Background

In a letter to Makan Delrahim, the head of the DOJ’s Antitrust Division, Senators Richard Blumenthal (D-CT) and Amy Klobuchar (D-MN) described the ticket industry as “broken” and they lamented the “exorbitant fees and inadequate disclosures” in the ticket buying process.

According to their letter, Live Nation’s acquisition of Ticketmaster in 2010 has resulted in the merged firm obtaining too much control over the concert business.  “The Ticketmaster-Live Nation merger has contributed to consumers’ difficulties in the ticketing market,” the two senators wrote in the letter.  In approving the Live Nation/Ticketmaster merger, the DOJ entered into a 10-year consent decree with Live Nation prohibiting the firm from certain behaviors like using its power over concerts to force venues to use Ticketmaster.  Over the years, a number of competitors have complained that Live Nation has been violating the terms of the consent decree or at the very least the spirit of the decree.

Senators Blumenthal and Klobuchar are asking the DOJ to conduct a “retrospective study on the effects of past consolidation” and to consider extending the decree past its expiration next year.  Though the DOJ has previously investigated claims that Live Nation had violated its consent decree, the DOJ has never taken action.  In an August 28 statement, Live Nation said the senators’ letter is “based on a fundamental misunderstanding of our consent decree and general ticketing industry dynamics.”  Further, “…Live Nation and Ticketmaster have always complied with their obligations under the consent decree.  We do not force anyone into ticketing agreements by leveraging content, and we do not retaliate against venues that choose other ticketing providers.”  Thus, according to the statement, “[t]here is no cause for further investigations or studies.”

The Antitrust Division has been investigating whether Live Nation has engaged in anti-competitive exclusionary behavior and is adhering to its 2010 consent decree.

Thoughts

The Obama administration was very lenient in its review of Live Nation’s acquisition of Ticketmaster.  The deal raised serious horizontal and vertical concerns and should have been blocked.  Yet, the DOJ opted to accept a weak settlement that included behavioral conditions prohibiting Live Nation from engaging in certain conduct.  The DOJ put itself in the position having to police Live Nation’s corporate behavior and third parties in the position of having to report bad behavior to the DOJ.  These types of behavioral conditions that cannot be effectively enforced are not useful.  In reality, there was probably no behavioral or structural remedies that could solve the anticompetitive concerns raised by the merger.  Behavioral remedies require ongoing monitoring of Live Nation’s and Ticketmaster’s conduct.  The settlement agreement was a quick win, but a settlement agreement that requires ongoing monitoring is not very effective unless it is enforced.  Clearly, Live Nation/Ticketmaster is a monopolist in the primary ticketing service market. The high market share is indicative of it having market power. However, there is nothing illegal about having a monopoly.  The question is whether Live Nation/Ticketmaster is engaging in any activity to maintain its monopoly such as exclusionary conduct or violating the express conditions in the 2010 decree.

The DOJ’s most recent investigation into Live Nation’s conduct without any enforcement action to date highlights the limitations of behavioral conditions in past consent decrees. DOJ Antitrust Division Assistant Attorney General Makan Delrahim is not in favor of behavioral decrees because they are regulatory and require monitoring and supervision.  The DOJ under his leadership has strengthened the terms of consent decrees making them easier to enforce.  For the DOJ to bring a case on an older consent decree violation or to force modifications of the Live Nation decree, it must meet a very high clear and convincing standard.  Unfortunately, there is so much wiggle room in past settlement agreements that contain behavioral restrictions that merging parties can devise strategies that may be within the letter of the settlement agreement but violate the spirit of the decree.  In short, the DOJ would need to uncover evidence that Live Nation has actually violated the decree before it can bring an enforcement action or force an extension of the decree.  Delrahim has expressed the view that Congress did not intend for the Antitrust Division or the courts to be overseers of corporate behavior.  He has argued that “antitrust is law enforcement, not regulation,” and that antitrust enforcers should seek to block anticompetitive transactions, rather than allow them to proceed subject to behavioral conditions.  The Live Nation/Tickemaster is a prime example of why the DOJ must sometimes decide to block a merger rather than negotiate a settlement with ambiguous behavioral conditions.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Complaint

The DOJ alleges that Sabre and Farelogix compete head-to-head to provide booking services to airlines.  Booking services are IT solutions that allow airlines to sell tickets and ancillary products through traditional brick-and-mortar and online travel agencies to the traveling public.  The DOJ alleges that the acquisition would eliminate competition that has substantially benefited airlines and consumers in both the traditional and online markets.  The complaint further alleges that the transaction would allow Sabre, the largest booking services provider in the United States, to eliminate a disruptive competitor that has introduced new technology to the travel industry and is poised to grow significantly.

