FTC/DOJ Merger Guidelines: Assessment of Rebuttal Evidence

As explained in our prior article discussing the recently- issued Merger Guidelines (“Guidelines”), the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) (the “Agencies”) having described and discussed the Guidelines next discuss how they will assess rebuttal evidence provided by the parties in situations where, having applied the Guidelines on a fact-specific basis, the Agencies have concluded that the merger may substantially lessen competition or tend to create a monopoly.

At the outset, the Agencies identify several common types of rebuttal and defense arguments/evidence and state that they are all subject to legal tests established by the courts, and further that the Agencies will apply those tests “consistent with prevailing law.”

Three types of rebuttable arguments are then discussed: the failing firm defense, inducement of entry and repositioning, and the presence of procompetitive efficiencies.

Failing Firms

When merging parties suggest that the weak or weakening financial position of one of the merging parties will prevent a lessening of competition, the Agencies state that they examine evidence of that under the “failing firm” defense established by the Supreme Court in Citizen Publg Co. v. United States, 394 U.S. 131, 138 (1969). According to the Agencies, this defense applies when the assets to be acquired would imminently cease playing a competitive role in the market even absent the merger.

As set forth by the Supreme Court, the failing firm defense as explained by the Agencies has three requirements:

(i) The evidence shows that the failing firm, in the case of a hospital merger, faces the grave probability of a business failure. The Agencies typically look for evidence that the allegedly failing firm would be unable to meet its financial obligations in the near future. Declining sales and/or net losses, standing alone, are insufficient to satisfy this requirement.

(ii) The prospects of reorganization of the failing firm are dim or nonexistent. The Agencies typically look for evidence suggesting that the failing firm would be unable to reorganize successfully under Chapter 11 of the Bankruptcy Act, taking into account that companies reorganized through receivership, or through the Bankruptcy Act, often emerge as strong competitive companies. Evidence of a “failing” hospital’s actual attempts to resolve its debt with creditors is important.

(iii) The healthcare system that acquires the failing firm or brings it under dominion is the only available purchaser. In this context, the Agencies look for evidence that a system has made unsuccessful good-faith efforts to elicit reasonable alternative offers that pose a less severe danger to competition than does the proposed merger.

Entry and Repositioning

Merging parties sometimes raise a rebuttal argument that a reduction in competition resulting from the merger would induce entry or repositioning into the relevant market, preventing the merger from substantially lessening competition or tending to create a monopoly in the first place.

To evaluate this rebuttal evidence, the Agencies assess whether entry induced by the merger would be timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern.

For a variety of reasons, this rebuttal claim likely has limited practical applicability in the case of healthcare system mergers and especially so where hospitals are involved. Putting aside the regulatory requirements often pertaining to entry, such an expansion into the market seems very unlikely given the obvious cost and expense associated with establishing and staffing new facilities in a new market, the garnering of needed name recognition and the limited revenue opportunities given government and commercial reimbursement rates.

This was illustrated in FTC v. Sanford Health, 926 F.3d 959, 965 (8th Cir. 2019). There the court rejected the argument that following a merger between a healthcare system and a large multi-speciality physician group practice that would otherwise impermissibly lessen competition, another healthcare system would enter the market and effectively compete. It reached this conclusion because the new entrant would face difficulties recruiting physicians in the area and it would “take up to twice as long” to establish a name and reputation that could compete. In the healthcare context and for obvious reasons (cost and expense, regulatory requirements and a myriad of other factors), this would seem virtually impossible.

Procompetitive Efficiencies

Merging healthcare systems have routinely asserted that their merger, even if resulting in the lessening of competition, should nevertheless be allowed because of certain procompetitive and related benefits arising from the merger.

These benefits have typically included, among others, the reduction of costs on account of the consolidation of services, the elimination of duplicative expenses and services optimization, quality improvements, marshaling of resources to meet community need for new, upgraded and expanded facilities and services, adoption of risk-bearing alternative payment models which tie reimbursement to the value of patient outcomes rather than patient volume, enhanced IT capability, and enabling financially troubled hospitals to remain in service and in some instances expand services to meet community need.

While these asserted benefits have in some cases carried the day, in many other instances they have been rejected by the Agencies and the courts typically because they have been considered too speculative or not merger-specific (i.e., they could be accomplished without a merger) and/or the few procompetitive effects did not constitute significant economies that would ultimately benefit competition.

