Demonstrating Absence of Anticompetitive Effects

• Pages: 187-228

CHAPTER VI

DEMONSTRATING ABSENCE OF

ANTICOMPETITIVE EFFECTS

If, after the relevant market has been properly defined and market

shares calculated, the proposed merger would create a high level of

concentration, the market structure will raise an inference that either

unilateral or coordinated anticompetitive effects may result. Left

unrebutted, such an inference could provide sufficient grounds to

prohibit the transaction under Section 7 of the Clayton Act (Section 7).1

Market definition and market shares are not necessarily dispositive,

however. The merging parties can rebut the inference that even a highly-

concentrated market is likely to lead to anticompetitive results.

A. The Significance of Market Shares, Market Structure, and

Concentration

Since 1974, defendants have relied on the Supreme Court’s decision

in United States v. General Dynamics Corp.2 to rebut inferences that

arise from high market shares. In General Dynamics, the Antitrust

Division of the U.S. Department of Justice (DOJ or the Division)

challenged the combination of two major coal producers that resulted in

“undue concentration” of past coal production in the relevant geographic

market3 sufficient to support “prima facie violations of Section 7 of the

Clayton Act.”4 Nevertheless, the Court concluded that the merger was

not illegal in light of “other pertinent factors” affecting the market.5

The Court observed that although “[e]vidence of the amount of

annual sales is relevant as a prediction of future competitive strength,” it

does not, “as a matter of logic, necessarily give a proper picture of a

company’s future ability to compete.”6 In addition to evaluating market

1. 15 U.S.C. § 18.

2. 415 U.S. 486 (1974).

3. Id. at 497-98.

4. Id. at 496 (citing Brown Shoe Co. v. United States, 370 U.S. 294 (1962)

and United States v. Philadelphia Nat’l Bank, 374 U.S. 321 (1966)).

5. General Dynamics, 415 U.S. at 498.

6. Id. at 501.

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188 Mergers and Acquisitions

shares and concentration, a court should analyze the “structure, history

and probable future” of the relevant product market. Because electric

utilities bought coal under long-term contracts, the better measure of a

coal company’s ability to compete for future contracts was the size of its

uncommitted reserves, not its past production.7 Based on this measure,

the Court concluded that the parties’ current market position and overall

concentration did not show the true competitive effects likely to result

from the transaction.8

Following General Dynamics, courts have held that merging parties

may rebut a presumption of anticompetitive effects based on market

shares and concentration by showing those statistics do not accurately

predict the transaction’s future competitive effects.9 In United States v.

Baker Hughes,10 the D.C. Circuit incorporated General Dynamics into its

burden-shifting approach to merger analysis.11 There, the DOJ

challenged the combination of two sellers of hardrock hydraulic

underground drilling rigs (HHUDRs) that resulted in a combined market

share of 76 percent and in an increase in Herfindahl-Hirschman Index

(HHI) levels from 2878 to 4303,12 which was sufficient to support “a

prima facie case of anticompetitive effect.”13 Nevertheless, the court held

that the merger was not unlawful in light of “the flawed underpinnings of

the government’s prima facie case,” the “sophistication of HHUDR

consumers,” and ease of entry.14

The court first rejected the Division’s argument that a prima facie

case could be rebutted only by evidence of ease of entry. It observed that

“[i]n the wake of General Dynamics, the Supreme Court and lower

courts . . . have successfully rebutted the government’s prima facie case

7. Id. at 501-02.

8. In so holding, the Co urt cited its anal ysis in Brown Shoe Co . v. United

States, 370 U.S. 294 (1962), which “cautioned that statistics concerning

market share and concentration, while of great significance, were not

conclusive indicators of anticompetitive effects.” General Dynamics,

415 U.S. at 498.

9. See, e.g., United States v. Citizens and S. Nat’l Bank, 42 2 U.S. 86, 121

(1975).

10. 908 F.2d 981 (D.C. Cir. 1990).

11. Id. at 982-83 (citing General Dynamics, 415 U.S. at 496-504).

12. Baker Hughes, 908 F.2d at 983 n.3.

13. Id. at 983.

14. Id. at 986.

Demonstrating Absence of Anticompetitive Effects 189

by presenting evidence on a variety of factors other than ease of entry.”15

Next, the court explained that in a small market with infrequent sales a

snapshot of market share at any particular point in time likely does not

accurately reflect the competitive strength of any given firm.16 The court

observed that the sophistication of HHUDR buyers “was likely to

promote competition even in a highly-concentrated market.”17 Finally,

the court determined that merging parties need not make a “clear

showing” to rebut the structural presumption. To require such a showing

would improperly “move far toward forcing a defendant to rebut a

probability with a certainty.”18 “In the aftermath of General Dynamics, a

defendant seeking to rebut a presumption of anticompetitive effect must

show that the prima facie case inaccurately predicts the relevant

transaction’s probable effect on future competition.”19 “The more

compelling the prima facie case, the more evidence the defendant must

present to rebut it successfully.”20

Since Baker Hughes, other circuit courts have adopted the same or

similar frameworks for analyzing mergers.21 Courts and the antitrust

agencies have continued to apply a rebuttable presumption of illegality22

15. Id. at 985.

16. Id. at 986.

17. Id. “These products are hardly trinkets sold to small consumers who may

possess imperfect information and limited bargaining power. HHUDR

buyers closely examine available options and typically insist on receiving

multiple, confidential bids for each order.” Id.

18. Id. at 989-92.

19. Id. at 991.

20. Id.

21. See, e.g., Chicago Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410, 423 (5th

Cir. 2008) (adopting Baker Hughes’s burden shifting framework); FT C v.

Butterworth Health Corp., 121 F.3d 708 (6th Cir. 1997) (same); FTC v.

University Health, Inc., 938 F.2d 1206, 1218-19 (11th Cir. 1991) (same).

22. The ultimate burden of proof in the case remains on the plaintiff. See,

e.g., Chicago Bridge & Iron Co., 534 F.3d at 423 (“[T]he ultimate burden

of persuasion . . . is incumbent on the Government at all times.”); Baker

Hughes, 908 F.2d at 991 (“If the burden of production imposed on a

defendant is unduly onerous, the distinction between that burden and the

ultimate burden of p ersuasion—always an e lusive distinctio n in

practice—disintegrates completely.”); United States v. H&R Block, Inc.,

833 F. Supp. 2d 36, 50 (D.D.C. 2011) (holding that “the ultimate burden

of persuasion . . . remains with the government at all times.”).