As alleged in the complaint, Sabre is the dominant provider of booking services in the United States with over 50% of airline bookings through travel agencies.  Sabre operates a global distribution system (“GDS”), which is a digital platform that provides booking services to airlines in addition to other functionality.  The DOJ characterizes Farelogix as an innovative technology company that has stepped in to address the needs of airlines and their customers.  The DOJ says that Farelogix has injected much-needed competition and innovation into stagnant booking services markets by developing new technology {new distribution capability} that empowers airlines to make a wider array of offers to travelers who book tickets through travel agencies.  This new technology enables airlines to make more varied and personalized offers to consumers who book through travel agents, including bundles of ancillary products such as wi-fi, lounge passes, entertainment options, and meals – choices not available to travelers through Sabre’s legacy technology.

The DOJ also points to some hot docs in its complaint.  The DOJ alleges that Sabre executives acknowledged that acquiring Farelogix would eliminate a competitive threat and further entrench Sabre in booking services.  For example, on the day Sabre announced its intention to buy Farelogix, Sabre’s chief sales officer texted a colleague that one major U.S. airline would “hate” it.  The colleague replied, “Why, because it entrenches us more?”  Similarly, a Farelogix executive observed that buying the company would allow Sabre to “tak[e] out a strong competitor vs. continued competition and price pressure.”  Sabre’s internal documents show that Sabre’s attempt to acquire Farelogix follows many other attempts by Sabre to neutralize its competitor, including a campaign to “shut down Farelogix.”  Indeed, Farelogix has long complained about Sabre’s tactics, alleging that Sabre has sought to stifle competition.  For example, in 2013, Farelogix’s Chief Executive Officer alleged that “Sabre has wielded its monopoly power in an attempt to destroy Farelogix and prevent competition….”  Moreover one Sabre sales executive noted after the announcement of the acquisition that the airline’s “FLX [Farelogix] bill is going up big time.”

The DOJ’s complaint alleges that Sabre has used a broad range of contractual and technical barriers to prevent entry or expansion by suppliers that could threaten its control over bookings through travel agencies. For instance, Sabre’s contracts include provisions that inhibit airlines’ use of an alternative supplier like Farelogix, even when doing so would be less expensive for airlines.  As recently as 2018, Farelogix denounced these restrictions, complaining that airlines’ GDS contracts “effectively prohibit working with third parties or make doing so cost prohibitive.”  In January 2019, a Sabre senior vice president acknowledged that airlines view Sabre’s restrictions as “abusive but there’s nothing they can do because they need the distribution and they are tied with a contract.”

The DOJ alleges that the two relevant markets are highly concentrated but acknowledges that Farelogix’ share is very small.  The DOJ alleges, however, that Farelogic’s market share understates its competitive significance in the current and in future markets.

In summary, the DOJ alleges that Sabre controls over 50 percent of bookings through traditional and online travel agencies in the United States, so airlines must sell tickets through Sabre to reach a broad set of U.S. travelers. Sabre has used this power to suppress Farelogic’s entry and expansion.  Nevertheless, Farelogix’s presence in these markets has led to lower prices and increased innovation that would be lost if the merger is not blocked.

Lessons Learned

The DOJ’s block of Sabre’s proposed purchase of Farelogix demonstrates that it is willing to challenge large dominant companies that seek to acquire small nascent rivals in technology markets that are highly concentrated.  Sabre’s proposed acquisition of Farelogix is a dominant firm’s attempt to take out a disruptive competitor that is an important source of competition and innovation.  The DOJ is taking the position that acquisitions of small disruptive rivals in highly concentrated markets can result in higher prices, reduced quality, and less innovation regardless of the target’s low market share.  The DOJ views the transaction as part of an emerging trend of large technology firms acquiring nascent competitors to keep them from emerging as full-fledged rivals.

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Here, the hot docs in Sabre’s text messages, documents, emails, and corporate filings support the DOJ’s decision to block the merger. Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The DOJ will focus on supposed “hot docs” to support its case because the buyer appears to be touting the intended anticompetitive consequences of the acquisition.  This case demonstrates why corporate executives must be mindful about what they write as careless and inappropriate language in company documents can have an extremely negative effect on a merger review.  A good rule of thumb is to write every document so that neither you nor the company would be embarrassed if it appeared on the front page of the Wall Street Journal.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

On the same day, Assistant Attorney General Makan Delrahim of the Antitrust Division of the U.S. Department of Justice (“DOJ”) said the DOJ is working with a group of more than a dozen state attorneys general as it investigates the market power of major technology companies.  Delrahim said at a tech conference that the government is studying acquisitions by major tech companies that were previously approved as part of a broad antitrust review announced in July of major tech firms with significant market power.  “Those are some of the questions that are being raised… whether those were nascent competitors that may or may not have been wise to approve,” he said.

