problematic than access guarantees. Nonetheless, these remedies also have some disadvantages. These restrictions may complicate business operations and block efficient contracts. If merger-related efficiencies depend on better coordination of vertically-related segments of the merged firm, these restrictions may block the information flows required for such coordination and thus prevent the firm from realizing those efficiencies.
Information restrictions may also be difficult to monitor and enforce. If a merged firm denies a competitor access in violation of a consent decree, then the competitor will know of the denial and have an incentive to complain to the authorities. If a merged firm violates a restriction on information sharing, the violation may be difficult to detect. Moreover, restrictions on information sharing are sometimes put in place to limit coordinated interaction, a horizontal competitive issue. As the firm’s competitors would likely benefit from that interaction, they would have no incentive to report the violation. Thus, information restrictions may be costly.
Implementing access guarantees, information restrictions and indeed all conduct remedies raises the question of their duration. DOJ’s 2011 Guide does not discuss the typical duration of conduct remedies. Conduct remedies should last until changes in the market mean that they are no longer required, but it is difficult or impossible to predict how long that will be. Too short a period may mean that relief is insufficient. Too long a period may mean that the relief continues when it is no longer beneficial.
The use of conduct remedies raises a number of serious issues, and the antitrust authorities should continue to prefer structural remedies. Because of the difficulties inherent in implementing access guarantees, they should rarely if ever be used as a remedy in merger cases. Moreover, the U.S. antitrust authorities should pay careful attention to how conduct remedies function in the various instances where they were recently applied. A review of the experience with conduct remedies in those mergers may be extremely valuable in determining the appropriate use of such remedies in the future.