D.C. Circuit Signals Openness to Vertical Merger Challenges, Cites Open Markets

Last Tuesday, the U.S. Court of Appeals for the D.C. Circuit upheld the district court’s ruling that allowed AT&T to acquire Time Warner. The three-judge panel found no clear errors with the trial court’s opinion allowing a vertical merger between two corporations at different stages of the video programming supply chain.

Some have portrayed the decision as a general rejection of efforts to challenge vertical mergers. Yet any fair reading of the decision reveals the exact opposite. The D.C. Circuit made clear that enforcers actually have ample reason to challenge vertical mergers and multiple grounds on which to do so.

The appellate court ruled that the district court reasonably interpreted theJustice Department’s evidence on price effects and rejected the Justice Department’s argument that the merger should be blocked because it would raise prices to consumers. In doing so, the decision dealt a hard blow to the claims that the “consumer welfare” philosophy of antitrust enforcement, with its fixation on short-term prices and output (as defined by neoclassical economics), is up to the task of protecting the public from harmful concentrations of economic power.

In allowing the merger, however, the court cited Open Markets’ amicus brief for the proposition that “[v]ertical mergers can create harms beyond higher prices for consumers, including decreased product quality and innovation.” As an example, it noted that the Supreme Court once blocked a vertical merger “without quantitative evidence about price increases.” In total, the court made three citations to the amicus brief Open Markets filed in support of the government’s case to block the merger, and specifically to highlight the harms that can come from vertical integration.

Unfortunately, the Justice Department appealed the district court’s decision mainly on the basis that it had erroneously interpreted an economist’s predictive, quantitative model. This strategic error by theJustice Department forced the appellate court to focus on how the district court handled that flawed model.

In stating that quantitative evidence is not required, the court’s decision provides the foundation for more vigorous enforcement of U.S. laws designed to limit vertical integration. This includes efforts to challenge future acquisitions by powerful platform monopolists. That’s because many such platform monopolists operate in what is sometimes termed “zero-price markets,” or markets where the products often have no dollar price. The harms to competitive market structures and consumers and businesses are real, notwithstanding the lack of easily quantifiable effects.

More broadly, the appellate court acknowledged the larger debate now underway over how to analyze vertical mergers under the Clayton Act. One citation recognized the Open Markets Institute for calling for a clear articulation of legal standards governing vertical mergers, while another relied on its gathering of an authoritative list of cases confirming that enforcers have to show a “reasonable probability” of competitive harm. The Court observed that the Justice Department’s guidelines for vertical mergers “were last updated in 1984, over three decades ago.”

Other policymakers have also recently recognized the need to re-examine vertical merger enforcement. The FTC’s hearings on “Competition and Consumer Protection in the 21st Century” devoted a day to talking about new potential vertical merger guidelines and what the proper legal standard for those guidelines would be. FTC Commissioners Rohit Chopra and Rebecca Kelly Slaughter, in particular, have sounded the alarm on vertical integration.

Slaughter, dissenting from the FTC’s 3-2 decision to allow office supply reselling giant Staples to merge with the country’s largest wholesaler of office supplies, noted that vertical mergers “can be just as pernicious in sapping our economy’s vitality.”

In a comment to the Federal Trade Commission in December, the Open Markets Institute called for antitrust enforcers to set forth new vertical merger guidelines that would recognize the competitive harms of vertical integration. To guide them, the Open Markets Institute pointed to theDepartment of Justice’s 1968 Merger Guidelines as a template. In implementing Congress’s intent in enacting and amending the Clayton Act, these guidelines set clear market share cutoffs and rejected an “efficiencies defense,” which would permit otherwise illegal consolidations because they allow the merged firm to achieve productive efficiencies.