Welcome to the Antitrust Antidote—a quarterly publication analyzing U.S. antitrust decisions from legal and economic perspectives. Authored by former Federal Trade Commission (FTC) enforcer Koren W. Wong-Ervin with former FTC economist co-authors Jeremy Sandford and Nathan Wilson, alternating each quarter. The title of this series, “Antitrust Antidote,” while mostly meant to be humorous (perhaps limited to those of who have heard Koren’s “let’s talk economics” as a cure for a bad day), also refers to the practical guidance we aim to provide throughout the series. We hope you enjoy it!
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There were a number of decisions from October-December 2024, including:
- FTC v. Amazon, applying an “indicia of oppressiveness” standard to a standalone Section 5 unfair methods of competition (UMC) parallel-pricing claim;
- FTC v. Kroger and FTC v. Tapestry, relying heavily on the DOJ-FTC 2023 Merger Guidelines, including the Guidelines’ lower HHI thresholds and heavy reliance on the Brown Shoe qualitative factors; and
- FTC v. Kroger, endorsing the FTC’s controversial labor-market theories based on increased employer bargaining power as opposed to traditional monopsony concerns.
Given the incoming Trump Administration and the possibility that the 2023 Merger Guidelines will be revised (and perhaps significantly), it is particularly noteworthy that several courts have now relied on the Biden Administration Guidelines.
- FTC et al. v. Amazon.com, Inc. (W.D. Wash. Sept. 30, 2024)
In September, a Washington federal district court denied Amazon’s motion to dismiss (with the exception of certain state law claims), applying an “indicia of oppressiveness” standard for standalone Section 5 UMC parallel-pricing claims:
In our view, before business conduct in an oligopolistic industry may be labelled “unfair” within the meaning of § 5 a minimum standard demands that, absent a tacit agreement, at least some indicia of oppressiveness must exist such as (1) evidence of anticompetitive intent or purpose on the part of the producer charged, or (2) the absence of an independent legitimate business reason for its conduct. . . . business practices are not “unfair” in violation of § 5 unless those practices either have an anticompetitive purpose or cannot be supported by an independent legitimate reason.
While there is 40-year-old caselaw support for this standard (the Second Circuit’s 1984 Ethyl decision),[1] reliance on intent alone is contrary with modern case law in the Sherman Act context, including more than 30 years of precedent making clear that “[a]nticompetitive intent alone, no matter how virulent, is insufficient to give rise to an antitrust violation,”[2] and that “[a]nimosity, even if rephrased as ‘anticompetitive intent[,]’ is not illegal without anticompetitive effects.”[3]
The conduct at issue (which Amazon argued amounted to “parallel pricing”) related to Amazon’s “Project Nessie,” which the FTC described as: a “secret algorithm” designed to “identify specific products for which it [Amazon] predicts other online stores will follow Amazon’s price increases. When activated, this algorithm raises prices for those products and, when other stores follow suit, keeps the now-higher price in place.” In applying the “indicia of oppressiveness” standard, the court found the following sufficient to allege anticompetitive intent or purpose: (1) when Amazon began testing Project Nessie, “[t]hese early experiments showed that ‘in many cases competitors match us at the higher price’”; and (2) “Amazon realized that it could increase its prices while reducing the risk of shoppers finding a lower price off Amazon if Amazon focused its price increases on products sold by competitors that were matching Amazon’s prices.”
The court also rejected Amazon’s arguments that Plaintiffs fail to allege anticompetitive conduct and anticompetitive effects, stating that “[a]nticompetitive conduct consists of acts that ‘tend[ ] to impair the opportunities of rivals’ and ‘do[ ] not further competition on the merits or do[ ] so in an unnecessarily restrictive way.’” The court declined to consider Amazon’s procompetitive justifications as “inapt” for a motion to dismiss.
