Antitrust Matters Episode 10: Private Equity & Antitrust – A New Approach?
Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.
In this episode, Jeffrey Shinder and Wyatt Fore are joined by Amanda Hamilton, Senior Correspondent at the Capitol Forum, to discuss emerging issues on private equity and antitrust. The three consider the extent to which enforcers have signaled a shift in approach by reviving dormant legal theories, including the prohibition of interlocking directorates.
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Episode Transcript and Show Notes:
Jeffrey Shinder:
Welcome to Antitrust Matters, a Constantine Cannon podcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.
Hello everyone. We are back for another episode of Antitrust Matters, and we have an interesting topic and an interesting guest today, our first journalist. Welcome, Amanda. We have Amanda Hamilton, a senior correspondent at Capitol Forum, and I’m also joined by one of our rising stars from our DC office, Wyatt Fore. Welcome, Wyatt. Amanda and Wyatt are here to discuss private equity and the antitrust issues that the increasing prevalence of private equity investments across many sectors of our economy, the issues that is having, and whether the antitrust laws as currently configured are well suited to addressing those competitive issues.
Let me just introduce Amanda. Amanda is a senior correspondent covering antitrust. She joined the Capitol Forum after working as an attorney in the Office of the General Counsel for the US Consumer Product Safety Commission. Prior to that, she was an attorney at the United States Postal Service and antitrust associate at Haug and Partners, hopefully I did not mispronounce it, and a staff attorney in the Federal Trade Commission’s Bureau of Competition. Amanda holds a J.D. and a B.A. in Economics from the University of Iowa and we are really pleased to have her on the pod. Amanda, welcome. Welcome, Wyatt. We have two newcomers today and we have an interesting topic that is cutting edge in antitrust. I wanted my colleague from DC to tee it up and explain it a little more. Wyatt, I’m going to turn to you to start. Why don’t you tell our audience a little bit about why private equity is an interesting topic in this moment of antitrust ferment? That raises unique issues that the antitrust laws in some form or fashion should address. I will turn the baton to you.
Wyatt Fore:
Wonderful. Thanks, Jeff, and welcome, Amanda. One of the animating questions I had for this podcast was in the last 30 years or so, the American economy is seeing the rise of these giant non-bank financial institutions, including private equity and hedge funds and shadow banks and that sort of thing. There’s a flurry of investment activity throughout the real economy, so to speak, and that this trend mirrors in my mind and to a lot of commentators, the trend that we saw in the late 1800s, early 1900s that gave rise to the original Antitrust Act where you had, because of these baseline financial interests, there’s increased coordination among traditionally separate horizontal rivals. These investments might have sort of competitive effects that are not immediately ascertainable. Because of the rise of what I’ll call private equity, but non-bank financial institutions, that’s happening in real time and that there’s a lot of questions and concerns about that rise.
It’s one of the things that our existing legal and economic tools are a step behind and are trying to catch up with, trying to figure out what are the effects of these investments, what are the effects of these giant financial institutions that are underlying a lot of the American economy? That’s one of the things that I’m interested in. There’s been a focus by the Biden enforcers on these private equity institutions, but as Amanda well knows from her reporting, they’re a step behind what’s happening. There’s a question of, well, what’s the appropriate legal tool to address this? How do we think about these problems? Are they problems at all? How do we measure the competitive effects? Are there competitive effects?
There’s a lag between what’s happening in the financial and real economy as well, a lag between that and our legal and economic tools to evaluate them. That’s the sort of overarching capital ‘P’ problem that I’m thinking about when I was trying to think about a guest for this podcast. I thought that, considering Amanda has extensive journalism and reporting on this, that she would be a wonderful guest to introduce to our audience on them.
Jeffrey Shinder:
Okay. Amanda, let me turn this over to you. From your perspective at the Capitol Forum, what are you looking into? What are you interested in? What are you seeing that relates to the issue that Wyatt just articulated?
