The Philadelphia National Bank presumption: merger analysis in an unpredictable world

• Author: Peter C. Carstensen
• Position: Emeritus Professor of Law, University of Wisconsin
• Pages: 219-267

THE PHILADELPHIA NATIONAL BANK PRESUMPTION:

MERGER ANALYSIS IN AN

UNPREDICTABLE WORLD

P

ETER

C. C

ARSTENSEN

*

From its decision in 1963 until at least 1974, and arguably down to the

present, the Philadelphia National Bank

1

(PNB) presumption of illegality of

mergers that result in significant increases in concentration in an already con-

centrated market has been central to the resolution of merger cases.

2

Yet when

one reads the decision, it is striking that so little is actually said about the

basis or strength of the presumption. Indeed, the bulk of the text and the dis-

sents are devoted to the esoteric question of whether or not bank mergers were

to be subject to the Clayton Act or only to the Sherman Act.

3

Nevertheless, the

decision’s significance rests on its articulation of the presumption of illegality.

The thesis of this article is that the PNB decision, building on Brown Shoe

4

and elaborated in Continental Can,

5

established a clear and useful criterion for

dealing with mergers among substantial competitors in a dynamic economy

that the agencies and courts should apply to merger analysis today. It simpli-

fied and focused the legal analysis and avoided interminable debates about the

specific probable adverse effects of the merger. Once the presumption ap-

* Emeritus Professor of Law, University of Wisconsin. I am indebted to Jon Baker, Harry

First, John Kwoka, Chris Sagers, Steve Salop, and Larry White for their comments and insights.

The editors of this Journal also provided thoughtful comments and suggestions for the improve-

ment of this article. I also greatly profited from the discussion at the Conference on the Fiftieth

Anniversary of United States v. Philadelphia National Bank held at New York University School

of Law (Nov. 15, 2013). Elaine Xu and Jose Castro provided valuable research assistance. None

of the above, however, necessarily agrees with the views expressed in this article.

1

United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963).

2

See, e.g., United States v. Bazaarvoice, No. 3:13-cv-00133-WHO, 2014 WL 203966 (N.D.

Cal. Jan. 8, 2014).

3

The majority opinion of Philadelphia National Bank runs 49 pages, of which more than 30

were devoted to the question of whether the Clayton Act’s § 7 applied to bank mergers and less

than 17 were devoted to application of the statute to the case. Philadelphia National Bank, 374

U.S. at 323–72.

4

Brown Shoe Co. v. United States, 370 U.S. 294 (1962).

5

United States v. Cont’l Can Co., 378 U.S. 441 (1964).

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220

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NTITRUST

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[Vol. 80

plied, the burden of pleading and proving an exception moved to the merging

parties whose defenses, as General Dynamics demonstrated,

6

were narrowly

confined.

The Clayton Act’s Section 7,

7

as amended by the Cellar-Kefauver Act in

1950,

8

views mergers among firms of any size in an explicitly suspicious way:

It condemns any merger that “may . . . substantially . . . lessen competition or

. . . tend to create a monopoly . . . .”

9

Congress was willing to accept some

false positives to ensure against the risk of the failure to condemn acquisitions

that in fact would cause competitive harm. Starting with Brown Shoe, the

Court began to address the debate over how to implement this standard.

10

Be-

cause until 1974, the Expediting Act compelled the Supreme Court to review

a large number of merger decisions,

11

it played the central role in fashioning,

elaborating, and applying the standard of presumptive illegality.

Since the mid-1970s, the Court has withdrawn from merger review and left

the evolution of the law to the agencies, trial courts, and, occasionally, the

courts of appeal. The result is a return to the ambiguities of the pre-PNB era.

12

The consequence is a renewed process of market concentration slightly

leavened by the development of a global market for some industries. Courts

and law enforcers should return to a strong presumption against mergers that

will increase concentration in already moderately concentrated markets. Mar-

kets are dynamic and the future is notoriously unpredictable. How such merg-

ers might specifically adversely affect competition over a period of years can

be answered as well by use of a dartboard as by high-priced economic ex-

6

United States v. Gen. Dynamics Corp., 415 U.S. 486 (1974).

