The Antitrust Paradox (Euro 2006 remix) The best of recent merger litigation … featuring Sony/BMG, Boots/Unichem and rivals’ other greatest hits

Simon PritchardDirector, Mergers

Office of Fair Trading

5th Annual BIICL Merger Control ConferenceLondon, 24 November 2006

The Antitrust Paradox (80’s U.S. original)Antitrust policy has ‘ led to the protection of inefficient competitors, the punishment of successful firms, and, ultimately, the detriment of the interests of consumers, which the antitrust laws were designed to protect in the first place.’R. Bork, The Antitrust Paradox: A Policy at War With Itself (1978)

‘There is a specter that haunts our antitrust institutions … The GM-Toyota joint venture illustrates clearly the strategic role of antitrust litigation … Paradoxically … [only] when the joint venture is really beneficial can rivals be relied on to denounce the undertaking as “anticompetitive”. That is exactly the response of Chrysler and Ford who have presented themselves here as defenders of consumers’ interests even though before other forums they have not hesitated to argue for blatantly protectionist measures’. W. Baumol & J. Ordover, ‘Use of Antitrust to Subvert Competition’ 28 J Law & Econ. 247 (1985)‘To the extent antitrust abuse consists of rent-seeking opposition to mergers, it brings to light a paradox of antitrust enforcement that has not generally been recognized.’J. Miller (FTC Chairman), ‘Comments on Baumol & Ordover’ 28 J Law & Econ. 267 (1985)

The Antitrust Paradox (Euro 2006 Remix) Classes of litigant

System incentives

A New Antitrust Paradox? – principles and impact

Agency challenges in litigation

Conclusion

Caveat: all views are personal and not necessarily those of the OFT

Classes of litigant

Customers, consumers – unlike in the U.S. the true beneficiaries of competition seem to lack resources, know-how, inclination to conduct merger litigation, at least in UK and EC

Merging parties –

Unlikely to appeal opening of Phase II Few settlements will be contested in court Litigating a prohibition is challenging

Competitors – most important UK merger litigation has been appeals by rivals of OFT clearances of horizontal mergers: IBA, Unichem, Celesio

Classes of litigant

Particular settings – appellants with incentive to challenge could include

Competitor fearing greater competition

Disgruntled trading partner (distributor, supplier)

Spurned bidder

Target in hostile takeover – see Endesa CFI + other litigation

Beneficiary of greater divestments (pick up assets on the cheap)

Beneficiary of rival deal – see Iberdrola CFI appeal of E.ON/Endesa

Cultural or other idiosyncratic agenda – Impala?

System incentives

Competitors have the ability (resources) and incentive to appeal

As complaints rise and yet agencies make robust independent decisions, they will inevitably reject more complaints and clear more contested cases

As rivals fail to convince the agencies CFI, CAT or other litigation

Generous standing rules – no inquiry into motives Public interest of access to justice for rivals and accountability of

agency trumps public interest of efficient M&A + merger regime Agency non-intervention subject to equally rigorous scrutiny

(IBA, Impala) Credibility and veracity of ‘altruistic’ competitor testimony

ex parte the consumer rarely challenged by the court No policy concerns with efficiency offense in horizontal setting

The ‘new’ efficiency offense in context Freiburg school democratic model efficiency offense Reg.

4064/89

Chicago school efficiency model 1982, 1992 U.S. guidelines

CFI reversals and GE/Honeywell fallout prompt EC reform

Substantive test – dominance vs. SLC SIEC 2004 guidelines – alignment with current U.S. guidelines + progeny

Explicit consumer welfare standard Efficiencies analysis: as per U.S. ’97 revision

Emphasis on integrating law and economics (via economic literacy + discipline, incl. Chief Economist team)

Agencies are ahead of courts in integrating economics at expense of structuralist, form-based approaches (cf. Art. 82 context)

Europe’s Antitrust Paradox – 3 key notes 1. Agencies should be appealed on bad clearances (false negatives)

… but probably won’t be

Market power higher prices benefit to competitors no appeal Customers unlikely to challenge

2. Agencies face most likely appeal on good clearances (true negatives)

Merger efficiencies price + non-price pressure on rivals appeal Merger delay benefits rival, but costs consumers, parties, taxpayers Direct and opportunity cost of litigation for agency (esp. Phase I)

3. After a formal rejection of the efficiency offense in the administrative procedure/agency arena … the doctrine finds new life in JR/courts

Antitrust Paradox – transatlantic issues

All 3 UK appeals and Impala, as framed, would fail U.S. antitrust injury requirements for standing – cannot possibly be harmed in relevant sense

Complainants in multinational or U.S.-to-U.S. deals can seek recourse in Europe, if not in principal jurisdiction

SBC/AT&T and Verizon/MCI J&J/Guidant GE/Honeywell – what if DG Comp had cleared too?