Amanda Hamilton:
Yeah. No, absolutely. A lot of our subscribers at the very beginning, Biden’s enforcers, Johnathan Kanter over the Department of Justice, Lina Kahn over at the FTC, issued a lot of statements surrounding private equity. Majority of their statements were related to whether or not private equities were good stewards of assets as a divestiture buyer and mergers, or even just how to evaluate whether or not a certain merger or their acquisition violates Section 7 in a very traditional sense, so whether or not this merger should go through, whether or not they should buy this asset. The FTC and DOJ has moved past that and where our subscribers are particularly interested in, they want to know what are the anti enforcers, what should they be expecting, how are antitrust enforcers foreshadowing, how they plan to combat the issue that they have spotted, which is private equity.
One of the ways Jonathan Kanter has been very vocal about how he wants to revitalize Section 8 enforcement, which is looking at interlocked directorates, and he’s made good on that promise. Recently as October, he announced that seven individuals resigned from five different company boards. He said that that’s just the beginning of the end. There’s also been reports by Bloomberg that DOJ has subpoenas out and CIDs out to massive private equity firms looking at the Section 8 problem, one being Apollo. He’s also mentioned that how private equity rollups, so a private equity firm acquiring competitors within a horizontal space… Could it potentially be attempted monopolization?
He’s not alone. FTC has joined him in his enforcement calls. FTC recently issued a revised policy statement saying that, “Look, it’s very clear. Section 5 goes beyond the Sherman and Clayton Act. There are things we can reach and we’re looking at things that affect competitive conditions and there’s a lower burden of proof for this, and that’s okay because we’re an expert agency.” It’s interesting to see how Lina applies that in a private equity context. Then, on the sidelines you have the academic community, which Kanter and Chairwoman Kahn are very close to as well. They’re asking the FTC and the DOJ to shift their focus to horizontal shareholding.
In that context you have non-controlling minority where, for example, investors will have a non-controlling minority interest in a highly concentrated industry, but buy stocks and every single member of that industry are each market player. The academic community has shown that the results are clear. That has resulted, they believe, in higher prices, and so they’re been looking at that as well, my understanding. My question to you guys as private enforcers is that we have this revised policy statement from the FTC that’s looking to go pretty far. My question to you guys would be, what would be a great test case there? Would horizontal shareholding be a good test case for the FTC to take on there?
Jeffrey Shinder:
Let me take the first crack at answering that, but I actually want to take this conversation from the abstract to the more tangible or particular by quoting from a Harvard Law Review piece that Einer Elhauge published on horizontal shareholding. His piece opens with the following, and this is fascinating. He opens with this, “An economic blockbuster has recently been exposed. A small group of institutions has acquired large share holdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other. For example, from 2013 to 2015, seven shareholders who controlled 60% of United Airlines also controlled big chunks of United’s major rivals, including 27.5% of Delta, 27.3% of JetBlue and 23.3% of Southwest Airlines. More generally, institutional investors held 77% of the stock of all airlines operating in the average flight route from 2001 to 2013. A new econometric study shows that this sort of horizontal shareholding has made average airline ticket prices 3 to 10% higher than they otherwise would’ve been.”
Now, that’s the opening paragraph of Einer’s piece. I haven’t actually had the benefit of crawling into the econometrics that he cites there. I’m not here on this podcast to bless those numbers, having put forward a lot of economic experts in our cases and understanding the complexities of econometrics. I would say the following, to answer your question. The policy statement on the revised deployment of Section 5 calls out interlocking holdings and directorates as a potential test case. The background of Section 5 deals with incipient harms to competition. I would think that in particular industries, and I’m not sure whether airlines is the best example…. Financial services is another, that Einer calls out. I know the private equity, and Wyatt can speak to this, is deeply involved in healthcare. Their tentacles are far and wide in the economy.
