The Efficiency Rebuttal in the New Merger Guidelines: Bad Law and Bad Economics

• Date: 01 July 2024
• Author: Mark Glick, Robert H. Lande, and Darren Bush

C O V E R S T O R I E S The Efficiency Rebuttal in the New Merger Guidelines: Bad Law and Bad Economics BY MARK GLICK, R OBERT H. LANDE, AND D ARREN BUSH THE 2023 MERGER GUIDELINES (“Guide- lines”) 1 attempt to give greater deference to the text of the Clayton Act, legal precedent, and modern economics compared to previous versions. While the Guidelines accomplish these goals in many respects, when it comes to the efficiency rebuttal section, the Guidelines fall short. The Guidelines remove the opportunity for the efficiency rebuttal only for the relatively unusual “tend… to create a monopoly” cases. The Guidelines should have abolished an efficiency rebuttal for all horizontal merger cases because textual analysis, legislative history, and modern economics do not provide any basis to justify facially anticompetitive horizontal mergers by efficiencies. It is difficult to support an efficiency rebuttal for horizontal mergers using the text of the Clayton Act. Textualist analysis shows that there is no efficiency rebuttal (or defense or exception) in the words of Section 7 of the Clayton Act, which simply bans mergers that “may be substantially to lessen competition or to tend to create a monopoly.” 2 More-over, a traditionalist statutory analysis, using the Clayton Act’s legislative history, demonstrates that Congress had little or no concern for efficiencies when it enacted Section 7. The overriding goal of Congress when it passed the amendments to the Clayton Act in 1950 was to prevent the incipient formation of market power through horizontal mergers. 3 There also is controlling U.S. Supreme Court precedent—old but never overturned—holding that there is no efficiency defense for an otherwise illegal horizontal merger. And the few lower court decisions that endorse an efficiency rebuttal simply use semantics to avoid this controlling precedent and offer no justification for doing so. Only three final lower court decisions accepted an efficiency rebuttal, and they did so in a manner that was not essential to the holding. 4 On substance, these lower courts merely followed the lead of the earlier versions of the Guidelines that were heavily influenced by an unproven presumption that horizontal mergers often result in significant cost savings. 5 In contrast to these earlier presumptions, recent economic studies show that the weight of the evidence indicates that horizontal mergers do not reduce costs in a significant percentage of high-concentration mergers. 6 We are surprised that the drafters of the Guidelines did not credit this more recent empirical evidence. Even if some horizontal mergers lead to cost savings, there are theoretical economic reasons to doubt that such savings can be shown to be merger specific and verifiable in advance of the merger, or that they are passed on to consumers. The benefits from a potentially expensive and usually unpredictable efficiency inquiry are therefore not likely to result in a significant social benefit. Moreover, as many economists have pointed out, the Guidelines already provide merging parties with an efficiency “standard deduction” embodied in the Guidelines’ HHI thresholds. In sum, the Guidelines have not been completely faithful to their promise to take textualism, legal precedent, and modern economics seriously. While the Guidelines narrowed the efficiency rebuttal, there was no cause to retain it. Textualism and the Efficiency Rebuttals for Horizontal Mergers The Guidelines’ efficiency rebuttal section cannot be justified by a textual analysis of the Clayton Act. Textualism is a method of statutory analysis that starts with, and in almost all cases ends with, the precise words of a statute. 7 It gives the words and phrases in a statute the plain, fair, straightforward, and ordinary meanings they had when the statute was enacted, and it almost always ignores everything else, including a statute’s legislative history. 8 Courts that apply textualism would not create rebuttals that are not found in the text of the statute. 9 Nor could they inject their own policy preferences into the interpretation of a statute. 10 A Mark Glick is Professor of Economics and Adjunct Professor of Law, University of Utah. Robert H. Lande is Venable Professor of Law Emeritus, University of Baltimore School of Law. Darren Bush is Leonard B. Rosenberg Professor of Law, University of Houston Law Center. The authors thank Cherie Correlli and Joshua Rodriguez for excellent research assistance, James Keyte for his excellent review and edits, and Gabriel Lozada for his invaluable input. A larger exposition of the arguments set forth here is available from the authors. 2 0 · A N T I T R U S T majority of current Supreme Court Justices often use textualism to interpret statutes. 