On July 23, the DOJ said it was opening a broad investigation into whether major digital technology firms engaged in anticompetitive practices, including concerns raised about “search, social media, and some retail services online.”  The investigations appear to be focused on Alphabet Inc.’s Google, Amazon.com, Inc. and Facebook, Inc. (“Facebook”), as well as potentially Apple Inc.

More than a dozen states are expected to announce in the coming weeks that they are launching a formal probe.  “I think it’s safe to say more than a dozen or so state attorneys general (that) have expressed an interest in the subject matter,” Delrahim said.  In July, eight state AGs met with U.S. Attorney General William Barr to discuss the effect of big tech companies on competition, and various antitrust actions.

On August 19, the New York Attorney General’s office said it is continuing to “engage in bipartisan conversations about the unchecked power of large tech companies.”  North Carolina Attorney General Josh Stein is also “participating in bipartisan conversations about this issue,” his office said.  The DOJ is looking not only at price effects, but also at innovation and quality, and the next steps in its broad antitrust review would be seeking documents and other information.  Delrahim also said that after the July announcement, the companies under investigation “immediately reached out to work with us in a cooperative manner to provide information that we need as far as the investigation.  In June, the FTC told Facebook it had opened an antitrust investigation.  Last month, the FTC resolved a separate privacy probe into Facebook’s practices after the company agreed to pay a $5 billion penalty.

Thoughts

The states joining the DOJ’s and FTC’s investigations are not a surprise.  As many as 39 states have been raising antitrust concerns about the big tech firms with both the DOJ and FTC.  They have similar concerns regarding big tech as the federal antitrust agencies.  The issues relate to whether the markets for online advertising, search, social media, app sales and certain retail sectors are currently competitive.  The state AGs involvement in these investigations adds another layer of complexity for Google, Facebook, and Amazon.  This action by the state AGs should remind everyone that sound antitrust enforcement is not just a federal affair.  Indeed, many of the seminal antitrust cases including cases creating key principles of monopolization and merger law were brought by state attorneys generals.

State attorneys generals use the power under federal and their own state statutes to protect consumers against anticompetitive and fraudulent conduct in credit card, pharmaceutical, computer and many other markets crucial to consumers.

States have significant advantages over federal enforcers.  They are closer to the market and consumers and recognize the direct harm to consumers.  They have the ability to secure monetary damages.  States are often customers and victims of anticompetitive behavior.  State enforcers can bring combined antitrust and consumer protection cases.  And although each state has limited antitrust and consumer protection resources, states increasingly are using multi-state task forces to investigate and prosecute unlawful conduct.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

The DOJ has indicated its review will take into account the changes in the identity of movie theatre owners, the increased number of movie theaters in a geographic area, the increased number of screens in movie theaters, and increased number of viewing platforms available to consumers.  The review is part of the Antitrust Division’s initiative to terminate long-standing antitrust judgment, including many that have no termination date.

“The Paramount Decrees have been on the books with no sunset provisions since 1949. Much has changed in the motion picture industry since that time,” Makan Delrahim, the DOJ’s antitrust chief, said in a statement. “It is high time that these and other legacy judgments are examined to determine whether they still serve to protect competition.” 

If the DOJ terminates the Paramount Decrees, it could lead to vertical integration of studios and theaters.  The result would be ironic given that the DOJ is currently appealing its loss in its attempt to prevent AT&T from vertically integrating with Time Warner.

As part of the review, the DOJ is interested in comments to the following issues:

• Do the Paramount Decrees continue to serve important competitive purposes today?  Why or why not?
• Individually, or collectively, are the decree provisions relating to (1) movie distributors owning movie theaters; (2) block booking; (3) circuit dealing; (4) resale price maintenance; and (5) overbroad clearances necessary to protect competition? Are any of these provisions ineffective in protecting competition or inefficient? Do any of these provisions inhibit competition or cause anticompetitive effects?
• What, if any, modifications to the Paramount Decrees would enhance competition and efficiency? What legal justifications would support such modifications, if any?
• What effect, if any, would the termination of the Paramount Decrees have on the distribution and exhibition of motion pictures?
• Have changes to the motion picture industry since the 1940s, including but not limited to, digital production and distribution, multiplex theaters, new distribution and movie viewing platforms render any of the Consent Decree provisions unnecessary?
• Are existing antitrust laws, including, the precedent of United States vs. Paramount, and its progeny, sufficient or insufficient to protect competition in the motion picture industry?

