Pitofsky Assesses Impact of Merger Guideline Revisions

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Robert Pitofsky, Chairman of the Federal Trade Commission, said today that 18 months after adoption of new guidelines for treating efficiency claims in defense of mergers, dire predictions about the effect of the guideline revisions have proven inaccurate. Pitofsky pointed to four merger cases recently litigated in the district courts -- Staples/Office Depot; Long Island Jewish Medical/North Shore Health; Lucy Lee/Doctors Regional Medical Center; and Cardinal/McKesson. According to Pitofsky, these cases show that early fears among lawyers in both the agencies and in the defense bar were unfounded.

Speaking at the George Mason Law Review's, Antitrust Symposium on "The Changing Face of Efficiency," Pitofsky said that when the FTC and Department of Justice published revised guidelines for the treatment of efficiency claims in defense of mergers, both antitrust enforcers and defense attorneys were concerned. "From many antitrust enforcers, it was said that it was difficult enough for a plaintiff to win a merger case now that the courts have backed away from strict structural presumptions; it will be far more difficult and perhaps impossible to win cases once a new and amorphous 'efficiency defense' is introduced into merger analysis," Pitofsky said. "From many in the defense bar, and many business consultants, it was said that the revised defense is so circumscribed with qualifications -- that the efficiencies must be merger specific, clearly substantiated, not a result of reductions in output or service, likely to improve consumer welfare, and virtually never sufficient to overcome mergers to monopoly -- that introduction of this 'revised' ' defense will make no practical difference in the results reached in any specific case."

Neither of these predictions has turned out to be true. The agencies have won major cases in the face of efficiency claims. And efficiency arguments have been significant and persuasive in the FTC's decision to allow certain transactioons to proceed. "In hospital mergers, it is often (though not always) the case that significant efficiencies can be achieved through a merger, and the Commission has relied on such efficiencies in recommending that some mergers not be challenged. In the Tosco-Unocal merger, involving a combination of refineries in California, the decision not to challenge similarly was influenced by a conclusion that there were real synergies to the deal. And in Chrysler - Daimler Benz, early presentation of evidence of efficiencies influenced the decision not even to issue a second request."

Pitofsky said that the revised guidelines explicitly recognize that certain efficiencies may reduce or eliminate the likelihood of anticompetitive effects from mergers. "The most significant aspect of the 1997 revisions is that they tied efficiencies directly into competitive effects analysis. The revisions recognized that cost reductions may reduce the likelihood of coordinated interaction or the incentive to raise price unilaterally. In these and other market situations, efficiencies are likely to lead to benefits to consumers," he said. Explaining other objectives in revising the guidelines, Pitofsky said, "The revisions refine the concept that efficiencies must be attributable to the merger and could not be achieved in a less anticompetitive way ... [e]fficiency analysis now expressly incorporates a sliding scale approach ... [and] the revisions define more clearly and explicitly which efficiencies 'count' ... In particular, efficiencies must not arise from anticompetitive reductions in output, service or other competitively significant categories, such as innovation.

"To my eyes, the early returns are encouraging. Lawyers present their efficiency claims, to the FTC and in court, in a more organized and realistic way. People dealing with the FTC staff -- including Commissioners -- find that staff reactions to efficiency claims are more consistent. There are now standards that defense lawyers, enforcement officials and judges can and do turn to in arguing efficiency questions pro and con," he said.

Discussing the results of four recent cases, Pitofsky said, "It is, of course, premature to offer a definitive analysis of the role of efficiency claims in merger enforcement. It is clear, however, that some of the extreme predictions ... have not proven to be accurate." But, he said some interim conclusions can be advanced.

  • "Given the many limitations and qualifications on the successful assertion of an efficiency defense, it will be difficult to reverse what otherwise would be a finding of illegality. That is as it should be. The goal of the merger revisions was to open the door to efficiency claims as part of a competitive effects analysis in close cases -- not to give away the entire enforcement enterprise.
  • "Grossly exaggerated efficiency claims do little good for those defending the legality of a merger. Indeed they may do considerable harm in making enforcement officials generally skeptical of proferred defenses and undermining credibility with judges.
  • "With increased experience, and with the help of some direction from judges, defense counsel should become more sure and more comfortable in addressing efficiency claims. I believe that is the history of the increased attention to conditions of entry over the last several decades and is likely to be the result in this area as well."

Copies of Chairman Pitofsky's remarks, "Efficiencies in Defense of Mergers: 18 Months After," are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

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