Antitrust standing in private merger cases: reconciling private incentives and public enforcement goals.

• Author: Brodley, Joseph F.

TABLE OF CONTENTS

INTRODUCTION

1. THE CRISIS IN PRIVATE MERGER ENFORCEMENT

   1. The Cargill Decision

   2. Subsequent Lower Court Decisions

   3. Enforcement Failure

2. FOUNDATIONS OF COHERENT POLICY

   1. Enforcement Goals

      1. Dual Enforcement

      2. The Deterrence Goal

      3. Substantive Uniformity

   2. Standing and Incentive Management

      1. Antitrust Injury

      2. Effective Private Enforcement

      3. Injunctions

3. A Systems APPROACH TO PRIVATE MERGER

   ENFORCEMENT

   1. Criteria for Effective Enforcement

      1. Enforcement Capability

      2. Gravity of Violation

      3. Incentive Compatibility

      4. Equity Controls and Mechanisms

   2. Possible Merger Enforcers

      1. Private Enforcers

      2. States Suing as Parens Patriae

   3. Effective Private Enforcers

4. COMPETITORS

   1. Enforcement Capability

   2. Incentive Compatibility and Threatened Injury

   3. The Economics of Competitor Injury

      1. Cartel Punishment

      2. Dominant Firm Predation

   4. Proposed Approach: Antitrust Injury Screen

      1. Sherman Act Approach

      2. Exclusionary Capability

      3. Threatened Market Dominance

      4. Illustration: Aspen Skiing Co.

   5. Equity Controls and Mechanisms

      1. Existing Procedures

      2. Improved Procedures

      3. Effectiveness of Proposed Procedures

   6. Gravity of Violation

5. TAKEOVER TARGETS

   1. Enforcement Capability

   2. Incentive Compatibility and Antitrust Injury

      1. Partial Acquisitions

      2. Full Acquisitions

      3. Loss of Trade Secrets

      4. Loss of Independence

   3. Controlling Managerial Incentives

      1. Existing Judicial Controls

      2. Improved Procedures

      3. Effectiveness of Proposed Procedures

   4. Gravity of Violation CONCLUSION APPENDIX

      INTRODUCTION

      Private antitrust enforcement is riven by a tension between public enforcement goals and the self-interested agendas of private enforcers. The antitrust statutes give private antitrust enforcers powerful weapons, attesting to the public importance of competition goals, the pursuit of which Congress was unwilling to leave exclusively in the hands of government officials. At the same time, private enforcers are driven by the strong winds of their own economic interests, which may sharply deviate from antitrust goals. It falls on the courts to reconcile these often conflicting purposes -- as demanding and challenging a task as any that confronts the judiciary.

      This article examines a vital problem of private antitrust enforcement -- the standing of private merger litigants -- where the unresolved tension between public antitrust goals and the private interests of litigants threatens enforcement breakdown. Private merger enforcement is at risk not because courts have determined that such enforcement is undesirable, but because courts have failed to see the problem as an issue of systems design requiring effective integration of public and private enforcement. Instead they have focused on particular elements of antitrust standing -- feared abuses by wrongly motivated plaintiffs -- neglecting systemwide effects and jeopardizing the health of private enforcement as a whole. In this paper, I attempt to develop a coherent method for reconciling public interest goals and private enforcement incentives that will be useful not only for merger enforcement, but for other areas of antitrust law, and perhaps for public interest litigation generally.

      Part I describes the present plight of private merger enforcement, where narrow standing rules threaten enforcement breakdown. Part II sets forth the substantive goals, procedural mechanisms, and incentive structure that underlie coherent policy. Part III proposes criteria for assessing standing rules and private enforcement procedures and for managing the distorted incentives of private enforcers. Parts IV and V apply the proposed enforcement criteria and procedural controls to competitors and takeover targets -- the private enforcers upon whom effective enforcement of the merger law inevitably rests.

      This paper focuses on merger enforcement alone because such enforcement is critical in order to maintain effective competition and because by treating a single enforcement policy in depth I am able to develop a fully specified methodology that appears suitable for other types of antitrust and nonantitrust enforcement as well. In a time of increasing skepticism toward public interest litigation, such an approach, concentrated on achieving systemwide goals and effectively managing the incentives of private enforcers, provides a constructive alternative to more draconian proposals that would close the door to many types of private suits because of feared litigation abuse.

