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THE THRESHOLD Newsletter Of The Mergers & Acquisitions Committee Volume XIV Number 2 Spring 2014 FROM THE CHAIR To All Committee Members: Welcome to the Spring edition of The Threshold! And for those of you who may be reading this at the J.W. Marriott Hotel, welcome to the Spring Meeting! This issue is packed with informative articles that merger practitioners should find both useful and timely. We lead off with Ronan Harty’s very interesting interview of FTC Chairwoman Edith Ramirez that touches on a number of hot merger topics, including acquisitions of physician groups, merger retrospective studies, potential competition mergers, patent portfolio acquisitions, and international merger enforcement. Next, Bruce Hoffman critiques the DOJ remedy in the American/US Airways merger, concluding that the remedy “inflicts harms and bestows benefits on passengers that appear unrelated to any merger effect” CONTENTS Interview with Chairwoman Edith Ramirez by Ronan P. Harty 3 Boarding For an Unknown Destination: The Remedy in the American / USAirways Merger by Bruce Hoffman 13 Dead on Arrival: Can Efficiencies Revive an Otherwise Unlawful Hospital Merger in Court? by John Matthew Schwietz 30 Navigating the Weeds of Foreign Investment Review: A Case Study of Archer Daniels Midland/Graincorp. and BHP Billiton/ Potash Corp. by Julie Soloway and Leah Noble 41 The EU Merger Simplification Package: What's New and What Are the Consequences? by Gavin Bushell and Luca Montani 55 Future Forecasting in Potential Competition: Stormy Days or Clear Visibility Summary of ABA Brown Bag Program by George Laevsky 68 International Roudup by Julie Soloway and David Dueck 75 About the Mergers and Acquisitions 86 Committee About the Threshold 87

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    THE THRESHOLD Newsletter Of The Mergers &

    Acquisitions Committee

    Volume XIV

    Number 2

    Spring 2014

    FROM THE CHAIR

    To All Committee Members:

    Welcome to the Spring edition of

    The Threshold! And for those of you who

    may be reading this at the J.W. Marriott

    Hotel, welcome to the Spring Meeting! This

    issue is packed with informative articles that

    merger practitioners should find both useful

    and timely.

    We lead off with Ronan Hartys very

    interesting interview of FTC Chairwoman

    Edith Ramirez that touches on a number of

    hot merger topics, including acquisitions of

    physician groups, merger retrospective

    studies, potential competition mergers,

    patent portfolio acquisitions, and

    international merger enforcement. Next,

    Bruce Hoffman critiques the DOJ remedy in

    the American/US Airways merger,

    concluding that the remedy inflicts harms

    and bestows benefits on passengers that

    appear unrelated to any merger effect

    CONTENTS

    Interview with Chairwoman Edith Ramirez

    by Ronan P. Harty 3

    Boarding For an Unknown Destination: The

    Remedy in the American / USAirways

    Merger

    by Bruce Hoffman 13

    Dead on Arrival: Can Efficiencies Revive an

    Otherwise Unlawful Hospital Merger in

    Court? by John Matthew Schwietz 30

    Navigating the Weeds of Foreign Investment

    Review: A Case Study of Archer Daniels

    Midland/Graincorp. and BHP Billiton/

    Potash Corp.

    by Julie Soloway and Leah Noble 41

    The EU Merger Simplification Package:

    What's New and What Are the

    Consequences?

    by Gavin Bushell and Luca Montani 55

    Future Forecasting in Potential

    Competition: Stormy Days or Clear

    Visibility Summary of ABA Brown Bag

    Program

    by George Laevsky 68

    International Roudup

    by Julie Soloway and David Dueck 75

    About the Mergers and Acquisitions 86

    Committee

    About the Threshold 87

  • 2

    alleged in the complaint. John Matthew Schwietz addresses whether efficiency claims can

    rescue a horizontal hospital merger that is otherwise dead on arrival in court after challenge by

    the FTC; he concludes that recent court decisions do not inspire hope, and that the merging

    parties best shot is presenting such claims to the FTC during the investigation phase. Gavin

    Bushell and Luca Montani discuss the ins and outs, and the consequences, of the recent EU Merger

    Control Simplification Package.

    Julie Soloway and Leah Noble discuss the foreign investment review processes in Canada

    and Australia that led to rejection of the ADM/GrainCorp and BHP Billiton/Potash Corp.

    mergersdespite the fact that the mergers were cleared by the national competition authorities.

    Julie is doing double duty for this issue, also collaborating with David Dueck on the International

    Roundup, which discusses recent developments concerning the failing firm defense in the EU,

    UK, and Australia, and efforts to streamline merger review in Europe, China, and Turkey.

    Finally, we have an interesting summary of a recent M&A Committee Brown Bag program on

    the current state of potential competition analysis in merger review, prepared by George

    Laevsky.

    The committee has been hard at work, not only on this issue of The Threshold, but also

    on a new edition of the Premerger Notification Practice Manual, a new edition of the Mergers

    and Acquisitions book, the soon-to-be completed second request cost study, and several changes

    to our committee website, including the update through December 2013 of our invaluable (or so

    we think) product market catalogue, the addition of a new resource base of antitrust-related

    merger agreement clauses, and the conversion of our website to the ABA Connect platform.

    The next Threshold will be out in the Summer. As always, we would be delighted to

    publish letters to the editor commenting on any past articles, and we would be doubly delighted

    to hear from you about any articles you would like to write yourself.

    Enjoy the newsletter!

    --Paul B. Hewitt

  • 3

    INTERVIEW WITH CHAIRWOMAN EDITH RAMIREZ1

    By Ronan P. Harty

    What are the principal items on your competition agenda as Chairwoman?

    I have focused on the healthcare and technology sectors since I first joined

    the Commission in 2010, and those sectors continue to be a priority for me as

    Chairwoman. As is well known, these have been important priorities for the

    Commission for many years. Let me say a few words about each area.

    Healthcare accounts for over 17% of GDP, and study after study tells us

    that vigorous competition in healthcare markets reduces costs, improves quality,

    and expands access for consumers. The Commission has a great record

    promoting competition in healthcare markets. Our Supreme Court victory in the

    Actavis case will make it easier to challenge anticompetitive pay-for-delay

    settlements. In addition to pressing forward with two ongoing actions, including

    Actavis, we continue to look carefully at settlements filed under the Medicare

    Modernization Act to determine whether there are other enforcement actions we

    should pursue in light of the Supreme Courts ruling. Preventing anticompetitive

    provider consolidation is another healthcare priority that has deep roots at the

    Commission. While hospital mergers can generate important efficiencies that

    benefit consumers, we will continue to look carefully at acquisitions that are

    likely to enhance market power.

    Promoting competition in high-technology markets is also a priority.

    Innovation drives economic growth and expands consumer welfare. Innovation

    also plays a central role in the competitive dynamics of high-tech markets. Firms

    1 Edith Ramirez is Chairwoman of the U.S. Federal Trade Commission. She was appointed to the

    FTC by President Obama and was sworn in as a Commissioner on April 5, 2010. She was

    designated to serve as Chairwoman effective March 4, 2013. Prior to joining the Commission,

    Ramirez was a partner in the Los Angeles office of Quinn Emanuel Urquhart & Sullivan LLP.

    She graduated from Harvard Law School cum laude (1992) and holds an A.B. in History magna

    cum laude from Harvard University (1989).

  • 4

    in this sector are more likely to compete on the basis of new products and

    business models rather than on price. So the risk of harm to competition and

    consumers through a lessening of incentives to innovate tends to be more acute.

    Consistent with our 2010 Horizontal Merger Guidelines, we will be on the

    lookout for transactions in this area that raise competitive concerns. Of course,

    evaluating competitive effects in rapidly evolving markets requires the

    Commission to make educated predictions about the future. But thats something

    we do every day when we evaluate mergers in a variety of industries, and is not

    something we can avoid where the competitive landscape is shifting more rapidly.

    We will also continue to take a hard look at exclusionary tactics that discourage

    entry from nascent rivals. Our staff has a wealth of experience in both merger and

    conduct enforcement in high-technology markets, and the Commission has

    demonstrated its ability to make tough calls based on the evidence in each matter,

    pursuing a challenge against Intel for exclusionary tactics in 2009, while voting

    unanimously to close its investigation of Googles product design decisions in

    2012.

    My policy agenda also tracks these interests. The Commissions unique

    advantage as a competition and consumer protection agency rests in part on our

    expertise in research and policy analysis, and our authority to collect nonpublic

    information to conduct industry studies. We can often accomplish as much for

    consumers through policy and advocacy as we can through enforcement. The

    Commission, for example, has always taken a leadership role on policy issues at

    the intersection of competition and intellectual property, and I hope to build on

    that record during my tenure.

    Our proposed study of patent assertion entities is one important project in

    this area. The available evidence suggests the PAE activity may be affecting

    incentives to innovate and compete in ways that we do not yet fully understand.

