FEBRUARY 15 1986 - VOLUME 7 - NUMBER 3
The Reagan Assault on Antitrust
by Eddie Correia
The Reagan administration has recommended to Congress legislation to revise fundamentally the nation's antitrust laws. The intellectual underpinning of the proposal is the idea that antitrust laws are the real villain behind our dismal showing in international competition. Critics of antitrust, particularly the secretary of commerce, Malcolm Baldridge, argue that the current law is too tough on business conduct, particularly proposed mergers between competitors.
If the Fortune 500 are allowed to merge, antitrust critics argue, the United States will once again be armed for international combat.
For a self-described conservative administration, attacking the antitrust laws as the cause of record trade deficits is radical indeed. The original trustbuster, Republican Teddy Roosevelt, would be shocked, not to mention Republican John Sherman, who authored the first major antitrust law in 1890. Republicans and Democrats alike, historically have supported antitrust enforcement as a way to promote efficiency and vigorous competition. Until recently, blaming antitrust for Japanese imports, much like blaming criminal laws for the high crime rate, was not a popular notion.
Five years ago, however, the U.S. Attorney General made a point of telling the American public, big is not bad. Now, Baldridge has taken that message even one step further: Bigness is positively good.
This notion that U.S. firms can become more competitive internationally if the big get bigger is the rationale behind a proposed new antitrust exemption from the basic prohibition of mergers that may harm competition. Under the bill, the president would be authorized to order an exemption for industries determined to be hurt by foreign competition. For a temporary period, perhaps five years, the president could make it easy for firms to merge in electronics, automobiles, textiles, shoes, steel and other high-import industries. The handful of companies that would be left, argues Baldridge, would then be strong enough to take on the Europeans, the Japanese and other foreign competitors.
The administration is banking on the fact that a Congress, desperate to do something about the disastrous U.S. trade deficits, will agree that a wave of massive mergers is a solution.
Unfortunately, there are few facts to back up such arguments. Trade deficits have soared in the last five years despite the fact that antitrust enforcement has declined radically in that same period. And, although the United States has the largest manufacturing firms in the world in automobiles, electrical equipment, steel and textiles, the size of the companies has not made them better equipped to deal with foreign competition. Antitrust enforcement it appears, has little to do with trade deficits. Lack of antitrust enforcement, however, can certainly harm international competitiveness.
American steel and autos developed in a domestic market that did not force consistent capital investment and improvement to keep up with state of the art technology. Oligopolies grown sluggish by a lack of vigorous competition were suddenly faced with cheap imported steel and cars from technologically advanced Japanese plants. The result: a painful loss of American jobs and a push for protection from foreign competition.
The same scenario is predictable in dozens of other U.S. industries if anti-competitive mergers are allowed. Industries taking a beating from imports will come to the White House arguing their salvation is in joining up with their largest competitor. With a fanfare of promises and high expectations, the President will bless the merger. A few years down the road-with higher costs, less efficient operations and a less competitive domestic market-the same industry will come back complaining about the unfair tactics of foreign firms who want to sell their higher quality product at a lower price. Meanwhile, the American consumer will have been the big loser.
An October, 1985 study by two Federal Trade Commission economists entitled, Antitrust Policy for Declining Industries, similarly concluded:
A policy liberalizing the antitrust laws specifically for declining industries would be ill-advised. Such a move would open the way for anticompetitive mergers for which there is no efficiency justification. Some have argued that such a liberalization might be justified to save jobs in areas hard hit by declining employment and/or to improve the balance of trade. However, there is no persuasive reason to believe that the mergers that would be allowed under the liberalization in question would increase employment or improve the trade balance. Indeed, anticompetitive mergers that do not improve efficiency could reduce U.S. employment and U.S. firms' ability to compete with foreign firms as domestic prices rise and output falls. As a result, changes in merger policy that allow anticompetitive mergers are not a solution to the problem of industrial decline.