The selection of the industry in question is one that has to be done with some care. You would want to have some ability, likely through econometrics, to understand the price effects and maybe have a situation where there’s a preexisting set of structural investments across an industry where you can isolate that price effects are happening. Then, private equity is deepening their investments in ways that would intensify a preexisting problem. That could be a good use of Section 5 because what I take from Elhauge’s piece is that you don’t need majority interests across these companies to see competitive issues. What he’s identifying is a tendency to pull competitive punches in the absence of Section 1 conspiratorial activity.
Those outcomes are harmful to consumer welfare and they would not be condemned by the Sherman Act. They strike me as exactly what Lina Khan is trying to accomplish through a re-energized deployment of Section 5. Picking the right case is critically important. As an economist on a recent pod said, “The facts matter.” In fact, he suggested maybe we rename this the Antitrust Matters. The facts matter. The facts matter, and the facts would matter. This has to be really thoughtfully selected, but private equity, interlocking holding type case strikes me as a good use of a re-energized Section 5. Wyatt, I don’t know if you want to comment on that or you want to speak to Section 8 and Jonathan Kanter’s activity there. I’ll toss it over to you.
Wyatt Fore:
Well, I totally agree with everything that you said, especially about the incipiency point. Part of the problem in my mind about the Sherman Act is that Section 1 and Section 2… Under a Section 2 you have to have a firm with monopoly power, which is a very, very high standard. In sort of casual parlance, people think of monopoly as being a market of one, although economics and law, there’s more fuzziness around that. If you don’t have a monopoly, then you’re stuck with Section 1 where you have to have an explicit agreement. There’s a gap in oligopolies where if you have a market with, for example, three firms, those firms can coordinate and pull punches and not compete vigorously in a way that would fall below an explicit price fixing agreement.
The trend of the last 30 years in this country is going from competitive markets to oligopolistic competition. Those oligopolistic markets are largely insulated from sort of scrutiny under the Sherman Act. We have to look at other tools outside of Section 1 and Section 2 to address those. The prime one that government enforcers use, and private enforcers can use as well, is Section 7. Well, in order to prevent a market where you have a lot of competitors to a market where you have few competitors, is Section 7 preventing these transactions.
I think that Jeff’s point about incipiency is really important because there’s all these markets, and airlines allegedly being one of them, where you used to have a lot of competitors and now you have relatively few of them. Absent a explicit price fixing agreement, it’s really difficult to address competition concerns there. Looking at Jonathan Kanter and Chairman Khan’s more expansive view of government enforcement I think is incredibly important and appropriate to address these situations.
Jeff, you mentioned interlocking directorates. That’s certainly one mechanism by which private equity can exercise restraining competition in oligopolistic markets. Also, I think that Section 7 in terms of common ownership, horizontal shareholding, but also Jonathan Kanter was quoted as saying, “Okay, well, actually, this might also be a theory of attempted monopolization.” I think that in terms of our legal tools, we have legal tools for it. It’s just that we need to update those tools to the fact patterns of the 21st century. I think that as Professor Elhauge, however he sort of surveyed the economic tools that we… The economic research on this is pretty clear that oligopolistic markets have restrained competition in a way that’s directly harmed consumers. We just need courts and enforcers and private enforcers and governments to update our tools for the 21st century.
Jeffrey Shinder:
Amanda, let me go back to your FTC experience. We have a policy statement that just came out that seems to signal a sea change in how the FTC is intending to deploy Section 5. I’m interested in your view on how that compares or contrasts with the deployment of Section 5 back in the day when you were at the FTC.
Amanda Hamilton:
Yeah, when I was at the FTC, it was Chairwoman Ramirez. Josh Wright was also one of the commissioners as well. I think that one of his lasting legacies was to strip Section 5 and essentially just having it to reach outside of Sherman Act and Clayton Act to reach an invitations to collude. I have to say that I know there’s been a fair amount of criticism of FTC staff over the years. I have to say that even the most conservative members of FTC staff, people who have clerked on the Fifth Circuit and whatnot, were incredibly upset by the narrowing of Section 5, just to invitations to collude.
