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John J. Miles I. Introduction The scenario occurs again and again: Two competing hospitals (or hospital systems) under independent control want to "do something together." They offer one of two (or sometimes both) rationales - that they must deliver services more efficiently because of government and managed-care reimbursement cutbacks or that they want to force managed-care plans to increase reimbursement. They don't want to merge, where one would be the surviving organization and the other would disappear; they don't want to consolidate, where they would create a new organization but themselves disappear; and they don't want to do an asset acquisition, where one would simply purchase all the assets of the other. There might be many reasons for their decision not to integrate totally -- pride, ego, politics, mission, identity, branding, culture, debt structure, community opposition, medical-staff opposition, lack of trust, lack of ability to back out, uncertainty, or canonical constraints. For whatever reason, the bottom line is that each participant wants to retain its assets and identity, as well as some degree of autonomy and control over the operation of the hospitals. For one or both parties, this point is not negotiable.
As the parties' transactions counsel explains, virtual mergers can take many forms, but two seem most popular: a joint operating agreement (or joint operating company, called "Newco") arrangement or a holding company. In the former, the hospitals' parents execute a joint operating agreement (or become the members of a newly created nonprofit joint operating entity) that operates the hospitals. In the latter, the parents form, and become the members of a new holding company (another type of the ubiquitous "Newco") that becomes the sole member of the parents' hospitals subject to the arrangement. There is a dizzying array of structural permutations and combinations to which these basic models can give birth, but most virtual mergers follow one of these two general forms. To facilitate their discussions, the parties have established a committee with members from both sides to determine both the most appropriate structure and the details of that structure. A major subject of the discussions about details has focused on who, among the parents, Newco, and the hospitals, will have particular powers relating to the operation of Newco and the hospitals. Those discussions have been heated at times, especially when talk centered on core issues such as Newco's ability to move or close services, appointment of board members and CEOs, and power over Newco's strategic plan. The transactions counsel now brings you into the picture to ensure that the transaction raises no significant antitrust problems. You realize immediately that you'll need, at a minimum, to provide advice relating to several broad questions: (1) whether the parties will need to report the transaction under the Hart-Scott-Rodino premerger notification provisions (a subject not discussed here); (2) whether any of the parties' proposed pre-closing conduct would violate either section 1 of the Sherman Act, or the Hart-Scott provisions if the transaction is reportable (also not discussed here(2)); (3) whether the transaction itself will violate either section 7 of the Clayton Act or section 1 of the Sherman Act (discussed only briefly); (4) whether the hospitals will constitute a single entity for antitrust purposes after the transaction; and (5) closely related to (4), whether, after the transaction, (a) the expected activities of the hospitals will result in any agreements potentially per se unlawful, and (b) the expected activities of the hospitals will result in agreements potentially unlawful under some form of the rule of reason. II. The "Transaction-Itself" and Single-Entity Issues The transaction itself, of course, results from one or more agreements; if any unreasonably restrain competition, they violate section 1 of the Sherman Act. Moreover, the definition of "acquisition" for purposes of section 7 of the Clayton Act is extremely broad(3) - certainly sufficiently broad to encompass many virtual mergers, although admittedly there are no cases directly on point. Section 7 also covers the creation of many joint ventures.(4) The analysis, under either section 1 or section 7, is classic "substantial-lessening-of-competition" merger analysis or "unreasonable-restraint-on-competition" rule-of-reason analysis, which other speakers discuss at this program and I won't repeat. In virtual-merger analysis, a difficult question the antitrust attorney sometimes faces is whether the transaction will result in a single entity for antitrust purposes, or whether the participating hospitals will continue to constitute separate, independent competitors.(5) So you wont be surprised later, I state clearly now that there are no black-and-white answers, rules, or standards for this issue. There is no case directly on point and very little guidance. As will become clearer later, the issue is one of fact, many facts are relevant, and no fact is determinative by itself. Rather, you have to identify the relevant facts, assess the importance of each, and somehow balance the facts suggesting a single entity against those suggesting separate entities. Moreover, there had probably better be relatively few facts tending to show that the hospitals are separate. The single-entity issue is important, of course, because if the hospitals participating in the collaborative transaction don't constitute a single entity after the transaction, then every activity that they undertake collectively or through a newly created Newco constitutes an agreement subject to section 1 of the Sherman Act.