American Law Institute - American Bar Association
The Communications Marketplace: Antitrust and Regulatory Issues
Federal Communications Commission
October 5, 2000
Can-Opener Merger Review Law
In this presentation, I am going to discuss what might be called "can-opener merger review law." What do I mean by that term? To understand, I believe one must be familiar with perhaps the most widely known joke about economists. Since all of you are lawyers, I am sure that you are only all too familiar with economist jokes.
Three people are stranded on a desert island. One is a physicist, one is a chemist, and one is an economist. They have no food or drinkable water except for cases of canned tuna fish. But they have no can-opener with which to open the cans.
The physicist says, "I have an idea. Let's climb this cliff and drop a can onto the rocks below." The physicist tries the experiment. A can did explode on impact, but the tuna fish sprays in all directions leaving nothing edible from the can.
The chemist says: "I have an idea. Let's soak a can in the ocean water and see if the salts and minerals in the seawater will pore a hole into the can." The chemist drops a can into a pool of seawater, but nothing happens.
The physicist and the chemist are depressed. But the economist triumphantly pronounces: "I have the answer! Let's assume that we have a can-opener!"
All economists know this joke, or some variation on it. Economic analysis is a powerful tool, but analysis often rests on market information that may not be available. Economists are often accused of making a lot of assumptions--some of which may be demonstrably false--in order to reach an analytical conclusion.
Some economists will jokingly--and perjoratively--apply the adjective can-opener to assumptions that are far-fetched, untrue, and demonstrably impossible to reach except by imagination. Economists are not the only ones to make outrageous assumptions. Sometimes lawyers do too. That's why I want to discuss can-opener merger review law.
Is antitrust law adequate for the review of mergers?
It is popular in some quarters to criticize American antitrust law. The complaints are predictable and repeated: (1) too many big companies behave anticompetitively; consolidation among businesses harms consumers; (3) consumers are harmed; and (4) the federal government seems either powerless or disinclined to do anything about it.
Critics say we need other agencies to step into the breach where the Justice Department and Federal Trade Commission have failed to stop big company mergers and have failed to protect consumers. Paradoxically, the alleged shortcomings of federal antitrust law--broadly speaking, inadequate attention to the harms from consolidation affecting competition and consumer welfare--are precisely the issues those laws are intended to address.
Whatever the failings of federal antitrust law may be, lack of legislative attention is not one of them. Antitrust laws, like other laws, are the products of years of legislative work, some of it more than a century ago. They did not spring forth in an instant, nor were they the reflection of a single point of view. Each of the major federal antitrust laws is the product of substantial give-and-take among legislators over a period of years. In each Congress, many amendments to antitrust laws are introduced; some are debated; but few are enacted into law.
Moreover, it is difficult to suggest that the application of federal antitrust law is either unpredictable or unwritten. The application of federal antitrust law, at least to mergers, is highly routinized and predictable under the Merger Guidelines.
Merger application procedures are well-known and easy to follow.
Deadlines are clear.
The standards that are applied by the federal antitrust agencies are well known.
Protective orders govern business-sensitive information.
And, at the end of the day, the federal agencies must go to court to stop a merger, and the legal standards that DOJ or the FTC must meet to block a merger are well established in a rich case law.
Not only is the application process routine, but countless experts are available for hire to help applicants wade their way through the merger review process under federal antitrust law--whether one is supporting or opposing the merger.
Expert lawyers know which documents to submit, how to protect them, and which documents to ask for.
Expert lawyers know the details of the application process, who can monitor it, and who can detect when and where problems may arise and how to react to those problems.
Expert lawyers understand the types of economic analyses the agencies may conduct or be persuaded by.
Expert lawyers can, if necessary, negotiate a consent decree.
Expert lawyers can, if necessary, litigate the case in court.
All of this expertise is not the product of idle dreams or speculation. Nor is it the product of a purely insider's game of personal connections. Rather, this expertise is the product of inferences that can be drawn by the consistent application of federal antitrust laws by antitrust agencies. And when either business or government depart substantially from the consistent application of antitrust law, once can go to court and both know what consistent application means and insist on that consistent application. For the federal antitrust agencies, both the antitrust law and the administrative law surrounding antitrust cases are both rich and compelling.
The antitrust review process
Moreover, early in the merger application process, the DOJ and the FTC divide cases between them. Only one federal agency reviews mergers for consistency with antitrust law, for consistency with an absence of harm to markets or consumers. To have more than one agency review the same transaction for the same possible offense would be more than just duplicative and wasteful activity. It would place merger applicants in a world of double jeopardy. Having satisfied one agency that a merger will harm neither competition nor competitors, the firm could find itself challenged by a second agency applying a slightly different interpretation or standard in an endless game of "Gotcha."
