The Competition Mission is based upon the fundamental premise of the antitrust laws that competition produces the best products and services at the lowest prices, spurs efficiency and innovation, and strengthens the U.S. economy. Unreasonable restraints on competition harm everyone, from consumers to businesses to workers. It is the Commission's job under its Competition Mission to ensure that markets function competitively by eliminating unreasonable competitive restraints, preventing anticompetitive mergers and acquisitions, and encouraging governmental reliance on market solutions. In mergers and acquisitions alone, the Commission has saved consumers approximately $24 billion in each of the last two fiscal years.
Given the Commission's flat resources in the midst of a growing economy and the unprecedented levels of mergers and acquisitions, the challenges to accomplishing this Mission are formidable. During fiscal year 1997, the Competition Mission focused its limited resources on bringing enforcement actions that make a positive difference in consumers' lives, minimizing the burden Commission actions place on business, and continuing to refine the agency's enforcement policies to account for dynamic changes in both the economy and antitrust analysis.
Making a Difference in Consumers' Lives.--The Competition Mission has focused its enforcement actions in markets and industries that matter most to consumers. In fiscal year 1997, more than 70% of the Mission's resources, measured by staff hours devoted to large cases, were at work in six key areas of the economy: health care, pharmaceuticals, information and technology, energy, consumer goods and services, and defense (where the consumer as taxpayer is the beneficiary). The agency's enforcement actions against proposed mergers in these key industries have made a difference. The Commission's actions:
- Blocked the planned merger of Staples and Office Depot, the Nation's two largest office supply superstores. It is estimated that consumers nationwide would have paid $1.1 billion more for office supplies over a five-year period if the merger had proceeded.
- Prevented the merger of the only national medical equipment rental companies in the United States, Mediq and Universal Hospital Services. Because the combined firm would have had the monopoly power to raise prices above competitive levels, the Commission filed a preliminary injunction action in federal court and the parties abandoned the transaction.
- Required Ciba-Geigy and Sandoz to provide necessary intellectual property rights to medical researchers to continue potentially life-saving gene therapy development, an action that ensured critical medical research would not be impeded by the merger of Ciba-Geigy and Sandoz.
- Protected American consumers' tax dollars by preventing anticompetitive combinations in the defense industry. Boeing and Rockwell entered into a consent order that will prevent Boeing's acquisition of Rockwell's Aerospace and Defense business from reducing competition and innovation in the markets for high-altitude-endurance unmanned air vehicles and space launch vehicles.
- Prevented auto salvage yards, auto insurance companies, and consumers from having to pay monopoly prices for computerized information systems and trading networks vital to the used auto parts market. The Commission's order required Automatic Data Processing to divest the rival computerized system and trading network it had acquired in 1995 after violating the Hart-Scott-Rodino (HSR) Act filing requirements.
- Ensured for consumers and businesses in the Southwest the benefits of competitive prices for natural gas by requiring Phillips Petroleum, which had acquired ANR Pipeline Company, to divest substantial natural gas gathering services in certain sections of Oklahoma.
- Required the divestiture of 10 supermarkets in Mississippi and Florida after the merger of Jitney Jungle and Delchamps. The divestiture ensured that competition by supermarkets would continue in those areas.
- In two separate challenges to drug store mergers, protected consumers from higher prices by securing the divestitures of over 200 stores in four states along the East Coast.
Commission actions in nonmerger cases, although often less visible than faster paced merger enforcement, also addressed anticompetitive conduct that threatened consumer welfare. For example, the Commission's actions:
- Prevented associations of health care providers from collectively increasing prices to consumers, government agencies, and third-party payers. In the case Mesa County Physicians Independent Practice Association, Inc., the Commission accepted a settlement agreement of an administrative complaint alleging that the Colorado physicians organization conspired with its members to fix fees charged for their services with third-party payers of other health plans. In another case, College of Physicians & Surgeons of Puerto Rico, the Commission and the Commonwealth of Puerto Rico joined together to halt boycotts and other illegal conduct by a physicians group against the Puerto Rican government's managed care plan for indigents. The Commission's consent order resulted in a $300,000 restitution payment by the College to the Puerto Rico Department of Health.