Third parties have a 60-day period for public comment. The deadline for comments is October 4, 2018.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Speedy Antitrust Approval

DOJ’s announcement of the settlement agreement is noteworthy because of the speed at which Disney was able to negotiate a remedy to a combination that raised a number of antitrust issues.  Though the parties received second requests on March 5, 2018, and Disney had only recently entered into a new agreement with 21CF on June 20, 2018, the DOJ and Disney were able to negotiate a divestiture worth approximately $20-23 billion within 6 months of review and 4 months after issuing information requests.  The dollar value of the Disney/21CF divestiture will likely double what the DOJ characterized as the largest divestiture in history in Bayer/Monsanto.

Disney was in a hurry to obtain antitrust approval because it is involved in bidding war with Comcast for the 21CF assets.  Indeed, Disney upped its offer on June 20^th because Comcast had started a bidding war for the 21CF assets on June 13^th.  Comcast has its own antitrust issues with its acquisition, but it was hoping to be on a level playing field with Disney in terms of the antitrust reviews at the DOJ. Indeed, Comcast said as much when it made its bid as it indicated that it had already provided documents and information to the DOJ in response to its civil investigative demand regarding the acquisition of 21CF assets.

Comcast was banking on the DOJ conducting a long drawn out second request investigation for Disney’s deal.  But, rather than conducting a lengthy review of the Disney/21CF deal, the DOJ entered into a quick settlement agreement.  This was surprising because the Disney/21CF deal raised a number of horizontal and vertical issues including increasing the size of its motion picture business, content library and cable programming, which would increase its bargaining leverage in negotiations with movie theatres and TV programmers on licensing fees, Multichannel programing distributors (MVPDs) and virtual MVPDs over affiliate fees for its channels, and video streaming services over licensing fees.  Moreover, Disney is taking control of Hulu and launching a number of subscription streaming businesses with the intent on foreclosing its content from rivals such as Netflix.  It could be that none of these issues amount to actual antitrust problems, but certainly they warrant some investigation.

Despite all of these other issues, the DOJ quickly focused on the overlap in cable sports programming.  The DOJ said in its Press Release that “to streamline agency clearance, Disney agreed to divest the 22 RSNs rather than continue with the Antitrust Division’s ongoing merger investigation.”  Anyone who has visited Disney World knows the value of fast passes.  Disney understands the value of time so it used a cooperative approach to get the greenlight for what appears to be the largest divestiture in history without an upfront buyer in record time.

Understanding that the DOJ’s major concern was the overlap in cable sports programming, Disney decided not to challenge that contention or negotiate a lesser divestiture, which would have lengthened the second request investigation many more months.  Disney likely could have argued that ESPN channels and local RSNs really do not compete head to head at all.  ESPN has market power as do the local RSNs to obtain increases in affiliate fees already.  Moreover, watching ESPN is no substitute for watching your home town team on the local RSN.  Disney, however, gave up on those arguments and agreed to a hefty structural remedy that took the issue off the table.

Makan Delrahim’s Editorial in the Washington Times Defending DOJ’s Fast Review

On July 12, 2018, Makan Delrahim wrote an editorial defending the speed in which Disney was able to negotiate a divestiture with the DOJ.  He noted that the divestiture agreement was a “victory for American consumers and should be heralded as an example of merger parties working effectively with Division investigators to resolve antitrust concerns.”  Delrahim noted that “each merger poses unique facts requiring unique market analysis.” He correctly stated that the pace of any review is largely in the hands of the merging parties, who control the timing of their Hart-Scott-Rodino (“HSR”) filings, as well as the pace and timing of compliance with the Division’s information requests.” He added that “parties can accelerate the review by pointing the Division to relevant information early in the investigation, promptly scheduling interviews, and remaining open to timely divestitures that resolve antitrust concerns.”

