Remarks as prepared for delivery
Thank you to Diana Moss and to the American Antitrust Institute (AAI) for having me here today. Under the leadership of Bert Foer, and now Diana, AAI has for 18 years been a forceful advocate for vigorous antitrust enforcement; and Congress, the public and the enforcement community have greatly benefited from its candid and thoughtful views. I would like to congratulate long-time friends and former FTC (Federal Trade Commission) colleagues Jonathan Baker and Jonathan Cuneo for the well-deserved awards they just received. It is an honor to be here with them and others—renowned academics, skilled practitioners and dedicated enforcers and policy makers—all of whom care about competition, effective antitrust enforcement and vigilance against anticompetitive mergers.
The antitrust laws rest on the principles of free and fair competition. Competition is the engine that drives the economy and it must be free of substantial restraints or its beneficiaries—the American people—will suffer. It must be fair so that the economy rewards work rather than protects unearned advantage. Competition that is free and fair improves the quality of goods and services, lowers their prices and powers technological innovation. These bedrock principles have withstood the test of time.
Competition is messy. It is an unstable process—some firms fail, while others are successful and grow. Growth comes in a variety of ways. Many businesses grow organically, by building new manufacturing plants, opening new offices, hiring more workers, or creating new—and increasingly ingenious—products and services that can in turn stimulate more consumer demand. Businesses also grow through acquisition, by merging with companies that have already proved successful. Mergers may benefit the public, as when they bring together complementary assets, people and ideas that help lower production costs or spur greater innovation. But mergers between substantial competitors, especially in already concentrated industries, can give companies far too much power over the markets in which they operate, threatening the principles of freedom and fairness that undergird our economy. Competition is not free when companies are allowed to purchase their main rivals to avoid competing with them, and it is not fair when merged companies use their new-found power to harm the interests of American consumers.
Congress embraced that principle in Section 7 of the Clayton Act, which prohibits mergers where the effect “may be substantially to lessen competition.” This statute is fundamentally about risk allocation. Merging parties often employ risk-allocation terminology when negotiating the terms of a deal that could raise antitrust concerns. They debate long and hard about what will happen and who will bear the costs if antitrust authorities threaten to challenge a deal. We see all sorts of deal terms that reflect the negotiation between buyers and sellers about allocating antitrust risk: hell or high water clauses, reverse break-up fees, material adverse condition clauses and divestiture commitments and time limits.
But those private negotiations have zero effect on how antitrust enforcers view problematic mergers. In enacting Section 7 over 100 years ago, Congress decided how antitrust risk should be allocated as between merging parties and the public. The Clayton Act directs antitrust enforcers and the courts to employ a low risk tolerance, and zealously protect the American economy and American consumers from mergers that may reduce competition and may lead to higher prices, reduced output, lower quality, or lessened innovation. As the Supreme Court explained in Brown Shoe, the Clayton Act deals with “probabilities, not certainties,” and thus is aimed at stopping in its “incipiency” the potential for competitive markets to trend towards anticompetitive oligopolies or monopolies. In short, enhancing shareholder value does not justify putting consumers and competition at risk.
The Supreme Court in Philadelphia National Bank (PNB) gave further meaning to that congressional determination by establishing a presumption that “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market” is unlawful. This is a sensible way of implementing Section 7’s ban on mergers that may tend to substantially lessen competition.
The PNB presumption kicks in where the combined firm’s share will be large and the overall market will be concentrated. Empirical research shows that horizontal mergers that substantially increase concentration can create or enhance market power and increase prices. Antitrust enforcers and the courts recognize that the presumption both is sound as a matter of economics and follows directly from the allocation of risk expressed in the text of the Clayton Act. It’s axiomatic that a merger between rivals eliminates the competition that previously existed between them. We use the tools described in the Horizontal Merger Guidelines to identify the relevant market, i.e., the zone of meaningful competition between the merging companies. The parties’ combined share of the market, and the extent to which their merger increases the market’s concentration, then give us a good sense of the likelihood that competition will be “substantially lessened” if those firms merge and eliminate their head-to-head competition.
The PNB presumption is not conclusive. Nor should it be. Parties deserve—and the antitrust enforcers provide—the opportunity to demonstrate the possible beneficial effects of consolidation. But where there is serious potential for harm and any resulting benefits are either uncertain or do not significantly outweigh the potential harms, we should view these mergers with great skepticism. That is how enforcers at the Justice Department and the Federal Trade Commission view our jobs. We take the direction Congress gave us and look hard and skeptically at mergers, joint ventures and other combinations that pose a risk of competitive harm. Where we identify risk to consumers and competition, we act. The enforcement record at both agencies in the seven-plus years of the Obama Administration makes the point.