The essence of the antitrust analysis is a market paradigm. Consumer behavior defines the extent and scope of a market on the demand side. What is substitutable with what? How substitutable are they?
Technology, businesses, and relations among them, in turn, determine how the demand is to be met. Ultimately, the interaction between the demand and how the suppliers meet it determines pricing. Antitrust analysis in a merger context asks how the market will be affected if the merger is consummated. What would happen to prices with one fewer competing source, or one fewer potential competing source, of supply? How would consumers be affected?
The antitrust merger review is conducted by the staff of the designated agency. There is no shortage of information. The parties filing for a merger initially submit substantial documents in support of their application. The agency staff can, and often does, request more information. Opponents of a merger are rarely shy about presenting their views, elaborately documented, to the staff of the designated antitrust agency.
The antitrust merger review by agency staff at either the DOJ or the FTC is tedious, analytical, and usually thorough. Some parties may not be pleased with the outcome of the antitrust merger review, but it is difficult to assert that--where the agency staff was alerted to a possible problem--a specific aspect of competition, market structure, or consumer welfare had not been addressed.
Second guessing the DOJ and the FTC
If you wan to believe that the DOJ and the FTC are the "be-all" and "end-all" of federal merger review, you may want to leave the room now.
Be happy! The DOJ and the FTC do a great job. Everyone respects them. No one is going to second-guess their merger review--at least on the grounds of market structure, competition, and consumer welfare--because DOJ and the FTC have all of the answers. And if neither DOJ nor the FTC will challenge a merger in court, it must pass federal muster, at least on the grounds of market structure, competition, and consumer welfare.
For those of you who have stayed, I am going to tell you the other side of federal merger review policy, one that is neither as pure, nor as predictable, nor as analytical as DOJ or FTC antitrust merger review. But it goes on every day. I call it "can-opener merger review law."
It is for government agencies that want to be in the merger review business but do not have the clear legal authority to do so. Why would a government agency want to engage in an activity for which it has no clear legal authority? To understand the answer to that question is to understand why government grows rapidly.
Can-opener merger review law works much more effectively than merely assuming a can-opener on a desert island. There, one can assume all one wants, but nothing actually happens. In government, however, assuming authority is tantamount to having the authority--at least until some more powerful governmental entity tells you otherwise.
Can-opener merger review law is not just for government agencies seeking more jurisdiction. It is also for parties who want to stop a merger, or at least make a merger much more costly for the merging parties. Often these parties have failed to persuade the DOJ / FTC to block the merger, or their case against the merger is so far outside of antitrust law they did not even try to block it through the antitrust agencies.
Much like the economist who assumed the can-opener on a desert island, so too an agency assumes authority to review mergers. If one is assuming legal authority, there is no reason not to duplicate the very same market structure, competition, and consumer welfare issues reviewed by the DOJ or the FTC in their antitrust review, but perhaps now with different, less predictable, standards.
A Prescription for Mischief
Suppose that you have a client that wants to stop a competitor's merger, or at least raise the cost of the merger or extract some economic rents. Suppose that the facts of the matter do not give much hope that either the Department of Justice or the Federal Trade Commission would do anything to block the merger. What should you do? Give up? Not necessarily. Here are four suggestions.
1. State antitrust authorities. Many states have agencies with antitrust authority independent of the federal authority. These states are free to impose their own tests and standards for merger reviews affecting their state.
2. Foreign antitrust authorities. Many foreign governments have agencies with antitrust authority. While one might reasonably expect that national antitrust agencies would block only the transactions involving assets within those countries, there are ample precedents for intervention in the transfer of assets outside a country. The European Union, for example, has taken an aggressive posture on the extent of its authority, as was evident in the Boeing-McDonnell-Douglas merger and the WorldCom-MCI merger. In the latter example, the EU demanded the two U.S. merging parties divest themselves only of assets located in the United States!
3. FBI A third approach is to go the FBI. "The FBI?" you may wonder. "Why there?" Blocking mergers or extracting rents is largely about creating fear in the minds of your adversaries. Few agencies can strike more fear than the FBI. Moreover, the FBI has legitimate legal interests in several assets that might be affected by a merger: compliance with CALEA, the location of earth stations for satellite communications, the location of information storage facilities, or the location of internal telecommunications networks, to name but a few. Ultimately, most companies give the FBI whatever they want, and the beauty of FBI negotiations is that there is no public written record.
4. FCC Finally, you could come to the FCC. The FCC is everything the federal antitrust authorities are not. They have clear legal authority to review mergers; the FCC does not, except under a dormant section of the Clayton Act which is never invoked. The FCC instead translates its license transfer review authority broadly into merger review authority.
