What structural presumption? Reuniting evidence and economics on the role of market concentration in horizontal merger analysis.

• Author: Sullivan, Sean P.

1. INTRODUCTION II. THE QUESTION POSED A. Market Concentration Evidence B. The Structural Presumption C. Evidentiary Presumptions 1. Substantive Factual Inferences 2. Rebuttable (Burden-Shifting) Presumptions D. Competing Interpretations III. THE CASE LAW HISTORY A. The 1960s (Philadelphia National Bank) B. The 1970s (General Dynamics) C. The 1980s and 1990s (Baker Hughes) IV. POSITIVE ANALYSIS A. The Probative Value of Market Concentration B. The Form and Procedure of Rebuttal C. The Order of Horizontal Merger Litigation V. NORMATIVE ANALYSIS A. Confusion of Horizontal Merger Analysis B. Undervaluation of Market Concentration Evidence VI. CONCLUSION I. INTRODUCTION

   The structural presumption is an important but contentious proposition in the antitrust law of horizontal mergers. It stands for the typical illegality of mergers that would combine rival firms with large shares of the same relevant market. The structural presumption is so named because the likely anticompetitive effects of such mergers are in some sense presumed to follow from the change in market structure involved in such consolidations. In one form or another, the structural presumption has undergirded all antitrust analysis of horizontal mergers since at least the early 1960s.

   Today, the structural presumption is a topic of significant debate. Though well entrenched in legal precedent, the validity and normative desirability of this proposition are increasingly questioned. Proponents argue that mergers leading to strongly concentrated markets tend to lessen competition and harm consumers. On this basis, they support a presumption that mergers leading to highly concentrated markets should generally be prohibited, even if specific theories of competitive harm are not brought forward by the party seeking relief. (1) opponents of the proposition argue that market structure should not be treated as determinative of the competitive consequences of a merger. They propose to eliminate any presumption of harm based on market concentration evidence and would generally require specific theories of harm to be raised as the basis for relief. (2)

   As things stand, consensus is not forthcoming. Across numerous academic papers, (3) conferences, (4) formal speeches, (5) informal commentaries, (6) administrative statements, (7) and judicial opinions, arguments have been forcefully articulated for and against the structural presumption with little to show for the exercise. The opposing sides are at an impasse, leaving unresolved the current and future significance of the structural presumption. This is an undesirable state of affairs for a proposition fundamental to the basic legality of business transactions that are often valued in millions to billions of dollars.

   Clarity on the role and relevance of market concentration evidence is attainable, but not by continuing to debate the legal providence of using this evidence as the basis for a presumption of anticompetitive harm. Instead, this Article asks a more basic question: what kind of presumption is it that market concentration evidence supports in the first place? Courts and commentators are often imprecise in their language and procedure when it comes to presumptions, (9) and treatment of the structural presumption is no exception. As this Article shows, debate over the use of market concentration evidence in the antitrust analysis of mergers can be focused--and largely resolved--by simply addressing a latent ambiguity in the conversation to date: namely, what do we mean when we say that evidence of undue concentration supports a presumption of competitive harm?

   There are two basic possibilities. First, the structural presumption could be a substantive factual inference based on evolving economic theory and independently probative of the competitive consequences of a merger. In this sense, competitive harm is presumed to arise as a logical implication of the increase in market concentration caused by a merger of large rival firms. Second, the structural presumption could be a formal rebuttable presumption that artificially shifts the burden of production to the defendant when undue concentration is shown. (10) In this sense, competitive harm is presumed by the mandate of a procedural device of administrative convenience, without direct reference to the probative value of the underlying evidence.

   Intermediate combinations of these two extremes are also possible, but this Article supports no middle ground. While it is assumed today that the structural presumption is a formal rebuttable presumption, this Article argues that it is actually a simple substantive inference. The distinction is important, and more than academic.

   First, this Article shows that the substantive inference interpretation is compelled by an honest reading of decades of controlling case law in antitrust. That is, the thesis of this Article is not merely an economic or theoretical argument. The need to treat the structural presumption as a substantive factual inference is a practical statement of merger law and should be followed by courts and litigants when considering the antitrust legality of horizontal mergers.

   Second, even beyond the specific antitrust case law on point, interpreting the structural presumption as a simple factual inference is the better practice as a matter of general legal principles. The substantive inference interpretation reflects economic theory, the substantive law of antitrust, and the procedural law of evidence for a fact like market concentration. By contrast, the structural presumption interpretation distorts and confuses the relevance of market concentration evidence under both substantive and procedural law.

   Third, the distinction is of practical importance. Interpreting the structural presumption as a rebuttable legal presumption complicates horizontal merger analysis without providing any benefit to justify the cost. This interpretation also perniciously obscures the probative value of market concentration evidence, likely leading to the systematic undervaluation of this evidence by courts and analysts. Paradoxically, creating a formal rebuttable presumption does not have the expected effect of imbuing weak evidence with artificial weight in this setting. Instead, it actually weakens the natural evidentiary weight of intrinsically probative evidence.

   Interpreting the structural presumption as a substantive inference corrects these problems. It also narrows and significantly resolves the extant debate on the validity and future viability of the structural presumption in merger law. Resolution of uncertainty over the role of market concentration evidence in merger analysis is immediate: this evidence supports a substantive economic inference about the competitive consequences of a merger. Further economic inquiry into the value and limits of market concentration evidence as a predictor of anticompetitive harm is needed, but all remaining questions are economic in nature. This Article obviates future legal debates about the calibration or utility of formal burden-shifting devices on this topic. Market concentration evidence deserves no more and no less than its own intrinsic probative value as evidence.

   The remainder of this Article presents the argument outlined above. The question--what structural presumption?--is posed in Part II. Context on the concept of market concentration is related to the different presumptions that this evidence might support. The following sections then compare the substantive inference and rebuttable presumption interpretations of the structural presumption, arguing in favor of the former. Part III traces the history of the structural presumption in case law, showing that the presumption is more naturally interpreted as a substantive inference than a formal burden-shifting presumption. Part IV combines current economic thinking with close attention to the rules of evidence on presumptions to show that interpreting the structural presumption as a substantive inference better fits the relevant procedure and substantive goals of antitrust law. Part V compares the normative desirability of each approach to the structural presumption. The rebuttable presumption interpretation is shown to have no advantages over the substantive inference interpretation, but many disadvantages. A brief conclusion responds to potential criticisms and proposes to restore appropriate weight to market concentration evidence by reviving the historic substantive inference approach to evidence of undue concentration.

2. THE QUESTION POSED

   Under Section 7 of the Clayton Act--the principal statutory basis for antitrust merger analysis in the United States--a merger is illegal if its effect "may be substantially to lessen competition, or to tend to create a monopoly." (11) Since at least the 1963 decision of United States v. Philadelphia National Bank, (12) courts and analysts have looked to market concentration evidence as a primary source of information on the likely competitive consequences of a merger. This is particularly true in the case of horizontal mergers: mergers of competitors in the same relevant market. In contemporary language, evidence that a horizontal merger will result in undue concentration is said to support a structural presumption that the merger is likely to have anticompetitive effects. (13) Relief from such a finding may include injunction of the merger, divestitures, or other remedies.

   But the importance of the structural presumption in both historic and contemporary merger analysis belies lurking uncertainty about what exactly is being presumed when undue concentration is proved. There are multiple senses in which market concentration evidence could be said to support a presumption of anticompetitive effects and only limited appreciation of this complexity in merger case law and the academic literature. Clarity on the role of market concentration evidence in horizontal...