Cross-Market Balancing of Competitive Effects: What Is the Law, and What Should It Be?

• Author: Werden, Gregory J.

1. INTRODUCTION II. CROSS-MARKET BALANCING IN MERGER CASES A. The Any-Market Rule B. Philadelphia National Bank III. JURISPRUDENCE ON RULE-OF-REASON BALANCING ACROSS MARKETS IV. CROSS-MARKET BALANCING IN A BURDEN SHIFTING FRAMEWORK A. The Plaintiff's Initial Burden B. The Burden of Procompetitive Justification C. Less-Restrictive Alternatives D. Balancing E. An Example V. CONCLUSION I. INTRODUCTION

   It is has been said that "antitrust cases have always rejected the premise that a procompetitive effect in one market will excuse an anticompetitive effect in another." (1) Philadelphia National Bank (2) and Topco (3) are cited as authority for this proposition recently dubbed the "market-specificity rule." (4) But the text of the Sherman Act contains nothing suggesting the rule, and the Supreme court has never directly addressed cross-market balancing under the rule of reason. In this article, I assemble what clues the Court has left and formulate a policy on cross-market balancing in rule-of-reason cases.

   I begin, however, with Section 7 of the Clayton Act, which the Supreme Court interpreted in Philadelphia National Bank. Section 7 declares a merger unlawful if it lessens competition substantially in any relevant market. (5) This "any-market rule" implies a market-specificity rule for merger cases, but I explain that Philadelphia National Bank relied on neither rule.

   I then review Topco and the other Supreme Court Sherman Act decisions that have been cited as authority on cross-market balancing and find them unedifying. In contrast, I find the Court's rule-of-reason jurisprudence irreconcilable with the any-market rule. Finally, I detail how cross-market balancing fits into the burden-shifting process courts employ in rule-of-reason cases. I conclude that the any-market rule applies to the plaintiff's initial burden, but in exceptional cases, cross-market balancing can save a restraint harming competition in a relevant market.

2. CROSS-MARKET BALANCING IN MERGER CASES

   1. The Any-Market Rule

      The any-market rule is the generally accepted plain meaning of the text of Section 7, as the Supreme Court declared in Brown Shoe:

      Because [section] 7 of the Clayton Act prohibits any merger which may substantially lessen competition "in any line of commerce" (emphasis supplied), it is necessary to examine the effects of a merger in each such economically significant submarket to determine if there is a reasonable probability that the merger will substantially lessen competition. If such a probability is found to exist, the merger is proscribed. (6) The legislative history of the 1950 amendment to Section 7 unequivocally states the intention to impose the any-market rule: "It is intended that acquisitions which substantially lessen competition ... will be unlawful if they have the specified effect in any line of commerce, whether or not that line of commerce is a large part of the business of any of the corporations involved in the acquisition." (7)

      The Areeda-Hovenkamp treatise finds the any-market rule in Section 7's text (8) and also supports the rule on administrability grounds. The treatise notes that, when the rule has bite, a merger's "illegality often can be avoided, and the benefits obtained, by partial merger or by disposal of one of the firm's assets in the suspect market to an independent purchaser." (9) But the treatise acknowledges that it can be "impossible or impractical" to fix an anticompetitive merger. (10)

      The any-market rule is the general policy of the U.S. merger enforcement agencies. (11) Since 1997, however, the Horizontal Merger Guidelines have asserted the inextricably linked exception. (12) As stated by the 2010 Guidelines, the agencies sometimes "consider efficiencies not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s)." (13) The Guidelines presented this exception to the general rule as an exercise of prosecutorial discretion because of the rule's statutory basis. (14)

      Market delineation under the Guidelines gives the any-market rule greater impact than could have been anticipated by the Congress in 1950 or the Supreme Court in 1962. One reason is that the Guidelines do not place products in the same relevant market on the basis that they are substitutes in supply:

      Market definition focuses solely on demand substitution factors, i.e., on customers' ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service. The responsive actions of suppliers are also important in competitive analysis. They are considered in these Guidelines in the sections addressing the identification of market participants, the measurement of market shares, the analysis of competitive effects, and entry. (15) Another reason is that the Guidelines delineate price discrimination markets around particular customer groups that could be targeted after a merger. (16)

      The practice of market delineation was quite different in 1962. All of the merging firms' products sharing a common production process often were placed in the same relevant market on the basis that they were good substitutes in supply. All procompetitive benefits from merger-related cost savings affecting that production process, then, arose in the relevant market. With the same facts today, products from a single production process typically are sorted into multiple relevant markets. The locus of alleged competitive harm in a merger challenge can be a small fraction of the products sharing a common production process and a relatively small portion of the merging firms' business. (17) In such cases, cost savings affecting the entire production process are viewed as generating competitive benefits in many distinct markets, with only a small portion in the relevant market.

      Perhaps the greatest concern engendered by the any-market rule is that it could lead to result-oriented market delineation that distorts the assessment of competitive effects. (18) If the delineation of the relevant market determines which effects of a merger are considered in determining its legality, a court might delineate the relevant market in a manner designed primarily to avoid constraint from the any-market rule. If a court found claims of procompetitive benefits both convincing and substantial, it could make the claims cognizable by gerrymandering the relevant market. Lacking legal authority to make the inextricably linked exception, a court could abandon sound market delineation principles. The cost of the any-market rule would then be bad market-definition precedent that jeopardizes sound analysis in future cases.

   2. Philadelphia National Bank

      Commentators and treatise writers generally read Philadelphia National Bank to hold "that it is improper to weigh a merger's procompetitive effects in one market against the merger's anticompetitive effects in another." (19) But the Supreme Court has not endorsed this reading, and the opinion's author, Judge Posner, lamented that he "didn't write very well in those days" and that the opinions were just his "first drafts." (20) It is appropriate, therefore, to take a close look at the paragraph in the opinion read to bar cross-market balancing. Although the opinion cannot have significant implications for Section 7 cases because the any-market rule applies, it is important to determine whether the opinion has any implications for Sherman Act cases under the rule of reason.

      When the government was denied an injunction against the merger of Philadelphia National Bank and Girard Trust Corn Exchange Bank, (21) it appealed directly to the Supreme Court, as the law then provided in government antitrust cases. The Court agreed with the Government (22) that the sole relevant market in which to evaluate the merger was commercial banking in a four-county area around Philadelphia. (23) The Court found that the competitors in this market were just the "commercial banks with head offices" in the area, (24) and they were assigned market shares on the basis of total assets, deposits, or loans without regard to the locations of the associated customers. (25) The Court found that the merger would produce "a firm controlling an undue percentage share of the relevant market, and result[] in a significant increase in ... concentration." (26) On that basis, the court found the merger "so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects." (27)

      The banks sought to overcome this presumption primarily on the basis that "the additional resources of the merged bank would permit it to serve more adequately the credit requirements of' the largest Philadelphia businesses. (28) Banks headquartered outside the Philadelphia area, especially New York banks, were serving large Philadelphia customers. (29) The appellee banks argued that their merger would allow them to compete successfully for those customers by making it economical for them to "offer more specialized services" and by increasing their lending limit. (30) Regulations limited outstanding loans to any one customer to 10% of a bank's capital and surplus, and the merger would have nearly doubled the highest lending limit of a Philadelphia bank. (31) Critically, the banks' contention was that the merger would promote competition for Philadelphia customers, not that the merger would promote competition for customers anywhere else. (32)

      The Court rejected this defense with the following paragraph cited for the market-specificity Rule (33):

      [I]t is suggested that the increased lending limit of the resulting bank will enable it to compete with the large...