Merging in the Shadow of the Law: The Case for Consistent Judicial Efficiency Analysis

Article excerpt

This Article examines current judicial interpretation of Section 7 of the Clayton Act through the lens of negotiation theory. The research exposes a gap between how courts state they are analyzing efficiency claims in Section 7 Clayton Act enforcement actions and what they are actually doing. During periods of lax antitrust enforcement, this pattern is not readily visible, since almost all proposed merger and acquisition ("M&A") deals are approved. With a shift to more aggressive antitrust policy, however, it is critical that merger review include appropriate weighing of transaction-generated efficiencies-something missing from courts' current antitrust analysis. Although only a small number of Section 7 cases are litigated each year, corporate negotiators assess thousands of potential M&A deals annually. For decades, scholars have applied microeconomic models to analyze antitrust policy. This Article applies analytical frameworks from the negotiation literature to demonstrate how, in an environment of increased enforcement, current judicial efficiency analysis would discourage corporate negotiators from pursuing efficient deals, thereby hurting the competitiveness of U.S. companies and markets.

INTRODUCTION

A significant gap exists between how courts say they are implementing Section 7 of the Clayton Act and what detailed case analysis reveals they are in fact doing. The purpose of the Clayton Act is to prevent mergers and acquisitions ("M&A") that may substantially lessen competition or tend to create a monopoly.1 The courts and the federal agencies responsible for enforcing the Clayton Act, however, have also expressly recognized the potential for M&A to contribute positively to competition through merger-specific efficiencies.2 These strategic synergies and cost savings - available only through the proposed merger - enable merging parties to combine to form stronger, more nimble organizations better positioned to challenge market leaders.

This Article examines twenty-five years of Section 7 Clayton Act cases in which efficiency claims were raised. The analysis reveals a disturbing pattern. Although courts claim to be balancing mergergenerated efficiencies with other negative factors affecting market competition, they are not in fact doing so. Rather, courts appear to be making an assessment of the relevant concentration in the applicable market and then allowing that initial assessment to color their recognition of claimed efficiencies. In cases with limited concentration concerns, courts often cite efficiencies as factors contributing to market competitiveness. In cases involving highly concentrated markets, however, courts often discard similar types of efficiencies. No balancing analysis is ever performed.

Such inconsistent judicial treatment of efficiency claims has not presented a significant problem before now because antitrust enforcement has been relatively lax; the vast majority of proposed deals proceed without intervention. With the changing economic3 and political4 climate, however, antitrust policy is likely to shift towards more aggressive enforcement, including increased scrutiny of mergers and acquisitions.5 This impending enforcement shift, combined with the failure of courts to appropriately balance efficiencies in Section 7 cases, threatens to worsen the competitiveness of U.S. corporations and markets. Inconsistent judicial treatment of efficiencies either blocks or discourages M&A deals that could have contributed to increased competitiveness.

This Article argues that if courts do not consistently balance pro-competitive efficiencies against the other anticompetitive effects of proposed M&A deals, corporations facing stricter antitrust regimes will abandon important deals that could have contributed to the competitiveness of the U.S. economy. Part I reviews how courts currently treat efficiency claims. It highlights some key differences between how courts say they are weighing efficiency claims and what an analysis of the case law reveals they are actually doing. …