(6) On the other hand, if the hospitals are a single entity after the transaction, then section 1 does not apply to their "intraenterprise agreements" and their joint activity violates the antitrust laws only if it at least threatens to result in a monopoly and thus violates the attempted-monopolization provision of section 2. In short, single entities can engage in conduct, if they act unilaterally, that unreasonably restrains competition, while firms acting concertedly cannot:(7) "Classification as a 'single entity' means immunity from Sherman Act, sec.1, considerations."(8) Related to this, the per se rule never applies to the conduct of a single entity, while it can apply to concerted action.(9) So it should give the parties a good deal of solace for section 1 not to apply to every action they take together after the transaction is consummated.(10) Thus, to the extent possible commensurate with the parties business and political needs and goals, it behooves them to structure their transaction in a way that maximizes the probability that the antitrust laws will deem them a single entity. The difficult issue is identifying exactly what makes two formerly competing hospitals a single entity for antitrust purposes. Its helpful to approach this issue from conceptual, legal, and practical standpoints. Conceptually, ask yourself what a firm is, why firms are established, and why, for example, the antitrust laws treat a merger of two firms into one more leniently than other arrangements by which entities agree that they will no longer compete against each other. A firm is merely a group of assets, including people, that attempts to maximize its own profits or utility. It doesnt, for example, enter into agreements with others unless those agreements further its own economic interests. Firms are established because the use of a firm is the most efficient way to organize decision making, production, and distribution, and accomplishing these tasks most efficiently is in the firms best economic interests. Mergers are analyzed more leniently under the antitrust laws than naked price-fixing agreements because, although both "fix prices" in a literal sense, mergers are more likely to achieve consumer benefits by generating efficiencies. So conceptually, the parts of a single firm all work together myopically to promote the firm's own best economic interest. Single firms are selfish and, as part of that selfishness, try to produce and deliver their services as efficiently as possible. In short, "A single firm does not evidence diverse economic interests to the outside world because final decisions are made by the owners or stockholders, who care only about the overall performance of the firm. Only because this is the case can single firms be assumed to behave in the canonical profit-maximizing fashion."(11) To a large extent, the relevant antitrust decisions discussing when technically separate entities constitute a single entity corroborate this conceptual approach. Copperweld(12) is the leading case, but examining briefly the way the courts handled the single-entity issue prior to Copperweld is instructive as to how courts might handle cases afterward where the answer to the single-entity issue is not so clear. Copperweld held, of course, that a parent corporation and its wholly owned subsidiaries are a single entity as a matter of law and therefore legally incapable of agreeing with each other for purposes of section 1. No factual inquiry is even necessary; a conclusive presumption exists. The law prior to Copperweld in most circuits was not that parents and subs (or other closely affiliated entities) were separate entities as a matter of law, but rather that the issue was a fact question. Different courts applied somewhat different tests, but most centered on the degree to which the two entities were "separate" as a factual matter. Courts examined, for example, whether the corporations, even if a parent and wholly owned subsidiary, competed against each other, whether they held themselves out to the public as distinct entities, whether they had overlapping managements, whether their financial statements were consolidated, whether they filed joint tax returns, the reason they operated through separate entities, their degree of integration, the degree to which the parent actually controlled the day-to-day activities of its subsidiaries, and even whether they had separate headquarters, records and bank accounts.