1. THE CRISIS IN PRIVATE MERGER ENFORCEMENT

   Restrictive judicial decisions threaten the ability of private litigants to challenge unlawful mergers. Where once private merger cases centered on the anticompetitive effects of the merger, now the spotlight of attention focuses on the plaintiff 's litigation credentials. Thus, the merger court must engage in a microscopic examination of the injury sustained by a plaintiff, in order to determine whether the injury is of the character that gives the plaintiff standing to sue. In technical terms, courts ask whether the plaintiff has sustained "antitrust injury" -- the standing doctrine at issue in merger cases. While courts at first thought the rule would not apply to merger injunction actions, that view changed in 1986, resulting in drastic curtailment of private merger enforcement.(1)

   At the same time, public merger enforcement atrophied during the 1980s.(2) The disturbing result was that mergers that appeared clearly unlawful under core judicial holdings occurred with virtually no restraint. This led to a frantic rush to merge, intensified by the desire to take advantage of a permissive regime that many believed could not last. The growing merger wave of the mid-1990s gives renewed urgency to merger enforcement policy.(3)

   1. The Cargill Decision

      The crisis in private merger enforcement was brought to a head by the Supreme Court decision in Cargill, Inc. v. Monfort of Colorado, Inc.(4) In a divided ruling, the Supreme Court held that a competitor, which in the judgment of two lower courts had proved a clear violation of the Clayton Act,(5) lacked standing to bring an injunction action to block the merger. The problem was not that there was doubt that the merger between the second and third largest meat-packers in the United States violated the antitrust laws, for the Court did not review the merits, or that the plaintiff was not threatened with injury as a result of the merger. The defect in the case was that the plaintiff had not suffered "antitrust injury," a judicial limitation on antitrust suits that requires a plaintiff to prove not only that it has been injured by an antitrust violation but also that its injury is an anticompetitive effect of the violation.(6)

      The plaintiff in Cargill had claimed antitrust injury because the merger created multiplant efficiencies that would enable the defendant to compete more vigorously with rivals, lowering the plaintiff's profit, and because following the merger, the defendant would attempt to drive the plaintiff out of business by "sustained predatory pricing."(7) Although these claims of threatened injury had satisfied the lower courts, the Supreme Court found them insufficient because the first claim, based on lower prices due to increased efficiency, was merely a claim of injury from intensified competition, and the second claim, future predation, was neither effectively alleged nor proved.(8) Moreover, the Court found that the market did not have the anticompetitive structure necessary to support predatory pricing.(9)

      The Cargill decision is notable, not because of these findings, but because the Court applied the antitrust injury doctrine to a merger injunction action. As the Court had explained in an earlier decision, to allow parties to collect damages for losses that stem from competition even though the transaction itself violates the antitrust laws would undermine the very purpose of those laws.(10) The Supreme Court, however, had previously applied this limitation on standing only to damage cases. In Cargill, the Court held for the first time that the antitrust injury doctrine prevented a plaintiff from maintaining suit under the antitrust injunction statute.(11) The Court reasoned that it would be "anomalous" to allow a plaintiff to obtain an injunction to prevent a threatened injury for which the plaintiff could not obtain damages if the merger occurred and that the injunction and damage statutes are "best understood" as providing "complementary remedies for a single set of injuries."(12)

      A strongly worded dissent written by Justice Stevens and joined by Justice White expressed concern that the majority decision would effectively bar private enforcement of the merger law.(13) The dissenters feared that the majority had rejected the prophylactic and preventive purpose of merger enforcement by requiring what amounted to proof of a Sherman Act(14) violation. The remedy sought was an injunction, which required proof only of threatened future loss or injury, but the majority would demand evidence of actual injury, as in a damage action. The Court's decision would lead to a statute "enforceable by no private party."(15)

      Thus, the standing of private merger plaintiffs remains unclear after Cargill. What proof must a merger plaintiff present to show antitrust injury? If the plaintiff is a competitor of the merging firms, must the plaintiff prove threatened price predation by the same evidence that would be required in a damage case? Apart from predatory pricing, what evidence must the competitor plaintiff present to demonstrate threatened injury from other anticompetitive effects, such as nonprice predation, market exclusion, or cartel punishment? How do the Cargill decision and its progeny affect the standing of other private merger litigants, particularly takeover targets? What constitutes antitrust injury as to them, and how is it to be proved? If both competitors and takeover targets face difficult...