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  • Daniel Sokol, Antitrust Merger Control as a Regulatory Sandbox, __ J. Corp. L. __ (forthcoming), available at SSRN (Apr. 4, 2023).
  • Daniel Sokol, Marissa Ginn, Robert J. Calzaretta, Jr. & Marcello Santana, Antitrust Mergers and Uncertainty, __ Bus. Law. __ (forthcoming), available at SSRN (Dec. 6, 2022).

In these two articles, Professor Sokol and his co-authors analyze recent changes in the methods the Federal Trade Commission (FTC) uses to review proposed mergers. Their findings are startling. The articles are required reading for anyone who is interested in antitrust law, administrative law, government regulation, or corporate law.

In his short essay Antitrust Merger as a Regulatory Sandbox, Sokol praises the antitrust merger control system under the Hart-Scott-Rodino Act as “an early attempt at a ‘regulatory sandbox,’” and criticizes developments of the Biden administration that reduce innovation and chill mergers. In Antitrust Mergers and Uncertainty, Sokol and his co-authors asked lawyers and economists who regularly advise firms about prospective mergers a series of questions about the ways in which the process has changed in the two years in which Chair Khan has headed the FTC.

By way of background, in 1976, Congress enacted the Hart-Scott-Rodino Act (HSR), which created a new system for determining whether a proposed merger or acquisition violates Section 7 of the Clayton Act.

Under the HSR, a firm that intends to merge with or acquire another firm must make a filing with the Justice Department and the FTC at least 30 days before the date of the proposed merger or acquisition. The Justice Department and the FTC meet periodically to allocate responsibility to implement the HSR between the agencies by sector of the economy. The agencies have 30 days in which to decide whether the proposed transaction would violate the Clayton Act. The statute authorizes extensions of the decisional deadline up to 30 days, but the parties to the proposed transaction often acquiesce in much longer extensions of the decisional deadline when the Justice Department or the FTC ask for additional time to evaluate a proposed transaction.

The HSR created a system of agency adjudication that is unlike any other. In other similar administrative contexts, an agency adjudication closely resembles a trial. The agency provides notice of its position and the reasons why it believes that a firm is violating the law. The firm then has an opportunity to respond. The agency and the firm present their conflicting evidence in a hearing conducted by an administrative law judge (ALJ). The parties file briefs, and the ALJ issues an opinion in which she explains her decision. Either party can appeal to the head of the agency. After considering the briefs of the parties on appeal, the agency head can either adopt the decision and reasoning of the ALJ or replace it with the agency’s contrary decision, along with a statement of the agency’s reasoning in support of its decision.

Each step in the normal process of agency adjudication is completely transparent. Every firm that is potentially affected by the agency’s decision and every potentially affected member of the public has complete access to the pleadings, the evidence, and the reasoning of the ALJ and the agency.

The HSR system of agency adjudication differs completely from the normal. Every step in the HSR decision-making process takes place behind closed doors. The process is completely opaque. The public has no way of knowing what transpired, except in the rare case in which the firm that proposes to engage in the transaction decides to complete the transaction after the agency has notified the firm of its decision that the transaction is illegal. In those few cases, the ensuing litigation creates a public record that provides the public with a window into the agency decision-making process that gave rise to the litigation.

Many scholars have long been critical of the opacity of the HSR adjudication process. Professor Sokol is not among those critics. In his words: “HSR combined with merger guidelines created a system of ex ante review with predictable rules and negotiation between merging parties and enforcers.” He emphasizes the role that merger guidelines have played in creating a healthy decision-making process: “Merger guidelines create transparency and greater predictability by identifying the core concepts that motivate the merger control system as well as to explain the legal and economic analytical framework that gets applied within merger control by the agencies.”

The merger guidelines are extremely detailed. They describe every step that the agency takes in the process of deciding whether a proposed transaction has the potential to reduce consumer welfare by reducing competition between firms in a market. According to Sokol, guidelines serve two valuable purposes.

