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FTC Policy: Commissioner Phillips Downplays Potential Use of Sherman Act Section 2 to Block Mergers

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The Capitol Forum is a premier subscription-based reporting outlet that more people should know about. It investigates corporate America and covers issues like market concentration, consumer protection, and government contracts. The Prospect is proud to partner with The Capitol Forum to bring you unpaywalled versions of their critical coverage. Here’s an exclusive interview they conducted with Federal Trade Commissioner Noah Phillips, which discusses the federal government’s ability to use the Sherman Antitrust Act to preserve competition and block mergers, as well as how certain highly publicized FTC investigations are progressing.

FTC Commissioner Noah Phillips downplayed the agency’s potential use of Section 2 of the Sherman Act to block anticompetitive mergers, highlighting its limitations compared with Clayton Act Section 7, the statute under which U.S. antitrust enforcers typically challenge deals.

For Section 2 to be effective in challenging a merger, the agency must show the acquiring company is overwhelmingly dominant, he said in an interview with The Capitol Forum.

“You need to have a monopolist,” Phillips said.

A Sherman Act Section 2 offense requires a showing that a firm possesses monopoly power in the relevant market and has engaged in exclusionary conduct to maintain its dominance.

But the first prong of a Section 2 case—showing that a defendant is a monopolist in a well-defined antitrust market—is often a significant barrier for plaintiffs. Clayton Act Section 7, by contrast, doesn’t require such a showing and instead requires plaintiffs to show only that a merger may substantially lessen competition.

Phillips’ comments come as FTC staff—concerned with potential competitive harm arising from Illumina’s (ILMN) proposed acquisition of gene-sequencing rival Pacific Biosciences (PACB)—is mulling whether to recommend that Phillips and the other commissioners use Section 2 to block the deal, a source familiar with the matter has said.

Bruce Hoffman, the director of the agency’s Bureau of Competition, also has highlighted how the FTC could use Section 2 to stop big tech companies from buying small companies before they grow into significant rivals and suggested that the statute may allow the agency to attack mergers that Section 7 couldn’t reach.

Nonetheless, Section 2 would be a novel tool in the merger context—the FTC has never challenged an unconsummated deal solely under the statute. This dearth of case law creates significant uncertainty around whether the statute would prove effective in stopping such acquisitions, antitrust lawyers have said.

As part of its Facebook (FB) antitrust investigation, the commission is examining whether the social-media titan violated the antitrust laws by snuffing out its most serious growing competitors by acquiring them, according to media reports. Facebook has purchased at least 92 companies since 2007, according to Columbia Law professor Tim Wu, including Instagram in 2012 and WhatsApp in 2014.

While declining to discuss the investigation, Phillips said the agency generally is considering the issue of nascent competition. “That’s an important question we are exploring,” he said. “Very interesting work has emerged on ‘killer acquisitions,’” the commissioner added, using a term coined by Yale economist Florian Ederer and two co-authors in describing how big pharmaceutical companies buy smaller rivals and then stop developing the acquired company’s pipeline products that could eventually compete with theirs.

Focus on advertising. Facebook disclosed in July that the agency’s antitrust probe of the company focuses on “social networking or social media services, digital advertising and/or mobile or online applications.”

Again, declining to discuss the investigation’s specifics, Phillips said, “When you look at any business, if you’re not paying attention to how the business generates money, you’re probably missing the story.”

Facebook derived $16.6 billion, or 97 percent, of its second-quarter revenue from advertising.

DOJ is focusing on Google’s (GOOGL) advertising business in its antitrust probe of the search giant. Together, Google and Facebook capture about 60 percent of digital advertising spending, according to AdAge.

The Capitol Forum is a subscription-based reporting outlet that investigates corporate America and covers issues of market concentration, consumer protection, and government contracts.

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October 10, 2019

6:30 AM

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