I think that there was a disagreement among political spectrum of how far Section 5 should go, but I think that there was essentially a consensus, at least among the younger members of staff that we should… Section 5 was a tool and it was a tool that we could use to combat concentration, competition problems, and we should certainly take it for a ride. How far of a ride was a disagreement, but I think that there was certainly a consensus that perhaps leaning towards Chairwoman Khan’s vision of Section 5 enforcement.
Jeffrey Shinder:
Would it be fair to say in your view that the policy statement that just came out is a pretty significant sea change in the direction of the FTC?
Amanda Hamilton:
It’s an incredibly significant sea change. While I understand it’s a broad policy statement to set parameters it, the focus is turned from whether or not a conduct impacts competition to competitive conditions, which just certainly opens the door and I think was very nicely added by Chairwoman Khan as well. Also, it seems to me that while certainly a smart enforcement articulation of a standard, it seems to me that there is a lacking of perhaps a burden of proof. I think that the way that they manage and were stewards of the FTC maybe imposed higher burdens than maybe was necessary for them to do so in the past.
Jeffrey Shinder:
Let me turn to you, Wyatt. We’ve got Section 5 of the FTC Act and a re-energized commitment to Section 5. It seems to be the direction of the commission. We have a Section 8, the generally long dormant but longstanding prohibition against interlocking directorates. We have Section 1 attempted monopolization under Section 2. There are different tools. You make a point that is interesting, that the exercise is to apply those tools in a 21st century setting in a way to make them more effective given the challenges that we face today, which has been the history of the Sherman Act and antitrust law generally. Amongst those options, which do you see as the most potentially important in terms of dealing with the problem of private equity?
Wyatt Fore:
That’s a great question. I think that my general view is all of the above, that we have a lot of tools, that a screwdriver doesn’t necessarily do the same thing that a hammer does, and so I hesitate to put too much emphasis on one. I do think that the Section 8 investigations and communications with private equity firms has been really important. In many respects, it’s the lowest hanging fruit. It’s a per se violation. If you establish that certain conditions are met, it is automatically a violation of the law. I think that because it’s long dormant that a lot of companies are violating the law and it’s very important for them to be aware that this is a risk. Also, I think that because interlocking directorates, it’s intuitive to see why that’s a competition problem, that even though it’s a low-hanging fruit, it’s an important one because it reeducates the wider community on how horizontal rivals can coordinate in a way that’s problematic.
To get to the meat of your question, what’s the most important tool? I would say it’s not the lowest hanging fruit, but in my mind, Section 7 is severely under enforced, especially among private enforcers. I would love to see the private bar become more active on this. I would also like to see government enforcers. It’s difficult to say for them to be more active on this because this really is the bread and butter of the DOJ and FTC is their Section 7 merger enforcement, but I would really love to see a test case to articulate how these theories of rival coordination through private equity firms. I think that certainly the public inquiry with respect to revising the horizontal merger guidelines, ask the public about economic and legal tools that the enforcement agencies can use to address issues of private equity in horizontal cross-holdings or common ownership situations.
I think that it will be really interesting to see how the agencies respond to that, and then once they have those economic tools as incorporated in new guidelines if it exists, will be really interesting. I would really love to see a test case under Section 7 exploring these issues because the traditional advice that you always hear, that horizontal merger bad, vertical merger good, that rule of thumb doesn’t really apply to the 21st century with as much strength. To answer your question, I think that Section 7 is very important and wide reaching and the legal tools that we have are more easily up dateable to the fact patterns of the 21st century. But I do think that I would like to commend the government enforcers for using Section 8, interlocking directorates, because I think that it’s a low-hanging fruit that educates the wider community about the possible competitive effects of these arrangements.
