Reinvigorating the Perceived Potential Competition Theory: An Analysis of the Potential Competition Doctrine and FTC v. Steris Corp.

KLIMOWICZ (DO NOT DELETE) 11/28/2018 3:14 PM REINVIGORATING THE PERCEIVED POTENTIAL COMPETITION THEORY: AN ANALYSIS OF THE POTENTIAL COMPETITION DOCTRINE AND FTC V. STERIS CORP. Henry S. Klimowicz Basic economic theory states that markets and consumers are usually best served when there is vigorous competition in a free market, with competitors battling over price and quality. For this reason, antitrust law recognizes the preservation of competition as its primary goal.1 During the 1960s and 1970s,2 antitrust enforcement agencies responded to an increase in merger activity by challenging many transactions under Section 7 of the Clayton Act.3 The newly recognized potential competition doctrine was an effective legal tool upon which the agencies relied in non-horizontal merger cases before the Supreme Court. It has been forty-three years since the Supreme Court last ruled on a potential competition case, however, and their less-than-clear-precedent on the subject has led to lower courts crafting difficult and inconsistent standards. In FTC v. Steris, a district court in Ohio recently rejected the government’s potential competition argument, finding that a merger between two of the largest firms in the already concentrated contract sterilization industry4 did not violate Section 7. Despite being the  J.D. Candidate, 2019, Seton Hall University School of Law; B.A., Gettysburg College. I would like to thank Professor Marina Lao for the inspiration to write this Comment, and for her invaluable guidance throughout my research and writing. I would also like to thank my parents, Doris and Bob Klimowicz, as well as my ciocia and uncle, Quiche and Richard Stone, for their unwavering love and support. 1 Mission, DEP’T OF JUSTICE, https://www.justice.gov/atr/mission (last visited Apr. 10, 2018) (“The goal of the antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace. Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad.”). 2 See generally Thomas M. Hurley, The Urge to Merge: Contemporary Theories on the Rise of Conglomerate Mergers in the 1960s, 1 J. BUS. & TECH. L. 185 (2006). 3 15 U.S.C. § 18 (2012). Section 7 of the Clayton Act deems a merger or acquisition unlawful if it may “substantially lessen competition.” Id. The Federal Trade Commission and Department of Justice are the two main federal agencies who file antitrust challenges. 4 The contract sterilization industry consists of companies that contract with 173 KLIMOWICZ (DO NOT DELETE) 174 11/28/2018 3:14 PM SETON HALL LAW REVIEW [Vol. 49:173 only sub-theory under the potential competition doctrine endorsed by the Supreme Court, the FTC did not argue its case under the perceived potential competition theory. Instead, the decision hinged on a single element under the actual competition theory—a sub-theory with higher evidentiary burdens and without explicit Supreme Court approval. Unsurprisingly, the court concluded that the FTC did not carry its evidentiary burden under the actual potential competition theory. It is unclear why the FTC chose not to raise the perceived potential competition doctrine. If agencies continue to forgo this theory, however, the sustained allowance of non-horizontal mergers will pose new threats to U.S. markets. I. INTRODUCTION As industries become more concentrated, consumers are increasingly threatened by the prospect of monopolistic behavior due to the reduction of competition.5 Antitrust enforcement agencies seek to prevent this occurrence by prohibiting certain merger or acquisition transactions that may have this effect; however, these transactions can provide significant procompetitive benefits.6 A merger, for instance, may benefit consumers and markets by augmenting innovation and efficiencies among the participating firms.7 But when these transactions occur in concentrated markets, they pose enhanced risks to competition.8 Congress addressed this concern long ago by enacting the Clayton Act in 1914, as amended by the Celler-Kefauver Act in 1950.9 manufacturers to rid their products of unwanted microorganisms. See FTC v. Steris Corp., 133 F. Supp. 3d 962, 96364 (N.D. Ohio 2015). 5 See generally Gustavo Grullon, Yelena Larkin, & Roni Michaely, Are US Industries Becoming More Concentrated?, https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=26120 47 (last updated Oct. 27, 2018) (“More than 75% of U.S. industries have experienced an increase in concentration levels over the last two decades. . . . Lax enforcement of antitrust regulations and increasing technological barriers to entry appear to be important factors behind this trend. . . . Overall, our findings suggest that the nature of U.S. product markets has undergone a structural shift that has weakened competition.”). 6 Competition Guidance for Antitrust Law, FEDERAL TRADE COMM’N, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers (last visited Apr. 9, 2018). 7 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES 29 (2010), https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf (explaining the benefits that merger transactions can provide) (“Nevertheless, a primary benefit of mergers to the economy is their potential to generate significant economic efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.”) [hereinafter 2010 MERGER GUIDELINES]. 8 Concentrated markets are harmful for competition and the DOJ recognizes this. See 2010 MERGER GUIDELINES, supra note 7. 9 The original Clayton Act only prohibited the acquisition of “stock.” 15 U.S.C. § 18 (2012). The Celler-Kefauver Act amended the Clayton Act to include horizontal mergers. KLIMOWICZ (DO NOT DELETE) 2018] 11/28/2018 3:14 PM COMMENT 175 Section 7 of the Clayton Act (“Section 7”) deems mergers and acquisitions unlawful where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”10 Congress conferred enforcement authority of Section 7 to the Federal Trade Commission (FTC) and Department of Justice (DOJ).11 Section 7 not only covers mergers between competitors in the same market (“horizontal” mergers), but also those effectuated by non-competitors in different markets (“non-horizontal” mergers).12 Historically, “potential competition” was a doctrine raised in cases involving non-horizontal mergers. 13 Today, it is also a concept that can be pertinent in horizontal mergers.14 Antitrust enforcement agencies, the Supreme Court, and a handful of circuit courts have (...truncated)