Practical Challenges Confronting Merger Reviews of Labor Markets

• Publication year: 2022
• Author: Written by Joshua Holian and Nitesh Daryanani

PRACTICAL CHALLENGES CONFRONTING MERGER REVIEWS OF LABOR MARKETS

Written by Joshua Holian and Nitesh Daryanani¹

I. INTRODUCTION

Section 7 of the Clayton Act ("Section 7") prohibits mergers and acquisitions that are substantially likely to lessen competition, or that tend to create a monopoly.²

When reviewing mergers for potential Section 7 violations, the United States Department of Justice's Antitrust Division ("DOJ") and the Federal Trade Commission ("FTC," and collectively, the "Agencies") historically have focused their analyses on the probable effects that the merger in question will have on consumer welfare. Through decades of case law and enforcement practice, the Agencies have established a relatively well-understood path for connecting product market concentration to anticompetitive effects that—under the right conditions—would negatively impact consumers with higher prices, reduced quality, or lower investments in innovation. The precise boundaries of when a specific merger is substantially likely to lessen competition will of course be heavily contested in any given merger review, but the analytical frames (and areas for debate) are relatively well defined.

Over the past 18 months, the Agencies have expressed interest in expanding merger reviews to analyze the impact of a proposed merger on labor welfare, in addition to consumer welfare.

Incorporating questions of labor welfare into Agency merger reviews may prove challenging in practice. While product and labor markets are governed by the same underlying forces of supply and demand, these segments differ in meaningful ways, as well. In combination, these differences may constrain the ability of the Agencies to use their historical experience with analyzing product markets as a model for how to evaluate a merger's effects on labor markets.

Of course, the observation that a task will be hard does not make it impossible. The Agencies may find the right case over time to overcome the below-described challenges and establish that a merger is substantially likely to cause a lessening of competition in a labor market. Correspondingly, parties pursuing mergers should bear in mind the risk that an Agency may scrutinize their transaction's impact on labor markets, in addition to the usual product market-focused analysis. That said, at least

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in the near term we anticipate that the Agencies will tend to look for opportunities to allege labor-based claims in addition to traditional allegations that a merger will impact consumer welfare, rather than pursue a labor-based theory as the sole grounds upon which to challenge a merger.

This article analyzes contemporary scholarship that has evaluated the question of whether merger review is an appropriate tool for analyzing impacts on labor markets. To contextualize that analysis, the article begins with a brief overview of the merger review process, and the typical role of the consumer welfare standard in that analysis, before we turn to an assessment of what a pivot towards assessing labor market competition would look like.

II. BACKGROUND: MERGER REVIEW AND ENFORCEMENT

A. THE BASICS OF MERGER REVIEW

Section 7 prohibits mergers and acquisitions that are substantially likely to lessen competition.³ The Hart-Scott-Rodino Antitrust Improvements Act of 1976 established a framework whereby parties to a proposed merger must notify the Agencies before closing the transaction if the transaction is not exempt and exceeds certain thresholds.⁴

Over the years, the Agencies have issued and reissued guidelines that reflect their approach to evaluation of horizontal and vertical mergers, among other reportable transactions (the "Guidelines").⁵ Courts hearing challenges by the Agencies to mergers have defined a framework for evaluating mergers, as well.⁶

A healthy debate remains open among antitrust practitioners on the exact boundaries and requirements for assessing whether a merger violates Section 7, and who should bear what burden of proof on these issues. At a high level, however, the basic merger review "algorithm" for transactions involving horizontal competitors is as follows:

First, to understand whether a merger will substantially lessen competition, we need to understand the relevant market impacted by the merger.⁷ The relevant market is the field of competition in which meaningful substitutes exist. The courts view market definition as an important threshold issue for merger review (the logic being, we cannot credibly assess the impact of a merger without first understanding what product and geographic markets might be impacted).⁸ Given the prominence of the issue, practitioners have devised a range of tools for identifying or approximating the boundaries of relevant markets to a merger, including economic analysis, ordinary course of business documents, and customer testimony.