My FTC colleagues deserve lots of credit. And it is not just for Sysco and Staples 2.0. Look at hospitals. For decades, courts had been giving the green light to consolidation among local hospitals. The FTC has been turning the tide. In recent years, it has won most of its hospital-merger challenges—including ProMedica in the Sixth Circuit and St. Luke’s in the Ninth. This resulted from persistent hard work by its lawyers and economists. The FTC’s study of the hospital industry showed that increases in hospital concentration tended to raise reimbursement rates and caused patients to pay more for health care and insurance premiums. Reassured by such evidence, most courts have found presumptively unlawful mergers that substantially increase hospital concentration and hospital bargaining leverage.
The Justice Department’s recent record of vigorous merger enforcement mirrors that of our enforcement colleagues down the street. With the full-throated and much appreciated support of Attorneys General Lynch and Holder, the Antitrust Division has embraced its role as the cop on the merger beat. The numbers bear that out. In the seven-plus years of the Obama Administration, we successfully challenged or secured the abandonment of 39 mergers—a dramatic increase from the 16 successful challenges or abandonments during the eight years of the previous administration. From oilfield services—our most recent success—tax preparation, online ratings, cable TV and internet, canned tuna, cooking appliances, cell phone services, aftermarket parts and services for gas turbines, equipment for next-generation semiconductors, to monopolization of airport slots, we have done our job.
We have shown that the antitrust laws apply with equal force in nascent markets. In securing a court order and well-reasoned opinion blocking Bazaarvoice’s effort to eliminate its only meaningful competitor, PowerReviews, in selling platforms for online ratings and reviews, we made the point that even non-reportable, consummated deals can risk competition.
We take on the big ones, too. The Halliburton and Baker Hughes merger was valued around $34 billion. As our complaint made clear, that deal threatened harm to competition in 23 separate markets for oilfield products and services that were important to ensuring a domestic and independent supply of energy.
In all our merger challenges—whether or not the combined shares give rise to a presumption of antitrust harm—we are committed to developing evidence showing the risk of injury to competition. We employ a variety of quantitative and qualitative tools aimed at predicting the likely result. We make the best estimate of anticompetitive effects that our evidence allows, and we will not bring a case based on the presumption where a holistic view of the evidence shows an anticompetitive effect is unlikely. Of course, there are also times when market shares alone understate the likely anticompetitive effects of a transaction.
We look at traditional downstream effects, but we also look at upstream competitive dynamics. Sometimes upstream markets are characterized by bargaining between large companies, but that does not mean antitrust laws step aside. When the elimination of competition through merger gives rise to substantially increased bargaining leverage, that is an antitrust concern. Last year, Comcast sought to acquire Time Warner Cable. The merging cable companies did not overlap in any downstream markets. Yet the two companies combined provided almost 60 percent of high-speed broadband internet service to U.S. households. The merger would have given Comcast too much power over content providers that relied on interconnecting to its network to deliver content. It risked giving the combined firm the ability and increased incentive to thwart disruptive innovators such as Netflix, Amazon Prime and Sling TV—providers of online video services that had begun to threaten the dominance of cable video services that Comcast and others provide. Together with our FCC (Federal Communications Commission) colleagues, we forcefully articulated those concerns to Comcast, which promptly pulled the plug on the deal.
Prior experience informs our current enforcement efforts. For example, understanding the importance of takeoff and landing slots to airline competition was key to our challenge to United Airlines’ effort to increase its dominance at Newark airport. These regulatory bottlenecks can give incumbents the tools to foreclose rivals. We previously had seen how our insisting that United sell its Newark slots to Southwest when it merged with Continental in 2010 had increased flight options and lowered prices on many routes to and from that congested airport. Last year we challenged United’s effort to acquire more. It was an easy call. With 73 percent of slots—and more unused slots than any other individual airline held—United had no legitimate competitive justification for acquiring an additional 2 percent at Newark.
