Late last month, a federal district court judge in Washington, D.C. granted the request of the Federal Trade Commission (FTC) for a preliminary injunction against the proposed combination of Sysco and U.S. Foods because, according to the FTC, the merger “raised questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance . . . .” In essence, despite having already conducted an intensive, 15-month investigation, the FTC sought an injunction that would allow it to further study the merger. The court’s injunction and the likely further delay predictably put an end to the merger.
The death of the Sysco/U.S. Foods merger underscores the sensibility of the proposed Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act, now working its way through Congress. While opposed by the FTC, SMARTER can simply and fairly require the FTC to show that a merger is likely to harm competition before it blocks the deal through the procedural device of a federal court preliminary injunction. That’s the same standard the Antitrust Division of the Justice Department (DOJ) must meet, and is the standard approach for federal courts considering a preliminary injunction request. Under current law, unlike DOJ the FTC faces the lower “further inquiry” standard quoted above. Passage of SMARTER could lead to equal treatment for all mergers under the law when tested in federal court regardless of which agency happened to review them.
Why the different standards currently? It’s not really clear. Largely as a result of historical accident, antitrust merger enforcement in the United States is split between the FTC and the DOJ. Both agencies review pending mergers for antitrust issues, enforce the same substantive law, use shared merger enforcement guidelines, but fortunately only one agency reviews any given merger. Which mergers go to which agency is determined by the industry involved. Chemical industry mergers go to the FTC, for example, while steel industry mergers are the domain of the DOJ.
That’s probably not the way you would set up a merger review regime if you were starting from scratch, but on its face the system has seemed workable—if a little awkward. But the fairness and reasonableness of avoiding duplication and having only one agency review a merger falls apart if the outcome of the merger review turns on the luck of the draw as to which agency reviews it. Those industries that find themselves in front of the FTC face a far more daunting task than those who go before the DOJ due to the disparate standards. The inequities in such a system are obvious and manifest.
The SMARTER Act appears to have some momentum in Congress, and one FTC Commissioner has come out in support of this legislation, correctly noting that it “solves a practical problem of potentially disparate preliminary injunction standards between the FTC and DOJ.” Nevertheless, FTC leadership is fighting passage of the statute, and argued against it in recent Congressional oversight hearings. In March, the FTC announced changes to its internal processes, seeking to stave off passage of the SMARTER Act, but those reforms apply only after the damage already has been done during the federal court preliminary injunction hearing.
FTC arguments for a lower standard do not hold water. The FTC relies on linguistic differences in its complex authorizing statute—the Federal Trade Commission Act (FTC Act). But it is simply not credible to assert that Congress considered the possibility that the FTC and DOJ should have different hurdles for blocking a merger, and then artfully crafted the FTC Act’s language to achieve this bizarre and unfair result. Additionally, in its recent oversight testimony before Congress, the FTC claimed that its status as an “expert” antitrust agency should afford it greater deference. But that argument is backwards. If the FTC has greater expertise, it should be better prepared after 15-months of investigation to show the likelihood of harm, not need more time for study. In reality, the FTC’s intransigence on this issue is likely driven more by the exigencies of litigation rather than sound policy. But win at any cost is not a long-term prescription for instilling confidence in the country’s merger enforcement regime.
Although a sense of basic fairness should have led the FTC already to support SMARTER, its success in the Sysco/U.S. Foods challenge should give it the confidence to do so. Let’s start with the observation that while the FTC sought an easy win in Sysco/U.S. Foods using its “further inquiry” standard, that lower standard does not fully reflect the FTC’s case. Almost despite itself, the FTC presented a more serious case on the antitrust merits and in doing so demonstrated why it doesn’t need special treatment to enforce the antitrust laws. That happened in significant part because the court recognized that its decision would dictate the fate of the merger. Although the court recited the FTC’s preferred standard, it made various findings and observations that may well have supported a decision on the merits. Similarly, the FTC does not believe that it merely showed a need for further study. Rather, according to Debbie Feinstein, Director of FTC’s Bureau of Competition, “The evidence shows that Sysco and US Foods were strong rivals in broadline food distribution whose combination would have harmed consumers.”
But the fact that the FTC didn’t get the easy win in Sysco/U.S. Foods does not eliminate the credibility and fairness problem from its having tried. No doubt the FTC would have applauded a victory where the court merely decided the FTC had raised “serious, substantial, difficult and doubtful” questions. And no doubt the FTC will rely on the lower standard in other cases and potentially block deals that would pass muster if tried under the more rigorous standard. If that had occurred in Sysco/U.S. Foods, the FTC would have blocked a merger after 19 months of investigation and litigation (the federal court case took 4 months on top of the 15-month investigation) without any government agency or court reaching a conclusion on the lawfulness of the transaction or even finding affirmatively that it was merely likely that the merger would be anticompetitive. That can’t be right on its face. Moreover, it is a jarring outcome when contrasted with the fact that the same merger would have been allowed to proceed if the DOJ had reviewed it.
It is hard to believe the FTC truly believes it needs the lesser standard. Is it the FTC’s position that it is less able to successfully prosecute a merger challenge than is the DOJ? Certainly, the DOJ believes it has the ability to prosecute merger challenges, having called on its federal court litigators to stop or modify mergers in the airline, cellular telephone, personal income tax software, local tour bus, movie advertising, and containerboard industries, as well as just having initiated a challenge to a major kitchen appliances merger. Why can’t the FTC do the same thing?
That brings us back to the Sysco/U.S. Foods challenge and what it teaches us. Leaving aside what one thinks about the facts and the merits of the case, the court and the FTC both seem to believe that the FTC proved a likelihood of the transaction being anticompetitive. If that is correct, then perhaps the decision will give the FTC the confidence in its own abilities to rely on the same standard as DOJ and to withdraw its opposition to the SMARTER Act.