11 A textualist approach to the merger efficiency rebuttal question entails a plain and straightforward reading of the Clayton Act and asks whether an efficiency rebuttal, defense, or exception appears in the words of the statute. It does not. The Clayton Act forbids all mergers that “may be substantially to lessen competition or to tend to create a monopoly”; 12 it does not include any form of an efficiency rebuttal. 13 It would have been simple for Congress to include an efficiencies rebuttal or defense in Section 7 of the Clayton Act. For example, the 1936 Robinson-Patman Act amendment to the Clayton Act contains one: This statute forbids price discrimination whose effect “may be substantially to lessen competition or to tend to create a monopoly” 14 (the exact language contained in Section 7). But Section 3 provides an explicit efficiency defense, if defendant can show that its pricing was caused by a lower “cost of manufacture, sale or delivery.…” 15 Because Congress in 1936 included an efficiencies defense in Section 2 of the Clayton Act, but not in Section 7 of the original Clayton Act or when it passed the Celler-Kefauver Amendment in 1950, Section 7’s lack of an explicit efficiencies rebuttal or defense, would decide the question for a true textualist, even if one personally considered it desirable from a public policy perspective. Although a sound textualist analysis should stop at this point, we briefly consider further each half of Section 7’s prohibition against mergers that “may be substantially to lessen competition or to tend to create a monopoly.” There is, at best, very limited support for an efficiency rebuttal. The May “Tend to Create a Monopoly” Clause. To a textualist, this clause is clear. A plain reading of this part of Section 7 precludes an efficiencies rebuttal so long as the merger tends to create a monopoly with no consideration as to whether that monopoly would be likely to be “efficient” (i.e., to have lower costs). The plain language of Section 7 forbids all mergers that would even tend to create a monopoly—let alone actually create one—regardless of whether the resulting firm might have lower costs, and without even examining whether prices were predicted to rise, fall, or remain stable. Perhaps the plain language of this clause is what caused the drafters of the Guidelines to provide that the enforcers will not recognize an efficiencies defense for mergers that may tend to create a monopoly. If this is the case, the Guidelines should be explicit about their reasoning. For example, there is not even a footnote to explain why an efficiency rebuttal is precluded for mergers falling under the “tend to create a monopoly” clause yet remains available to those analyzed under “may be substantially to lessen competition.” It is odd for the Guidelines not even to have a section on this part of the statute. The “May Be Substantially to Lessen Competition” clause. Section 7 contains a potentially plausible textual argument for an efficiency rebuttal for mergers that only “may be substantially to lessen competition” but do not “tend to create a monopoly.” A textualist analysis of the “may be substantially to lessen competition” clause would center around what the word “competition” meant in the English language dictionaries and legal dictionaries from the 1900–1950 period. Fortunately, Justice Scalia’s treatise on textualism provided a list of such sources that he considered “useful and authoritative.” 16 These definitions are the same ones we use today. Each dictionary defined competition in terms of rivalry or acts of rivalry. 17 None defined “rivalry” in terms of a net balancing of harm, or efficiency, or defined more “rivalry” as achieving lower costs through the merger. Suppose a merger would reduce the number of rivals in a market from four to three. Using a straightforward definition of “rivalry,” a textualist could conclude that the amount of rivalry (i.e., competition) would likely decrease, even if the merged firm might experience lower costs, because on average three firms compete less—engage in less rivalry or competition—than four. However, it is possible that the drafters of the Guidelines had in mind a situation where a merger of two smaller firms resulted in cost savings that made the new entity a stronger rival—and therefore could increase rivalry although with fewer competitors. But if this is the logic behind the Guidelines’ efficiency rebuttal, why not simply provide that defendants must come forward with evidence that their merger fits this potential exception? Indeed, if this is the thinking behind the efficiency rebuttal, the Guidelines should explain how this theory can be reconciled with the fact that Congress chose not to include an explicit efficiencies rebuttal in the statute, in contrast to Congress’s decision to include one in another part of the Clayton Act. We see little evidence that the Guidelines are truly taking statutory textualism seriously when they contain an efficiency rebuttal for the section of Section 7 that affects most horizonal mergers. Legislative History and Concern for Efficiency In contrast to textualism, a traditionalist approach to statutory...