Amanda Hamilton:
I have a question for Wyatt. A lot of the pushback I get from our Capitol Forums readership is that, look, if it’s a novel legal theory and the government’s not likely to win, they shouldn’t be bringing it at all. I guess with a lot of these test cases, because it’s treading new grounds, should the government not be bringing these cases unless they’re sure to win? I would love to hear your thoughts on that as a private enforcer who probably would love to bring a lot more cases, but probably have financial reasons for not doing so or resource reasons.
Wyatt Fore:
That’s a good question.
Jeffrey Shinder:
Wyatt, I’m going to let you have that first, but I definitely want to weigh in on this one. You go first.
Wyatt Fore:
Yeah, and I think that that’s a great question. My general view is that the government is in a strong position that… Yeah, it’s something that we all know that courts struggle with antitrust, and when the United States Department of Justice or Federal Trade Commission comes in and makes a point that courts listen to them in a way that they don’t listen to private enforcers as well. I will say that my view is that this is not as novel of a legal theory as I think the judiciary or the wider business community thinks. If you look back to earlier Sherman and Clayton Act cases that this idea that horizontal rivals can affect each other’s competitive decisions through a common ownership or a common trade association or whatever is actually well trod in the antitrust legal precedence in that.
That’s why I tend to use language that we should update it for the fact patterns of the 21st century, because in my mind this isn’t really new. It’s just forgotten, and so it’s really important to draw the judiciary’s attention to the fact that there are these precedents that exist and that we can apply them. I also think that a lot of whether or not these cases live or die really depends on the economic evidence and that we already have really good economic evidence about this problem. It’s just applying it to a particular case. I will say that obviously the government has a very strong institutional position that it doesn’t like to lose. Unfortunately, that means that they have to bring good cases and win them.
That’s easy for me to say as an arm chair coach on the sideline, cheering them on. I realize that these are very resource intensive and difficult and there’s a lot of procedural and logistical reasons why they might not bring a case, but I would like to just encourage them to find a good case and bring it and to win. That’s all there is to say. It’s easy for me to say it on the sideline, but that would be my suggestion is that you can’t update these laws without cases, without carefully educating the judiciary on them. That can only happen in the context of a good case that’s well run and well litigated and well argued.
Jeffrey Shinder:
Let me add to what Wyatt said and perhaps be a little more iconoclastic about this, which is I think it is the wrong standard for the enforcers, FTC or DOJ, to select only cases that they are very confident in winning. Antitrust cases are hard. The good ones are always hard. As I say to many clients, there are no slam dunks in antitrust. There are a lot of good cases where there is some prospect of defeat, particularly because the court may misapprehend the economics or a particular court’s political leanings are against vigorous antitrust enforcement for whatever reason. Risk of loss should be accepted as a reality of the enforcement of the antitrust laws and it should not chill the bringing of cases. I wish I could remember who said this recently because I would quote, I think it was a him on this, but someone I remember recently said, “The government has to bring cases and maybe lose them or lose some of them to reorient our culture around antitrust enforcement and generate more education at the judicial level.”
That may be part of the process. Sometimes you got to bring cases and lose them to advance the ball, which may seem counterintuitive. The other thing that I want to speak to, because this is something that frustrates me, is, I understand we have a lot of corporate clients. I’ve counseled a lot of corporate clients and in-house counsel wants predictability in how things are going to be enforced. The reality of the antitrust laws, which, by the way, informs some of the current judicial hostility to the antitrust laws, is that most cases are adjudicated under a rule of reason standard. Per se rules have largely fallen away, not completely. There’s some left, but the greater the zone of the rule of reason, the more unpredictability is introduced into antitrust outcomes because they’re fact dependent.