Prior experience informs our view of competition in telecommunications markets too. In the cellular telephone industry, competition increased following our successful challenge to the AT&T/T-Mobile deal. As new deals were proposed we looked at each on its individual merits, incorporating what we learned from prior matters. When T-Mobile proposed to acquire MetroPCS, a relatively small provider of low-cost cell phone service on a month-by-month basis, we investigated the potential for the deal to reduce competition; but we concluded it held a greater potential for consumer benefits. MetroPCS was low priced, but its geographic reach was limited. After the merger, MetroPCS rolled out that plan across much of the country using T-Mobile’s much larger network. Other proposed deals in this space looked questionable to us. When Sprint’s owners suggested that they planned to acquire T-Mobile, threatening to reduce the number of national providers from four to three, we made clear such a deal involved an unacceptable risk-reward proposition for consumers.
Let me turn next to the role of market definition in assessing the competitive risk posed by a merger. Market definition is an analytical tool that helps us measure that risk; it is not an end in itself. The central issue in merger enforcement is determining the likelihood of an adverse change in the competitive dynamic brought about by the elimination of a rival. That common-sense approach to enforcing Section 7 is reflected in the latest iteration of the Merger Guidelines and in recent decisions by the courts. The agencies and the courts look at all available evidence that helps us understand the competitive landscape. Debating endlessly the precise metes and bound of the market does not advance that cause. In AT&T/T-Mobile, we saw that competition at its core was increasingly between wireless providers with nationwide networks, even though they sold their services to consumers in local markets. In Halliburton/Baker Hughes, a key element of competition was between large, globally-integrated providers of oilfield services, even though they sold each product or service in distinct product markets. Many customers preferred providers that sold multiple oilfield products and services, and only those large providers had the resources necessary to engage in the most important innovation. In challenging both mergers, we recognized that the most effective competitors in the individually defined geographic and product markets were companies that had a breadth of offerings across a range of geographic or product markets.
As with our analysis of the relevant market, our assessments of competitive effects do not simply rely on quantitative evidence provided by expert testimony; we look at likely effects as shown by qualitative evidence, including party documents and industry and customer witness testimony. In Bazaarvoice, much of our story was told through Bazaarvoice documents. One executive candidly stated that the transaction would “[e]liminat[e]” Bazaarvoice’s “primary competitor” and provide “relief from . . . price erosion”; another observed that Bazaarvoice would have “[n]o meaningful direct competitor” after the acquisition.
We look at more than short-term price effects. In some mergers, prices can be protected from immediate post-merger increases, but competition nevertheless can still be harmed. Parties often argue that a deal that substantially increases concentration poses no competitive risk because prices are locked in by long-term contracts. Sometimes they entice customers to sign up for such contracts so the customers will not complain to us about a merger. That is clever, but it will not work. We legitimately worry about non-price effects. We take into account the impact of a merger on innovation, on the intensity of research and development and on the quality of products and services. We are also concerned about what happens to prices after the long-term contracts expire.
The presumption that mergers between substantial competitors are unlawful applies with full force in markets with price regulation. Even when price is regulated, rivalry among market participants is still important. Competition is not replaced but rather channeled into other dimensions—especially product quality and innovation. Philadelphia National Bank, it is worth remembering, involved commercial banking, where interest rates had a ceiling set by state usury laws and a floor by federal lending policies. But price competition was still important; and the Supreme Court noted that competition among commercial banks was intense across other dimensions, including “variety of credit arrangements, convenience of location, attractiveness of physical surroundings, credit information, investment advice, service charges, personal accommodations, advertising, [and] miscellaneous special and extra services.” Price regulation does not provide a justification for monopoly. The principles of freedom and fairness require competition between market participants, in regulated as well as in unregulated markets.
These concepts can play an important role in our investigations of defense-contractor mergers. Often, the Department of Defense (DoD) is the largest or only customer of those firms, and sometimes price and other contractual terms can be locked-in for a long period. But even where a contract establishes price for a weapons system, rivals compete to improve the quality of their offerings for the next round of contracting and for the next generation of products. The DoD procurement process works in concert with the Clayton Act to protect the economy against incipient losses of competition—on price, quality and innovation. As we said in our recent joint statement with the FTC about protecting competition in the defense industry, our duty remains “to maintain competition going forward for the products and services purchased by DoD” so that the “DoD has a variety of sourcing alternatives and the most innovative technology to protect American soldiers, sailors, marines and air crews, all at the lowest cost for the American taxpayer.”