- FTC v. Kroger Co. (D. Ore. Dec. 10, 2024)
The court relied on the DOJ-FTC 2023 Merger Guidelines to preliminarily enjoin Kroger’s proposed acquisition of Albertsons. The court repeatedly credited the FTC’s expert over the parties’ expert on the ground that the FTC-expert’s analysis was based on the 2023 Guidelines, while the parties’ expert relied on the 2010 Horizonal Merger Guidelines. The decision is significant for its endorsement of the 2023 Guidelines, including the lower HHI thresholds and controversial labor-market theories.
The FTC alleged that the transaction would harm both workers and consumers. The court credited the second theory, while finding insufficient evidence to support the first theory. The court did, however, appear to endorse the FTC’s labor theory, which was based on increased employer bargaining power, specifically over workers and their unions. This is not uncontroversial. As Carlton & Israel (2011) have explained, one may draw a distinction between buyer power that results in a buyer capturing a higher share of surplus when bargaining with a seller (i.e., a transfer due to increased bargaining power) and the standard textbook model of monopsony power. The antitrust treatment of monopsony power is clear. It’s the mirror image of monopoly power with output reduced inefficiency in order to increase the buyer’s profits. According to classical economic theory, monopsony power reduces output and harms workers and other input suppliers while at the same time increasing prices for consumers. In contrast, if increased buyer bargaining power lowers the marginal cost of production, that could result in increased output and lower prices for consumers. Just as it would be bad policy to focus solely on output markets and monopoly while ignoring the effects of monopsony, it would be shortsighted to base antitrust policy solely on the effect on workers without considering the downstream effects on consumers. The point is not that downstream effects always matter or necessarily legitimize an illegitimate practice. Instead, the principle is that downstream effects may be material to understand the rationale for a practice. Upstream and downstream markets are on the same supply chain, which is a classic example of interdependency.
With respect to harm to consumers, the FTC asserted that the transaction would lead to a meaningful loss of competition in a “supermarket” market, which included some types of retail food sellers (e.g., grocery stores, “supercenters”) but not others (e.g., club stores, natural grocers, limited assortment stores). The FTC also considered a “large format store” market. To establish the “supermarket” market, the court appears to have accepted the FTC’s reliance on Brown Shoe factors, though it notes that an application of the hypothetical monopolist test also supports the conclusion.
The FTC constructed geographic markets by drawing circles around each store of interest. The radius of the circle was calculated as twice the radius of the circle that would account for consumers driving 75% of sales (as shown in loyalty data). From the decision, it is not evident why this definition was appropriate, but the judge accepted it as valid, noting that the vast majority of the markets defined by the FTC would pass a critical loss test. The opinion does not make clear how the FTC’s expert evaluated the actual loss that would result from a price increase.
The parties contested the appropriateness of the FTC’s market, emphasizing the important constraining role played by other store formats and contesting the fitness of the FTC’s circle drawing as missing how residents of an area may actually shop. Instead of formally defining alternative markets, defendants and their expert focused on an economic model from published scholarly literature. This model does not require the exogenous specification of product and geographic market for each store it focused on. Ultimately, the court did not engage with the comparative accuracy of different economic approaches to defining markets. Instead, the opinion emphasizes that it found the FTC’s methodology more persuasive as it enables use of traditional antitrust methods like shares and concentration. The court also rejected much of the parties’ expert’s analysis on the grounds that he sometimes relied on the withdrawn 2010 Horizontal Merger Guidelines, while also sometimes citing to the 2023 Merger Guidelines.
With respect to the competitive effects analysis, the court appeared to be persuaded by the 2023 Merger Guidelines’ assertions regarding the relationship between changes in market structure and the presumption of anticompetitive effects. The court was unconvinced by defendants’ arguments, citing a lack of engagement with “the relevant antitrust markets that have been adopted in this case” and a reliance on analytical methods that do not use “inputs and assumptions that align with the relevant markets adopted in this case.” In addition, the court noted the presence of ordinary course documentary evidence showing that each party often focused— to at least some degree—on the other. Moreover, the opinion notes “natural experiment” evidence showing that Albertsons’ stores lost more sales when Kroger stores opened than when other types of grocers entered.