(13) In the case of parents and wholly owned subsidiaries, Copperweld changed the question from one of fact to one of law. Why? First, because given the incentives of and the relationship between a parent and its subsidiary, together with relevant principles of corporate law, no factual inquiry is necessary to determine that the subsidiary will always act in the parents best interest, or that, if it doesnt, the parent has the incentive and ability to force it to do so; and second, the two entities working together are so likely to achieve important efficiencies that applying an unreasonable-restraint-on-competition standard to their activities might deter them from taking efficiency-enhancing activities together. On the first point, several concepts from the opinion are telling. The Court explained that a parent and its wholly owned subsidiary do not "pursu[e] separate economic interests."(14) They "have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousnesses, but one."(15) "With or without a formal 'agreement,' the subsidiary acts for the benefit of the parent. . . ." They "always have a 'unity of purpose or a common design. They share a common purpose whether or not the parent keeps a tight rein over the subsidiary; the parent may assert full control at any moment if the subsidiary fails to act in the parents best interests."(16) As to the second point -- that the relationship likely would achieve efficiencies -- the Court expressed concern that vigorous conduct that might achieve efficiencies could result in the misimpression of unreasonably restraining competition, emphasizing that "it is sometimes difficult to distinguish robust competition from conduct with long-run anticompetitive effects."(17) The Court felt that "a business enterprise should be free to structure itself in ways that serve efficiency of control, economy of operations, and other factors dictated by business judgment without increasing its exposure to antitrust liability."(18) It noted that a corporation and its divisions are a single entity for antitrust purposes because "[a] division . . . pursues the common interest of the whole rather than interests separate from those of the corporation itself; a business enterprise establishes divisions to further its own interests in the most efficient manner possible."(19) The Seventh Circuit noted later that "[l]ike a single firm, the parent-subsidiary combination cooperates internally to increase efficiency."(20) The concurring judge in that case based his analysis of the single-entity issue primarily on the belief that separate interests among the parties would lead to inefficiency and inefficient decision making.(21) Although the Court in Copperweld was careful to limit its holding strictly to only the parent-subsidiary relationship, it's clear that its rationale applies to a wide variety of affiliated-entity situations.(22) No decision discusses the single-entity issue in the context of a virtual merger, but all of Copperwelds progeny focus on the question of whether, in the relationship between firms that are affiliated in some way, the parties have divergent interests that may prevent them from acting to maximize the benefits of that relationship. As in Copperweld, the answer is easy, and can be determined as a matter of law, where one party to the relationship can control all its activities, as in the case of wholly owned sister corporations of the same parent,(23) the divisions of a single corporation,(24) corporations owned by the same shareholders,(25) shareholders and their corporations,(26) and employers and their employees.(27) The issue becomes more difficult where control is only partial. The cases are not completely consistent is determining whether, for example, a corporation and its majority, but less than wholly, owned subsidiaries are capable of conspiring(28) and in determining whether corporations whose owners differ to some extent are legally capable of conspiring.(29) It seems relatively clear that most joint ventures are not single entities and thus that their actions are subject to section 1.(30) The Chicago Bulls decision, however, throws a mini-wrench into even that conclusion, indicating that a joint venture may be a single entity with respect to some of its activities but not as to others, and requiring an in-depth factual analysis of the issue.(31) Arguing in favor of single-entity treatment, the court explained, was that the NBA produced a single product, that cooperation among the teams was essential for the product to be offered, and that the NBA had no existence independent of sports. None of these factors would seem to apply to hospital virtual mergers. Copperweld seems to tell us, in attempting to determine whether two technically independent entities that operate themselves through a Newco are a single entity for antitrust purposes, to examine whether, after their transaction, the separate entities continue to have divergent interests that may prevent Newco from achieving the efficiencies it would achieve absent those divergent interests: "The antitrust issue is really whether, as a result of some cooperative venture, economic interests which remain independent coordinate their decisions. . . . Joint ventures . . . are subject to antitrust scrutiny [under section 1] precisely because separate economic interests are joined in decision making, with the potential for distorted results."