    We know that litigation activity by PAEs is on the rise, but we have little more

    than anecdotal evidence on PAE activity outside of the courtroom. Under

    Section 6(b) of the FTC Act, we have the authority to collect nonpublic

  • 5

    information to conduct industry studies, and last fall the Commission voted

    unanimously to issue a Federal Register Notice seeking comment on a proposed

    PAE study focusing on the economic costs and benefits of PAE activity. We are

    completing our analysis of the nearly 70 comments we received and will soon be

    seeking OMB approval to proceed with the proposed study. The Commission is

    uniquely positioned to expand the empirical picture on the costs and benefits of

    PAE activity. We have a talented and dedicated team of lawyers and economists

    working on this study, and I am excited about moving forward with it.

    While the Commission has always been active when it comes to hospital

    mergers, we are also seeing challenges to physician acquisitions, for example

    the Reno consent last year and the St. Luke's litigation. Do you anticipate

    continued active enforcement in this area? Many of these types of

    acquisitions (physician acquisitions) do not meet HSR thresholds. So, how do

    you ensure that you are able to review such acquisitions?

    The FTC will continue to carefully review all types of combinations

    between healthcare providers. As Ive already noted, we have good evidence that

    mergers between providers that enhance market power can increase costs and

    reduce quality and access to healthcare services. While these acquisitions can

    also generate efficiencies, where we have evidence that a merger is likely to

    enhance market power, parties must be able to verify any efficiency claims and

    show that the efficiencies are merger-specific and of a character and magnitude

    that would outweigh any likely anticompetitive effects in the relevant market.

    In the St. Lukes case, the court carefully considered whether efficiencies

    provided a defense to the Commissions challenge and concluded they did not.

    St. Lukes acquisition of the Saltzer Medical Group would have combined the

    largest provider of adult primary care services in Nampa, Idaho with its closest

    rival in a very concentrated market. The parties claimed that the merger would

    have created valuable efficiencies by permitting more integrated patient care and

    greater sharing of electronic medical records. While the court was persuaded that

    team-based care and shared electronic records can improve quality and reduce

    costs, it concluded that the parties could have achieved those same efficiencies

  • 6

    through collaborative arrangements short of a merger. So the court correctly

    concluded that the merger was unlawful.

    As to your point about reporting thresholds, it is true that small provider

    acquisitions often fall below HSR reporting thresholds. However, we typically

    learn about potentially problematic mergers from a variety of sources, including

    state attorneys general, commercial health plans, others in the marketplace, media

    reports, and our own monitoring. And we make sure through publications like

    this and other public engagement that our views about the potential

    anticompetitive risks of these combinations are well known to all participants in

    healthcare markets.

    The FTC has a reputation as an agency that works effectively and in a

    bipartisan way. Thats not always the case in Washington. Whats the

    FTCs recipe for success?

    As an independent agency with important law enforcement

    responsibilities, we take great pride in our bipartisan and consensus-oriented

    culture. While my colleagues and I may at times see things differently, we work

    hard to understand one anothers perspectives and always aim for consensus. We

    are all committed to protecting consumers and promoting competition, and the

    vast majority of our decisions are unanimous. But let me also emphasize that the

    FTC has a great reputation mainly due to our talented and hardworking staff. Not

    only are they on the front lines in everything we do, but it is also the high quality

    of their work that enables informed dialogue among Commissioners, including in

    those instances when we dont all agree on the outcome.

    Are there any ongoing FTC studies of the effects of your merger enforcement

    program in healthcare or other areas?

    I think retrospectives are an important tool that can be used to improve the

    quality of merger enforcement programs. Done well, retrospectives may be able

    to tell us whether we are providing consumers with good value for their

    enforcement dollar. They can also help us educate courts. As is well known,

    retrospectives helped the FTC reinvigorate its hospital merger enforcement

  • 7

    program about a decade ago. Retrospectives that focus on remedies, particularly

    whether divestitures are effective in restoring the competition lost through an

    otherwise anticompetitive transaction, can also help improve merger enforcement.

    The Commissions divestiture policies today are grounded in part on what we

    learned from our 1999 divestiture study.

    At the same time, merger retrospectives are resource intensive, and it is

    not easy to design a study that provides us with unbiased answers to the relevant

    enforcement questions. But good retrospectives can make us a more effective

    agency and I am working with our Bureaus to identify possible projects.

    What are your views on potential competition? Typically, we see potential

    competition cases in the pharma and medical device industries but the FTC

    recently obtained an enforcement action in the Nielsen/Arbitron matter.

    Does that signal that we are likely to see more potential competition cases in

    the future?

    I think Nielson/Arbitron can be seen as an example of the Commissions

    commitment to promoting competition in the high-tech sector. We challenge

    mergers where the evidence provides us with a sound basis to believe that

    competitive harm is likely, and that was the case in Nielson/Arbitron. Internal

    documents and statements from the parties showed that the parties had each

    invested significant time and resources to develop an audience measurement

    product that covered multiple platforms and were beginning to offer them to

    customers. There was broad consensus among media companies and advertisers

    that Nielsen and Arbitron were the two firms best positioned to develop a cross-

    platform measurement product in the foreseeable future that would satisfy

    emerging demand. The evidence also showed that these products would likely

    compete directly for business. Taken together, the evidence provided ample

    reason to believe the transaction was likely to harm competition, and I was very

    comfortable supporting a challenge and settlement in that matter.

  • 8

    We have seen a number of transactions in recent years in the IT sector

    involving the sales of large patent portfolios. Is there something unique about

    the Section 7 analysis when the buyer is a patent assertion entity?

    We apply the same basic analytic tools and economic principles to

    evaluate mergers irrespective of the business models of the transacting parties.

    As always, we are concerned with transactions that enhance market power or

    facilitate the exercise of market power. In a situation involving the acquisition of

    a large patent portfolio, the relevant question under Section 7 would be whether

    the transfer is likely to enhance market power.

    For example, with regard to the upstream technology market, we would

    want to understand whether the transaction combined important substitute patents,

    and whether there were any merger specific efficiencies associated with the

    combination. We would also ask if the patents at issue are important to

    competition in one or more downstream markets, and, if so, whether the buyers

    incentives to license those patents are likely to differ from those of the seller post-

    acquisition and how that change would be likely to affect downstream

    competition. The downstream product market analysis would follow the same

    basic framework we apply to other vertical mergers, such as the GE/Avio

    transaction earlier this year.

    In some cases, the incentives of PAEs to assert and license patents may

    differ from those of operating companies. Operating companies that are

    themselves vulnerable to infringement claims may refrain from asserting patents

    against entities that could strike back. Since PAEs are not generally susceptible to

    countersuit, the transfer of a large portfolio from an operating company to a PAE

    might lead to more assertion activity. If PAEs assert these patents against firms

    that have already embedded the patented technology in products, the transfer

    could also increase the risk of patent hold-up, which may distort incentives to

    innovate and reduce consumer welfare.

    I am committed to using all of the agencys tools to protect consumers

    from harmful PAE activity, including using our antitrust enforcement authority to

  • 9

    stop anticompetitive portfolio acquisitions by PAEs. However, it is also

    important to understand that antitrust cannot provide a solution to some of the

    broader competition policy risks that may be associated with PAE acquisitions.

    To reduce the threat of patent hold-up more broadly throughout the marketplace,

    policymakers should continue to pursue reforms that improve the patent system.

    Much has been said about Section 5 and there appears to be a clamoring

    from the bar and others for guidance on what is commonly called the

    Commissions standalone Section 5 authority. Does the Commission plan

    on issuing a policy statement on Section 5? Why or why not?

    The Commission is clearly engaged on this issue and several of us have

    explained our views publicly. I favor developing Section 5 enforcement

    principles using a common law approach. Congress deliberately drafted Section 5

    broadly to provide the agency with the administrative flexibility to address unfair

    methods of competition that would have been difficult to define adequately in

    advance and that would necessarily change over time with economic learning and

    an evolving competitive landscape. Courts have successfully developed the

    contours of both the Sherman and Clayton Acts using a case-by-case approach,

    and I believe the Commission can and should follow that approach for Section 5.

    While I recognize that a predictable enforcement environment promotes

    economic growth, an enforcement policy that places too much weight on certainty

    has economic costs as well. As I noted in a speech I gave at a recent symposium

    at GMU, an approach that is excessively concerned about over-enforcement does

    not serve the marketplace as whole. While erring on the side of under-

    enforcement may provide certainty to incumbents, it can impose a great deal of

    uncertainty on nascent rivals seeking to challenge a dominant firm or business

    model.

    In my view, our enforcement actions themselves provide useful guidance

    for the business community. Our most recent cases show that the Commission

    will challenge conduct that courts may conclude falls outside the scope of the

    Sherman Act, but only where we have reason to believe the conduct is likely to

  • 10

    cause harm to competition and where the harm outweighs cognizable efficiencies.

    We applied this very familiar rule of reason approach in our Google/MMI and

    Bosley actions last year, and it is the standard that I think ought to be applied in

    future actions.

    You were in Beijing recently to meet with MOFCOM. What is your

    impression of the way in which China is handling merger reviews? Is there

    anything you would like to see them change?

    We have followed the evolution of MOFCOMs merger review process

    with great interest. The FTC, together with the Department of Justice, provided

    MOFCOM with input on the merger provisions of the draft Anti-Monopoly Law

    through the consultation process prior to adoption of the law in 2007. We have

    been in regular contact since that time regarding implementation, and even more

    so since 2011 when we entered into a Memorandum of Understanding with

    MOFCOM and the other two Chinese competition agencies. I am impressed that,

    in just over five years, MOFCOMs Antimonopoly Bureau has built the capacity

    to analyze complex merger issues with skill. AMB staff are diligent and appear

    eager to learn from the experiences of enforcers around the world.

