August 7, 1995
REFORMING AND STRENGTHENING THE MERGER ENFORCEMENT PROCESS AT THE FTC
By Christine A. Varney
ABA Antitrust Section -- Summer Meeting
Commissioner, Federal Trade Commission. The views expressed are those of the Commissioner and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner or staff.
It is indeed a pleasure to speak to you today. I want to report on what we accomplished in the four months since Chairman Pitofsky and arrived and our merger enforcement agenda. A great number of the changes that Chairman Pitofsky instituted were begun by his predecessor, Janet Steiger, who has our deepest gratitude for revitalizing the agency and reinvigorating its staff.
Historically, the antitrust enforcement agencies have been the moving force in developing and shaping antitrust law. Now, with much Supreme Court precedent decades old, the enforcement agencies are again the crucibles for developing, as well as questioning and challenging, substantive antitrust issues. In the past few years, the agencies have responded, with guidelines on merger law, health care issues, intellectual property issues, and international issues. Nevertheless, given this important responsibility, we must constantly challenge ourselves to make sure that we have gotten an issue right.
We all share a common interest in fostering the bedrock principles that guide our agencies: that unfettered competition fosters the highest quality and most innovative products and services at the best prices, benefitting both consumers and our Country. How best to ensure vigorous competition remains, for me at least, the most difficult task. Our statutes require us to stop anticompetitive outcomes at their incipiency, to attempt to forecast the probability of anticompetitive effects in the future. Faced with such a daunting task, it is easy to question whether antitrust can answer these difficult issues. I would hope that we reject such a nihilistic critique of the law. Rather, we should view the development of antitrust theory as akin to the development of the common law, informed and improved by a continuous dialogue between theory and reality, between abstract concepts and the harsh realities of the marketplace, between lawyers, economists, business people and consumers. Consequently, as a New Democrat, I believe that government is at its best when it embraces that continuous dialogue. Healthy criticism helps government agencies to evolve. The FTC has shown that it is willing to listen and change when necessary. If there is one thing that the new Federal Trade Commission is about, it is this: that the enforcement agencies cannot do their job properly in a vacuum, walled off from the views of outside theorists, business people, consumers and other knowledgeable government officials.
Today I would like to discuss some of the changes in our merger enforcement policy over the last few months, as well as changes in the Commission's posture toward some recent individual merger cases.
Over the past few months, the Federal Trade Commission, in conjunction with the Justice Department's Antitrust Division, has sought to minimize unnecessary costs associated with merger enforcement. On March 23, 1995, the agencies announced a series of improvements for examining mergers under the Hart-Scott-Rodino Act. Most importantly, the agencies issued a joint, annotated model "second request;" established time deadlines and faster procedures for determining which agency will handle a particular merger; and adopted a formal internal appeals process for second requests in situations where private parties feel that staff attorneys are requiring unnecessary production of documents.
At the time of the March announcement, the agencies also promised to look into exempting from HSR filing requirements certain mergers and acquisitions that were unlikely to have any competitive impact. On July 21, 1995, we announced five proposed changes to the HSR filing requirements. The five changes would exempt certain purchases of goods in the ordinary course of business; certain real estate acquisitions not likely to violate the antitrust laws; acquisitions of carbon-based mineral reserves valued at $200 million or less; and institutional investors acquiring real estate solely for rental or investment purposes. We look forward to hearing from you whether these transactions or other transactions should be exempted.
The Federal Trade Commission has also sought to change the type of relief it seeks in merger challenges. The Commission in the past has routinely required prior approval for future transactions in the same market. Prior approval requirements often placed significant competitive handicaps on respondents in future transactions and generally forced the respondent to incur more costs in coming forward with evidence than might otherwise be the case. This is not to say that prior approval did not have some benefits. Particularly when a company is engaging in a pattern of small incremental acquisitions in a market, prior approval requirements can ensure that the relief obtained is able to restore competition completely, and not just partially. The reality, however, is that the Commission's experience with the HSR program has shown that the most competitively troublesome transactions are reported under the HSR program, so that a prior approval requirement is generally unnecessary. Consequently, on June 22, 1995, the Commission announced that it will no longer require prior approval in consent orders. The Commission will, however, continue to include narrow prior approval provisions where there is credible risk that the parties will engage in another anticompetitive transaction.