(32) If those divergent interests exist, Newco may not be able to act in its own, individual best interest; if that occurs, Newco may not maximize its own efficiency as a single firm. When one party completely controls the other, they should meet the single-entity test automatically -- that is, as a matter of law -- as in Copperweld. Thus, in the nonprofit world, two "subsidiaries" and their single corporate member are a single entity if that corporate member itself exercises complete control over the "subsidiaries." The question is more difficult and fact-specific absent this circumstance, however. Then we have to examine the transaction closely and identify whether its structure leaves open the significant possibility of divergent interests and the ability of the separate parties to implement decisions that are in their own, but not in Newcos, best interests.(33) Thus, the salient question in virtual-merger single-entity analysis probably will be the degree of divergent interests after the transaction and whether those separate interests are sufficient that Newco itself can't take actions that are in its best interests. It seems doubtful, however, that the hospitals would literally have to have a complete unity of interests. The Seventh Circuit, in the Chicago Bulls case, reversed the district court on that very point. The district court read Copperweld to require a "complete unity of interests." The Seventh Circuit explained that the Supreme Courts use of the "complete unity of interests" phrase only described the factual relationship between a parent and its wholly owned subsidiary, not a legal requirement for single-entity status: "As a proposition of law, it would be silly. Even a single firm contains many competing interests."(34) Similarly, the Eighth Circuits earlier decision in City of Mt. Pleasant suggests that trivial divergent interests dont preclude single-entity status. Rather, the court explained that there must be, "at the very least, interests which are sufficiently divergent so that a reasonable juror could conclude that the entities have not always worked together for a common cause."(35) Accordingly, a first step is to identify any variables in the transaction suggesting that the hospitals will still have significant divergent interests after the transaction. The second step is to determine whether the separate parties will have the power to implement actions that promote their separate, divergent interests. Two variables that would seem particularly important are whether the hospitals continue to compete in the same relevant market as Newco after the transaction and whether they share the risk of profits and losses from their new relationship in fixed proportions.(36) If the hospitals continue to compete against one another in the same relevant market as Newco, then they are almost sure to try to direct Newco in ways that benefit themselves individually.(37) The competitive relationship among the parties was the crux of Judge Borks reasoning in Rothery Storage & Van Co. v. Atlas Van Lines, Inc.,(38) that the board members of Atlas Van Lines, an agglomeration of independently owned moving companies, were legally capable of conspiring with Atlas. Each Atlas director was associated with an independent moving company that was an actual or potential competitor of Atlas. Numerous other decisions have based a finding that the parties were incapable of conspiring primarily on the fact that they were not actual or potential competitors of themselves or of the new entity they had created,(39) or a finding that parties were capable of conspiring on the fact that they were independent, competing entities.(40) In addition, the draft federal government Collaboration Guidelines list four requirements for a transaction to be "treat[ed] . . . as a horizontal merger," including that "the integration eliminate[s] all competition among the participants in the relevant market."(41) That the participants in Newco continue to compete in the same relevant market as Newco is probably sufficient by itself to constitute a significant divergent interest that precludes single-entity treatment. The converse, however, is clearly not true: The mere fact that the Newco participants cease to compete after the transaction is far from sufficient to justify single-entity treatment. Otherwise, the parties could fix prices, allocate markets, or otherwise agree not to compete with impunity without integrating at all. The sharing of Newco's profits and losses in fixed proportions by those who own or control it probably goes a long way, but not far enough, to justify single-entity treatment. In Maricopa dicta, the Supreme Court explained that the defendant foundations for medical care were "not analogous to partnerships or other joint arrangements in which persons who would otherwise be purchasers pool their capital and share the risks of loss as well as the opportunities for profit. In such joint ventures, the partnership is regarded as a single firm competing with other sellers in the market."(42) The parties' sharing Newco's profits and losses provides them with an incentive to maximize Newco's profits (or minimize its losses). If they split revenues or profits on an "eat-what-you-kill" basis, however, their incentive is to operate Newco in a way that maximizes only their portion of the returns from Newco.