    With that said, I am concerned about some aspects of MOFCOMs review

    process. Merger review goes more slowly in China than in most other

    jurisdictions with a pre-merger notification program. MOFCOM has reported that

    87% of the mergers they review move to a second phase investigation, similar to a

    second request here, even though ultimately MOFCOM imposes conditions on

    less than 5% of all reported transactions. In most jurisdictions, less than 10% of

    reported transactions go to a second stage investigation, with the percentage

    below 5% in the United States. These numbers suggest that a large number of

    transactions that do not pose competitive issues are subject to a lengthy review in

    China, imposing costs on the merging parties and consuming MOFCOMs limited

    enforcement resources. Recently, MOFCOM released rules on simple

    transactions, which may make it easier for MOFCOM to complete many more

    investigations within the initial 30-day review period. I hope these new rules will

  • 11

    allow MOFCOM to focus its resources on those mergers that pose genuine

    competitive concerns.

    I am also concerned about the role that industrial policy plays in

    MOFCOMs merger enforcement program. The AML expressly requires that

    MOFCOM take economic development into account in merger review. As a

    matter of practice, MOFCOM will often consult with other ministries, including

    those responsible for designing and implementing Chinas industrial policies. In

    my view, antitrust enforcement should focus on promoting competition and

    consumer welfare, and should not be used as a tool for industrial policy.

    However, where an enforcement agency is obliged to consider other goals, it is

    particularly important to the global regulatory environment that the agency do so

    in a manner that is transparent.

    Are we seeing greater convergence in international merger enforcement?

    Does the Commission plan any initiatives in this area?

    The FTC has worked hard to reduce the burdens on parties that can be

    associated with differences in merger analysis and procedures across jurisdictions,

    and I think the trend toward convergence is continuing. The FTC promotes

    convergence on sound antitrust principles through our work in multilateral

    organizations and our bilateral relations with counterpart agencies around the

    globe.

    By way of example, as you touched on earlier, I recently participated in

    the second FTC/DOJ Joint Dialogue with Chinas three competition agencies, at

    which senior officials addressed antitrust policy and practice issues, including

    those related to merger review, timing, and remedies. We also just concluded a

    trilateral meeting with the Canadian and Mexican competition agencies and held

    bilateral meetings over the past year with the European Commission, Japan, and

    India at which we discussed merger policy convergence and cooperation.

    Additionally, through consultations and cooperation on merger cases under

    concurrent review, we have addressed key policy and procedural issues that have

  • 12

    helped bring our approaches to merger policy and practices closer. We also

    continue to strengthen case cooperation and coordination to reach compatible

    results on individual cases of mutual interest. Thermo Fisher/Life Technologies is

    a recent example of a case in which we cooperated with antitrust agencies in

    many jurisdictions, including Australia, Canada, China, the European Union,

    Japan, and Korea to reach compatible results on a global scale. We have also

    been active with technical assistance to a broad array of young agencies.

    The FTC remains committed to working towards even greater

    convergence of competition policy and practice internationally, and we look

    forward to working with the Antitrust Section and others to do so.

    Justice Brandeis once said, You can judge a person better by the books on

    his shelf than by the clients in his office. What books have you been reading

    recently?

    I hope Judge Brandeis would view me as a good commissioner, as my

    daily reading mainly consists of staff memos, white papers and case law. I wish I

    had time to read more widely and am always on the lookout for good books. The

    last book I read was La Sombra del Viento by Spanish author Carlos Ruiz Zafn,

    which I thoroughly enjoyed. Im about to start Quiet by Susan Cain, which I am

    looking forward to reading. It was recommended to me a while ago, and I was

    finally prompted to buy it after listening to Cain speak at the HLS Celebration

    60 conference last fall. Another book that I hope to get to soon is Thanks for the

    Feedback by Douglas Stone and Sheila Heen. It relates to an issue that I have

    given significant thought to in the past while working with young law firm

    associates, and am thinking a great deal about now at the FTC how to ensure

    that staff are fully engaged and that those of us who are managers are effective

    supervisors and mentors. Thanks for the Feedback was recommended to me as

    having useful insights on that subject.

    If anyone has any other good reading suggestions, I would love to hear

    them.

  • 13

    BOARDING FOR AN UNKNOWN DESTINATION: THE REMEDY IN THE AMERICAN /USAIRWAYS MERGER

    D. Bruce Hoffman1

    On August 13, 2013, the United States, joined by seven States and the

    District of Columbia (collectively, DOJ), filed suit to block the proposed

    merger of American Airlines and US Airways. The complaint2 made sweeping

    allegations that the merger would spur nationwide coordinated price increases and

    service reductions, inflict consumer harm on over a thousand routes served by

    both American and US Airways, and produce a near-monopoly in slots at Reagan

    National Airport (DCA). But a scant three months later, DOJ and the airlines

    announced a settlement which was essentially limited to addressing the airlines

    slot overlap at DCA, plus a few slots at LaGuardia (LGA) and a handful of

    gates and related facilities at a few other airports around the country.3 The

    settlement has been harshly criticized for failing to address the harms alleged in

    the complaint, and also for requiring that the divested assets go to one set of

    competitorsthe so-called Low Cost Carriers, or LCCs, such as Southwest and

    JetBlue.

    Litigation has consequences: as a result, there is no requirement that a

    settlement reached during litigation mirror the allegations of a complaint. But

    1 Bruce Hoffman is a partner and head of antitrust at Hunton & Williams LLP. Thanks to Brian

    Hauser of Hunton & Williams for extensive assistance with this article, Jeff Ogar for helpful

    thoughts about airline mergers and related issues, Ronan Harty for suggestions and (particularly)

    patience, and Gil Ohana for editing. The author represented Delta in its acquisition of Northwest

    and its slot swap transaction with USAirways, but is not representing Delta or any other airline in

    connection with this matter. This article does not purport to represent the views of Hunton &

    Williams or any of its clients.

    2 This article focuses on the Amended Complaint filed by the United States, the States of Arizona,

    Florida, Michigan, Pennsylvania, Tennessee, Texas, and Virginia, and the District of Columbia,

    against US Airways Group, Inc. and AMR Corporation, in the United States District Court for the

    District of Columbia on September 5, 2013 (Compl.).

    3 See Proposed Final Judgment, Competitive Impact Statement, etc., filed on November 12, 2013.

    The Competitive Impact Statement is cited as CIS below.

  • 14

    here there is a fundamental divergence between the complaint, the remedy, and

    the antitrust laws. That divergence could perhaps be reconciledthough with

    potential implications for the scope of the remedybut DOJ has not provided the

    analysis that would be necessary to do so.

    I. The Merger and the Complaint

    On February 13, 2013 American Airlines (then in bankruptcy) and US

    Airways announced a merger. That merger would combine the third and fifth

    largest US airlines to create the largest airline in the world. In the U.S., the four

    largest remaining airlinesthe new American, Southwest, United, and Delta

    would carry over 80% of domestic passenger traffic.4

    On August 13, 2013, the complaint was filed, followed on September 5 by

    an amended complaint (on which this article focuses). The complaint is detailed

    and lengthy, and a full description of it and the amended complaint is beyond the

    scope of this article. But its central themes are easily summarized.

    The complaint drew a sharp distinction between so-called legacy

    airlines and LCCs. Legacy airlines are the descendants of the nations historic

    airlines, and typically operate hub-and spoke networks serving numerous

    destinations with mixed fleets of aircraft and multiple classes of service.5 The

    complaint alleged that post-merger there would only be three such airlines:

    American, United, and Delta.6

    LCCs, on the other hand, typically operate point-to-point service with

    simple aircraft fleets appealing primarily to leisure travelers, though business

    travelers do patronize LCCs.7 Southwest, by some measures the nations largest

    airline, is the most prominent LCC. Among the numerous other LCCs are

    4 Compl. 36.

    5 E.g., Compl. 32.

    6 E.g., Compl. 1, 3.

    7 E.g., Compl. 17, 32, 47, 93.

  • 15

    JetBlue, Spirit, Virgin America, and Allegiance. The complaint alleged that while

    LCCs may drive down average prices on routes they serve, they do not presently

    offer good substitutes for the legacy airlines, for reasons including their lack of

    hub and spoke networks, preferences of many passengers for legacy airlines

    offerings, and the LCCs absence from many routes.8

    Against this backdrop, the complaint alleged that the merger would result

    in three major legacy airlines that, as the DOJ put it, prefer tacit coordination

    over full-throated competition.9 The merger would reduce the number of legacy

    airlines from four to three, and align the economic incentives of those that remain,

    allowing increased coordination on price and service.10

    This alignment would

    occur by eliminating two forms of maverick competition by the existing legacy

    airlines. First, the complaint contended that US Airways (US) is a price

    maverick. In essence, according to the complaint, USs hub and route structure

    was inherently less lucrative than the other legacy airlines, giving US an

    incentive to compete directly with the other legacy airlines on price (particularly

    by offering low prices on connecting routes that compete with other airlines

    direct routes).11

    Second, according to the complaint, American (AA) was

    poised to become a service maverick on exiting bankruptcy, dramatically

    increasing capacity (and thereby inevitably driving prices down) while the other

    legacy airlines had been attempting to reduce industry capacity.12

    The complaint also observed that slots at DCAone of the four airports in

    the US subject to slot constraintswould be very highly concentrated. Slots are

    rights to take-off or land; airports subject to slot limitations are restricted in the

    number of take-off or landing operations they can permit in any given day.

