Brussels on the Hudson: New York Imports European Merger Control

In 2004, the European Commission re-wrote its Merger Regulation, making its well-established dominance test subservient to a U.S.-style significant lessening of competition (SLC) standard.  In 2021, New York State is poised to do the opposite: legislating market dominance as the touchstone for the evaluation of mergers that affect the 10th largest economy in the world.  The similarities between the pre-2004 European Community Merger Regulation (ECMR) and the provisions of  New York’s pending Twenty-First Century Antitrust Act (the “New York Bill”)—which has already passed the State Senate—go far deeper than labels.  With adoption of the law, New York would become the center for progressive merger control in the United States.

Comparing the New York Bill to the Pre-2004 ECMR

New York proposes to prohibit mergers that constitutes an “abuse of a dominant position.” Under the New York Bill, dominance can be established through direct or indirect evidence.  Direct evidence of dominance includes “the unilateral power to set prices,” “the unilateral power to dictate non-price contractual terms,” and evidence that an entity is “not constrained by meaningful competitive pressures.” Alternatively, an entity’s market share may be used as indirect evidence of dominance, with a 40% share as a seller or a 30% share as a buyer giving rise to a presumption of market dominance.  Dominant firms that engage in transactions that “tend[] to foreclose or limit the ability or incentive of … actual or potential competitors to compete” would violate New York law.  And merging parties will not be able to defend their transaction through evidence of procompetitive effects, which statutorily may not be considered to “offset or cure competitive harm.”

These standards are loosely similar to those that prevailed pre-2004 in the EU.  Prior to the EU’s adoption of the SLC test in 2004, the ECMR prohibited mergers that “create[d] or strengthen[ed] a dominant position as a result of which effective competition would be significantly impeded.”  The standard for dominance was set forth in Hoffman La Roche & Co. v. Commission, Case 85/76 [1979] ECR 461, where the European Court of Justice defined “dominance” as “the power to behave to an appreciable extent independently of its competitors, its customers, and ultimately of consumers.”  In general, a 50% market share created a presumption of dominance under EU law, while evidence such as the size of competitors, the existence of entry barriers, and the countervailing power of the firm’s customers could justify a finding of dominance at lower thresholds.  In practice, the Commission typically stopped its analysis after determining that a merger would create or strengthen a dominant position, assuming that such dominance would naturally cause a significant impediment to effective competition, often refusing to consider evidence of procompetitive effects.

The GE/Honeywell Divide

How might New York’s adoption of a dominance standard affect U.S. merger control policy?  The much-debated GE/Honeywell merger case from 2001 provides some clues. That transaction concerned the proposed combination of the leading aircraft engine manufacturer (GE) with the leading avionics and non-avionics manufacturer (Honeywell).  The U.S. Department of Justice (DOJ) did not challenge the deal, but the Commission reached the opposite conclusion, finding that GE was already dominant in the markets for large commercial and regional aircraft engines, that GE’s dominant position in these markets would be strengthened by the merger, and that a merged GE/Honeywell would become dominant in several markets, including for buyer-finished avionics, supplier-furnished equipment, and corporate jet aircraft engines.  The Commission’s conclusions were premised on several factors, including GE’s high (and growing) market shares, GE’s vertical integration into aircraft purchasing, financing and leasing, as well as GE’s strength in aftermarket services and its financial resources courtesy of GE Capital.

None of these findings were disputed by the DOJ.  But U.S. antitrust enforcers emphasized that GE’s market shares were only weakly indicative of competitive conditions because GE’s large share was almost entirely dependent on a single-source contract with Boeing.  Moreover, the DOJ placed significant weight on what appeared to be growing competition among jet engine manufacturers and on Honeywell’s poor finances.  While American and European enforcers diverged on many points, they disagreed most notably on the merger’s potential effect on competitors.  The Commission predicted that the merged firm would be able to offer prices below the fixed costs of its competitors, which would drive them out of the market and give GE/Honeywell a durable dominant position.  The DOJ categorically rejected the notion that low prices could ever produce anticompetitive effects.