Competition Concern

The DOJ alleged that without the divestiture the acquisition would likely result in higher prices for cable sports programming licensed to MVPDs in each of the local markets that the RSNs serve.  As the DOJ explained, Disney (ESPN properties) and 21CF’s (RSNs) cable sports programming competed head to head.  The DOJ alleged that the ESPN properties and the 21CF’s RSNs compete to sell cable sports programming to MVPDs in various local markets across the United States.  Because of this competition, the complaint alleges that the proposed acquisition would likely result in MVPDs paying higher prices for cable sports programming in those local markets.

No Allegation of “Must Have” Programming

Interestingly, the DOJ did not allege that Disney or 21CF had “must have” programming.  Arguably, ESPN channels and RSNs would be considered “must have” programming for MVPDs and VMVPDs.  It could be that given Judge Leon’s Opinion in AT&T/Time Warner that the DOJ has given up on being able to prove that certain programming is “must have”.

No Upfront Buyer

Another interesting point is that the DOJ did not require an upfront buyer.  There could be good reasons for why no upfront buyer was necessary. Upfront buyers are usually required when the DOJ is not sure that any appropriate buyers exist or if all of the assets need to be divested to one buyer.  Here, there are numerous buyers and the DOJ decided that the RSNs can be sold to multiple buyers not to a single buyer.  In that scenario, Comcast could be a buyer for some RSNs located in geographic areas where it is not the incumbent cable provider; AT&T and Charter have very little in the RSN space and may want to buy other properties to gain a larger footprint; Discovery has international sports rights so they may be interested in some RSNs; Liberty Media has owned RSNs in the past; Youtube, Facebook, and Amazon may want to dip their toes into the RSN space; and Sinclair, which has a strong local presence in many markets and currently owns the Tennis Channel could be interested in some of the RSNs.

Lessons Learned

The DOJ’s quick settlement demonstrates that the DOJ is willing to streamline investigations if merging parties propose substantial structural fixes upfront.  The settlement and Mr. Delrahim’s editorial reminds merging parties that they control the timing and length of merger investigations.  Merging parties control how fast they file their HSR submissions and when they comply with the DOJ’s second requests.  Some merging parties take their time to comply, hold back submission of documents and information and delay offering any real significant divestitures until exhausting all of their economic arguments.  While the government gets a lot of blame for long antitrust reviews, merging parties are always in control of the timing.  This settlement agreement also demonstrates that the DOJ is willing to work with merging parties that are willing to cooperate in negotiating  a complete solution to a competition concern.  Consistent with its recent enforcement action in Bayer/Monsanto, the DOJ is willing to approve deals with significant divestitures.  Here, the divestitures are worth approximately $20-23 billion—more than double the size of the Bayer divestiture.  Finally, the settlement shows that the DOJ is willing to approve settlements without upfront buyers in situations where multiple buyers can acquire the divested assets, a single buyer is not necessary, and a number of potential buyers exist.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

First, T-Mobile and Sprint argue that they need the deal to compete with the Big Two (AT&T and Verizon) – the combined firm would be able to take advantage of efficiencies and economies of scale to bring technological innovations (5th generation (5G)) to the market faster to provide customers with better broadband services at a lower cost.  Thus, customers would benefit from the merger through lower prices and investments to their network.  The parties basically acknowledge that it is a four to three deal.

Second, the parties argue that the wireless market is no longer as concentrated because an abundance of competition exists or will exist in the near future as cable companies, Google, and others are increasingly entering this space. Even using current technologies, Comcast has rolled out low-cost wireless service to its cable customers that rides on Verizon’s network.  So the argument goes that this isn’t a case of going from 4 to 3 wireless companies – there are now at least 7 or 8 big competitors in this converging market.  There is a lot of reasons why long time staffers at the FCC and DOJ might be skeptical of this claim.

Third, the merged firm is pledging to spend $40-50 billion to bring 5G to the United States.  Ultimately, the reasoning behind this transaction is to establish a “strong third” player.  Merging T-Mobile and Sprint would grant the combined company more scale, which could help it compete against AT&T and Verizon.  That is the argument that Sprint made to regulators in 2014 and it is part of the argument the companies are making today.  Promises, Promises?

In 2014, Bill Baer, then head of the Antitrust Division, told the New York Times: “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers.”

But on June 1, 2018, the current head of the Antitrust Division, Makan Delrahim, declined to support the Obama administration’s firm backing of the need for four U.S. wireless carriers.  Delrahim told reporters, “I don’t think there’s any magical number that I’m smart enough to glean.”  He also said the DOJ would look at Sprint and T-Mobile’s arguments that the proposed merger was needed for them to build the next generation of wireless, referred to as 5G, but that they had to prove their case.