- Challenged practices that could increase the price of toys. A Commission Administrative Law Judge found that Toys "R" Us, the Nation's largest toy retailer, extracted agreements from toy manufacturers to stop selling some of the country's most popular toys to warehouse clubs or to put the toys into more expensive combination packages. Based upon the evidence submitted, the Judge found that the actions of Toys "R" Us had harmed consumers, limiting their ability to obtain lower-priced toys from the clubs or to compare prices easily. The case is currently before the Commission on appeal.
- Prevented an association of dentists from denying important advertising information to consumers. In the case California Dental Association, the Commission issued an order finding that the association unlawfully restrained truthful and nondeceptive advertising regarding the price, quality, and availability of dental services. The U.S. Court of Appeals for the Ninth Circuit affirmed the Commission's order. A petition for certiorari is pending before the U.S. Supreme Court.
- Protected farmers from paying higher prices due to vertical price fixing. In American Cyanamid, the Commission accepted a consent order settling charges that the firm had violated the antitrust laws by fixing the resale prices of agricultural chemical products through a rebate program that induced dealers to sell at or above specified minimum prices. In a coordinated enforcement action by 50 state Attorneys General, $7 million in damages was recovered.
Minimizing the Burden on Business.--While the Commission looks out for consumers' interests, it attempts to do so with the least possible burden on business. Obviously, the Commission cannot avoid all burdens on business if it is to investigate and enforce the law. The agency constantly reassesses its policies and procedures, however, to see where it can streamline them or eliminate any unnecessary requirements. During fiscal year 1997, for example, the Commission:
- Revised, in coordination with the Department of Justice, the Horizontal Merger Guidelines to clarify the way the agencies analyze efficiency claims and determine whether claimed efficiencies are likely to lead to lower prices, the creation of new products, or enhanced competition in the marketplace.
- Improved the Premerger Notification process by adding a Premerger section to its Web site to make more accessible the existing guidance on HSR Act filing requirements.
- Responded to an estimated 44,000 phone calls to help business in complying with the HSR Act.
- Penalized a supermarket chain for allowing assets it had agreed to divest to deteriorate significantly before they could be sold. In Schnuck Markets, Inc., the Commission obtained a $3 million civil penalty and divestiture of other stores under terms of the proposed settlement agreement.
- Implemented the Commission's policy to review cases in which a District Court has denied the Commission's request for a preliminary injunction in order to determine if further administrative litigation is warranted.
- Continued its commitment to work with state antitrust agencies to leverage antitrust resources. The Commission has engaged in several joint investigations with the states, including Staples/Office Depot, American Cyanamid, and College of Physicians & Surgeons of Puerto Rico, enabling it to conduct thorough investigations with fewer Commission resources and reducing the burden on business by allowing joint interviews and joint requests for documents and information.
- Cooperated with foreign antitrust agencies to enforce the antitrust laws in cases where the actors and effects may be subject to scrutiny in foreign countries as well as in the United States, including such transnational mergers as Ciba-Geigy/Sandoz.
Forward-Looking Antitrust Enforcement.--Rapid technological development and increased globalization of the marketplace have increased the need for dynamic antitrust enforcement. The Commission continues to refine its analysis to adapt to these changes and to structure the least intrusive enforcement that effectively protects free and competitive markets. During fiscal year 1997, the Commission:
- Held hearings on the appropriate role of antitrust enforcement regarding joint ventures. The hearings included testimony from economic and legal scholars, business executives, consumer groups, state enforcement authorities, and foreign enforcement authorities.