    8 Compl. 93; see also CIS at 5-6.

    9 Compl. 3.

    10 Id.

    11 Comp. 5-6.

    12 Compl. 8-9.

  • 16

    Without slots, airlines cannot serve a slot-constrained airport, and limits on slots

    constrain airlines ability to expand service. 13

    The complaint then alleged two relevant antitrust markets, both consistent

    with longstanding DOJ precedent:

    1) Scheduled air passenger service between cities (city-pairs), such

    as Washington-Chicago. Also consistent with DOJ practice, the complaint

    observed that in some cases consumer preferences and price

    discrimination may support smaller relevant markets involving service

    between particular airports, such as between DCA (highly preferred by

    business travelers) and other airports. This allegation put into play well

    over 1000 relevant markets.14

    2) Slots at DCA. Slots are bought and sold, and since they are

    necessary for flight operations at slot-controlled airports, the DOJ has in

    the past contended that slots at particular airports are relevant markets.15

    However, while slots were alleged to be a relevant market, the complaint

    and other filings in the case generally described the competitive effects

    related to slot concentration in terms of their effects on downstream

    competition, i.e., the effect of slot holdings on city-pair concentration and

    the ability of competing airlines to enter city-pair routes originating or

    terminating at the slot-controlled airport.

    The complaint began its analysis of effects by alleging a structural case

    based on concentration in each set of relevant markets.16

    It claimed that the

    merger would increase the HHI beyond the level at which anticompetitive effects

    13 Compl. 10. The other slot-constrained US airports are all in the New York area: JFK,

    LaGuardia, and Newark.

    14 Compl. 24-29, 38; see also CIS at 4-5.

    15 Compl. 30-31; see also CIS at 5.

    16 See Compl., 36-40.

  • 17

    are presumed likely in over 1000 city-pairs. It further alleged that the merger

    would substantially increase HHI in the already highly-concentrated market for

    DCA slots, again resulting in a structural presumption of increased prices

    (apparently for air service using those slots).

    The complaint operationalized the structural presumption through what

    appeared to be two theories. First, the complaint alleged a theory of coordinated

    interaction on price and service among the remaining legacy airlines.17

    By

    reducing the number of legacy airlines and eliminating two mavericks, the

    complaint alleged that the merger would generally increase price and service

    coordination, elevating price and reducing service. The complaint noted that the

    LCCs would not constrain this effect because of the difference between their

    products and customers and those of the legacy airlines.18

    Second, the complaint appeared to allege a unilateral effects theory in

    numerous markets where the merger would eliminate competition between AA

    and US, particularly markets involving routes originating or terminating at

    DCA.19

    This included seventeen nonstop direct overlaps (traditionally, the

    greatest area of DOJ concern), and included lost competition on routes DOJ

    alleged the airlines had planned to fly prior to the merger, such as planned entry

    by US on DCA-MIA. But it also included over 1000 other overlaps, including

    connecting routes, on which DOJ alleged prices would rise due to the loss of

    competition between AA and US. Finally, the DOJ alleged that US used its large

    slot holdings at DCA inefficiently, and was hoarding them to block entry (noting

    that competition from JetBlue had reduced fares on the limited routes it had been

    able to fly after obtaining slots at DCA, notably DCA-BOS).

    17 See Compl., 41-81; see also CIS at 5-6.

    18 Compl. 47, 93; see also CIS at 5-6.

    19 See Compl. 82-90; see also CIS at 6.

  • 18

    Thus, the complaint alleged sweeping theories of anticompetitive effects

    extending across the nation to over 1000 city-pair relevant marketseffects

    which the numerous LCCs allegedly would not constrain.

    II. The Settlement

    The settlement, announced just three months later, painted a different

    picture.

    The settlement itself involved relatively modest relief. The merged airline

    (NewAA) would divest 104 slots at DCAeffectively eliminating any increase in

    slot concentration there.20

    It would also shed 34 slots at LaGuardia (LGA), one of

    the three slot-constrained New York airports.21

    And it would divest

    accompanying gate and other ancillary ground facilities at DCA and LGA, as well

    as two gates each plus ancillary facilities at Chicago OHare (ORD), Los Angeles

    International (LAX), Boston (BOS), Miami (MIA), and Dallas-Love Field

    (DAL).22

    The DOJs competitive impact statement explaining the effects of the

    settlement conceded that [t]he proposed remedy will not create a new

    independent competitor, nor does it purport to replicate Americans capacity

    expansion plans or create Advantage Fares [allegedly disruptive low connecting

    fares used by US on certain routes] where they might otherwise be eliminated.23

    Instead, DOJ argued that the divestitures in the settlement would create network

    opportunities for the purchasing carriers that would otherwise have been out of

    reach for the foreseeable future. Those opportunities will provide increased

    incentives for those carriers to invest in new capacity and expand into additional

    20 CIS at 2.

    21 Id.

    22 CIS at 2-3.

    23 CIS at 8.

  • 19

    markets.24

    This set of divestitures, the DOJ contended, promises to impede

    the industrys evolution toward a tighter oligopoly by requiring the divestiture of

    critical facilities to carriers that will likely use them to fly more people to more

    places at more competitive fares. In this way, the proposed remedy will deliver

    benefits to consumers that could not be obtained by enjoining the merger.25

    By

    carriers that will likely use [slots] to fly more people to more places at more

    competitive fares, DOJ meant LCCs, to whom it required the divestitures be

    made, to the exclusion of the legacy airlines.26

    III. The Criticism and DOJs Response

    Under the Tunney Act, Section 2(b) of the Antitrust Procedures and

    Penalties Act, 15 U.S.C. 16, following the filing of a propose settlement of a

    DOJ antitrust case any person may file comments with the United States, after

    which the court determines whether entry of the final judgment called for by the

    settlement is in the public interest.27

    The settlement attracted numerous comments. Criticism of the settlement

    was extensive and harsh.28

    Some of the key themes in the critiques include the

    following:

    24 Id.

    25 Id.

    26 CIS at 9-10.

    27 15 U.S.C. 16(e)(1).

    28 See, e.g., February 7, 2014 letter from the American Antitrust Institute, the Airline Passengers

    Organization, the Association for Airline Passenger Rights, the Business Travel Coalition, the

    Consumer Travel Alliance, and FlyersRights.Org to William H. Stallings (the AAI Comments);

    January 9 2014 Comments and January 16, 2014 Supplemental Comments of the Wayne County

    Airport Authority Concerning Potential Anti-Competitive Impacts of the Proposed DOJ

    Settlement (Wayne County Comments); Comments of Delta Air Lines, Inc. Concerning

    Proposed Final Judgment As To Defendants US Airways Group, Inc. and AMR Corp., January 21,

    2014 (Delta Comments); Tunney Act Comments of Relpromax Antitrust Inc., February 7, 2014

    (Relpromax Comments); and Response of Plaintiff United States to Public Comments on the

    Proposed Final Judgment, filed March 10, 2014 (DOJ Resp.) at 2 and n. 1.

  • 20

    (1) The remedies did not address the overwhelming majority of

    alleged harms. As the American Antitrust Institute (AAI) pointed out, the

    divestitures at best would address only eighteen of the one hundred city-

    pair routes where concentration post-merger would be highest.29

    Numerous commentators made similar points.30

    (2) Given the complaints insistence that LCCs cannot presently

    check coordinated interaction among the legacy airlines, there was no

    apparent reason to believe that divesting slots to LCCs would address the

    coordination theories described in the complaint.31

    (3) The remedy would fail to address, and in fact inflict harm on,

    consumers, including those flying from DCA to small airports that would

    likely lose service as a result of NewAAs net loss of slotsservice LCCs

    would be extremely unlikely to replace.32

    This criticism seems to be

    29 AAI Comments at 5, n. 7.

    30 See, e.g., Delta Comments at 6-8; Relpromax Comments at 7-8. AAI also argued that DOJs

    approach violated the legal principle that harms and benefits be considered only on a market-by-

    market (here, city-pairs) basis (the out of market efficiencies rule). AAI Comments at 4, 11.