Besides new leadership at the FCC and the Antitrust Division in the form of FCC Chairman Ajit Pai and DOJ’s Delrahim, respectively, not much else has changed so as to make a deal more palatable this time around.  Like then as now, the Big Four still make up 98% of a wireless market that is important to just about all U.S. consumers.  Nevertheless, both Pai and Delrahim agree that there is no magic number.

Unlike the last time around, the Trump administration will hear the merging parties out before pre-judging the deal.  So third parties and consumer groups will have their work cut out for them.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

The report highlighted how critics and rivals, such as Yelp Inc., are trying to bring Europe’s antitrust approach to Google to the United States.  Margrethe Vestager, the European Union competition commissioner, told CBS that she is intent on stopping Google’s “illegal behavior” in web search, suggesting that the EC isn’t appeased by the company’s proposed solution for the hefty charges the EU filed last year.  “You have to look at the power they have and it’s something the Justice Department I hope takes a serious look at,” Mnuchin said, though he added that “issues of monopolies are out of my lane” and that it’s up to the DOJ to review antitrust violations.

CBS featured guests who argued Google abuses its dominance in search and search advertising.  It didn’t show any evidence that U.S. lawmakers or enforcement agencies will target the company or mention the potential cases Vestager is pursuing against Google for its Android mobile software and advertising business.

Observations:  The Trump administration is signaling that it wants to scrutinize big tech companies’ two sided digital platforms and their associated network effects.  The EU law has a provision that imposes a special responsibility on dominant firms not to hinder competition.  The U.S. antitrust agencies and Makan Delrahim are in favor of using an evidence-based approach meaning there has to be harm to competition and consumers. But even Delrahim has noted that “in certain platform markets involving network effects, there may be barriers to entry or a tendency toward a single firm emerging as the sole winner” and in those situations, “antitrust enforcers may need to take a close look to see whether competition is suffering and consumers are losing out on new innovations as a result of misdeeds by a monopoly incumbent.”  So, the DOJ and FTC antitrust officials should be “open and receptive” to evidence that some incumbent monopolist tech firms may be engaging in exclusionary conduct, such as below-cost pricing aimed at driving out competitors, to gain control of a market.

The Trump Administration has its eye on Google, Facebook and Amazon and the DOJ has noted that if there is “clear evidence of harm to competition in digital platforms, enforcers must take vigorous action and seek remedies that protect American consumers, so that free markets or consumers don’t instead bear the risk of failure.”

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Delrahim noted that outside of flat out price fixing and naked restraints of trade, which are clearly illegal, “antitrust demands evidence of harm or likely harm to competition, often weighed against efficiencies or procompetitive justifications.”  He added that “taking an evidence-based approach to antitrust law should not be mistaken for an unwillingness to bring enforcement actions.” He said that if there is clear evidence of harm, the antitrust enforcers should vigorously prosecute the antitrust laws. He noted that antitrust enforcers that failed to take action when they had credible evidence and accepted behavioral “band-aid” fixes to anticompetitive mergers should accept some blame.  Delrahim noted that “the Microsoft case proved that an evidence-based antitrust enforcement approach can be flexible in its application to new types of assets and markets—in that case, the computer code and software markets.”

His message was that the U.S. and international antitrust agencies should not simply go to war with digital platform companies rather a more effective approach would be grounded in evidence.  He added that “in certain platform markets involving network effects, there may be barriers to entry or a tendency toward a single firm emerging as the sole winner” and in those situations, “antitrust enforcers may need to take a close look to see whether competition is suffering and consumers are losing out on new innovations as a result of misdeeds by a monopoly incumbent.”

While Delrahim said it should be a high bar to condemn charging a lower price than one’s competitor, he noted that antitrust officials should be “open and receptive” to evidence that some incumbent monopolist tech firms may be engaging in exclusionary conduct, such as below-cost pricing aimed at driving out competitors, to gain control of a market.  Though Delrahim does not share the same views as Lina Khan’s regarding how predatory pricing or other exclusionary conduct claims might apply to digital platforms, he gave her some props.  Lina Khan wrote a paper which outlines the threats Amazon poses to competition, and argues that the framework used by U.S. antitrust enforcers is ill-equipped to take on today’s dominant online platforms.  “Her note surely has been subject to some criticism,” Delrahim said, “but we should encourage fresh thinking on how our legal tools apply to new digital platforms.  We need more thinking – diverse thinking – about these questions.  And, we need a civil discourse on this topic.”