I said earlier, quoting the economist on our last podcast, “The facts matter.” You hear the corporate community say, “Well, we don’t know. This is novel. We don’t know what the rules are.” I say to that ‘bunk’ at the end of the day. Sophisticated antitrust counseling, which every company that operates in highly concentrated industries, they have antitrust lawyers who are embedded, who understand their business. They understand the give and take and the complexities as to the facts. They get counseled and they take their risks accordingly. What I would caution the audience and you and your readers is sometimes commentaries around, “Well, we need bright line rules and the Sherman Act is too vague.” What’s a restraint of trade or what’s a monopoly or an attempted monopoly? And this is really just a backdoor way of attacking antitrust enforcement and its ideology more than serious discussion of the law. That’s my perspective on your question, Amanda, I’m curious to know if you have a reaction and pushback. I’m happy to have pushback.
Amanda Hamilton:
Yeah, I guess one of the things is that I wonder if the media’s responsible for that, because Jonathan Kanter over there is bringing very heroic government challenges. He suffered three losses in a row and some of them are up for appeal and people have more in the media has been focusing on the losses and not necessarily the burden. The federal judiciary is the one who adjudicates these cases, so we’re focusing on the fact that DOJ lost. The media’s doing that, versus what tools he has at his disposal, how difficult it is to prove those cases and the federal judiciary’s role in that. Would it be more helpful to maybe government enforcement efforts if the media focused more on the judiciary’s role on that and the dual tools that are at his disposal? For example, the role of reason, that’s a really difficult burden for a government enforcer to prove.
Jeffrey Shinder:
Well, I’ll give you my reaction, but Wyatt, I also… I can’t criticize the media for some focus on the obvious outcome where they have brought a series of cases and lost. They’ve also won in some instances, and so I’d like to focus on that as well. These are hard cases and courts sometimes get things wrong. I know there is some effort within the federal court system to help judges get educated on the economic issues that antitrust cases bring to bear, and that’s a good thing.
My hope would be that the government enforcers are not responding to media pressures. I’m sure if they were on, they would say they’re not. I think the current regime has really done a good job, and I credit both the FTC and the DOJ for really trying hard to find new ways, innovative ways. I liked Wyatt’s approach of updating. The law is the law, but the facts change. Our economy changes, the competitive challenges change, and the antitrust laws are there to meet them and they’re really doing their best. I love what they’re doing and hopefully the media will in their own way, although I can’t blame them for reporting on negative outcomes, because it happened. That’s not necessarily a bad thing for the ultimate enforcement and the antitrust laws, which is going back to my previous point. Wyatt, I don’t know if you have any further thoughts on that.
Wyatt Fore:
I totally agree with what you’re saying. That’s where I think that presumptions are the enforcers’ friends, especially in the merger guidelines. Speaking off the cuff, there’s no law, to my knowledge, saying that you have to have merger guidelines. The agencies just do that to provide some comfort to the business community about how they’re going to enforce the antitrust laws. I think that the merger guidelines have been really important to educating the judiciary about the economic effects of transactions. The enforcement agencies are looking at the economic evidence and they’re drawing a dotted line in the sand saying, “Okay, well because of our updated knowledge about economics and HHI, we have all this economic research about how HHI concentrations above a certain level can lead to bad unilateral effects and bad coordinated effects. Therefore, we’re going to say as a rule of thumb, that mergers that increase HHI concentration above a certain amount, there’s a presumption that we’re going to challenge them in court and that we’ve met our prima facie burden.”
I think that this has been a wonderful tool, not only for the business community to who has certainty, but also for antitrust practitioners who are interested in updating the laws pursuant to emerging economic research. I would like to see a lot more presumptions broadly in antitrust law about these. There’s emerging economic evidence about how certain tools like MHHI and modified index can capture the likely competitive effects of horizontal cross holding. Certainly, our firm does interesting transportation work in the oceanic carrier context. There’s emerging economic tools in addition to MHHI that sort of capture the likely competitive effects of certain arrangements, like joint ventures and consortia. I think that what the enforcement agencies are doing, asking the public, asking economists, “Okay, what tools do you think are helpful?” Then, responding to those comments and incorporating them into transaction guidelines moving forward, I think that that’s a very appropriate way to act and I would like to see more presumptions.