    However, AAI appears to have misunderstood this principle, for two reasons. First, as the DOJ

    and FTC have long recognized, the principle does not apply when out-of-market efficiencies are

    inextricably intertwined with a mergers benefits. United States Department of Justice and

    Federal Trade Commission, 2010 Horizontal Merger Guidelines, n. 14. Even assuming that city-

    pairs are relevant markets, that is nearly always the case in airline mergers, because harms in

    particular city-pairs cannot be specifically remedied by divestitures, and the benefits of airline

    mergers (which are often extensive but were given little discussion in any of the public analyses of

    the merger) likewise typically cannot be isolated and preserved. Taken to its logical conclusion,

    AAIs argument would likely require prohibiting any airline merger with any overlap on any city-

    pair: that is to say, effectively any airline merger. Second, the cases casting doubt on out-of-

    market efficiencies relied heavily on the fact that the benefits of the mergers at issue flowed to

    entirely different people than those affected by the harms. See, e.g., Kottaras v. Whole Foods

    Market, Inc., 281 F.R.D. 16, 25 (D.D.C. 2012 (a merger that substantially decreases competition

    in one placeinjuring consumers thereis not saved because it benefits a separate group of

    consumers by creating competition elsewhere.) (emphasis added). However, in airline mergers

    that frequently is not the case. For example, passengers living in Dallas or Charlotte might lose

    some competition on particular routes from this merger (such as Dallas-Phoenix, or Charlotte-

    DCA), but the exact same passengers might benefit from the increased connectivity out of Dallas

    or Charlotte provided by the mergers combination of the two airlines networks. The limited case

    law on out-of-market efficiencies does not address this scenario.

    31 E.g., AAI Comments at 4-11; Relpromax Comments at 8-9.

    32 E.g., Wayne County Suppl. Comments at 1-2; Delta Comments at 25-30.

  • 21

    proving to be correct. For example, NewAA has eliminated or reduced

    service to numerous cities from DCA and LGA as a result of its net loss of

    slots, and it does not appear that the recipients of those slots have replaced

    much of that lost service.33

    The DOJ filed a detailed response to the criticisms. Much of that response

    focused on legal points explaining why the attacks on the settlement fell short of

    the demanding standard for rejecting a settlement under the Tunney Act, or

    addressing comments not clearly related to Tunney Act issues (such as claims of

    political pressure on DOJ).34

    The DOJs substantive defense of its remedies,

    while quite detailed, boils down to two simple propositions. First, the DOJ

    conceded that its remedies do not address the mergers increase in concentration

    on the overwhelming majority of city-pair routes.35

    But the DOJ argued that no

    remedy could address that issue, because no divestiture can require an airline to

    serve any particular city-pair,36

    and its remedy would at least reduce prices on

    routes the LCCs choose to serve. Second, while the settlement did not prevent the

    effects of the merger that allegedly increased the risk of coordination (the alleged

    reduction of legacy carriers from four to three, and the elimination of USs and

    AAs incentives to behave like mavericks),37

    providing additional slots to LCCs at

    DCA and LGA would allow LCCs to expand and, potentially, gain the ability to

    33 See, e.g., Wayne County Suppl. Comments at 2. Delta also argued that the DAL divestitures

    would harm it and its customers by essentially evicting it from DAL, the closest airport to

    downtown Dallas. Delta Comments at 30-34.

    34 DOJ Resp. at 15-21, 44-50.

    35 See, e.g., DOJ Resp. at 27-30.

    36 DOJ Resp. at 29-30, and n. 52. In fact, for virtually all city-pairs, there may not be an asset that

    could be divested that relates specifically to that city-pair, because planes can fly anywhere, gates

    are rarely if ever in short supply, and even slots cannot generally be restricted to serving particular

    routes.

    37 DOJ Resp. at 8-9.

  • 22

    disrupt that coordination at some point in the future (while providing lower prices

    to at least some passengers in the interim).38

    IV. Analysis

    The settlement is drastically different from the complaint. That, in itself,

    is not necessarily cause for concern about a settlement. Cases change when

    theyre litigated. The facts and economic analysis dont always turn out as

    anticipated, and the parties view of the issues may evolve. The DOJ clearly has

    latitude to accept a settlement that reflects the lessons learned during litigation

    and the risks of proceeding to trial.

    Here, though, there is a fundamental tension between the complaints

    allegations, the settlement, and the requirements and limitations of the antitrust

    laws under which the complaint was filed. While perhaps not an appropriate

    matter for Tunney Act review,39

    that tension raises significant issues of antitrust

    policy.

    To understand this issue, its necessary to go back to the legal foundation

    of merger enforcement: section 7 of the Clayton Act, 15 U.S.C. 18. That statute

    prohibits mergers where in any line of commerce or in any activity affecting

    commerce in any section of the country, the effect of such acquisition may be

    substantially to lessen competition, or tend to create a monopoly.40

    In other

    words, merger enforcement is intended to preclude substantial competitive harm

    in relevant markets. And, accordingly, merger remedies should address the

    identified harms in the identified markets.41

    38 DOJ Resp. at 9-15, 23-30.

    39 E.g., DOJ Resp, at 21-22.

    40 15 U.S.C. 18.

    41 Antitrust Div. Policy Guide to Merger Remedies, 2-4 (June 2011).

  • 23

    The theories of harm identified in the complaint cannot be reconciled with

    the settlement that purports to remedy them.42

    Why is this so? Because in order

    for the DOJs remedy to work, LLCs have to be competitive constraints on legacy

    airlines and relevant markets cannot be city-pairs. If those two conditions hold,

    the remedy might work but the complaint would be wrong. If either of those

    conditions does not hold, the complaint might be right, but the remedy does not

    work. In other words, based on the information provided to the public, the

    complaint and the remedy cant both be right.

    As described above, the complaints basic theories were (1) the merger

    would increase the risk of coordinated interaction by reducing the number of

    legacy airlines from four to three, and (2) the merger would directly harm

    consumers by reducing the number of competitors on over 1000 city-pairs, which

    would result in price increases on those city pairs. For those harms to be

    remedied by slot divestitures at two airports to LCCs who are not likely to use the

    slots to fly the routes affected by the merger, it must be the case that (1) LCCs

    constrain coordinated interaction by legacy airlines, and (2) prices on

    concentrated routes must be affected by competition on other routes, i.e.,

    competition must occur at a network level, not a city-pair level.43

    The complaint, however, alleged precisely the opposite. And, if LCCs

    constrain coordination by legacy airlines, or if competition is not on a city-pair

    basis, the complaint simply fails to allege a viable theory of anticompetitive harm

    sufficient to justify challenging the merger.

    First, if LCCs constrain coordination, rather than a 4-3 merger this merger

    was more like an 11-10 merger (with the addition to the market of LCCs

    42 As noted above, DOJ has urged that a challenge to the merits of the original antitrust case is not

    permissible under the Tunney Act.

    43 Otherwise, there is no justification under Clayton 7 for divesting a slot to an LCC to use that

    slot to fly a route not affected by the merger for the benefit of passengers unharmed by the merger,

    unless relevant markets are broader than particular city-pair routes, or perhaps under the

    inextricably intertwined principles discussed earlier.

  • 24

    Southwest, JetBlue, Allegiant, Alaska, Frontier, Spirit, and Virgin America along

    with US, AA, DL, and UA).44

    Moreover, the remaining competitors are not

    small, fringe firms. They include Southwest, arguably the largest airline in the

    U.S., and a number of the fastest-growing, lowest-priced, highest-service airlines

    in the business (e.g., Spirit and Allegiant on price, and JetBlue and Virgin

    America on service), none of whom face any material obstacles to entry or

    expansion at the overwhelming majority of airports and on the overwhelming

    majority of affected city-pairs, and each of whom offer differentiated service

    under different business models than the legacy airlines.45

    Coordinated

    interaction theories are not normally considered plausible under these sorts of

    market conditions.

    Second, if city-pairs are not relevant markets, the concentration indices

    and price effects described in the complaint would be erroneous and irrelevant.

    Moreover, if there were price disparities between concentrated and

    unconcentrated city-pairs, if city-pairs are not relevant markets, those effects

    would likely caused by factors other than market power, and thus would be

    neither a concern of merger enforcement nor capable of being remedied by such

    enforcement.

    Assuming, however, that the complaint was not fundamentally wrong, the

    settlement not only fails to remedy the harms identified in the complaint, but

    inflicts harms and bestows benefits on consumers without regard to any merger

    effectsand that is not what the Clayton Act requires.46

    44 Entry and exit are not uncommon in the airline industry, so this list could be subject to change

    or debate, but by any definition, the number of competitors is large.

    45 See supra. See also John Kwoka, Kevin Hearle, and Phillippe Allepin, Segmented Competition

    in Airlines: The Changing Roles of Low-Cost and Legacy Carriers in Fare Determination

    (February 6, 2013), available at SSRN: http://ssrn.com/abstract=2212860 or

    http://dx.doi.org/10.2139/ssrn.2212860, at 4-6, and generally.

    46 Once again, with the possible exception of inextricably intertwined efficiencies.

    http://dx.doi.org/10.2139/ssrn.2212860

  • 25

    First, as noted above, with perhaps a handful of exceptions the divestitures

    do not address harms on routes where concentration is increased by the merger.

    For example, a passenger formerly able to choose between AA and US in flying

    between Charlotte and Miami will lose that choice with no new choice to replace

    it. Thus, if the relevant markets are city-pairs, the remedy does not address the

    harm alleged from the merger.