(43) In the latter case, Newco's best interests are secondary. Although the sharing of profits and losses clearly provides the parties with an incentive to act in the best interest of Newco as a whole, it seems doubtful that the Supreme Court was establishing a single-variable test for single-entity status, an issue that was not even under review. The incentive created by risk sharing might not override other interests the parties might have in operating Newco in a way that maximizes their individual interests. So this variable, like that of whether the parties continue to compete against each other, probably is not determinative of whether the virtual merger will result in a single entity. Thus, youll have to carry the analysis further. Look in particular at the efficiencies the transaction is supposed to generate, whether either of the parties will have an incentive to prevent Newco from taking action that generates those efficiencies, and whether the transaction is structured in a way that would permit either party to prevent Newco from taking the efficiencies-enhancing action. Look at the powers Newco has and the powers that its parents have reserved to themselves or to the hospitals. Powers relating to Newco's operation reserved to the individual parents or the individual hospitals cut against single-entity status. Related to this, look at ways the individual parties might block Newco action, such as parent or hospital veto powers and Newco-board or hospital-board supermajority voting requirements. The examination is a "who-has-the-power-to-do-what" analysis. First, determine if the power is significant in the sense that it affects Newco's ability to achieve efficiencies. If the power is insignificant, don't worry about who has it. If it is significant, Newco's holding it argues for single-entity status, while the parents' or the hospitals' holding it argues for separate-entity status. Examine and think carefully about the state's nonprofit corporation statutes, the transaction documents, and the parties stated reasons for structuring the transaction as a virtual merger rather than as either a complete merger or joint venture. Sometimes their rationale tells you about whether the parties will continue to have divergent interests. Mark Bottis paper discusses concerns the Antitrust Division raised about the original structure of the Long Island Jewish Medical Center/North Shore Health System transaction. He notes that one of the parties' goals was to maintain each hospitals continued independent identity. Depending on how the parties planned to accomplish this, that goal can argue against single-entity treatment. He also notes that Newcos board would have been able to remove a hospital trustee only by a supermajority vote and thus that the representatives of the two hospitals on Newcos board could effectively block the removal of a trustee of their hospital. The hospitals would not have shared profits and losses, and importantly, I think, a supermajority of Newcos board would have had to approve any consolidation of services. Each of these factors argues against single-entity status. We can develop a list of significant activities or powers, no one of which is determinative by itself, that ideally should be centralized in Newco and not subject to reserve or veto powers of Newco's parents or its "subsidiary" hospitals. Reasonable minds can differ on the appropriate factors, but my list, in general order of importance, is as follows:
I don't suggest that this list is exhaustive or that a transaction's failure to centralize each of these functions will preclude single-entity status. But these are functions that the parties should delegate the Newco wherever possible. By "Newco has complete control," I mean that these powers are not reserved in any way to either party or hospital. If they are, then that party can block Newco action. Requiring a supermajority vote by Newcos board can have the same effect. In fact, some might argue that even a Newco board appointed 50-50 by the two parents might preclude Newco from single-entity treatment because each side could block Newco action. An issue that might arise as you look for separate or divergent interests is whether a theoretical divergent interest is sufficient to preclude single-entity status, or whether there must be evidence that a party has actually taken action to pursue its divergent interest. In the case of a corporation and its employees, most circuits hold that an employee has the legal capacity to conspire with his or her employer only if he or she has an "independent personal stake" in the outcome of the conspiracy separate from that of the employer.(46) But its not clear whether a mere divergent incentive is sufficient, whether the employee must actually have the power to implement that divergent interest,(47) or whether he or she must actually act to implement the divergent interest.