Ironically, the administration is promoting a policy that will increase prices and make us less competitive in the world, not more. Allowing our major manufacturing industries to consolidate during a five-year merger spree will do permanent competitive harm to the American economy.
The element of truth in the administration's argument is that the antitrust laws should consider foreign competition when appropriate. The current law, however, is flexible enough to include such a consideration. In order to make sure the courts consider this factor, Sen. Howard Metzenbaum of Ohio has introduced legislation requiring it to be included in the legal analysis. In addition, the bill directs the antitrust agencies to consider documented claims by merging companies that the acquisition will reduce costs and make the combined firm more competitive. This approach is far better than an across the board permissive merger standard for certain industries.
Relaxing merger standards is not the only thing the administration has in mind with its new merger proposal. It also wants to make it harder to prove any merger is illegal by raising the burden of proof on government prosecutors and private plaintiffs. The law prohibits mergers if the effect "may be substantially to lessen competition, or to tend to create a monopoly." The Reagan administration wants to require proof of a"significant probability" of harmful effects. Although both phrases must be given meaning by the courts, the Reagan administration intends its standard to be much tougher to meet than the current one. Just how much tougher would depend on the nuances of legislative history and years of court decisions interpreting the new law.
In the past, the basic problem facing antitrust agencies and the courts was how to predict the future effect of a complex business transaction when the understanding of how markets work is imprecise. Most economists agree that a market with a handful of competitors will be less competitively vigorous than one with dozens. But, exactly how concentrated the market must be before prices begin to rise because of reduced competition, is unknown. There is also general agreement that concentration is a much greater problem if new competitors can't get in the market easily, if the competitors tend to share information and if other factors ' make it easy to coordinate prices. Nevertheless, despite general agreement about the basic economic theory, there is enormous disagreement about the likely effect of any specific merger. Applying the law against harmful mergers means predicting the future, and a fair amount of educated guesswork is inevitable. The requirement that antitrust enforcers must be "certain" of a merger's effects before prohibiting it, is really advocating a policy that allows all mergers to proceed unimpeded.
The courts have long struggled with how to apply the very general standards against harmful mergers. By 1960, merger cases had become confused undertakings with issue upon issue presented to the courts for an analysis it was ill-prepared to make. In an influential law review article in 1960, professor Derek Bok, now president of Harvard, argued that the courts should focus primarily on the combined market shares of the merging firms and resulting competitive harm if the market shares exceeded some threshold level. This kind of approach was adopted by the Supreme Court in 1963 in the Philadelphia National bank case and reached a high water mark in 1966 in the Von's Grocery opinion. There the Court held a merger that led to a firm with 7.5 percent of the market was unlawful.
There is no doubt that the Court went too far in the Von's Grocery case and that it would not be followed today. Since then, the courts have become more sophisticated in their analysis of mergers. The clear trend in the law has been to make it more and more complex to prove a merger violates the current standard. During the 1970s, the courts and the antitrust agencies required solid economic proof that a merger was likely to harm competition before deciding it was unlawful.
Then, the Reagan administration entered the scene. Since 1981, virtually every merger has been viewed as beneficial. In 1982, the justice Department issued merger guidelines setting out its own interpretation of the requirements of an illegal merger. These included 1) raising the combined market shares that would prompt concern; 2) raising the standard for a "concentrated" market; and 3) requiring proof of other factors, including the fact that new firms could not easily enter the market. In addition, the department has tended to define the market very broadly, making it hard to show that companies have a significant market share. Further, the analysis takes account of the possibility firms can convert current production capacity to make the products of the merging firms, that foreign competition will increase, and that the merger will reduce costs.