    Second, if LCCs do not restrain coordination by legacy carriers,

    divestiture of slots to LCCs will not address the increased coordination allegedly

    caused by the merger. This is true both on the city-pair level (since the complaint

    articulates no theory by which LCCs could constrain coordination on routes they

    do not fly) and more generally. Neither the complaint, nor the CIS, nor the

    DOJs response to the criticisms of the merger provide any argument explaining

    how the divestitures would address coordination on capacity or service (and if

    city-pairs are markets, there is no reason to think they would, except where LCCs

    that acquire divested slots and facilities actually enter). To the contrary, by

    arguing that LCCs cannot address such coordination now, the DOJ essentially has

    ruled out any claim that enabling relatively modest expansion by some LCCs

    (limited to flights to or from a handful of airports) could have any effect on the

    alleged legacy airline coordination, at least in the foreseeable future.

    Third, as commentators have noted, the remedy harms passengers who

    likely would not have been harmed by the merger. Stripping the merged airline of

    slots at DCA and LGA has resulted in the termination of service on less-profitable

    routes that were served by either US or AA premerger, but not both. To the

    extent those routes are relevant markets, passengers traveling them would not

    have been affected by the merger. But the settlement has caused them to lose

    service they previously enjoyed.

    DOJs defense of its remedy increases the tension with the Clayton Act.

    In essence, DOJ argues that it is threading a competitive needle that will allow it

    to stitch together a superior industry structure sometime in the future. According

  • 26

    to DOJ, while it is true that the LCCs today or immediately post-remedy can

    neither constrain legacy airline coordination nor prevent the vast majority of price

    increases on particular city-pairs, the remedy will help them acquire the assets and

    size to do so someday. And, in the meantime, the remedy will produce lower

    prices on the routes the LCCs receiving slots choose to fly for the passengers who

    choose to use those routes (and, potentially, for connecting itineraries involving

    those routes).

    The primary thrust of this remedysetting the stage for more robust

    future competition by strengthening selected competitorsseems quite

    speculative. As complaint alleges, the LCCs are ill-suited to address the harms

    alleged at any time in the near future. DOJ has not provided any timeline by

    which its hoped-for industry reconfiguration will occur, or by which the LCCs

    will achieve sufficient scale to challenge the legacy airlines in the arenas in which

    the legacy airlines allegedly coordinate. Given Southwests size, it is unclear

    what more DOJ might believe is needed, or even if it is attainable. The remedy

    here, though, seems a Lilliputian step in that direction.47

    Further, DOJs professed reasons for favoring LCCs amount to preferring

    their current business models and hoping that theyll continue to pursue them.

    But nothing in the settlement requires any LCC to do so. Moreover, the

    complaint provides some evidence that it is unlikely LCCs will ever constrain

    alleged coordination among legacy airlines. The complaint alleges that the LCCs

    cannot constrain the legacy airlines now because they do not offer the breadth of

    service, nor engender the customer loyalty, that the legacy airlines provide with

    their far-reaching hub-and-spoke networks. But that implies that in order to beat

    the legacy airlines at this game, the LCCs will likely have to look more like

    legacy carriers, at least to some extent. And, as some commentators have

    observed, doing so would likely require the LCCs to change their structure

    which would change their costs, their business model, and might well be expected

    47 See Relpromax Comments at 8 (comparing effects of divestiture on relative sizes of LCCs).

  • 27

    to cause them to behave like the legacy airlines allegedly do.48

    If so, while the

    number of competitors in various markets might expandperhaps impeding

    coordinationthose additional competitors may not pursue the LCC business

    model on which DOJ places considerable weight as an obstacle to coordination.

    Finally, DOJs claim of benefits from the reduction of prices on routes the

    LCCs choose to enter suffers from two problems. First, as noted above, those

    benefits do not directly address either the alleged harms from the merger or the

    harms inflicted by the remedy. Second, the hoped-for LCC price reductions

    bestow benefits unrelated to the merger on passengers unaffected by the merger.

    To illustrate this, consider the example DOJ provides of reduced prices on

    Newark-Houston and Newark-St. Louis following the slot divestitures required in

    UA/CO.49

    While this is difficult to determine with certainty, it appears that prior

    to acquiring Continental, United did not fly nonstop between Newark and either

    Houston or St. Louis.50

    Thus, while DOJs remedy may have benefited

    passengers on those routes, they were not going to be harmed by the merger.

    They simply received a windfall. Likewise, here passengers benefiting from

    increased service between, say, DCA and Orlando will receive windfall benefits.51

    Put differently, the professed benefits of the remedy are out-of-market benefits.

    To summarize, DOJs complaint, remedy, and the Clayton Act seem

    incompatible. If the complaints description of the relevant markets and

    competitive harms is correct, the remedy does not appear to be directly related to

    any alleged substantial lessening of competition in any line of commerce and

    48 AAI Comments at 10; Delta Comments at 20-24, 26-28; Relpromax Comments at 8-9. There is

    some evidence that this is already happening. AAI Comments at 8; see also Kwoka, Hearle, and

    Alepin at 7-9.

    49 CIS at 10.

    50 UA may have flown this route via connections, but if airlines behaved then the way the DOJ

    alleges they behave now, the UA connections would not have affected the pre-merger price, and

    thus the merger likely would not have harmed passengers on those routes.

    51 It is true that many of the passengers at issue may be the same people who would be harmed by

    increased concentration on city pairs, and that might support DOJs approach to benefits. But

    DOJ has not made this argument.

  • 28

    does not appear to correct any such lessening caused by the merger. Further, the

    remedy appears to bestow benefits and inflict harms on consumers without any

    connection to any such lessening of competition. The remedy here more closely

    resembles a tax imposed on the transaction, the proceeds of which are then used

    by the government to benefit particular preferred competitors in the hopes that

    doing so will eventually make the market more competitive. This is a wide-

    ranging endeavor that is very difficult to connect to antitrust law. If, on the other

    hand, the complaint was fundamentally erroneous, then the justification for

    imposing a remedy seems absent, and its connection to any kind of antitrust

    theory obscure. Finally, under either scenario, the remedy seems to provide little

    more than a hope that things may improve in the future, without any clear path to

    that desired outcome.

    There are two other possibilities. First, it could be that in airline mergers

    there simply are no practical remedies for competitive harms from mergers, and

    the best that can be done is to weigh total harms and benefits in deciding whether

    to approve a merger. The DOJ hints at this in the CIS and its response to the

    comments on the settlement. But if this is the correct reading of events, it would

    be greatly beneficial if DOJ would be far more explicit on this point. DOJs

    filings to date fail to describe the benefits that would offset the harms DOJ

    continues to assert, and provides no means for industry participants, practitioners,

    or the public to assess and weigh those harms and benefits. Further, this still

    leaves unanswered the deeper question raised by DOJs remedies here. In the

    past, the DOJ seems to have sought to block airline mergers when the aggregate

    harms exceeded benefits (e.g., the proposed United/US Air merger, which the

    United States sued to stop in 2001), or cleared them without conditions when the

    reverse was true (e.g., Delta/Northwest). But here the DOJ has done something

    different. It imposed remedies that harm some consumers and benefit others in

    what could be an attempt to address the total welfare effect of the transaction,

    without clearly explaining what it was doing. Whether DOJs approach was

    correct is a serious issue that is difficult to assess absent more explanation from

    DOJ.

  • 29

    Second, it is possible DOJ simply concluded it could not win the case and

    took whatever remedy it could get. That often happens in litigation between

    private parties with only their own economic interests to consider. But should the

    DOJ engage in such a practice? Or should it either litigate and, if necessary,

    loseor simply drop cases that turn out to be unmeritorious? And, in any event,

    if DOJ is simply extracting the most from what turned out to be a bad hand, it

    would be beneficial to the public if it provided more information explaining that

    that is what it was doing.

    Conclusion

    The DOJs challenge to the AA/US merger was comprehensive. It

    described sweeping nationwide harms, as well as harms in an enormous array of

    narrow antitrust markets. The settlement, however, leaves the alleged harms

    largely unaddressed. It instead transfers assets from the merging firms to another

    set of firms to facilitate the recipients development as future competitors. In so

    doing, the remedy inflicts harms and bestows benefits on passengers that appear

    unrelated to any merger effect. Whether this was in fact what DOJ intended is

    unclear, but there is not enough information provided to conclude otherwise.

    And, if that is what the settlement is intended to do, further public debate may be

    merited on whether market engineering of this nature is an appropriate role for an

    antitrust enforcer applying Section 7 of the Clayton Act, as opposed to an industry

    regulator.

  • 30

    DEAD ON ARRIVAL: CAN EFFICIENCIES REVIVE AN OTHERWISE UNLAWFUL HOSPITAL MERGER IN COURT?

    John Matthew Schwietz1

    Efficiencies have come a long way with respect to their recognition in

    merger analysis. Historically, courts have deliberately disregarded efficiencies or

    treated them with hostility until it eventually became economically irrational to

    do so.2 The increased recognition of efficiencies is also apparent in each

    successive publication of the United States Department of Justices and Federal

    Trade Commissions (Agencies) Horizontal Merger Guidelines, which

    progressively reflect the Agencies willingness to consider efficiencies during

    merger review.3

    A major concern when analyzing efficiencies is whether or not the merger

    at hand will produce efficiencies that are likely to reverse its potential

    anticompetitive effects.4 Courts use a sliding scale approach when balancing

    claimed efficiencies against potential anticompetitive effects.5 This approach

    requires that, if a mergers potential harm is substantial, the parties must produce

    extraordinarily great cognizable efficiencies to survive.6 The Agencies

    specifically recognize that efficiencies in hospital merger context present both

    1 John Matthew Schwietz is J.D. Candidate, University of Minnesota Law School (2014)

    2 See Thomas B. Leary, Commr, FTC, Efficiencies & Antitrust: A Story of Ongoing Evolution,

    Remarks at the ABA Section of Antitrust L., 2002 Fall Forum (Nov. 8, 2002), available at

    http://www.ftc.gov/speeches/leary/efficienciesandantitrust.shtm) (hereinafter Leary Remarks)

    (citing Williamson, Economics as an Antitrust Defense, 58 Am. Econ. Rev. 18 (1968).