(48) In City of Mt. Pleasant, for example, the court explained that the plaintiff had to show that "defendants had pursued interests divergent from those of the co-op itself,"(49) but rarely is the issue discussed. In any event, it seems that in determining whether a virtual merger results in a single entity, we regress to the pre-Copperweld world of examining all the relevant facts indicating the degree of "separateness" between the hospitals after the transaction. The question is one of fact, but, like other factual issues, it can be decided on summary judgment if the underlying facts are not in dispute. Indeed, even though the issue is factual, the City of Mt. Pleasant court was able to decide the question on summary judgment, and I'm not aware of a post-Copperweld case in which the issued reached a jury. III. No Single Entity? The Applicable Standard and Its Application Although it helps the home team substantially if the hospitals are a single entity for antitrust purposes, the game is not necessarily over if they aren't. It does mean, however, that section 1 applies to every action Newco takes, which may result in the Lawyers' Full Employment Act. Of most concern, obviously, are - horizontal price-fixing and horizontal market-allocation agreements because of the spectre of per se condemnation. Thus, Newcos negotiating contracts with managed-care plans and its deciding which hospital will provide particular services and which wont (ironically, a major vehicle for achieving potential efficiencies) will be particularly suspect.(50) The issue, in sum, is whether any of Newcos post-transaction actions will unreasonably restrain competition. Classic section 1 joint-venture analysis from the cases (as well as the governments Statements of Antitrust Enforcement Policy in Health Care and the draft Collaboration Guidelines(51)) come into play. Other speakers will discuss this analysis in detail, and so I'll only outline it briefly here. Lets focus on Newcos negotiating contracts with payers for both hospitals. The first basic question is whether that price-fixing activity is ancillary to Newco activities that generate procompetitive effects, or whether the restraint is "naked."(52) The decisions are fuzzy on precisely what makes an agreement ancillary, but an agreement is clearly ancillary if (1) the parties, through the transaction, have significantly integrated their operations (2) in a way that makes significant efficiencies plausible, and (3) the agreement under examination is reasonably necessary for the transaction to achieve the plausible efficiencies. Each of these requirements raises a number of subissues and questions of degree that can require a relatively subjective analysis. Following the contours of Statements 8 and 9 of the Enforcement Statements, such price-fixing agreements are ancillary where prices are fixed on contracts through which the hospitals share substantive financial risk. Additionally, its probably possible for the hospitals to integrate clinically sufficiently for the price restraint to be ancillary, but determining precisely whats necessary and implementing it are no easy tasks. Moreover, it is far from clear that either of these forms of integration is necessary if there is substantial governance and operational integration. A related issue that can arise, especially when the providers clinically integrate, is identifying the point in time at which the providers' integration is sufficient so that their price-fixing activities are ancillary. At what point can a provider network that clinically inteagrates jointly negotiate contracts with payers without running afoul of the per se rule? When it decides it will clinically integrate? When it develops a plan for clinical integration? When its board approves that plan? When it begins to implement the plan? When the plan is fully implemented? Or only when the network can prove that efficiency benefits actually result from the plan. All else equal, my view is that the plan needs to be fully implemented and operating but that provable results need not have been achieved. The price-fixing agreement's ancillarity gets it rule-of-reason treatment. But which rule of reason applies, or more precisely, at what point on the rule-of-reason continuum of degree-of-necessary-review does the analysis occur? If the agreement is a horizontal price-fixing agreement (or if "an observer with even a rudimentary understanding of economics could conclude that [the agreement] would have an anticompetitive effect"(53)) and the plausible efficiency justifications can easily be dismissed as a theoretical or factual matter (or if the parties proffer no significant plausible efficiencies), the agreement can probably be condemned summarily with no further analysis.(54) Likewise, if there is direct evidence that the agreement has already resulted in anticompetitive effects, such as supracompetitive prices, and no significant efficiencies, no further analysis is necessary.(55) On the other hand, absent these conditions and if its obvious the defendants lack market power, the analysis can stop at that point in favor of the agreement. Where none of these circumstances hold, then you must at least begin a "full-blown" rule-of-reason analysis, although even it can sometimes be short-circuited before all potential steps are taken. First, the relevant market (or markets) must be defined;(56) the hospital merger decisions are particularly helpful in explaining the relevant geographic market analysis.