While the Trump Administration has its eye on Facebook and Amazon, Delrahim’s remarks were really about having a measured approach to enforcing the antitrust laws, one based on economic evidence.  He basically said if there is “clear evidence of harm to competition in digital platforms, enforcers must take vigorous action and seek remedies that protect American consumers, so that free markets or consumers don’t instead bear the risk of failure.”

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

He noted that the Division’s recent consent decrees reflect several provisions designed to ensure the Division can meaningfully enforce them.  Delrahim stated that the DOJ’s approach will be to enter into consent decrees only when the DOJ can effectively enforce them, and when the DOJ enters into consent decrees, to enforce them effectively.

Consent decrees should be used consistent with a view of the Antitrust Division as a law enforcement agency, not a regulatory one. Faced with a violation, the Antitrust Division has an obligation to the public to ensure any settlement contains meaningful relief and that the settling parties obey its terms.  He said that “filing a consent decree that would be difficult to enforce certainly minimizes litigation risk and provides for a quick win in the press, but it goes without saying that the unenforceable decree provisions would not vindicate the Division’s duty to protect competition.”

Delrahim spoke about the difficulties of enforcing behavioral conditions as it puts enforcers and corporate counsel in an untenable position—“how can a small team of lawyers keep capable executives from doing what executives are trained to do, day after day for years?”  The free markets depend on businesses taking advantage of their assets to maximize their returns.  The risks and penalties of a civil consent decree violation would need to be high enough to deter such conduct.  Meanwhile behavioral conditions are fundamentally regulatory, imposing government supervision on what should be free markets.  Antitrust enforcers have long preferred structural remedies, in large part for these reasons.

Delrahim announced that all new consent decrees will contain a set of procedural provisions designed to improve their function and enforceability that will be used in future decrees.  First, a key provision relates to the burden of proof should the defendant violate the decree and the DOJ move for contempt.  The standard for proving a civil antitrust violation is a preponderance of the evidence, however, the default rule for seeking contempt on a settlement is clear and convincing evidence.   The new terms contract for the same preponderance standard for decree violations as for the underlying offense and for decree interpretations.  (Before these changes, it was difficult for the DOJ to investigate and prove violations of the decree.)  This provision will make enforcement of decrees substantially easier.  The second decree provision relates to the common practice of parties to a contract agreeing to more efficient fee shifting rules.  Before the change,  the Division had to bear the costs of decree enforcement investigations and proceedings.  The Division’s new fee-shifting provision requires defendants to agree to reimburse the DOJ for attorneys’ fees, expert fees, and costs incurred in connection with any successful consent decree enforcement effort.  (This provision should encourage speedy resolution of any potential violations as there will be no advantage for the defendants to delay).  Third, a new provision will allow the Division to apply for a one-time extension of the term of the decree, if a firm is found to have violated the decree.  (This provision discourages violations.) Fourth, a new term will be included that permits the DOJ to terminate the decree early upon notice to the Court and the defendant(s), if necessary.

Observations:

The DOJ has adopted new terms in recent consent decrees that enhance DOJ’s ability to enforce its settlements by lowering the evidentiary standard for proving a defendant has violated the terms of a settlement agreement.  In the past, the burden of proof in civil contempt cases sometimes forced DOJ to conduct burdensome investigations to prepare its contempt case and encouraged defendants to delay and “exacerbate the situation. In addition to lowering the evidentiary standard, the new consent decree terms require defendants to pay the costs of DOJ enforcement efforts and allow DOJ to extend the term of the decree or terminate it upon notice to the court and defendants.  These new terms increase DOJ’s leverage over settling in the event there is a dispute about compliance with the consent decree. Indeed, the fee-shifting provision should encourage speedy resolution of consent decree violation investigations and compensate taxpayers for the cost of enforcement.  Permitting the DOJ to extend the decree if a court determines defendants violated the decree is another hammer.  It appears that the DOJ will insist on these new terms to be included in all civil merger and non-merger consent decrees so there really will be no negotiation.  These new provisions are good for the DOJ but not so good for settling parties because there will be less flexibility in negotiating compliance details and greater potential risks associated with any future violations.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Delrahim explained that effective antitrust enforcement lessens the need for market regulations and that behavioral commitments imposing restrictions on the conduct of the merged firm represents a form of government regulation and oversight on what should preferably be a free market.