    3 See Leary Remarks.

    4 Robert F. Leibenhuft, Asst. Dir., Bur. of Comp., FTC, Antitrust Enforc. & Hosp. Mergers: A

    Closer Look, text of remarks before the Alliance for Health, Grand Rapids, Mich. (June 5, 1998)

    (hereinafter Leibenhuft Remarks).

    5 D. Daniel Sokol & James A. Fishkin, Antitrust Merger Efficiencies in the Shadow of the Law, 64

    VAND. L. REV. 45, 47-48, 65 (2011) at 64 (hereinafter S/F) (citing id. at 720); see also Merger

    Guidelines 10.

    6 S/F at 60-61 (citing Merger Guidelines 10 (emphasis added)).

  • 31

    ample reasons for skepticism as well as unique opportunities.7 Perhaps the most

    unique opportunities efficiencies offer in the context of hospital mergers are

    patient care benefits that result from the consolidation of clinical services.8

    Typically, efficiencies that yield short-term positive effects and pass savings on to

    customers are given the most weight.9 Nevertheless, efficiencies have yet to

    revive an otherwise unlawful merger in court.10

    This is no longer the case merely

    because courts continue to lack the utility to examine difficult economic

    problems.11

    Instead, parties often-claimed efficiencies are simply not merger-

    specific and are notoriously difficult to measure.12

    For litigators hoping to revive an otherwise unlawful merger in court, it is

    important to note that efficiencies are typically the last factor courts consider.13

    In

    other words, some mergers may appear to have ended up in court dead on arrival,

    requiring extraordinary efficiencies arguments to resuscitate the merger. Two

    fairly recent cases broadly illustrate how litigators should (or perhaps, should not)

    present efficiencies claims in court: FTC v. OSF Healthcare System, and FTC v.

    ProMedica Health System, Inc.14

    7 Id.; see Christine A. Varney, Commr, FTC, New Directions at FTC: Efficiency Justifications in

    Hosp. Mergers & Vertical Integn. Concerns, text of remarks before Health Care Antitrust Forum

    (May 2, 1995) (hereinafter Varney Remarks).

    8 See Tenet, 186 F.3d at 1054.

    9 Id. at 31 n. 15.

    10 John Miles, Analyzing Hospital Mergers-Other Factors-Efficiencies, 3 HEALTH L. PRAC. GUIDE

    12:36 (2012). (citing ProMedica, 2011 WL 1219281 (citation omitted)).

    11 See U.S. v. Topco Assocs., Inc., 405 U.S. 596, 609 (1972).

    12 See id.; Miles (citing FTC v. Univ. Health, 938 F.2d 1206, 1223 (11th Cir. 1991)); FTC v.

    Butterworth Health Corp., 946 F. Supp. 1285, 1301 (W.D. Mich. 1996).

    13 Debra A. Valentine, Gen. Counsel, FTC, Health Care Mergers: Will We Get Efficiencies Claims

    Right?, text of remarks before St. Louis Univ. Sch. of L. (Nov. 14, 1997) (hereinafter Valentine

    Remarks); see Varney Remarks.

    14 852 F. Supp.2d 1069 (N.D. Ill. 2012); 2011 WL 1219281 (N.D. Ohio).

  • 32

    Case Analysis I: The OSF Healthcare System Courts Sliding Scale Required

    OSF to Produce Substantial, Non-Speculative Efficiencies.

    In the first case, OSF Healthcare System, the FTC challenged the

    proposed merger-to-duopoly of St. Anthony Medical Center and Rockford

    Memorial Hospital in Rockford, Illinois.15

    They were separately owned and

    operated by OSF Healthcare and RHS (hereinafter referred to as OSF-RHS).16

    Through their negotiations, OSF agreed to acquire RHSs assets; become its sole

    corporate member; and combine operations to create a new health care system. 17

    In OSF, the applicable primary product markets at issue were general

    acute care [(GAC)] inpatient services . . . sold to commercial health plans and

    primary care physician services.18

    These markets included a broad cluster of

    overnight hospital stays, surgical procedures, and emergency and internal

    medicine services.19

    The court defined the relevant geographic market as the area

    within a 30 minute drive-time radius from Rockford, Illinois.20

    With respect to

    patient admissions and patient days21

    , the mergers resulting HHI22

    would have

    increased 151 and 161 percent, respectively.23

    In addition, the new health care

    15 See OSF, 852 F. Supp.2d at 1069.

    16See id. at 4.

    17 Id. at 1072.

    18 See id. at 1075-76.

    19 Id.

    20 See Tenet, 186 F.3d at 1052; id.

    21 Def. of Patient Day, http://medical-dictionary.thefreedictionary.com/patient+day, (last viewed

    May 17, 2013) (Each day represents a unit of time during which the services of the institution or

    facility are used by a patient).

    22 See Def. of Herfindahl-Hirschman Index HHI, http://www.investopedia.com/terms/h/hhi.asp

    (last viewed May 15, 2013) (A commonly accepted measure of market concentration[ that] is

    calculated by squaring the market share of each firm competing in a market, and then summing the

    resulting numbers. The closer a market is to being a monopoly, the higher the market's

    concentration . . . .)).

    23 OSF, 852 F. Supp.2d at 1079.

  • 33

    system would have controlled 59 percent of the GAC market based on patient

    admissions and 64 percent of that market based on patient days.24

    The Court had No Trouble Finding the OSF and RHS Merger

    Presumptively Unlawful.

    Given the relevant markets at issue, the court had no trouble finding the

    proposed merger to be presumptively illegal, as the market concentration

    calculations far surpass[ed] the percentages that are regularly deemed illegal.25

    To rebut the FTCs case, OSF-RHS claimed its merger would result in substantial

    efficiencies, including recurring and one-time capital avoidance savings.26

    Specifically, OSF-RHS made five cost-savings claims, including:

    (1) $15.4 million in annual, recurring cost savings from clinical and operational consolidation;

    (2) $114.1 million in avoiding one-time capital expenditures for building a new bed tower at one of its locations;

    (3) $6.4 million through avoiding the replacement of outdated equipment and by purchasing a single, shared

    surgical da Vinci Robot;

    (4) $7 million based on the replacement cost of a trauma helicopter; and

    (5) $7.8 million per year by enhancing clinical

    effectiveness.27

    The merging parties also argued that their merger would lead to certain

    community benefits for the Rockford area such as improved quality of care and

    the development of centers of excellence.28

    The purported community

    24 Id. at 1078.

    25 Id. (citing U.S. v. Phila. Natl Bank, 374 U.S. 321, 363 (1963); Univ. Health, 938 F.2d at 1219

    (holding that the FTC clearly established a prima facie case of anticompetitive effect when the

    merged entity would control approximately 43 percent of the GAC market with three remaining

    competitors)).

    26 OSF, 852 F. Supp.2d at 1079, 1088-91.

    27 Id.

    28 OSF, 852 F. Supp.2d at 1093.

  • 34

    benefits were alleged to increase the hospitals ability to attract specialists and

    develop a residency program.29

    With respect to OSF-RHSs cost savings claims, the judge found that a

    substantial portion of them were overstated, . . . speculative, [and] inadequately

    substantiated.30

    This finding was due in part to conflicting expert testimony on

    the subject of efficiencies and the uncertainty surrounding whether, and to what

    extent, the proposed consolidations would actually occur.31

    The court also

    summarily dismissed the consolidation arguments after OSF-RHS failed to offer

    evidence (and failed to study) the consolidations feasibility, as OSF-RHS had no

    specific plans for the consolidations to occur.32

    The other examples of capital spending avoidance savings OSF-RHS

    identified suffer[ed] from similar infirmities.33

    Specifically, these claimed

    savings were based solely on the success of service line consolidations, the scope

    of which was uncertain.34

    [T]o the extent that the proposed savings [we]re

    speculative or otherwise not cognizable, these secondary benefits [we]re likewise

    speculative or not cognizable . . . .35

    As such, the projected savings were deemed

    too speculative and the claimed efficiencies were deemed not cognizable.36

    With respect to OSF-RHSs community benefits arguments, the court

    found that a merger was not necessary to implement graduate education programs

    in Rockford.37

    The hospitals could have simply implemented a joint-residency

    29 Id.

    30 Id.

    31 Id.

    32 Id. at 1090-91.

    33 Id.

    34 Id.

    35 Id.

    36 Id. at 1091-92.

    37 Id.

  • 35

    program via partnerships to accomplish this goal.38

    Under the sliding scale

    approach, the court found that the private equities were too speculative to revive

    the unlawful merger in court.39

    Case Analysis II: The ProMedica Court Required ProMedica to Present

    Extraordinary Efficiencies.

