US antitrust law – which prohibits mergers and acquisitions that may lessen competition – is enforced by both the Department of Justice and Federal Trade Commission. The agencies apply the same substantive guidelines, but seek preliminary injunctions to block proposed transactions under different laws. Critics argue the result at times depends upon which agency reviews a deal.
That may change. Pending legislation, approved by the House Judiciary Committee, would address perceived discrepancies by applying the standard now imposed on the DOJ to obtain an injunction to the FTC and removing the FTC's ability to bring administrative challenges to proposed deals. With the Senate and the House in Republican control, that bill appears more likely to become law.
Dual agency enforcement
The DOJ challenges deals under the Sherman and Clayton Acts. The FTC, created in response to concerns about deficiencies in the Sherman Act and a desire for an expert administrative agency, relies on Section 5 of the FTC Act. Both agencies regularly seek injunctions in federal court. The FTC also litigates before administrative law judges, whose decisions are reviewed by the commission and appealable to the federal courts of appeal.
Most deals valued over about $75 million must be reported to the DOJ and FTC under the Hart-Scott-Rodino Act. The agencies divide review of such deals based on "expertise" – their experience investigating the same industry – under a "clearance agreement," last revised in 1995. In some industries, which agency will get clearance is clear: beer and steel to the DOJ; hard liquor and pharmaceuticals to the FTC. In others, such as computers and telecommunications, "clearance disputes" sometimes arise.
Those who believe which agency reviews a deal matters point to perceived differences in the standard the agencies confront in seeking injunctions and the additional burden parties may face in administrative litigation with the FTC.
Preliminary injunction standards
When seeking a preliminary injunction, the DOJ relies on the Clayton Act, which authorizes "proceedings in equity" to prevent violations but contains no standard for issuing a preliminary injunction. Rather, courts apply the traditional four-part test, commonly described as weighing (1) the likelihood of success on the merits, (2) the threat of irreparable injury, (3) the possibility of harm to other interested parties, and (4) the public interest.
The FTC, on the other hand, typically relies on Section 13(b) of the FTC Act, pending administrative litigation. That statute requires "a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest."
The differences between the standards are subject to debate, as at least some courts have held that DOJ need not prove irreparable harm or harm to the public, have recognized the "public interest in having competitive markets," and have required only "serious questions … requiring further probing" or that are "fair grounds for thorough investigation." Critics, however, argue that the different standards make it easier for the FTC to prevail than the DOJ.
There are also procedural differences. In DOJ cases, courts may order the merits trial be consolidated with the preliminary injunction hearing. In such cases, the DOJ must prove the proposed merger may substantially lessen competition by a preponderance of the evidence. When not consolidated, the DOJ may continue to seek a permanent injunction when it loses at the preliminary injunction phase, but it would be in front of the same federal judge, and even if DOJ won, it would have to unwind a consummated transaction.
While the FTC is also authorized to seek permanent injunctions in federal court, it has never done so in challenging a proposed merger. Rather, the agency generally seeks a preliminary injunction pending an administrative trial. The agency often drops administrative proceedings after losing a preliminary injunction, but the fear of lengthy administrative challenges leads some to argue the FTC has a procedural advantage, making parties less likely to challenge FTC threats to block transactions.
The path to legislation
Congress is considering the Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act, following a recommendation of the Antitrust Modernization Commission (the AMC).
The AMC was created to "examine whether the need exists to modernize the antitrust laws" and prepare a report and recommendations for changes. The AMC found the potential divergence between DOJ and FTC standards created the "impression that the ultimate decision as to whether a merger may proceed depends in substantial part on which agency reviews the transaction." It recommended in 2007 that Congress "ensur[e] that courts apply the same standard in ruling on a motion for a preliminary injunction."
Court decisions have fueled additional calls for legislation. In reversing a district court decision denying a preliminary injunction against Whole Foods' acquisition of Wild Oats, the US Court of Appeals for the DC Circuit in 2008 emphasized that the district court's role was not to decide the merits but to "balance the likelihood of the FTC's success against the equities" and held that 13(b) creates a "presumption in favor of preliminary injunction relief." The court reasoned that preliminary injunctions should "be readily available to preserve the status quo while the FTC develops its ultimate case."
Lower courts have cited the Whole Foods case and invoked the "serious questions" standard, holding that an injunction should issue if the FTC "has raised questions that are so 'serious, substantial, difficult and doubtful' that they are fair ground for thorough investigation, study, deliberation and determination by the FTC."
While that language dates back to at least 1953, and was first used by the FTC in 1977, some argue that the courts are applying a "substantially reduced standard" for granting a preliminary injunction in FTC merger challenges.
The House Judiciary Committee's Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing last April, and the full committee voted in September to approve the SMARTER Act. The act was introduced two days earlier as H.R. 5402 by Subcommittee Vice- Chair Blake Farenthold, R-Texas, and cosponsored by Committee Chair Bob Goodlatte, R-Va.
The act would modify the FTC's merger authority in two key respects. It would authorize the FTC to bring merger challenges in federal court under the Clayton Act, like the DOJ, and it would remove the FTC's ability to bring administrative actions against "the consummation of a proposed merger, acquisition, joint venture, or similar transaction subject to Section 7 of the Clayton Act."
The strongest argument favoring the legislation is that companies should not face disparate legal standards or processes depending on which agency obtains clearance. The strongest argument against it is that it prevents the FTC from serving as an expert administrative agency.
FTC Chairwoman Edith Ramirez argues the bill would "fundamentally alter the nature and function of the FTC" and has the "potential for significant unintended consequences."
The commission is not unanimous, however, in its opposition. Republican Commissioner Joshua Wright, for instance, supports "the general attempt to equalize the standards," arguing that "eliminating even the perception that exists that the standard that might be applied to one's merger is different depending on whether one draws the FTC or DOJ."
Interestingly, the American Antitrust Institute, a nonprofit think tank, says that if the goal is to reconcile DOJ and FTC standards, perhaps Section 13(b) should apply to DOJ actions as well.
So what now?
With Republican control of both the House and Senate, the SMARTER Act has an increased chance of becoming law, but enactment is far from certain.
The Senate Judiciary Committee is now chaired by Chuck Grassley, R-Iowa, who says he "champions anti-trust enforcement" and wants legislation that "protects consumers" but also legislation that "reduces regulatory burdens on businesses."
Senator Mike Lee, R-Utah, is expected to chair the Subcommittee on Antitrust, Competition Policy and Consumer Rights, after serving as the ranking member for two years. Lee's spokesman said Lee will see if the legislation aligns with the priorities of the incoming Senate Majority Leader Mitch McConnell before deciding to sponsor it.
The bill must be reintroduced in and passed by the full House, and the Senate, and other priorities may take precedence. A filibuster in the Senate or veto by the president could also prevent enactment.