The Commission has also provided important clarification on its merger enforcement policy in instances where a federal district court has denied a preliminary injunction. We will no longer automatically commence administrative litigation after losing a preliminary injunction. Such action will be infrequent and determined on a case-by-case basis. In addition, the FTC's administrative litigation process will be streamlined. In May, Chairman Pitofsky formed an FTC task force, chaired by General Counsel Steven Calkins, to reform the administrative litigation process.
The Commission has also sought to improve its cooperative efforts in merger enforcement with state Attorneys General. So long as statutory requirements and the confidentiality of information is preserved, we believe that information sharing between state Attorneys General and the FTC can only help both sides in better analyzing the competitive effects of mergers. Under a 1992 Program put in place by then Chairman Janet Steiger, the Commission has been providing participating states (who must submit a one-time certification of confidentiality to the Commission) with certain information and with limited analysis where the merging parties have waived federal confidentiality protections that otherwise limit federal-state cooperation. The Commission's new policy provides that states may receive two types of information previously unavailable in HSR investigations:
- information obtained from third parties, although the identity of third parties and other identifying information will continue to be protected unless the third party consents to disclosure; and
- staff analytic memoranda, once the Commission has determined whether or not to challenge the merger. This new policy will apply to all merger investigations.
The Commission is also rethinking how it handles merger investigations where parties are under time pressure to close deals. This is a thorny issue. On the one hand, the Commission must have evidence sufficient to find reason to believe that a merger will violate the law before it will accept a settlement of a matter or challenge a merger in litigation. Developing evidence, however, cannot be done in a day -- it takes time. On the other hand, respondents often have valid and important reasons why they need to close deals quickly. The Commission has recently accepted a settlement that may provide a solution to this conundrum in certain limited instances. The settlement concerned Hoechst's proposed acquisition of Marion Merrell Dow. Hoechst AG, Marion Merrell Dow, and the Dow Chemical Company entered into a "hold separate" agreement with the Federal Trade Commission under which Hoechst can acquire Marion Merrell Dow's stock, but cannot exert control over its operations, pending the conclusion of the Commission's investigation of the competitive impact of the acquisition. Hoechst has agreed to a broad settlement that would restore competition in each drug category that could possibly be harmed by the acquisition by requiring Hoechst to divest certain pharmaceutical businesses. In other words, Hoechst has agreed to give the FTC all of the relief it could possibly want. At the conclusion of the FTC staff investigation, the Commission may determine whether it needs any, some or all of that relief. Later this week, Bill Baer, the new Director for the Bureau of Competition, will be talking more about the Hoechst settlement, and I encourage you to hear what he has to say about it.
The Commission has not only been rethinking its procedures for merger enforcement; it also has been rethinking individual cases. As you know, every merger settlement at the FTC is placed on the public record for public comment. The Commission has found that public comment can often be an important reality check to make sure that we got it right the first time. To my mind, it is a sign of strength that the Commission is willing to admit that it made a mistake and change its posture toward a particular case. Two recent examples show the importance of the public comment period and, also, the willingness of the FTC to re-examine earlier decisions.
The Chairman already discussed one case, Eli Lilly. In that case, the Commission made final a proposed settlement with Eli Lilly, concerning its acquisition of PCS Health Systems, Inc., pharmacy benefits management ("PBM") company. As you know, this acquisition is the latest of three vertical acquisitions where pharmaceutical companies acquired PBM's. The original settlement was designed to forestall the most likely anticompetitive concerns emanating from this vertical acquisition. During the public comment period, the Commission received many valuable comments concerning the settlement, suggesting that further relief might be appropriate. After considering the public comments, the Commission still believed that, based on the evidence currently before it, the original order provided the most appropriate relief available. Nevertheless, the Commission indicated in a statement that it remains concerned that this acquisition, together with other vertical integration in these markets, could lead to anticompetitive consequences that might require additional relief. In light of the rapidly evolving nature of the markets for pharmaceutical products and PBM's, the Commission stated that it would continue to monitor this industry carefully, both through ongoing investigations elsewhere in this market and Lilly's compliance obligations under the order. The Commission expressly retained the right to reopen the Lilly order and seek additional relief if necessary to forestall further anticompetitive conduct, including seeking to require Lilly to divest PCS outright.