The court considered, but dismissed, arguments that competitor entry or repositioning would discipline anticompetitive effects. In particular, the court noted the evidence that entries were risky and time consuming, raising questions about whether rivals could be relied upon to forestall anticompetitive effects. Similarly, while seeming to credit the plausibility of some of the parties’ efficiency arguments, the court noted that even the high end of what might be cognizable fell short of offsetting the harm implied by the FTC’s modeling.
In evaluating the divestiture, the court noted that both the FTC’s and defendant’s modeling showed that there would still be markets in which the 2023 Guidelines’ structural presumption of harm applied. This was seen as a sufficient basis on its own to conclude that, even if remedied, the transaction would substantially lessen competition. The court’s conclusion was strengthened by its assessment of the difficulty of achieving success with the divestiture, which would involve a mix of store banners and product labels as well as a buyer with questioned experience that would remain entangled with the parties.
- FTC v. Tapestry, Inc. (S.D.N.Y Oct. 24, 2024)
Tapestry is yet another decision that relies on the 2023 Merger Guidelines to preliminarily enjoin a transaction. The court relied on the Brown Shoe qualitative factors in accepting the FTC’s narrow market definition of “accessible-luxury handbags.” It also adopted the 2023 Guideline’s lower HHI thresholds, as well as the FTC’s assertion that the transaction would give the combined firm a nearly 60% share, which is well over the 30% threshold from the Supreme Court’s decision in Philadelphia National Bank.
The FTC argued that a broad “handbag” space could be subdivided into three distinct (for antitrust purposes) markets: “mass market”, “accessible-luxury,” and “true luxury.” The defendants argued that such a delineation was contrary to market realities. The court considered both the Brown Shoe factors and an analysis based on the hypothetical monopolist test. With respect to the latter, the court agreed with the FTC’s expert, who relied on surveys commissioned by Tapestry to perform a critical loss test. The surveys showed that many purchasers of one party’s handbags saw the other party’s products as their second choice. The FTC’s expert used these “second choice” data to infer diversion between products. Given the high margins earned on handbags in the hypothesized market, the aggregate diversion within the accessible-luxury market was found to exceed the critical diversion. The court rejected Tapestry’s attempt to discredit the surveys on the grounds that they did not address how consumers would respond to a price increase as well as other design issues. The court found it reasonable for the FTC to rely on the surveys given that Tapestry appeared to find them probative of competitive dynamics in the ordinary course of business.
In evaluating the qualitative evidence, the court noted that technological substitutability (i.e., that a pocketbook can be carried in an expensive Birkin bag just as easily as in a cheap Trader Joe’s tote) is not the relevant criterion. Rather, antitrust markets should be based around whether products are reasonably interchangeable for consumers. Thus, while technically focused on qualitative factors, the overarching logic applied by the court to an evaluation of whether “accessible luxury handbags” constitute a relevant antitrust market was not necessarily different from that motivating a quantitative assessment of consumer preferences. The judge’s evaluation of the qualitative evidence was reached through a separate consideration of each of the Brown Shoe factors: peculiar characteristics, unique production facilities, distinct prices, and industry or public recognition. For each factor, the court found that the preponderance of evidence suggested that accessible-luxury bags were different from both mass-market and true-luxury ones in the eyes of consumers. With respect to sensitivity to price changes, the court took that as equivalent to its separate analysis of whether a hypothetical monopolist test established the FTC’s market.
The court did not find persuasive Tapestry’s arguments about the ease of entry, nor did it credit arguments on the lack of competitive effects owing to the Tapestry’ practice of letting constituent brands operate independently, noting that some of these arguments appeared in tension with defendants’ expert’s own academic writing.
