On September 28, 2021, the U.S. Federal Trade Commission (FTC) published a blog post outlining the agency’s plans to expand and purportedly strengthen its process for in-depth investigations of transactions (known as “Second Requests”) reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act).
In announcing the most recent of a series of policy shifts since the appointment of Chair Lina Khan in June, the FTC asserted that these changes were necessary to address the “unduly narrow approach” to merger review the FTC had previously applied under both Democratic and Republican administrations which may have resulted in “blind spots” and “unlawful consolidation,” particularly in light of what it is has been characterizing as an unprecedented “merger wave” burdening the antitrust agency's ability to adequately review transactions.
As part of its escalating scrutiny of transactions, the FTC will now include new demands in its Second Requests for documents, data and information about “facets” of transactions that traditionally have not been considered relevant under U.S. antitrust laws, including a transaction’s effect on labor markets, the cross-market effects of a transaction and how the involvement of investment firms—including private equity and venture capital—could be detrimental to a post-transaction firm’s incentives to compete.
This latest development follows several procedural maneuvers undertaken by the FTC since Chair Khan was appointed earlier this year, including the introduction of “warning letters” sent to some merging parties that their investigation remains open despite the expiration of the applicable HSR Act statutory deadline. Khan also recently published a policy memo addressed to FTC staff that laid out her vision for more aggressive enforcement, which highlighted, in particular, the need to “find ways to deter unlawful transactions.” Although Khan did not articulate what legal standard might be applied, she stated that the FTC must “take a holistic approach to identifying harms, recognizing that antitrust and consumer protection violations harm workers and independent businesses as well as consumers.”
Even before the FTC’s September 28 blog post was published, several antitrust practitioners had publicly questioned (including at the FTC’s open meeting earlier in September) the FTC’s recent practice of including in their investigations topics beyond the scope of traditional antitrust analysis. For example, FTC staff has reportedly asked parties how transactions would affect unionization, environmental, social and governance policies, franchising and equity (including granular probes into the numbers and type of workers within a company), as well as whether noncompete agreements are used in worker contracts.
These new categories of questions from the FTC—the U.S. Department of Justice to date does not appear to have adopted similar practices—are a significant and potentially alarming departure from the more focused questions customarily raised by the agencies in either their initial 30-day review of a transaction or via a Second Request. The agencies have typically asked questions to further their assessment of a transaction’s direct effects on competition and the corresponding likely impact on consumers.
Under the more traditional approach, there can be instances where labor issues are relevant to a competition analysis (e.g., if reduced competition would affect wage levels by creating a buyer-side monopsonist in the labor market). However, it is not evident how the recent FTC questions focused on labor and worker issues relate to the evaluation of output, product quality or prices that form the traditional basis of analysis under the prevailing consumer welfare standard.
Despite the apparent push by progressives led by Khan to abandon the decades-old consumer welfare standard and expand antitrust enforcement to encompass social issues such as poverty, inequality and climate change, the courts may prove to be a check upon those impulses, as the consumer welfare standard is supported by decades of well-established legal precedent applying the existing statutory framework.
However, Khan’s stated desire to expand that framework, including by the apparent attempt to revisit the scope of the FTC’s authority under Section 5 of the FTC Act, suggests that merger parties should be mindful of the risk that these adjustments could affect their planned transactions in significant ways. While an FTC merger challenge that disregarded the consumer welfare standard and went beyond litigating competition on the merits would face difficulties in court, there are limited constraints on the FTC’s ability to issue Second Requests, and little to no judicial precedent on the proper scope of an FTC investigation.
As a consequence, the FTC can impose significant burdens on parties, such as expensive Second Request compliance, and delay closing, to pursue issues unrelated to assessing the conventional horizontal and vertical market-based analysis.
While the apparent marked departure from the consumer welfare standard has not been tested in the courts, and Congress has not (yet) passed any of the many proposed antitrust reform bills, parties should still consider the following in light of the recent developments at the FTC:
- Given the presumption at the FTC that consolidation within industries is generally harmful, transactions reviewed by that agency face more regulatory risk even if they do not present significant horizontal or vertical competitive issues. Parties should focus greater attention on the antitrust risk-shifting provisions in transaction agreements, even in the context of transactions that would not have been previously subject to significant antitrust scrutiny.
- Although the most recent changes were made under the guise of better-allocating limited resources, the addition of substantive areas to investigate will likely serve to extend already lengthy investigations. Parties should therefore be cognizant of this potential when considering their transaction timelines and termination dates.
- Parties should be prepared to answer questions about how their deal affects labor markets, particularly if they have emphasized the issue publicly or in internal synergy documents that might need to be produced to the agencies as part of the HSR filing or in a merger investigation.
- Parties should consider how public statements and internal documents produced to the agencies generally portray the transaction’s relevance to other societal issues.
- Parties should be prepared for the possibility of antitrust scrutiny in transactions involving financial buyers, even where the absence of a substantive competitive overlap traditionally would have suggested a financial buyer would present less antitrust risk than a strategic buyer.