On November 16, 2017, Makan Delrahim, recently confirmed as Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice (“DOJ”), delivered a speech on the relationship between antitrust as law enforcement and his goal of reducing regulation.
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.