There are two important lessons to be drawn from GE/Honeywell and other EU merger cases of similar vintage.  First, the EU’s dominance test was primarily concerned with unilateral effects, that is a merger’s tendency to concentrate market power in a single firm, while the American SLC standard could also be used to analyze coordinated effects, i.e., the ability of competitors to coordinate post-merger (see, e.g., United States v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963)).  While European and American merger analysis greatly converged following the EU’s adoption of the SLC test, the old EU dominance test was generally considered to be more effective at policing unilateral effects.  The New York Bill would give New York enforcers a new weapon to challenge transactions by dominant firms under state law in state courts. It is worth noting that it was this perceived gap in EU merger control—the inability to block mergers that facilitate inter-firm coordination (by, for example, eliminating a maverick firm)—that ultimately convinced the Commission to adopt the SLC standard as its primary merger control test.  The same gap likely exists in the New York Bill, which would, if adopted, likely compel New York enforcers to rely on the federal Clayton Act to challenge mergers over coordinated effects.

Second, while consumer welfare remains the sole touchstone of U.S. antitrust law, European competition law also considers a merger’s effects on smaller competitors.  In this respect, European merger control law reflected U.S. antitrust law at or around the time of United States v. Von’s Grocery Co., 384 U.S. 270 (1966), in which the Supreme Court held that the antitrust laws were designed to prevent dominant firms from driving smaller competitors out of business.  Through the New York Bill, past may once again prove to be prologue, as New York revisits the truism that there can be no competition without viable competitors.  While federal enforcers concentrate on a transaction’s impact on output and attempt to calculate price effects to consumers, New York enforcers can now complement that analysis by focusing on the proposed transaction’s potential exclusionary effects.

Happy Hunting Grounds for Private Enforcers

There is one major difference between the New York and EU law—in New York, competitors will have broad standing to challenge mergers in New York State courts.  While successful private merger challenges by competitors have been rare, in recent years competitors have had some success in challenging mergers at the federal level.  For example, in the case of Steves and Sons, Inc. v. Jeld-Wen, Inc. 988 F.3d 690 (2021), affirmed by the Fourth Circuit earlier this year, Steves, a molded door manufacturer, successfully challenged the acquisition of CMI by its competitor Jeld-Wen.  Steves had antitrust standing to challenge the transaction because it was also a long-term customer of the vertically integrated Jeld-Wen.  Jeld-Wen, which resulted in a $36 million jury award and a court-ordered divestiture four years after the transaction closed, has rekindled interest in private merger enforcement.  That interest will only grow once the New York Bill becomes law.

The New York Bill provides a perfect statutory framework to take this emerging trend to the next level. Wielding dominance theory, competitor-plaintiffs should have standing to challenge transactions by dominant firms that foreclose or limit the plaintiff’s ability or incentive to compete.  Moreover, defending such a transaction may prove difficult because the New York Bill will restrict merging parties’ ability to offer procompetitive effects to justify the transaction.  That means that once plaintiffs come forward with prima facie evidence of the acquiring firm’s dominance, along with proof that the transaction tends to result in market foreclosure or otherwise inhibit a competitor’s ability to compete, defendants’ only viable defenses will be to disprove this evidence.  Moreover, the New York Bill provides that where there is direct evidence of dominance, plaintiffs need not plead a relevant market to state a claim.  Accordingly, creative market definition arguments, often the most powerful tools in the merging parties’ arsenal, may be blunted in New York merger challenges.

Concluding Thoughts

Opponents of the New York Bill have seized both on New York’s proposed entry into merger control and the adoption of the dominance standard, claiming that both reforms will result in chaos.  Even though their conclusion is wrong, they are right to focus on those aspects of the New York Bill because they will do the most to right the wrongs of the last two generations of lax federal enforcement.

New York’s adoption of the dominance standard, combined with the limited defenses available to defendants, would empower New York enforcers and private plaintiffs alike.  Mergers that would have previously sailed through may now face additional scrutiny, and potentially, disruptive challenges.  And smaller competitors facing market foreclosure may now have recourse in New York courts.  All of this would be good for competition, and ultimately for New York’s economy.

Edited by Gary J. Malone

Tagged in: Antitrust Enforcement, Antitrust Litigation,