I believe that the public comment period provided invaluable information on these markets, and I would like to thank those who provided us with them. The comments provided extensive, well-thought out and valuable information about this rapidly evolving market, as well as concrete suggestions. Because PBM's did not exist six years ago, we found that this new information gave us a much clearer picture of a quickly evolving and complicated area than might otherwise have been possible.
In the second case, concerning Nestle's acquisition of Alpo PetFoods, the Commission rejected a proposed settlement that would have required Nestle to divest a canned cat food plant in Fort Dodge, Iowa. The Commission initially believed that the merger could substantially reduce competition for canned cat food. During the public comment period, however, the Commission received what I can only describe as a flood of comments opposed to the case. These commenters -- many of whom worked at the plant or lived in the Fort Dodge community -- provided substantial evidence showing that the divestiture remedy was likely to diminish the plant's output, possibly leading to its closure and the loss of many jobs. Our own independent re-assessment of all the evidence accumulated in the case, including the receipt of some new information, cast substantial doubt on the entire antitrust case: from relevant product market definition -- the original complaint posited that dry cat food was separate from canned cat food -- to evidence of market concentration and entry conditions. Consequently, given this turn of events, the Commission determined to reject the consent and close the investigation.
If by our actions in the last few months we have shown a willingness to engage in a new dialogue over our merger enforcement program and individual competition cases, we have also moved on the consumer protection front to engage in a more extensive dialogue with business and consumer groups. For example, the rulemaking process for the soon-to-be-published Telemarketing Sales Rule reflects an overall Commission approach that welcomes and supports extensive public involvement. In addition to the usual Notice and Comment period, the Commission also conducted a three-day public workshop in Chicago for interested parties to express their views further to Commission staff and myself. After reading and listening to the public comments, we realized that the initially proposed Rule did not quite get it right -- that is, it did not strike the appropriate balance in attempting to prohibit fraudulent telemarketing activity without unduly burdening the legitimate industry. The Commission then published a revised Rule for additional public comment.
In the future, the Commission hopes to continue the dialogue with the public about antitrust and consumer protection enforcement priorities by hosting a series of hearings on major issues facing the FTC. The Commission has recently announced that it will hold hearings this fall to determine whether changing economic factors, such as the growth of high-tech industries and the increasingly global nature of markets, require adjustments in current antitrust and consumer protection enforcement. These hearings underline the unique historical role of the FTC as an independent agency well-positioned to examine all aspects of American industry.
The FTC has a great deal of expertise in the subject of these hearings,since it has reviewed many high-tech transactions. I wanted to mention two of the most recent. The first example of the new thinking at the agency is a vertical merger enforcement action, Silicon Graphics Inc., which involved an acquisition by Silicon Graphics, a dominant workstation producer, of two of the largest downstream high-end entertainment graphics software producers, Alias and Wavefront. I love this case because it involves the companies that make the wonderful special effects in films like Jurassic Park and Terminator 2. The complaint alleged that Silicon Graphics has a 90 percent share of the market for the workstations that run entertainment graphics software, while the two acquired companies have a dominant position in the software market. The Commission was concerned that the combination could foreclose competition in both the upstream and downstream market, ultimately raising barriers to entry.
The Commission's settlement placed conduct restrictions, designed both to facilitate the entry of other workstation producers into this market and prevent actions that could disadvantage independent software producers. The first provision is aimed at restoring competition in the entertainment graphics workstation market. Because Alias and Wavefront are industry standards with an installed base, other workstation producers would be less likely to enter, unless Alias or Wavefront software was made compatible with their workstations. The proposed consent agreement seeks to solve this problem by requiring that Alias's two major entertainment graphics software programs are made compatible with another workstation producer's product. The second set of provisions are designed to prevent the combined entity from discriminating against independent software producers, thus ensuring competition in the software market. The proposed agreement would require Silicon Graphics to maintain an open architecture and publish its application programming interfaces so that software developers other than Alias and Wavefront could develop entertainment graphics software for use on Silicon Graphics' workstations. In addition, the agreement would require Silicon Graphics to offer independent entertainment graphics software companies participation in its software development programs on terms no less favorable than it offers other types of software companies.