First, they allow firms to predict with a high degree of confidence which of three actions the agencies will take with respect to a transaction the firm is considering. The FTC or the Justice Department determines that most of the thousands of proposed transactions are unlikely to have adverse effects on competition. In those cases, the agency quickly terminates the review process and notifies the firm of its decision to acquiesce in the transaction. In a much smaller number of cases, the agency notifies the firm that it needs additional data and must engage in detailed analysis of the proposed transaction to determine whether it is likely to have an adverse effect on competition.

In some fraction of those cases, the agency determines that the transaction is likely to have an adverse effect on competition and notifies the firm that it will seek an injunction to preclude the firm from completing the proposed transaction if the firm decides to attempt to complete the transaction. Until recently, the FTC prevailed in most of the cases in which it sought to stop a transaction that it found to be a violation of Section 7 of the Clayton Act.

Second, the guidelines provide a detailed description of the data that a firm must collect and the analyses that the firm must complete and submit to the agencies to allow them to decide whether to acquiesce in the transaction, to engage in a more detailed analysis of the transaction, or to disapprove of the transaction.

Sokol observes that the status quo is undergoing dramatic change. As he explains, “[t]he current regulatory antitrust sandbox system is under attack by the Biden antitrust agencies as part of a broader push to reduce total merger activity.” In January 2022, the new leadership at FTC and DOJ Antitrust, FTC Chair Lina Khan and Assistant Attorney General Jonathan Kanter, announced their intent to publish new guidelines that would significantly reduce the number of permissible mergers. Khan and Kanter have not yet taken that action, but it is obvious to all participants in the HSR decision-making process at FTC that it is not acting in ways that are consistent with the existing merger guidelines.

Khan has made it clear that she disagrees with virtually every characteristic of the guidelines, including the guidelines’ goals. She rejects the goal of maximizing consumer welfare, which the Justice Department and the FTC have pursued for the last 50 years. Instead, she has emphasized the need to protect competitors from large firms that charge low prices—a goal that the enforcement agencies and the Supreme Court disavowed 50 years ago. Khan cannot further her stated goals by applying the 2010 guidelines.

The conflict between Khan’s policy goals and the guidelines raises a critically important question. How does the FTC interpret Section 7 of the Clayton Act under Khan’s leadership, and what analytical steps will the FTC take to determine whether a proposed transaction is legal? That is the question that Professor Sokol attempted to answer, but his efforts were unsuccessful. The experienced lawyers and economists who regularly assist firms in navigating the HSR decision-making process at FTC had no difficulty determining that the FTC is not applying the guidelines, but they have no idea what goals the agency is attempting to further, what theories of harm it is attempting to explore, or why it is asking for the additional data that it requests.

Moreover, their experience with the process during the past two years causes them to believe that the FTC staff that participate in the HSR decision-making process also lack an understanding of the agency’s goals, theories of harm, or reasons for requesting additional data. When they ask staff members those questions the typical response is an apologetic admission of ignorance. The goals, theories of harm, and reasons for the requests for additional data may be known to the political leaders of the agency, but they have not been effectively communicated to the staff.

Here are two of the many concerns that Professor Sokol expresses as a result of his study:

When there is lack of clarity in the merger control process because the goals, process, and substantive analysis of merger control are not clear, this may delay or even undermine certain proposed mergers that benefit society, thereby creating economy wide problems.

[A] merger system that lacks intellectual clarity as to substance, transparency, and clear procedural rules also taxes the limited resources of antitrust enforcers that need to focus on actual problems that merger control identifies . . . .

I am confident that anyone who reads Professor Sokol’s articles will find ample evidence to support the concerns that he expresses.

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Cite as: Richard J. Pierce, Jr., Confused Merger Policy at the FTC, JOTWELL (May 25, 2023) (reviewing Daniel Sokol, Antitrust Merger Control as a Regulatory Sandbox, __ J. Corp. L. __ (forthcoming), available at SSRN (Apr. 4, 2023) and Daniel Sokol, Marissa Ginn, Robert J. Calzaretta, Jr. & Marcello Santana, Antitrust Mergers and Uncertainty, __ Bus. Law. __ (forthcoming), available at SSRN (Dec. 6, 2022)), https://adlaw.jotwell.com/confused-merger-policy-at-the-ftc/ .