Jeffrey Shinder:
Amanda, I’m intrigued by the question you asked us, and I think I heard you correctly, and if I didn’t, you’ll correct me, that your readership is critical of the notion of government enforcers bringing, and I put it in quotes, “novel theories.” That’s something that they’re hostile to on some level. Yeah. Can you expand on that a little bit? Exactly what is their perspective? Where is it coming from, in your sense?
Amanda Hamilton:
Yeah, I think their perspective is, and I’m certainly parroting them, but they see it as bad governance. Former Commissioner Phillips said it best, when they’re just increasing the M&A tax. Go in for a deal that normally wouldn’t be challenged. It gets challenged. You spend all this money in federal court and just for a judge to rule, “Okay, this deal’s fine, there’s no Section 7 violation here.” The way that they say that they could predict it from the forefront, that just raises the tax of the deal. That’s certainly not the way that business has been done in the past, but I guess in some ways the good governance… They have a good point. They shouldn’t be raising M&A taxes on certain things. I do think that the context of private equity, my days as an FTC enforcer when we were, and bouncing divestiture offers off of customers, and this is a long time ago, was a lot of the customers would say, “Anyone but private equity would be an appropriate divestiture buyer.”
It’s not until today where Chairwoman Khan is now saying, “No. No to private equity.” We’re finally listening to consumers, but I guess going back to what my subscribers are saying, I think they were saying, “Look, here’s another example of good governance.” Not all private equities are slash and burns. Not all private equities are created equal. They’re not all the same, and so they see this as a wholesale condemning private equity where private equity has some benefits. They believe in investments stimulating new startups and generating new competition. I think this is another example where some of our subscribers would say, “This is another example of bad governance.”
Jeffrey Shinder:
I appreciate that answer on a couple levels. One, going back to the facts matter theme that’s come up a few times, I’m certainly not expounding the position that private equity is bad and necessarily generates anti-competitive outcomes. It depends. It always depends. I appreciate that comment. Your overarching answer triggered the following thought in me, which is almost a philosophical discussion around antitrust, which is what’s worse? The false positives or the false negatives? I just think wherever you sit on the ideological divide in terms of antitrust, your answer to that will be really predicated on ideology, more than economics, more than law.
Your constituency, at least the portion in which you’re talking about that the false positive positing and positive in terms of enforcement, the costs of that are attacks, and that’s a problem. That’s what they’re saying and Wyatt started the discussion with… Look over the last 20, 30 years, 40 years. We could take it back to 1980 and the beginning of the serious Chicago School era, really. It’s 40 years now, 45 years of the Chicago school, if you take it all the way back to Sylvania. All the false negatives, and what have they contributed to? Highly concentrated oligopolistic economy, higher prices for American consumers, and so what’s worse? That’s the question. I will put that to you. False positive, false negative, both of you if you want to speak to it. Amanda, you could channel your audience if you like. What do you think? What’s worse? I’m challenging both of you.
Amanda Hamilton:
Just putting on my personal hat, I certainly think false negative is much worse. I think, in putting on my former enforcer hat, I remember being at the FTC and growing increasingly frustrated by us not bringing more actions and perhaps just not being more bullish on transactions or even conduct. Perhaps, in certain instances, maybe articulating a prima facie case that was probably higher than maybe what a court would accept, and I think that we just increased the burden for ourselves. I think channeling many members of my audience, I would certainly say a false positive is much worse because you just increased transaction costs and you reduced predictability and then there’s lower transparency. They would argue, and as a former defense attorney, I would also argue, there’s a lot of companies out there, if they were aware of the risk beforehand, they probably wouldn’t enter into the transaction in the first place. Once they’re there, they’re just going to go for it, but I leave it to Wyatt.
Jeffrey Shinder:
Wyatt, you can’t dodge this one, so have at it.