Procedural dissonance could undermine substantive convergence

Little comfort to merging parties that EC and U.S. agencies in alignment to clear if rival can hold up or derail deal in European court

Antitrust Paradox – UK issues

Pressure points and constraints

Wide jurisdictional net (share of supply, material influence tests) forum shopping

Duty to send case to Phase II on a “may be the case” threshold

OFT has no third party evidence-gathering powers, yet must dispel SLC concerns with a belief ‘objectively justified by relevant facts’

Speedy and intensive JR if duty misapplied

Impact on deal – Phase II long (24 wks+) and very intensive, costly

Even if OFT clears, similar delay to parties if case is remitted – Unichem appeal imposes 24 wk delay on Phoenix/EAP merger

Nature of litigated cases has tilted system in favour of guarding against false negatives, creating potentially greater risk of false positives

Antitrust Paradox – UK issues

OFT strategies

Robust line on doing the right thing

Referring a case for the ‘quiet life’ rather than due to a genuine issue would be a gross dereliction of duty, contrary to OFT values

Emphasis on defending integrity of UK merger control against distortion, including a critical element – Phase I remedies in appropriate cases (Boots/Unichem)

Mitigate litigation risk (arises in many more cases than actually litigated) with extra attention to all aspects of case, especially decision drafting under pressure – and defend ourselves vigorously in court if necessary

Put onus on complainants to furnish evidence; no issues letter if concerns lack credibility (as this is simply Exhibit 1 for the complainant)

Agency challenges in litigation

Retracting the ‘case against’ is essential modus operandi …

EC 14 of 62 (33%) Phase II outcomes were ‘reversed’ post-SO

US 192 of 365 (53%) mergers went unchallenged after 2d Req. (FY 99-03)

CC 1 of 13 EA02 cases was ‘reversed’ after SLC at PF stage: (CC full report clearance rate = 59%)

OFT 20 of 79 (25%) post-IBA CRM cases were ‘reversed’ via unconditional clearance – but NB underreporting of discarded issues

Agency challenges in litigation

… yet exposes agencies to challenge on appeal

Impala This fundamental U-turn in the Commission’s position may indeed appear surprising (283) … unless the entire investigative administrative procedure is to be deprived of the slightest value, the Commission must [ ] explain [why] its provisional findings were incorrect (335)

IBA To decide [in] a week that all the matters set out in the issues letter were successfully dealt with or rebutted .. seems .. somewhat surprising .. we would expect to find a detailed point by point rebuttal (236-7)

UnichemWe fully accept that the sending of an Issues Letter does not oblige the OFT to refer. If, however, the OFT sends an Issues Letter and then shortly afterwards decides not to refer, it must be shown that the requisite likelihood of SLC has been removed’ (201)

Conclusion

Positive disciplines … carry risk

All agencies must observe due process and manage decision risk of false positives and false negatives. Consumers, not just business, can suffer from false positives.

Structural indicia to effects analysis – intellectual discipline, but easily misused by rivals on appeal

Defining a market Choosing measure(s) of concentration Screen out no-problem cases

SO-type docs: committing theories of harm to writing

Check on rigour – does it stack up when you write it down? (Celesio at 142) Stress-test ‘case against’ with parties (but no ‘subcontracting’ – see

Impala) Due process for affected parties Internal consistency published decision predictability public confidence

Conclusion

Too much of a good thing?

These disciplines make for litigation ‘hooks’ when coupled with other litigation plus-factors:

Tight deadlines – valued in Europe compared to U.S. 2nd requests

Full transparency of Phase I and II outcomes Modest public sector resources compared to opponents –

OFT merger control is run on £2m

EC and UK rules on standing Intensive review + high expectations set in JR by CAT, CFI

But tools of intellectual discipline cannot be sacrificed … … we must therefore look at the other plus-factors