- Considered the critical importance in merger analysis of "innovation markets," or the competition between companies in the research and development of new products that currently may not be available to consumers. For example, in Ciba-Geigy/Sandoz, the Commission's consent order required the divestiture of intellectual property necessary for scientists to continue research and development toward novel, life-saving gene therapy products that are expected to be used for many diseases, including hemophilia and cancer. As a result, consumers may enjoy the benefit of competition in the products of this research when they begin to appear in the near future.
- Protected innovation and competition in the market for "routing" software, used in the design of microchips to map out the connections between millions of miniature components. The Commission's consent order in Cadence Design Systems, Inc. requires Cadence to allow participation by other developers of routing software in its programs for the development of interfaces between Cadence products and the software design tools of other manufacturers.
Programs Under the Competition Mission
The Commission implements its Competition Mission through three major program areas: the Hart-Scott-Rodino (HSR) Premerger Notification Program, the Mergers and Joint Ventures Program, and the Nonmerger Program.
Premerger Notification Program
Through its implementation and enforcement of the HSR Act, the Premerger Notification Program helps protect consumers from anticompetitive mergers. Prior to enactment of the Act, mergers often were consummated and assets and operations combined before the antitrust agencies learned of the transactions. It was then difficult, if not impossible, to "unscramble the eggs" and restore the benefits of a competitive market. The HSR Act requires entities that meet certain size requirements and that plan significant acquisitions to file notice with the Commission and the Antitrust Division of the Department of Justice. Consummation of the merger must be delayed for statutorily prescribed periods of time. The HSR Act thus allows the antitrust agencies to analyze and take action against anticompetitive mergers before they actually take place.
The program strives to minimize the burden on businesses that are required to comply with the HSR Act. To improve voluntary compliance, the Commission's Premerger Office provides assistance to filers in understanding the Act's requirements, primarily through responses to tens of thousands of telephone inquiries annually.
The HSR Act has become an essential component of antitrust enforcement. In particular, the Commission's effective enforcement of the Act has made parties to mergers and acquisitions more certain of the timing of stages along the investigation path, enabling them to schedule business activities with greater confidence. Similarly, the Commission can make more reliable enforcement decisions because it has access to most of the relevant data concerning the competitive effect of a proposed merger. In sum, the Premerger Program is an important example of efficient antitrust enforcement that protects the consumer's interest in a competitive market while minimizing costs to business.
Premerger Notification Enforcement Activities
During fiscal year 1997, the number of premerger filings increased for the sixth year in a row, totaling 3,702. This number of filings represents a 20% increase over the number reported during fiscal year 1996 and a 142% increase over the 1,529 filings recorded in fiscal year 1991.
The Premerger Office works closely with the private bar to minimize unnecessary filings and to make the entire process work as efficiently as possible. The Premerger Office's activities in fiscal year 1997 included responding to an estimated 44,000 phone calls seeking information under the HSR Act. Approximately one-half of the calls concerned whether a proposed transaction was covered under the reporting requirements, while the other half concerned details involved in completing and filing notices of proposed transactions.
The HSR Act can ensure swift and efficient review of proposed mergers only if the parties comply with the Act's requirements and provide complete information. When parties fail to comply with these requirements, the Act provides for the imposition of civil penalties. During fiscal year 1997, the Commission collected $5.752 million in civil penalties after obtaining consent decrees for violations of the HSR Act. In the settlements:
- Mahle GmbH, a German automotive parts manufacturer, and Metal Leve, S.A., a competing Brazilian automobile parts manufacturer, paid a combined $5.602 million, the largest civil penalty ever paid for an HSR violation;
- Harry E. Figgie, Jr., paid a civil penalty of $150,000 for an alleged failure to file.
Mergers and Joint Ventures Program
The Mergers and Joint Ventures Program seeks to prevent mergers and acquisitions that are likely to harm competition and consumers. The program also investigates joint ventures and interlocking directorates among competing firms that may have similar anticompetitive effects. The program has three essential components:
- Detecting potentially harmful mergers before they occur by monitoring merger activity and screening all significant mergers, in conjunction with the Premerger Notification Program;
- Investigating those mergers that the screening process has targeted for further inquiry; and
- Taking appropriate action to prevent (or undo) those mergers or portions of mergers that, after investigation and analysis, appear likely to substantially lessen competition.