Wyatt Fore:
I think that Amanda’s comments are really insightful. There has to be- The challenge is sifting through the transactions, for example, on practices that are pro-competitive or competitively neutral, from the relatively small category of transactions and conduct that are very problematic. I think that over the last 40 to 50 years, maybe shorter than that, the dial has been way too geared in one direction. The concern against false positives has far outweighed the false negatives. I would like to see it moderated a bit. I think that it’s difficult for businesses and the business community who are trying to have a non-problematic transaction. I think that Commissioner Phillips comments are well received, that for a lot of conduct and transactions where there’s really no issue, that raising the tax for those transactions is problematic for the economy.
Certainly, I worry about overregulation and over-enforcement with respect to those, but because most of my work focuses on the problematic conduct, I am continually frustrated to see what defendants get away with that are with their problematic activity. They essentially pay no price or pay pennies on the dollar compared to the anti-competitive effects. Unfortunately, Jeff, I’m also going to evade your question a bit because I’m not so sure if there is empirically a question about whether or not false negatives or false positives are worse. I think that the burden shifting framework of the rule of reason helps to sift through these problems and I think that I would appreciate a perspective that goes more towards the middle of weighing the difficulties for both of them. As opposed to now, where I think that enforcers and judges are so worried about false positives that they’re letting so much problematic conduct go wreak havoc on our economy.
Jeffrey Shinder:
One thing I’ll add to the give and take, and I appreciate your answers, is the role of the private bar. We’ve been talking about the FTC and the DOJ. Obviously, there’s no private right of action under Section 5, so the private bar does not have those tools, but it definitely has Section 7 tools. It has Section 1 and 2 and the private bar is important in all of this. The one concern I have is the death by 1000 cuts to private enforcement that has been ushered in over the last X number of decades. It’s much, much harder to certify classes and get class action certified. The class device is important. The law around arbitration clauses is an issue, and private enforcement, we need all… If it’s a three legged stool, we need all three legs to support the stool and private enforcement’s important. With that noted, I want to give each of you a last… If there’s anything, any final thoughts on this topic before we wrap up. Amanda, I don’t know if you have any questions or thoughts that this conversation has generated.
Amanda Hamilton:
Yeah, I think that there’s always new issues emerging and just because government hasn’t necessarily took an action on those issues in the past, it doesn’t necessarily mean, I think, that previous government enforcers necessarily rubber stamped those issues. For example, how loss of competition led to job cuts or agreeing on wages that no one before necessarily saw that as an antitrust violation. Recent government enforcement action had that. As a reporter, Chairwoman Khan and AAG Kanter has certainly made my life more interesting. It’s certainly made it more difficult to crack cases and to report on what’s happening because it’s not always so clear because they are looking to reinterpret antitrust laws and bring exciting new cases. I will say that it certainly made my life interesting.
Jeffrey Shinder:
Wyatt, I’m happy to give you the last word if you want it.
Wyatt Fore:
Always stressful. No, I would only reiterate that I think that some of the smartest people in the country today are attorneys and economists working in the enforcement agencies. I think that they do, in general, a wonderful job with a very, very difficult task. Any criticisms or suggestions that people make, I hope that they know that they have a lot of fans on their sides, that they’re doing the best with the very limited resources they can with a large set of problematic tasks, and prioritizing them and attacking them are always challenging. I would just like to give a shout-out to our quiet government enforcers who certainly do the Lord’s work every day under very challenging circumstances.
Jeffrey Shinder:
Well, Wyatt, I’ll say that resource constraints is something that’s important to point out. They are under-resourced and they really are doing great work under somewhat difficult circumstances and it’s appreciated. Amanda, I want to thank you for coming on the pod and bringing the Capitol Forum and the perspective of your readership to this conversation. It was great. Wyatt, I appreciate your insights and organizing this pod and we will definitely have you back. I think we can conclude.
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