    In the second case, FTC v. ProMedica Health System, Inc., the FTC

    sought to enjoin ProMedica from further consolidating its operations with St.

    Luke's Hospital in Ohio.40

    At the time, ProMedica was a dominant, not-for-

    profit integrated healthcare system that served Ohios Lucas County.41

    This area

    includes the City of Toledo and adjacent areas of southeastern Michigan.42

    There,

    ProMedica operated three GAC hospitals that offered inpatient obstetrics

    services.43

    Its market share from July 2009 to March 2010 accounted for nearly 50

    percent of the GAC services patient days and 71.2 percent of obstetrics services

    patient days. 44

    Meanwhile, St. Luke's was a non-profit, low-cost, high-quality

    GAC community hospital, located in southwestern Lucas County where it

    provided a full array of GAC services.45

    Like in OSF, this case also presented high market concentration levels.46

    The relevant product markets at issue were a cluster of GAC inpatient services

    sold to commercial health plans and inpatient obstetrical services.47

    Also

    similar to OSF, the ProMedica court found that the market shares and HHI levels

    38 Id.

    39 Id.

    40 2011 WL 1219281 at 1 (N.D. Ohio).

    41 Id. at 2.

    42 Id.

    43 Id. at 1-2.

    44 Id. at 3.

    45 Id.

    46 Id. (citing Heinz, 246 F.3d at 72122).

    47 Id. at 55.

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    here far exceed[ed] those that regularly establish presumptive illegality.48

    Accordingly, the burden to rebut the FTCs prima facie evidence shifted to

    ProMedica to present efficiencies that outweigh the mergers anticompetitive

    effect.49

    In order to revive the merger in court, application of the sliding scale

    required that the District Court find ProMedicas efficiencies to be

    extraordinary, which it did not.50

    The Sliding Scale Approach Effectively Rendered ProMedicas

    Speculative Efficiencies Arguments Dead on Arrival.

    To support its efficiencies claims, ProMedica produced an economic

    report that represented an initial plan, based on preliminary estimates that

    were subject to further analysis, revision, and substantiation.51

    However, this

    tentative sentiment from the report was merely illustrative of the several problems

    ProMedica faced, making it improbable the court would ever tip the sliding scale

    in its favor.

    The first problem ProMedica encountered was that its purported

    efficiencies were not clearly cognizable. For example, ProMedica argued that

    certain revenue enhancements were efficiencies despite that they merely shifted

    revenue among market participants and did not reduce costs or increase inputs.52

    Also, the District Court described as suspect ProMedicas capital cost

    avoidance claims because ProMedica had no investment plans for the saved funds

    that would pass savings onto customers.53

    ProMedica also claimed that it might

    avoid $100 million in construction and equipment costs for building a new

    hospital at its Arrowhead location.54

    However, this plan did not convince the

    48 Id. at 56 (citing Heinz, 246 F. 3d at 716).

    49 See Univ. Health, 938 F.2d at 1218.

    50 ProMedica, 2011 WL 1219281 at 3 (citing Heinz, 246 F.3d at 72122).

    51 Id. (citation omitted) (emphasis added).

    52 Id. at 36.

    53 Id.

    54 Id.

  • 37

    court because, even though ProMedica owned the Arrowhead land for a decade,

    it failed to take any recent steps consistent with its intent to build on the site.55

    ProMedica also made several unsuccessful cost avoidance arguments and

    its other claimed efficiencies were simply speculative, as [v]irtually all of

    the[m] contained the caveat that they may be accomplished.56

    First, it claimed

    it could avoid spending $30 million on constructing an additional bed tower.57

    Second, it averred it could save St. Luke's between $7.6 and $15.6 million in

    information technology upgrade costs.58

    The District Court dismissed both

    claims and described them as unsubstantiated because ProMedicas pre-merger

    strategic plans never included adding a bed tower in the near future.59

    So the

    avoided construction costs ProMedica pointed to were not costs that ProMedica

    anticipated incurring before the merger.

    Like in OSF, the District Court found that ProMedicas arguments

    regarding savings from consolidation were insufficient. Because ProMedica failed

    to undertake any detailed analysis of its proposed clinical consolidations, its

    $1.45 million in consolidation savings claims were unsubstantiated.60

    Further,

    when ProMedica claimed it could save $1.4 million through lowering post-merger

    physician insurance coverage costs, it failed to compare those costs on an apples

    to apples basis and based the calculation on a different, less robust type of

    insurance coverage.61

    Ultimately, the District Court found that ProMedicas

    efficiency claims were unsubstantiated and speculative because they lacked

    55 Id.

    56 Id. at 38 (citation omitted).

    57 Id. at 37.

    58 Id.

    59 Id.

    60 Id.

    61 Id. at 38 (citation omitted).

  • 38

    detail about how prices the hospitals paid differ and omitted analyses of

    ProMedica's capacity to absorb St. Luke's volumes.62

    Several of ProMedicas Claimed Efficiencies were Not Merger-

    Specific.

    In addition, several of ProMedicas claims were simply deemed not

    merger-specific. For example, the court noted that St. Lukes could achieve a

    substantial amount of the claimed efficiencies through affiliation with a

    different Lucas County hospital.63

    In fact, the court cited a then-recent St. Luke's

    Board presentation that described several opportunities such an affiliation could

    create, specifically noting that it could provide endless benefits and be just as

    valuable as a partnership with ProMedica.64

    In addition, ProMedica alleged that it

    could save $4.5 million by closing a family practice residency program.65

    The

    District Court found that this claim was not merger-specific, as ProMedica could

    have eliminated one of its residency programs on its own without the

    acquisition.66

    Likewise, the District Court found the information technology

    upgrades claims to be largely overstated because ProMedica failed to account for

    certain subsidies that could have substantially lower[ed] St. Lukes overall costs

    absent a merger.67

    The final asserted revenue enhancement regarded the addition of St.

    Luke's to the Paramount provider network.68

    Here again, the District Court found

    that the alleged efficiencies could be achieved without the acquisition because St.

    Lukes was already interested in participating in the network.69

    Ultimately, the

    62 Id. at 39.

    63 Id.

    64 Id.

    65 Id. at 40.

    66 Id.

    67 Id.

    68 Id.

    69 Id.

  • 39

    court found that ProMedica failed to prove efficiencies that were: (1) verifiable;

    (2) not attributable to reduced output or quality; (3) merger-specific; and (4)

    sufficient to outweigh the transaction's anticompetitive effects.70

    It Remains to be Seen Whether or Not Real, Cognizable Efficiencies

    can Revive an Otherwise Unlawful Merger in Court.

    Because the Agencies are charged with the important task of protecting

    consumer welfare, it should be no surprise that the few cases that reach the courts

    often go in the Agencies favor. As the above cases illustrate, efficiencies are

    typically the last factor a court will consider in merger cases. This is especially

    the case, as seen above, when parties merely rely on the the impressive-sounding

    quantity of unsubstantiated arguments rather than making quality, substantiated

    efficiencies arguments.

    Practitioners should note that although OSF and ProMedica do not inspire

    hope that courts will see efficiencies as a reason to permit an otherwise anti-

    competitive hospital merger, the robust efficiencies discussions from these cases

    signal that courts are willing to examine proffered efficiencies claims carefully.

    Much of the uncertainty regarding efficiencies in these cases appear to be due to

    the fact that the sliding scale significantly weighed in the Agencies favor and the

    merging parties presented - at best - speculative efficiencies arguments. By the

    time the court considered the arguments (regardless of their merit), it was likely a

    case of too little, too late the court had already formed the view that the merger

    was anti-competitive, and only very concrete and credible efficiencies claims

    would cause the court to reexamine that conclusion. The parties in these cases

    failed to carry that heavy burden, by failing to take advantage of the unique

    opportunities for efficiencies arguments that hospital mergers can present.

    While prospective merging parties prepare for Agency challenges, they

    must consider how best to develop evidence of efficiencies that the court is likely

    70 Id. at 57 (citing Heinz, 246 F.3d at 721; Univ. Health Inc., 938 F.2d at 1223; see also Merger

    Guidelines 10.

  • 40

    to recognize. Merging parties should recognize that the courts will not consider

    efficiencies are merely promises about post-merger behavior.71

    Generally,

    merging parties must substantiate and support their efficiencies claims to an

    extent that allows a court to verify by reasonable means (1) the[ir] likelihood and

    magnitude . . ., (2) how and when each will be achieved (and the costs of doing

    so), (3) how each will enhance the merged firm's ability and incentive to compete,

    and (4) why each one is merger-specific.72

    If a hospital merger case does in fact

    reach the courts, it would be wise to center these arguments around patient care

    benefits, clinical services consolidations, and most importantly, short-term

    positive effects regarding customer savings. In other words, merging parties must

    demonstrate exactly where they will save money through consolidation and show

    the court exactly how those savings will be passed on to patients.

    Finally, if merging hospitals sufficiently bolster their efficiencies claims

    with cognizable, non-speculative, merger-specific arguments during the

    government merger investigation, the Agencies may be less likely to challenge the

    mergers to begin with. After all,