- United States v. American Airlines Group, Inc., (1st Cir. Nov. 13, 2024)
The First Circuit affirmed the lower court’s Section 1 liability finding based on a partnership agreement between American Airlines and JetBlue that allowed the two airlines to share revenue and coordinate capacity while separating pricing decisions. The lower court determined that the partnership was a joint venture, and not a de facto merger, and applied a truncated “quick look” approach. Of significance, the First Circuit rejected American Airlines’ argument that the lower court necessarily should have applied a full-blown rule of reason analysis, noting that, regardless, the lower court “did not condemn the … [partnership] with as quick a look as American suggests,” but instead “made extensive and reasoned findings regarding” the joint venture’s effects on competition.
The First Circuit also rejected American’s argument that the district court relied on the wrong evidence in concluding the NEA was anticompetitive. In particular, the court cited the factual conclusions about the agreement’s impact on capacity, frequency, and choices, which, according to the court, American did not challenge. Moreover, the court noted that the lower court did consider defendants’ arguments that the true effects were beneficial to consumers, but that it rejected the underlying evidence as unreliable.
Finally, the court rejected American’s assertion that the lower court wrongly cabined its assessment of efficiencies by failing to adequately consider whether they might offset the government’s prima facie case. On the contrary, the court declared that some of the NEA’s asserted efficiencies were “simply not cognizable” before proceeding to emphasize that American had not seriously attempted to challenge the district court’s factual conclusion that the alleged benefits of the transaction lacked evidentiary support.
- Tera Group, Inc. v. Citigroup, Inc. (2d Cir. Oct. 16, 2024)
Tera alleged that Citigroup and other major banks (“bank defendants”) colluded to exclude them from developing a credit default swap (“CDS”) trading platform. A CDS contract is a financial instrument that pays off in the event of a specified credit event. The bank defendants create and sell CDS contracts to investors, which may include mutual funds, hedge funds, and insurance companies. Historically, buyers would work directly with sellers like bank defendants, seeking quotes on the CDS contracts they were interested in. This was known as the “request for quote” (“RFQ”) system. Tera developed an exchange wherein CDS contract buyers and sellers could transact anonymously. The idea was that it would reduce information asymmetries that may benefit CDS contract sellers under the RFQ system.
After one day of successfully accommodating trades, Tera’s platform never executed another trade as bank defendants all indicated that they would not trade or clear trades on Tera’s platform. These refusals to deal precipitated Tera’s complaint that the defendant banks had colluded to protect the profits they earned from direct sales. The district court dismissed Tera’s complaint, a decision affirmed by the Second Circuit.
Lacking evidence of direct communications among bank defendants about the plan to exclude Tera, Tera’s complaint relied heavily on so-called “plus factors,” which may be associated with coordination. However, supporting the district court’s decision to dismiss, the Second Circuit noted that the alleged factors were insufficient to distinguish possible conspiracy from plausible conspiracy.
Specifically, the Court observed that bank defendants’ unilateral self-interest could not be ruled out as an explanation for each choosing not to work with Tera’s new platform. If each bank had a dominant strategy of not working with Tera, for which the Court was able to cite some evidence, then no agreement to collectively boycott the new platform was required. Similarly, the Second Circuit noted that the mere fact that Tera presented evidence that defendant banks regularly communicated did not establish that their communications crossed the line into illegality.
Nathan Wilson & Koren W. Wong-Ervin
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| Citation: Nathan Wilson & Koren W. Wong-Ervin, Antitrust Antidote: Antitrust Antidote: October-December 2024, Network Law Review, Winter 2024. |
[1] For a summary of UMC case law, see Wong-Ervin & Sherman (2022).
[2] McWane, Inc. v. FTC, 783 F.3d 814, 840 (11th Cir. 2015).
[3] Schachar v. Am. Acad. of Ophthalmology, Inc., 870 F.2d 397, 400 (7th Cir. 1989); see also e.g., United States v. Microsoft, 253 F.3d 34, 59 (D.C. Cir. 2001) (en banc) (per curiam) (“[I]n considering whether the monopolist’s conduct on balance harms competition and is therefore condemned as exclusionary for purposes of § 2, our focus is upon the effect of that conduct, not upon the intent behind it.”).