7

Clayton Antitrust Act § 7, 15 U.S.C. § 18.

8

Cellar-Kefauver Antimerger Act of 1950, 64 Stat. 1225 (1950).

9

15 U.S.C. § 18 (emphasis added).

10

See, e.g., B

ETTY

B

OCK

, M

ERGERS AND

M

ARKETS

, A

N

E

CONOMIC

A

NALYSIS OF

C

ASE

L

AW

(1960); George J. Stigler, Mergers and Preventive Antitrust Policy, 104 U. P

A

. L. R

EV

. 176

(1955); Derek C. Bok, Section 7 of the Clayton Act and the Merging of Law and Economics, 74

H

ARV

. L. R

EV

. 226 (1960).

11

Prior to 1974, the Expediting Act authorized direct appeal to the Court of antitrust cases in

which the Department of Justice was a party and so the Court was put in the position of fashion-

ing a national judicial policy for merger review. 15 U.S.C. § 29 (1964). The modification of the

Act routed almost all appeals through the courts of appeal before they could reach the Supreme

Court. 15 U.S.C. § 28 (1964), amended by Antitrust Procedures and Penalties Act, Pub. L.

93–528, § 4, 88 Stat. 1708 (1974).

12

Compare United States v. Baker Hughes, 908 F.2d 981 (D.C. Cir. 1990) (affirming a find-

ing that although the challenged merger was presumptively illegal under PNB, the presumption

was rebutted because of the likelihood of future entry) with FTC v. H.J. Heinz Co., 246 F.3d 708

(D.C. Cir. 2001) (reversing a district court decision refusing to enjoin a merger since it was

presumptively illegal under PNB, and the evidence of efficiencies was insufficient to rebut the

presumption). On the ambiguity of the pre-PNB era standards for merger analysis, see Bok,

supra note 10, at 249–69 (describing alternative approaches to merger evaluation and the ambig-

uous analysis in a pending FTC case).

2015]

T

HE

PNB

P

RESUMPTION

221

perts.

13

What is essential from the perspective of competition policy is to have

a significant number of firms competing in price, quality, and innovation.

The analysis that follows starts with a doctrinal history. It traces the evolu-

tion of the presumption of illegality from its open-ended origin in Brown Shoe

to its explicit formulation in PNB with the recognition that the presumption

was rebuttable. Continental Can then clarified the basis for the presumption,

and finally General Dynamics showed the inherently limited scope of rebuttal.

The presumption in its finished form rests on the inherent fact that a merger

between competitors eliminates competition between them. When those firms

have significant market shares and the overall market is at least moderately

concentrated, the effect on competition is likely to be a substantial lessening

of competition in some way. The presumption removes the need to demon-

strate the probability of some specific competitive risk.

14

The limits of that

presumption rest again on market characteristics and not speculation on the

degree of any specific risk. The inherent logic of the Court’s presumption and

the strict limit on the rebuttal process are not transparent. The Court re-

sponded to specific cases; the underlying analytic framework has to be de-

rived from an examination of the decisions rather than taken directly from the

case-specific pronouncements.

The second part of this article turns to the competition policy reasons that

warrant the retention of and return to a more vigorous use of the presumption.

A robust presumption of illegality advances a number of important policies

aimed at preserving, protecting, and promoting competition. Moreover, the

downside of having such a presumption is at most very modest and probably

non-existent.

I. THE RISE AND MEANING OF THE PRESUMPTION OF

ILLEGALITY (A DOCTRINAL HISTORY)

A.

B

ROWN

S

HOE

AND THE

O

RIGINS

The Cellar-Kefauver amendment to Section 7 clarified that the anti-merger

provision applied to asset acquisitions as well as stock acquisitions, thereby

13

The transformation of telecommunications following and in significant part as a result of

the breakup of AT&T is a cautionary lesson for experts. The 1981 dissolution was predicated on

an assumption that wired systems would remain the essential, regulated monopoly feature of

local service. The survivors of that dissolution are still the major players in the field, but the

technology is radically changed.

14

The complex new economic modeling would retain relevance for market definition pur-

poses, and in cases where the PNB presumption does not apply, it can provide more specific

proof of a cognizable risk of competitive harm.