In the case of some mergers, the Commission can act to prevent harm to consumers and competition only by preventing the merger or, in rare cases, by undoing it. In many other cases, however, competition can be preserved by more narrowly tailored relief that still allows the overall merger or transaction to proceed. Determining the kind of relief necessary entails investigations that are designed to answer fundamental questions about the merger and the affected relevant product and geographic markets:
- Is the merger likely to result in a lessening of actual or potential competition, increase the market power of the merging firms, and lead to market dominance or a significant increase in the likelihood of collusion?
- Is the merger likely to increase barriers to entry or expansion or to foster interdependent conduct among firms?
To protect consumers from mergers that may substantially lessen competition, the most efficient and cost-effective strategy is to prevent mergers before they occur. The Commission has authority under Section 13(b) of the Federal Trade Commission Act to seek a preliminary injunction in federal district court to stop a merger pending administrative adjudication, but more often, it resolves the competitive problem through consent agreements with the merging parties. In addition to injunctive relief, the Commission may rely on administrative remedial powers to restore competition lost as a result of a merger. In either case, the principal (though not exclusive) remedy is the prompt divestiture of assets sufficient to restore competition.
Merger and Joint Ventures Enforcement Activities
During fiscal year 1997, Commission staff opened investigations on 82 transactions, including 32 initial-phase investigations (9 of these were later converted to full-phase) and 50 full-phase investigations. The Commission issued requests for additional information or documentary materials under the HSR Act ("second requests") for 45 of these proposed transactions. Preliminary injunction cases were authorized in two transactions. One of these cases, Mediq, was subsequently abandoned by the parties once the complaint was authorized. In the other transaction, the proposed merger between Staples and Office Depot, a federal court granted the Commission's motion for a preliminary injunction, and the parties then abandoned the transaction. Finally, parties abandoned five transactions after the Commission issued second requests for information.
During the year, the Commission authorized an appeal of a federal court decision denying the Commission's 1996 motion for a preliminary injunction to block the proposed merger of Butterworth and Blodgett, two hospitals in the Grand Rapids, Michigan, area. The Sixth Circuit upheld the lower court's decision on July 6, 1997. On September 26, 1997, the Commission ended its administrative challenge to the merger, concluding that further litigation was no longer in the public interest. The Commission's action was in keeping with its policy to determine on a case-by-case basis whether to pursue administrative litigation in merger cases in which the federal court had denied the Commission's motion for a preliminary injunction.
The Commission's merger investigations included a number of complex and significant transactions in the defense, health care, and computer and software industries, where Commission efforts helped protect competition in the midst of intense industry restructuring as a result of rapidly changing economic forces and technology. Notable examples include the merger between Boeing and Rockwell, the merger between Ciba-Geigy and Sandoz, and the acquisition of Cooper & Chyan Technology by Cadence Design Systems.
During the year, the Commission also accepted for public comment 17 new consent agreements (of which 15 were also finalized during the year) in the following industries:
|Defense and technology||3|
|Oil and natural gas||2|
|Supermarkets and food||2|
The Commission continued to improve the analysis of, and the remedies for, the anticompetitive effects of proposed mergers and made significant gains in achieving divestitures more quickly. During fiscal year 1997, the Commission built on efforts begun in earlier years to shorten the time to accomplish divestitures ordered to remedy otherwise anticompetitive mergers. The Commission has done so by insisting, where appropriate, that signed purchase agreements for divestiture assets be provided to the Commission before the order becomes final. Other provisions that advance this goal include shorter divestiture periods, broader asset packages, and so-called "crown jewel" provisions, which provide for the divestiture of an alternative, generally more marketable package of assets by a trustee if the respondent fails to divest the basic package of assets by a specific date. Enforcement of the terms of these orders also has been made a high priority, with stringent penalties assessed for noncompliance.