Merger Reviews at the FCC
The antitrust agencies have clear and well-understood procedures to apply for a merger and the rules and standards by which it will be reviewed. The FCC has none of these. The FCC has no rules, not even about which "mergers" it will review, and which it will not. The FCC has a web site organized by a "Merger Review Task Force," but none of the posted information is based on legally binding rules. The Merger Review Task force is intended to coordinate and harmonize the merger review efforts that used to go on independently in each FCC bureau. But the Task Force has no binding rules or even precedents; each case is an ad hoc case.
Which mergers will the FCC review? Don't look for a law, or rule, or precedent to guide you. The basic assumption is that any entity that is heavily regulated by the FCC and that is involved in a major acquisition had better watch out.
The criterion is not the number of licenses. Large mergers involving hundreds of licenses have gone unnoticed, while mergers with many fewer license transfers have been heavily scrutinized. The recent unscrutinized mergers include: Exxon-Mobil, BP-Amoco, United-U.S. Air, and any number of recent mergers in the banking and financial sectors.
License transfers at the FCC are common. There are hundreds of thousands, if not millions, of FCC licenses. Each of these licenses has public interest obligations. Every year, tens of thousands licenses are transferred. All transfers are accountable to the same statutory public interest standard. But that standard seems to be applied differently for different license transfers. Most are handled routinely. Only a few are given more than a glancing review. Relatively few are held up to close scrutiny.
The same statutory public interest standard applies with equal force to the license involved in Exxon-Mobil as it does to the licenses involved in SBC-Ameritech or AOL-Time Warner or even transferring a truck radio dispatch license from Joe's Hardware Store to Mary's Hardware Store. Yet the FCC applies radically different public interest standards.
How do we get away with it? We claim that we review mergers with our public interest standard. If you say it often enough, and loud enough, and apply it only to companies that live in regulatory fear of the FCC, no one will disbelieve you. Ask the New York Times, or any media outlet, or any Member of Congress: "Does the FCC review mergers?" The answer, without hesitation, is "Yes, of course." The mere assertion of agency power has made it so.
To the extent the FCC has any legal authority to review mergers under the license transfer provisions of Title III, it has authority to review all mergers involving FCC licenses, not just those of companies we typically regulate. The FCC does not review the merger of Exxon and Mobil, or even Joe and Mary's Hardware Stores, because these entities, unaccustomed to daily regulation by the FCC, would not stand for such a review.
Conditional License Transfers and Conditional Justice
The administrative process for merger reviews at the FCC is a sight to behold. You cannot see it because it is often done behind closed doors, conveniently beyond public scrutiny.
The FCC cannot legally block a merger as such, but it can refuse to grant license transfers, or it can condition license transfers. Conditions on license transfers could be crafted at the Commission and then imposed on the applicants without their prior knowledge. There would be no need for meetings with applicants to negotiate conditions. The Commission could simply write the conditions and tell the applicants that, if they are not satisfied, take us to court
If the applicants were to proffer the conditions themselves in their application, their opportunity to challenge them subsequently would be substantially circumscribed. How does the applicant know which conditions to proffer? The FCC must tell them. How can the FCC tell an applicant what to proffer when no formal decision has been made, much less published? That is why you meet behind closed doors at the FCC: so the FCC or its staff can tell what conditions should be proffered in order to receive a favorable decision.
One set of rational and obvious conditions would include compliance with all Commission rules and the Communications Act. But that would be too obvious. Moreover, there is no need to negotiate what is lawfully required. Instead, the Commission often insists on conditions that place burdens on industry licensees that the Commission could not lawfully impose by general rule on an industry. In some instances, the Commission imposes conditions that require licensees explicitly to violate the Communications Act, as in the case of the SBC-Ameritech license transfers. In other instances, such as the recent Clear Channel deal, the Commission requests social policy goals outside of the scope of the Communications Act.
Most of the public interest analysis written by the Commission to support merger reviews and conditions on license transfers is supported by concepts of "reduced competition," or "harm to competitive markets," or "consumer welfare." Ironically, these are the same concepts examined by the antitrust agencies in their merger reviews. The FCC has rationalized that its separate review of mergers is appropriate because it applies a different law and a different standard from the DOJ or the FTC. While one agency labels a review a "public interest" review, and the other an "antitrust" review, it is very difficult to distinguish the underlying issues.
The federal antitrust agencies ultimately examine the same issues and the same information as the FCC. Only the federal antitrust agencies have unambiguous law, clear rules, and consistent precedent. The FCC has none. And we are left with can-opener merger review law. Simply assume it is there.
Government is at its best when it is predictable and boring in its adherence to its own laws. The FCC should let the antitrust agencies handle issues of competition and consumer welfare. Suggestions that a federal agency abandon power, even unlawfully accrued power, are met with reactions of disbelief. The American public cannot have complete confidence in a government that makes up the rules as it goes along, that assumes the law where none exists, that relies on can-opener laws. We need to restore trust in our government as based on law. We have more than enough federal laws to protect the American consumer. We just need to have the government follow those laws.