Getting merger remedies right is central to merger enforcement policy. The government carries the burden of proving a violation in the first place, but once that burden is met, courts resolve doubts in favor of the government in determining whether an injunction should issue. Merging parties often argue that divestitures offered to reduce anticompetitive effects—typically by limiting the increase in concentration in affected markets—should change our view.
We don’t see it that way. A remedy should fully and squarely cure the violation. It needs to preserve the status quo ante in affected markets by effectively addressing any and all anticompetitive effects arising from the transaction. Merger law is intended to protect consumers from the potential for diminished competition. Here is where Congress’ risk-allocation determination matters a lot. Partial remedies do not cut it. They do not warrant shifting some portion of the risk posed by the merger back to consumers and competition.
Some mergers are susceptible to a negotiated settlement. Acceptable remedies come in different shapes and sizes, but they tend to share certain features. The remedy almost always needs to be structural, preserving an independent competitive force in the marketplace, rather than behavioral, simply placing limits on the merged firm’s ability to use or profit from increased market power. The structural relief should involve divesting standalone business units rather than simply product lines that need to be stripped from an infrastructure that the merging parties intend to retain. Moreover, the divested business needs to be fully capable from day one to preserve the status quo competitive dynamic in the market. Finally, the buyer of the divested business should be known and financially sound and the transaction needs to be relatively free of entanglements (e.g., supply or IP licensing arrangements) with the merged firm.
We recently saw this issue play out publicly in the Halliburton and Baker Hughes challenge. There, Halliburton repeatedly told the markets that they would “fully” address our competitive concerns. But, as our complaint made clear, their proposals fell well short of ensuring that the current competitive dynamic would be preserved: carving off assets (usually the weaker set) from one of the two firms in just some of the product markets at issue did not come close to preserving the status quo ante. We could not seriously consider a remedy where Halliburton determined which employees would go and who would stay, and where it decided what intellectual property would be licensed, what retained and what shared. We could not accept ongoing entanglements that would have prevented the buyer from acting as a free and independent competitor. And we would not accept a remedy proposal that, even putting aside those inadequacies, left unaddressed harm in some markets. In the end, there was no assurance that customers would view some unidentified third party buyer as a serious alternative to Halliburton and Schlumberger. In short, Halliburton and Baker Hughes wanted that which the Clayton Act prohibits—letting rivals combine even where competition going forward was at risk. We, and our counterparts in Europe and around the globe, thought nothing short of no deal at all was the only right outcome.
One of the first mergers I worked on when I came to the Antitrust Division three and a half years ago—ABI/Grupo Modelo—provides a useful contrast. When ABI, the largest American beer company, proposed to acquire Modelo, the largest Mexican beer company, we justifiably had concerns. ABI and MillerCoors, the other large American beer company, too often seemed to favor interdependent pricing over vigorous competition. Modelo, a much smaller third firm, often acted as a disruptive force, declining to follow ABI’s price increases. Modelo also pushed ABI to innovate. ABI initially tried to convince us to let the acquisition go ahead with a woefully inadequate remedy—some behavioral conditions placed on the merged firm and a long-term supply arrangement that would have put the importer of Modelo products totally at the mercy of ABI. But after we sued, ABI capitulated and consented to substantial structural relief. Due to that settlement, Constellation now owns Modelo’s U.S. business and a state-of-the-art brewery in Mexico sufficient to supply U.S demand today and into the future. Under a new owner, Modelo beer sales have grown dramatically in the U.S.
In merger investigations, we sometimes are faced with choosing between seeking an injunction that would preserve a sub-optimal status quo or opting for a settlement that potentially would improve on that less-than-perfect competitive dynamic. Those are not easy choices. The US Airways/American Airlines merger falls into this category. AAI respectfully—and vigorously—disagreed with our decision to allow the deal to proceed subject to our demand for significant divestitures. But here is why we did what we did. As our complaint made clear, competition in the airline industry at the time of the merger was far from dynamic. The legacy airlines too often acted like oligopolists, softening the intensity of their competition and setting their fares and their fees in interdependent fashion. They were profiting at the expense of travelers. Congestion—slot controls and gate constraints at critical airports—prevented entry and expansion by low-cost carriers that could have improved the competitive situation. An injunction blocking the merger, to be sure, would have prevented further consolidation. But it would have done nothing to upset this unhealthy status quo. On the other hand, by removing bottlenecks to competition—securing divestitures of slots at congested airports, including Washington’s Reagan National and New York’s LaGuardia, and divestitures of gates at five other concentrated airports—we opened up key markets to further competition. We also took advantage of the fact that restrictions on Dallas’s Love Field—a closer-to-downtown-Dallas alternative to the bigger Dallas-Fort Worth—were about to be lifted, strengthening the impact of the gate divestiture there. We have already witnessed substantial benefits to competition at those airports. In the years following the remedy, low-cost carriers used the divested slots and gates to expand services at Reagan National, LaGuardia, Chicago’s O’Hare and Los Angeles’ LAX. On routes affected by the divestitures, we are seeing prices that have fallen by around 20 percent and passenger volume that has expanded by around 40 percent. At Dallas airports, the number of originating passengers soared—from roughly 200,000 in 2013 to almost 1.2 million in 2015—and fares plummeted—by as much as 30 percent on flights to popular destinations like New York and D.C. Though problems remain in the airline industry, our actions secured tangible benefits for the flying public in many markets across the country.