Criticizing the early Obama administration for entering into several behavioral consent decrees that allowed illegal vertical mergers such as Comcast/NBCU, Google/ITA, and LiveNation/TicketMaster to proceed, Delrahim said there is bipartisan agreement that behavioral conditions have been inadequate. He shares the same skepticism that John Kwoka, a law professor and economist who previously served in various capacities at the Federal Trade Commission, Antitrust Division, and Federal Communications Commission, and American Antitrust Institute (AAI) President Diana Moss have about using regulatory solutions to address antitrust violations.  Specifically, Delrahim agrees with them that “allowing the merger and then requiring the merged firm to ignore the incentives inherent in its integrated structure is both paradoxical and likely difficult to achieve.”

In Delrahim’s words, “behavioral remedies are the wolf of regulation dressed in the sheep’s clothing of a behavioral decree.”  He identified several practical problems with behavioral conditions, namely:

• They are difficult to structure and negotiate.
• The mere existence of agreed upon arbitrators interfere with the competitive process of negotiating contracts.
• It is difficult to determine their expiration periods. Short remedies may be mere “Band-Aids” and not a fix, while long remedies make the DOJ a full-time regulator.
• They are unduly burdensome for the merged firm and the DOJ because they require monitoring the merged firm’s day-to-day operations.
• And they are challenging to enforce – especially the granular commitments of discrimination and information firewalls – because the DOJ often lacks the resources to do so effectively.

Delrahim then praised the later Obama administration’s efforts to block Comcast’s acquisition of Time Warner Cable and Lam Research’s acquisition of KLA-Tencor rather than impose ineffective behavioral remedies.  Both those deals were abandoned in the face of pressure from the DOJ.

Because he is skeptical that behavioral remedies can be effective, Delrahim said that under his leadership, the Antitrust Division will cut back on the 1300 behavioral consent decrees that are currently in place and focus, instead, on structural remedies to resolve antitrust concerns presented by mergers. He referred to the DOJ’s 2004 Remedies Guidelines, a report that states “conduct remedies generally are not favored in merger cases”.

Nevertheless, Delrahim left open the possibility that the DOJ may accept behavioral commitments in certain circumstances.  He noted that it would be a high standard to meet but that such commitments may be accepted when the DOJ has a “high degree of confidence that the remedy does not usurp regulatory functions for law enforcement.”  Delrahim said that behavioral remedies should avoid taking pricing decisions away from markets and should be simple enough so that the DOJ can oversee them. He further explained that behavioral remedies must completely cure the anticompetitive harms.  This line of thinking is consistent with his friend, former Antitrust Division chief Bill Baer who said that “consumers should not have to bear the risks that a complex settlement may not succeed.”

Finally, Delrahim underlined that if a merger is illegal and a proposed remedy does not resolve the competitive problem, the deal should be blocked and, conversely, if a merger does not raise competitive concerns, the DOJ will no longer accept a behavioral remedy just because it is offered.

Lessons Learned: According to Makan Delrahim, the Antitrust Division will cut back on behavioral commitments in consent orders that regulate conduct.  Instead, the Division will rely more on structural remedies such as divestitures to resolve anticompetitive concerns with mergers.  He made some good points with respect to the adequacy and effectiveness of behavioral remedies, which are difficult to structure and police.  On the surface, this policy announcement is not much different from current and past antitrust thinking.  Delrahim is simply making clear where he stands on the issue.  Divestitures of a business or a product line have always been the preferred remedy for any merger, be it horizontal or vertical.  However, the antitrust agencies have typically used behavioral remedies to resolve antitrust concerns presented by vertical mergers that result in efficiencies in order to retain the procompetitive benefits of the transaction.  But, it has never been the Division’s policy that conduct remedies will always be available and sufficient to resolve vertical antitrust concerns.  And while he acknowledges that behavioral remedies may be adequate where the Division has a high degree of confidence that the remedies can be effective, Delrahim is clearly signaling a far more restrained application of such commitments.  In fact, even under Obama the DOJ forced parties to vertical mergers to abandon their deals when the Division could not negotiate structural and/or behavioral remedies to resolve the anticompetitive concerns.  For instance, in 2016, the DOJ forced Lam Research and KLA-Tencor to abandon their vertical merger when it became clear that behavioral commitments were not sufficient.  In sum, Delrahim’s policy stance signals that he will continue to take an aggressive approach on how the DOJ resolves anticompetitive concerns presented by vertical mergers.  In particular, he seems especially unenthusiastic about behavioral remedies.  The DOJ’s recent lawsuit to challenge AT&T Inc.’s acquisition of Time Warner Inc. suggests Delrahim has the courage of his convictions.  How that deal plays out in court – or out of it – may well set the stage for the enforcement of vertical mergers in the foreseeable future.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com