(57) Second, calculate the parties post-transaction combined market share, the level of market concentration, and the extent to which the transaction increases that level and the parties' market share, and apply the structural standards of the Merger Guidelines(58) and the cases. This quantitative data may show that the transaction does not raise competitive concerns and thus that the analysis can stop. If the analysis must proceed, examine qualitative factors, such as the height of entry and expansion barriers (which will typically be too high in hospital markets to negate a price increase), whether the parties will continue to compete against themselves and Newco (sometimes called "insider competition"(59)) (which they rarely will do after a virtual merger), whether the hospitals are each other's most direct competitors, and the efficiencies the transaction will generate. If entry or expansion barriers are sufficiently low or substantial insider competition would exist (both of which seem unlikely), the analysis can stop in favor of the agreement. The case law, unfortunately, is of little help in conducting an in-depth analysis of efficiencies and in determining whether they offset the potential or actual anticompetitive effect of the transaction shown by the quantitative data. Indeed, the decisions say little more than that the efficiencies must be significant and must benefit consumers.(60) The governments discussions, in both its Merger Guidelines(61) and its draft Collaboration Guidelines, are much more detailed, but its not clear that a court would require the degree of proof the guidelines require. It seems to me that the parties should have to show, first, (1) the specific efficiencies they will achieve and how they will achieve them, (2) the magnitude of those efficiencies in dollars, (3) when they intend to achieve each efficiency, (4) the cost of achieving each efficiency (that is, "net" efficiencies), (5) that the efficiency would not be achieved if the transaction did not occur (that is, that the efficiencies are "transaction specific"), and (6) that they indeed will take the action necessary to achieve each efficiency, including that no significant impediments exist to prevent achievement. An interesting question is whether only "real" efficiencies (that is, use of fewer resources to produce the same or greater output) should count, or whether "pecuniary" efficiencies (that is, such things as the exercise of monopsony power and tax and accounting gimmicks, that save money but not resources) also should count. Colorable arguments exist for both positions. Second, if the transaction presents competitive concern -- that is, if the prior analysis indicates that the parties will be able to exercise market power -- the efficiencies must somehow be "balanced" against the potential anticompetitive effects.(62) It's not even clear, however, what this means. Does it mean that if efficiency effects equal five and market-power effects equal four on some scale, the transaction is lawful because efficiency effects predominate? No decision discusses this question in detail, but some cases can be interpreted as accepting this position. Or does it mean that the efficiency effects must be such that the parties can't or won't exercise market power? The governments position seems to be the latter.(63) Another question is whether the efficiency savings have to be passed on to the parties customers to count in favor of the transaction. If, indeed, the antitrust laws are a "'consumer welfare prescription'" as the Supreme Court has said,(64) the answer is yes. If the purpose of the antitrust laws is to maximize total welfare (the aggregate welfare of both producers and consumers) as most economists believe, then the answer is no. Recent cases appear to adopt the consumer-welfare view.(65) A final difficulty in efficiencies analysis is simply measuring the procompetitive and anticompetitive effects of the agreement before the "balancing" process even begins. As a practical matter, both the measurement of the relevant concepts and their balancing is a highly subjective task, and only rough estimates (or hunches) are actually possible. Conclusion Unfortunately, this presentation raises a number of questions that neither the courts nor the enforcement agencies have answered. The analysis of virtual mergers, particularly the single-entity issue, can be complex and detailed guidance is lacking. To paraphrase one decision, "Whether [Newco] itself is more like a single firm, which would be analyzed only under sec. 2 of the Sherman Act, or like a joint venture, which would be subject to Rule of Reason analysis under sec. 1, is a tough question under Copperweld."(66) What an understatement! The good news is that, thus far, the enforcement agencies appear to have analyzed virtual mergers as mergers. The apparent lack of government interest in the single-entity issue suggests that the government is more interested in examining the issue that really matters: whether the transaction, regardless of how it is structured, is likely to result in market power. It is this situation that harms consumers, not when two firms without market power might engage in a technical violation of section 1 because they fix prices without sufficient economic integration. On the other hand, the single-entity issue is always lurking in the background in virtual-merger transactions as a potential hook on which the government can hang its hat when it receives a complaint from a payer. Accordingly, the question still deserves close examination and analysis. Thus far, however, the problem has been more theoretical than real.
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Ober, Kaler, Grimes & Shriver
Maryland
Washington, D.C. Virginia |
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