The second case highlights the unique interplay of intellectual property, antitrust and developing theories of innovation markets. Boston Scientific wished to acquire its leading competitor in the intravascular ultrasound (IVUS) imaging catheter business, Cardiovascular Imaging Systems, Inc. ("CVIS"). Thereafter, Boston Scientific also sought to acquire SCIMED Life Systems, Inc., which allegedly was within two to three years of introducing its own IVUS catheter. IVUS catheters are used in the diagnosis and treatment of heart disease. By using IVUS, cardiologists can generate an ultrasound image of the inside of arteries, providing detailed information useful in diagnosis and treatment. The Commission alleged that the merged company would have 90 percent of the domestic IVUS catheter market. The Commission also alleged that, although SCIMED was not currently producing IVUS catheters, it had conducted substantial research and development in the IVUS field and had developed a prototype imaging guidewire, making it a likely entrant into the market within two to three years.
In its consent agreement, Boston Scientific agreed to grant a broad royalty-free, non-exclusive license to use its own patents and the acquired companies' patents and technology to a new entrant in the IVUS catheter market, as well as the non-patented research and development of CVIS and SCIMED related to imaging guidewire technology. The concept behind the settlement is to launch a strong, independent competitor in the U.S. IVUS catheter market. The settlement gives the licensee a wider array of patents and research and development -- indeed, including even Boston Scientific's own patents -- than is normally required in licensing remedies. The reason for this was that there had been a history of patent and licensing disputes in this market. Although the companies had in fact continued to compete on innovation over time, the history of patent litigation had rendered that competition less robust than it otherwise would have been. Given this history and what appeared to be a minefield of patents obstructing competition on innovation, the order was crafted in order to ensure that the licensee would be able to undertake future research and development from a strong technology portfolio, free of any possible dispute or cloud.
I think these enforcement actions demonstrate that the FTC is uniquely situated to host these hearings. Before I tell you what the hearings are about, let me assure you what they are not about. The hearings are not designed to question the fundamental notion that competition is good for both consumers and competitors -- namely, that strong rivalry in domestic markets helps U.S. firms compete successfully throughout the world. The hearings are also not designed to tackle thorny issues surrounding the interface between international trade laws and antitrust. For example, these hearings are not about recommendations that international trade law and antitrust should converge, or even that antitrust laws around the world should be harmonized. Finally, these hearings are not about abstract theory divorced from reality, nor are they intended as some kind of an informal opinion poll about particular enforcement issues.
Now, let me tell you what these hearings are about. They are designed to provide a forum to make sure that antitrust enforcement is keeping up with increased globalization and innovation -- a reality check if you will on the way we enforce the antitrust laws. We hope to obtain hard evidence to serve as the basis for making recommendations to change policy in concrete ways. We are interested in fact-based, concrete suggestions: for example, what questions should be asked to get a better handle on market definition in an increasingly global market; what kind of documents are important in looking at innovation issues; what type of information is readily available concerning market definition, competitive effects and the like. Specific issues most relevant to merger enforcement include:
- whether the traditional antitrust approach to measuring market power fully accounts for global or innovation-based competition
- whether merger analysis should revise its approach to claims of efficiencies, and also to claims of corporate failure and distressed industry conditions
- whether competition policy needs to be adjusted when applied to industries that compete more directly through innovation, rather than price.
The hearings are intended as a two-way dialogue providing you with an opportunity to understand enforcement staff's thinking on some of these issues. The approach of staff at the enforcement agencies has evolved to keep up with changing economic forces and, thus, these hearings will offer you a chance to compare some of the new ways our staff is approaching merger investigations. Ultimately, Susan DeSanti's Policy shop, which will be conducting the hearings, hopes to hammer out some policy recommendations for the Commission to consider. I encourage you to participate in whatever way you want in what promises to be a forum that will help set the agenda for antitrust law as we near the turn of the century.
The past few months have been an exciting time to be at the Federal Trade Commission. We have made tremendous progress in streamlining our merger enforcement procedures. Our actions both concerning procedures and particular cases demonstrate a continued willingness to engage in a dialogue with all interested parties and a new-found flexibility to admit when we need to modify or change course. I trust that the hearings planned for the fall will continue and strengthen this dialogue. These actions all demonstrate that the FTC remains a strong and responsive government agency that will always strive to better serve the American people.