Finally, the Commission continued its commitment to work with state antitrust agencies to coordinate antitrust enforcement. The Commission's regional offices have particularly close working relationships with state antitrust enforcers. Staff from both the regional offices and the Bureau of Competition conduct joint and parallel antitrust investigations with the states. Last year, the regional offices hosted two "Common Ground" conferences, bringing together representatives of state Attorneys General offices, several Commission regional offices, and the Department of Justice. The conferences were designed to discuss substantive antitrust issues and to explore areas where the state and federal agencies could work together to promote consumer welfare. Plans are underway for future conferences.
The Commission's Nonmerger Program includes three areas of potential anticompetitive conduct: horizontal restraints, distributional arrangements, and single firm violations. The Horizontal Restraints Program is directed at investigating collusive or other collaborative activities involving direct competitors that may harm consumers, such as price fixing. Such activities can harm consumers by raising prices and reducing the quantity and quality of available goods and services. Although some joint activity among competitors, such as setting standards and promulgating legitimate ethical codes, can be procompetitive and even essential, such agreements also can be abused in a way that harms consumers.
The Distributional Restraints Program seeks to protect consumers from anticompetitive consequences that arise from certain vertical agreements among firms in the chain of distribution - from producers to distributors to retailers. An agreement on minimal resale price between firms in a vertical relationship is an example of a distributional practice that has a harmful effect on consumers and is considered per se illegal. The Commission investigates distributional restraints carefully to avoid challenging vertical agreements that may benefit consumers.
The Single Firm Program seeks to prevent firms from creating or maintaining market power through conduct that is injurious to consumer welfare. A single firm with market power can use various anticompetitive practices to reduce output below the competitive level and to maintain supracompetitive prices, thereby injuring consumers and misallocating resources. While neither the existence of market power nor the attempt to gain market share is unlawful in itself, achieving market power by practices that exclude competition is unlawful. The principal challenge of the Single Firm Program is to distinguish anticompetitive conduct from conduct that merely constitutes vigorous competition. Conduct investigated under this program that may be unlawful includes exclusive dealing arrangements, tying arrangements, and price and non-price predation - all of which can have the effect of driving competitors from a market through means other than vigorous competition on the merits.
Nonmerger Enforcement Activities
Under the three nonmerger programs, the Commission opened 38 initial-phase investigations during fiscal year 1997. Ten of these investigations were converted to full-phase, along with 15 others that had been opened in earlier years.
The Commission accepted three consent agreements for public comment (with two of them made final during the year), finalized three other consent agreements, and modified two others. The consent agreements accepted for public comment included:
- American Cyanamid (resale price maintenance on agricultural chemicals);
- College of Physicians & Surgeons of Puerto Rico (physician boycott to demand price-related changes under Puerto Rico's health care plan for the indigent); and
- Montana Associated Physicians, Inc. (concerted action to obstruct managed care plans, to set prices, and to thwart cost containment measures).
During fiscal year 1997, adjudicated decisions were issued in three significant nonmerger matters:
- In Toys "R" Us, an administrative law judge upheld the Commission's complaint and ruled that Toys "R" Us entered into illegal vertical agreements with toymakers to restrict sales to warehouse clubs and facilitated horizontal agreements to prevent competition among toy manufacturers. The initial decision is currently on appeal before the Commission.
- In California Dental Association, the Court of Appeals for the Ninth Circuit upheld the Commission decision finding antitrust violations for restrictions against truthful, nondeceptive advertising involving the price, quality, and availability of dental services. A petition for certiorari is pending before the Supreme Court.
- A Commission decision in International Association of Conference Interpreters upheld portions of the complaint regarding the Association's rules, fees, and expenses, but found insufficient evidence to support charges concerning rules that governed non-price-related practices.