The Third Circuit’s decision in FTC v. Hackensack Meridian Health, Inc., 30 F.4th 160 (3d Cir. 2022) is illustrative. In that case, the merging hospitals offered a number of procompetitive benefits that might result from the merger including upgrades and increased capacity, the expansion of complex tertiary and quaternary care, cost-savings resulting from service optimization, and quality improvements at both hospitals.

The Court found that most of these claimed benefits were either speculative or non-merger-specific and that the few procompetitive effects that the hospitals did establish did not constitute significant economies that would ultimately benefit competition. See also, In the Matter of RWJ Barnabas Health and Saint Peter’s Healthcare System, FTC Matter/File Number 2010145 Docket Number 9409 (FTC rejecting hospitals’ assertion of adequate procompetitive benefits; parties called off their merger).

With respect to procompetitive efficiencies, in the Guidelines and as a starting point, the Agencies state that possible economies from a merger cannot be used as a defense to illegality. According to the Agencies, competition usually spurs firms to achieve efficiencies internally, and firms also often work together using contracts short of a merger to combine complementary assets without the full anticompetitive consequences of a merger.

Where merging parties raise a rebuttal argument that, notwithstanding other evidence that competition may be lessened, evidence of procompetitive efficiencies shows that no substantial lessening of competition is in fact threatened by the merger, the Agencies, when assessing this argument, will not credit vague or speculative claims, nor will they credit benefits outside the relevant market that would not prevent a lessening of competition in the relevant market. Rather, the Agencies examine whether the evidence[1] presented by the merging parties shows each of the following:

Merger Specificity. The merger will produce substantial competitive benefits that could not be achieved without the merger under review. Alternative ways of achieving the claimed benefits are considered in making this determination. Alternative arrangements could include organic growth of one of the merging firms, contracts between them, mergers with others, or a partial merger involving only those assets that give rise to the procompetitive efficiencies.

Verifiability. The procompetitive benefits must be verifiable, and must have been verified, using reliable methodology and evidence not dependent on the subjective predictions of the merging parties or their agents. According to the Agencies, procompetitive efficiencies are often speculative and difficult to verify and quantify, and efficiencies projected by the merging firms often are not realized. If reliable methodology for verifying efficiencies does not exist or is otherwise not presented by the merging parties, the Agencies are unable to credit those efficiencies.

Prevents a Reduction in Competition. To the extent efficiencies merely benefit the merging parties, they are not cognizable. The merging parties must demonstrate through credible evidence that, within a short period of time, the benefits will prevent the risk of a substantial lessening of competition in the relevant market.

Not Anticompetitive. Any benefits claimed by the merging parties are cognizable only if they do not result from the anticompetitive worsening of terms for the merged firm’s trading partners.

Procompetitive efficiencies that satisfy each of these criteria are called cognizable efficiencies. To successfully rebut evidence that a merger may substantially lessen competition, the Agencies state that cognizable efficiencies must be of a nature, magnitude, and likelihood that no substantial lessening of competition is threatened by the merger in any relevant market. Cognizable efficiencies that would not prevent the creation of a monopoly cannot justify a merger that may tend to create a monopoly.

If inter-firm collaborations are achievable by contract, they are not merger specific. The Agencies will credit the merger specificity of efficiencies only in the presence of evidence that a contract to achieve the asserted efficiencies would not be practical.

Some Concluding Thoughts

Overall, the focus of this evidentiary review appears to be on whether the merger will produce substantial competitive benefits, i.e., will improve competition in the relevant market or prevent the threat that it may be lessened.

Because the Guidelines do not give examples of what might be considered procompetitive efficiencies, it remains unclear as to how these rules will be applied and assessed in the case of a healthcare system merger in which the parties assert that the merger, while resulting in increased market concentration, will also result in benefits such as cost reductions, quality enhancements, provision of new needed services, expansion of existing services, upgrading of facilities and equipment, increased ability to recruit and retain clinicians, preserving and expanding care to medically underserved areas, new approaches to risk-based contracting and the like.[2]

Accordingly, given that the courts have in many, if not most instances, rejected arguments that there will be procompetitve benefits from a merger that outweigh competitive harm, it can be expected that under the Guidelines, it will be very difficult for merging parties to establish the presence of rebuttal evidence such as will convince the Agencies not to challenge a merger that would otherwise substantially lessen competition, i.e., that “cognizable” procompetitive effects do not sufficiently benefit competition.

[1] In general, evidence related to efficiencies developed by the parties prior to the merger challenge is  much more probative than evidence developed during the Agencies’ investigation or litigation.

[2] In the 2010 Merger Guidelines, there is a more detailed articulation of the types of procompetitve efficiencies that may prevent a merger from being anticompetitive.