After identifying the relevant market at issue, we must understand whether the relevant market is concentrated.⁹ Absent durable concentration, economics tells us that a merger is unlikely to have an anticompetitive effect, since consumers could avoid a price increase or reduction in quality by the merged firm by diverting their business to other suppliers.

Once we sufficiently understand the market we are talking about, we assess whether the merger is likely to cause an anticompetitive effect. In a horizontal merger between two competitors, an anticompetitive effect could be the product of coordinated effects—that is, a collective relaxing of competitive tension between the surviving competitors in the industry—or unilateral effects—a single firm relaxing its competitive behaviors without losing so many customers to alternatives as to render that reduced competition unprofitable.¹⁰ In assessing competitive effects, we consider not only the incentives of the parties to the transaction, but also the incentives of actual competitors, potential competitors, and new entrants.

Antitrust agencies use essentially the same framework to evaluate horizontal combinations of buyers, as opposed to sellers.¹¹ Monopsony power is, in essence, market power exercised by a buyer against sellers of a good or service.¹² A merger of employers that compete for the same pool

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of employees can enhance market power in the labor market, just as mergers of competing sellers can enhance market power on the selling side of the market.¹³

B. THE MOVE TOWARDS INCLUDING LABOR MARKETS IN MERGER REVIEW

The move towards including labor markets in antitrust reviews starts from the general observation that labor welfare in the United States has declined over time. Research shows that wage growth in the United States has stagnated since the 1980s,¹⁴ which is attributed, at least in part, to the diminishing relevance of unions and the collective bargaining process during that time.¹⁵ Unions have gone from representing more than a third of American workers in the twentieth century to representing a tenth of the labor market, most of whom are in the public sector.¹⁶ Scholars argue that a "fissured" labor environment is stacked against workers trying to organize and bargain collectively, i.e., labor markets are geographically fragmented and heavily reliant on contractors, staffing agencies, and franchises.¹⁷ Labor market enforcement actions brought by government agencies have also declined in recent years, and COVID-19 sharpened the decline.¹⁸

The Biden administration has looked for a range of solutions to address these challenges, including antitrust. In July 2021, President Biden issued an executive order emphasizing the importance of competitive labor markets to create more high-quality jobs and foster economic freedom to switch jobs or negotiate a higher wage.¹⁹ The administration explained that industry consolidation has led to depressed wages because employers have market power and are able to pay lower wages than they would in a competitive market, while many workers are unable to find new jobs because there are few alternatives.²⁰ Monopsony theory predicts that a firm faced with less competition for labor may cut wages and benefits, or wastefully degrade conditions of employees to take advantage of employees who are "stuck" or locked into the job.²¹ Declining labor mobility undercuts wage growth because employees have less leverage to demand higher wages and better benefits.²²

The administration has specifically looked at antitrust merger review as an opportunity to address challenges in the labor markets. In January 2022, the Agencies explicitly addressed labor markets in their request for comments on revising and updating the Agencies' Guidelines.²³ Specifically, the Agencies raised the following questions relating to labor markets:

1. whether the guidelines adequately assess whether mergers may lessen competition in labor markets, thereby harming workers;
2. whether there are factors beyond wages, salaries, and financial compensation that the guidelines should consider when determining anticompetitive effects; and
3. whether cost savings generated through layoffs or reduction of capacity should be treated as cognizable efficiencies.²⁴

In June 2021, FTC Chair Lina Khan expressed an intent to prohibit mergers that reduce competition in labor markets based on a mandate to "protect[] everybody, including workers."²⁵ Relying on economic studies which suggest a link between employer concentration and low wages,²⁶ antitrust agencies and academics argue that wage stagnation in the United States economy is the result of allowing too many mergers that have increased concentration in labor markets go unchallenged.²⁷

Beyond merger control, in the last decade the Agencies have prioritized enforcement against specific forms of conduct by employers, like illegal agreements amongst employers to fix wages and the imposition of no-poach agreements on high-skilled workers.²⁸ While outside the scope of this article, those enforcement efforts underscore the focus that the current administration is bringing to these...