Significant work remains. The United States is in the midst of a merger wave, with the number, size and complexity of mergers among the highest they have been in the last decade. Some of the country’s most important industries are faced with the possibility of substantial consolidation. At this moment, antitrust enforcers are reviewing two proposed mergers involving the country’s largest health insurers and investigating major consolidation among large agricultural chemical and seed manufacturers, to cite a few examples. Especially in this environment, we cannot afford to let up our efforts.
Let me close by thanking AAI for its steadfast commitment to antitrust principles and vigorous merger enforcement. As Attorney General Lynch said recently, “All of us in this room have a responsibility to stand up for people where they cannot stand up for themselves. We have a duty to defend the institutions that make this country strong: businesses that serve the consumer first; exchanges that are transparent and free of manipulation; and markets that allow for competition that is fair, vigorous, vibrant and honest. And we have a sacred obligation to protect the opportunities that make this nation what it is: a nation where every person has a meaningful chance to succeed and to thrive.”
A healthy economy depends on strong merger enforcement. The alternative allows economic power to accumulate in private hands, whether by gradual accretion or through large combinations. That is inconsistent with the basic tenets of freedom and fairness upon which our economy is built. Only through the vigilance of government enforcement; only with the continued support of those like AAI who advocate for merits-based antitrust enforcement and only by committing to the notion that companies cannot combine where consumers may be put at risk, can we protect the basic principles that keep competition strong and working to benefit all Americans.
12 Mitchell Schnurman, Year 1 after Wright: a win-win for both North Texas airports, Dallas Morning News (Jan. 15, 2016), http://www.dallasnews.com/business/columnists/mitchell-schnurman/20160115-year-1-after-wrighta-win-win-for-both-north-texas-airports.ece.
13 Loretta E. Lynch, Keynote Address at the 64th Annual American Bar Association Antitrust Law Spring Meeting (April 6, 2016), available at https://www.justice.gov/opa/speech/attorney-general-loretta-e-lynch-delivers-keynote-luncheon-address-during-64th-annual.
 15 U.S.C. § 18.
 Brown Shoe Co. v. United States, 370 U.S. 294, 317, 323 (1962).
 United States v. Phila. Nat’l Bank, 374 U.S. 321, 363 (1963).
 FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015).
 FTC v. Staples, Inc., Civ. No. 15-2115, 2016 WL 2899222 (D.D.C. May 17, 2016)
 ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6th Cir. 2014).
 Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775 (9th Cir. 2015).
 United States v. Bazaarvoice, Inc., Civ. No. 13-0133, 2014 WL 203966 (N.D. Cal. Jan. 8, 2014).
 2014 WL 203966, at *15.
 374 U.S. at 368.
 See Joint Statement of the DOJ and FTC, Preserving Competition in the Defense Industry (April 12, 2016), available at https://www.justice.gov/opa/file/863246/download.
 Mitchell Schnurman, Year 1 after Wright: a win-win for both North Texas airports, Dallas Morning News (Jan. 15, 2016), http://www.dallasnews.com/business/columnists/mitchell-schnurman/20160115-year-1-after-wrighta-win-win-for-both-north-texas-airports.ece.
 Loretta E. Lynch, Keynote Address at the 64th Annual American Bar Association Antitrust Law Spring Meeting (April 6, 2016), available at https://www.justice.gov/opa/speech/attorney-general-loretta-e-lynch-delivers-keynote-luncheon-address-during-64th-annual.