The economic analysis for each of these questions can become enormously complex and burdensome. In 1984, the justice Department came up with yet another version of the guidelines, making proof of an illegal merger more difficult. This increasing burden of proof, combined with an administration that is biased in favor of mergers in the first place, has led to a laissez-faire merger climate and infrequent enforcement. During the last few years, the number of mergers has gone steadily upward. The number of mergers over $100 million in value has gone from 94 in 1980, 113 in 1981, 116 in 1982, 137 in 1983, to 200 in 1984. The annual rate for mergers during the first half of 1985 was the highest since 1974. The largest sixteen mergers in U.S. history have occurred during the last five years.
One of the most striking facts is that at the same time as merger activity has increased, those charged with ensuring that mergers do not harm competition have become less active-both the number of lawsuits and the number of investigations brought by antitrust enforcement agencies and officials have plummeted. The number of cases filed by the Justice Department during fiscal years 1981 through 1985 declined 25 percent from the average rate during the fiscal years 1976 through 1980. The Federal Trade Commission's pattern was similar. In addition, the antitrust agencies failed to investigate proposed mergers at the rate of the previous administration. The rate at which the agencies asked merging firms for more information about their proposed combination declined by 39 percent from 1979 to 1984.
"Over the last five years, our Nation has witnessed a misguided retreat from fundamental antitrust principles," charged Sen. Howard Metzenbaum last month. "This administration has consistently cut back on enforcement and attempted to reinterpret the law whenever possible to reduce its effectiveness.
"The result," he said, "has been the most permissive antitrust climate in this century."
Any statutory change in the basic law against harmful mergers will enormously complicate the task of proving to a court that it should be prohibited. Some of the favorable early business reaction to the Reagan administration proposal was based on the argument that the new standard would be more understandable. It is doubtful anyone knows what the new standard means precisely-only that it means it will be easier to merge.
The final attack by the administration on the current antitrust framework is the proposal to limit the damages a successful plaintiff can obtain. Under current law, plaintiffs who win antitrust cases are awarded three times their actual losses, plus a reasonable attorney's fee. In addition, a plaintiff can recover entire damages from any single defendant who was a part of an antitrust conspiracy (though he can't recover twice). This principle of "joint and several liability" is the same as the standard rule for intentional personal injuries under state law. A person who is intentionally injured by three people can recover damages from all three proportionally or from any one of them or any combination.
These rules give an incentive to small businesses to take on giant corporations who have damaged them through anticompetitive practices. Antitrust litigation is notoriously long, complex and expensive. In manv cases, only the reward of substantial damages will encourage the small plaintiff to take the time and expense to vindicate economic rights. The threat of large damages is intended to deter companies from breaking the law in the first place. Breaking the antitrust laws can be profitable beyond a corporation's wildest dreams. The OPEC countries made hundreds of billions of dollars on inflated oil prices until their cartel began to fall apart. Monopolists that drive everyone out of the market can multiply their profits tenfold. It takes a stiff penalty to discourage such lucrative conduct, particularly when it is not easy to prove the violation in the first place. Finally, the 'joint and several liability" rule, allowing recovery of all one's damages from a single defendant encourages early settlement of cases and prevents a plaintiff with little money from having to win major lawsuits against a larger number of giant defendants.
The administration wants to undercut the treble damage remedy by reducing the category of cases in which treble damages are available and by forcing the plaintiff to sue each defendant to recover the entire award. The fundamental problem with this approach is that it would undercut private enforcement of the law at a time when the government itself is doing a poor job of public enforcement. Since the Justice Department does not represent an adequate deterrent, the main reason U.S. companies obey the antitrust laws is that they fear a private lawsuit.
It is no secret that the Reagan administration doesn't like the antitrust laws. It has been able to reduce enforcement at the justice Department and the FTC for five years by appointing people who share the predisposition that business knows best and the antitrust laws are a nuisance. The threat of the administration's antitrust legislation is that the permissive enforcement of the last five years could become permanent if the administration gets its way.
Eddie Correia is chief counsel for Sen. Howard Metzenbaum for the Senate Committee on the Judiciary.